On May 19, 2023 the Financial Crimes Enforcement Network (“FinCEN”) and the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) released a joint supplemental alert (the “Supplemental Alert”) concerning Russian export control evasion attempts. The supplemental alert adds to and refines the June 28, 2022 alert about which we previously blogged.
According to the Supplemental Alert, the sanctions imposed by the Global Export Control Coalition (“GECC”) in response to the Russian Federation’s war against Ukraine has been successful in “significantly degrad[ing]” Russia’s “military-industrial complex and defense supply chains” and making it difficult to replace the estimated “10,000 pieces of equipment” that Russia has lost on the battlefield. The Supplemental Alert cautions that Russia has tasked its “intelligence services with finding ways to circumvent sanctions and export controls to replace needed equipment.”
In response, the BIS has imposed additional export control restrictions on February 24, 2023 on items such as components for aircraft and tanks, semiconductors, and “low-technology consumer goods.” BIS has extended these export control restrictions beyond Russia’s borders, to Iran and China. BIS believes that Iran and China have “served as supply nodes to the Russian war machine.” The Department of Justice and the Commerce Department also announced in February the creation of the Disruptive Technology Strike Force, which brings together experts from across government and across the nation to, among other things, “protect critical technological assets from being acquired or used by nation-state adversaries.” This strike force is in addition to the now well-known Task Force KleptoCapture that was formed last year.
The Supplemental Alert also emphasizes a joint compliance note published by the Department of Justice, the Department of Commerce, and the Treasury Department discussing the use of third-party intermediaries and transshipment points to hide the involvement of illicit actors attempting to evade Russia-related sanctions and export controls. The Supplemental Alert warns financial institutions and businesses to be on the lookout for shell or front companies, the use of authorized resellers with lackluster customer due diligence, or procurement agents that create multiple shell companies and order small amounts of goods to attract less attention. Transshipment points include China and countries close to Russia, like Armenia, Turkey, and Uzbekistan.
The Supplemental Alert “strongly encourage[s]” financial institutions, including banks, to conduct additional due diligence when a financial institution learns that one or more of the nine high-priority items (“HS Code Items”), listed by Harmonized System Code (“HS Codes”) in the Supplemental Alert, are the subject of a transaction. The BIS believes that importers in certain non-GECC countries, especially those located in the transshipment countries described above, are more likely to be engaged in export control evasion in the following three scenarios:
- The company never received exports prior to February 24, 2022;
- The company did not receive exports of the HS Code Items prior to February 25, 2022; or
- The company received exports of the HS Code Items previously, but purchases spiked after February 24, 2022.
When financial institutions see any one of these scenarios, they should conduct additional due diligence to determine the customer’s date of incorporation, the end user and end use of the HS Code Items, and where the customer is located.
The Supplemental Alert also lists nine new red flags unique to export control evasion. The Supplemental Alert indicates that these new red flags should be read in conjunction with those from the initial alert and with all relevant facts and circumstances. Generally, the red flags focus on newly incorporated companies, companies located in non-GECC countries, and companies involved with the HS Code Items. The nine new red flags are:
- Transactions for defense or dual-use products for a company incorporated after February 24, 2022 in a non-GECC country;
- New customers who trades products associated with the HS Code Items, located in a non-GECC country, and incorporated after February 24, 2022;
- An existing customer who did not previously receive exports of the HS Code Items that started receiving such items after February 24, 2022;
- An existing customer who previously received exports of the HS Code Items but is receiving a significant increase after February 24, 2022;
- Any customer that refuses to provide details about end users, end use, or ownership;
- Multiple, smaller-volume transactions to multiple suppliers of dual-use products;
- Transactions involved ultimate consignees that “do not typically engage in business consistent with” the commodities (e.g., “other financial institutions, mail centers, or logistics companies”);
- Significantly overpaying for a commodity; or
- The customer or address is similar—even if not identical—to one on the BIS Entity List, the SDN List, or the Department of State’s Statutorily Debarred Parties List.
As stated in the previous alert and our previous post, FinCEN provided particular instructions for filing related SARs to Russia export control evasion. Specifically, FinCEN requests financial institutions to reference the joint alert by including the key term “FIN-2022-RUSSIABIS” in SAR field 2, and to indicate in the SAR narrative field the connection between the suspicious activity being reported and the activities highlighted in the joint alert. FinCEN further requests financial institutions to check box 38(z) (Other Suspicious Activity) and note “Russia Export Restrictions Evasion,” and to indicate in SAR field 45(z) (Other Product Types) the appropriate North American Industry Code(s) (NAICs) for the involved product, if known, and the appropriate financial instrument or payment mechanism in SAR field 46.