U.S. Government Cracks Down on the Use of Third-Party Intermediaries for Russia Sanctions and Export Controls Evasion as War Against Ukraine Reaches One-Year Mark

6 min

As we pass the one-year anniversary of Russia's invasion of Ukraine, the U.S. government has launched an interagency initiative to crack down on evasion and violations of U.S. sanctions and export controls targeting Russia and Belarus. It has also issued a Tri-Seal Compliance Note highlighting evasion tactics to assist the private sector in identifying warning signs and implementing appropriate compliance measures. Assistant Attorney General for National Security Matthew Olsen said of the initiative, "Companies are our first line of defense, and today's joint compliance note will inform the private sector about enforcement trends and convey the Department's expectations as to national-security related corporate compliance."

For companies engaged in or facilitating global trade, these developments serve as another important warning: implement appropriate compliance policies and procedures, or risk being the target of enforcement actions.

Interagency Compliance Note on Sanctions and Export Control Evasion by Third-Party Intermediaries

On March 2, 2023, the U.S. Department of Commerce's Bureau of Industry and Security (BIS), the U.S. Department of Justice (DOJ), and the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) (collectively, the "Agencies") issued a joint Tri-Seal Compliance Note, "Cracking Down on Third-Party Intermediaries Used to Evade Russia-Related Sanctions and Export Controls" (the "Note"). The Note urges individuals and companies with a U.S. nexus to be vigilant for efforts to evade U.S. export controls and sanctions related to Russia or Belarus, particularly with the use of third-party intermediaries as front companies or for transshipment. Significantly, the Agencies have explicitly warned "manufacturers, distributors, resellers, and freight forwarders" to "exercise heightened caution and conduct additional due diligence if they detect warning signs of potential sanctions or export violations," noting that these companies are often in the best position to determine if a cross-border transaction is consistent with industry norms and practices.

Assistant Secretary of Commerce for Export Enforcement Matthew Axelrod reiterated the Department's expectations of companies engaging in the export of implicated goods. "As this first-ever joint compliance note makes clear, it is incumbent upon industry to maintain effective, risk-based compliance programs. BIS, in coordination with our partners, including at OFAC and the Department of Justice, will continue to use all tools at our disposal to prevent bad actors from circumventing the comprehensive export controls put in place to deter Russian aggression." Since sanctions and export control violations are "strictly liability" offenses, companies and individuals that fail to exercise reasonable care and diligence may become the targets of regulatory actions, civil enforcement actions, or criminal investigations for potential export control or sanctions violations that arise in connection with their business activities.

To help U.S. businesses detect higher-risk transactions, the Note lists 13 common "red flags" that indicate a third-party intermediary may be engaged in efforts to evade sanctions or export controls, including the following:

  • Use of corporate vehicles (i.e., legal entities, such as shell companies, and legal arrangements) to obscure (i) ownership, (ii) source of funds, or (iii) countries involved, particularly sanctioned jurisdictions
  • Routing purchases through certain transshipment points commonly used to illegally redirect restricted items to Russia or Belarus. Such locations may include China (including Hong Kong and Macau) and jurisdictions close to Russia, including Armenia, Turkey, and Uzbekistan
  • A customer's reluctance to share information about the end use of a product, including reluctance to complete an end-user form
  • Last-minute changes to shipping instructions that appear contrary to customer history or business practices
  • Payment coming from a third-party country or business not listed on the End-User Statement or other applicable end-user form

Echoing prior OFAC and BIS guidance, this publication is another reminder to U.S. companies and companies with a U.S. nexus that the best defense against sanctions and export control violations is an effective, risk-based compliance program with established policies and procedures that are tailored to the organization's activities. For companies engaged in cross-border activity, best practices typically involve (but are not limited to) screening current and new customers, intermediaries, and counterparties through the U.S. government's Consolidated Screening List, conducting risk-based due diligence on these parties, and requesting end user certifications when exporting or facilitating exports to high-risk jurisdictions. To keep abreast of emerging risks, companies should also have an established process for routinely reviewing, evaluating, and, when necessary, expanding existing compliance policies and controls.

Finally, the Note underscores the Agencies' willingness, with the support of the administration, to investigate, bring enforcement actions against, or designate persons suspected to be involved in evasion efforts. As made clear by the several examples cited in the Note, suspected violations could result in steep monetary penalties, the denial of export privileges, criminal charges, or designation:

  • In September 2021, BIS imposed a civil monetary penalty of $497,000 on Vorago Technologies (Vorago), a Texas-based technology company, for allegedly violating U.S. export controls by conspiring to send unlicensed integrated circuit components to Russia via a Bulgarian front company. As part of the settlement, Vorago also lost its export privileges under the Export Administration Regulations (EAR) until September 2023.
  • In November 2022, OFAC designated individuals and entities involved in a global procurement network maintained by a Russian microelectronics company, AO PKK Milandr, which used front companies to transfer funds from Milandr to other front companies in a third country, which in turn purchased microchips and other components to divert to Russia.
  • In December 2022, the DOJ unsealed an indictment charging five Russian nationals and two U.S. citizens with conspiracy and related charges stemming from an alleged scheme to obtain and divert military-grade and dual-use technologies from U.S. companies for Russia's defense sector, and to smuggle sniper rifle ammunition to Russia, in violation of U.S. sanctions and export control laws. Allegedly, the defendants used shell companies and transshipment points in third-party countries—such as Estonia—to conceal the unauthorized shipments of ammunition and other export-controlled items to Russia. The investigation was led by the DOJ's Task Force KleptoCapture, an interagency task force developed in 2022 to focus on enforcement of U.S. sanctions, export controls, and economic countermeasures.

In sum, companies—especially manufacturers, freight forwarders, distributors, and other parties involved in the import and export of goods, services, or technology to and from the United States—should carefully review the Note and other BIS and OFAC guidance and enforcement materials to stay apprised of red flags, risk factors, and compliance best practices in the current trade landscape.[1]

Venable's International Trade and Logistics Group is carefully monitoring the evolving situation in Ukraine and will continue to provide updates as developments occur. If you have any questions, please reach out to the authors for guidance.

[1] For example, BIS's publication, "Don't Let This Happen to You," is a helpful survey of recent criminal and administrative actions and is available at https://www.bis.doc.gov/index.php/documents/enforcement/1005-don-t-let-this-happen-to-you-1/file.