Regulatory intelligence for US exporters

Canada, Germany, Netherlands Issue Red Flags for Russia Sanctions Evasion

Canada, Germany and the Netherlands released a joint advisory this week to give their companies guidance on how they can identify and report suspected Russian sanctions and export control evasion. The advisory, issued by the financial intelligence units of each country, includes a list of red flags, suggestions for customer due diligence and various case examples of Russian companies trying to evade sanctions.

All three nations have received reports “from a variety of sources” describing illegal export attempts to Russian end users from their countries, the advisory said. Because of this, they said their domestic industries have asked for “additional guidance on reporting suspicious transactions” and “on conducting client risk assessments.”

The advisory stressed that companies shipping microelectronics, electronics, manufacturing goods, testing equipment and other high-priority items should be especially careful. They should make sure to always “match the flow of goods with the flow of funds"; ask for “supporting evidence” from their customers, such as invoices, contracts, bills-of-lading and customs declarations; and cross-check that information “with the documentary standards that your customer is required to meet.”

The countries also urged companies to do due diligence on their actual customers, saying that while some parties may not be specifically subject to sanctions, they could be “part of larger company structures that include sanctioned entities/persons.” They may also do business with sanctioned companies, which carries a compliance risk.

The advisory lists several common “indicators” that may signal a customer that trades in dual-use goods is trying to evade sanctions and export controls, including:

  • A dormant company suddenly increases its transaction activity
  • A company “substantially” increased its activity before or after Russia’s invasion of Ukraine in February 2022
  • A company “introduces complexity into its existing ownership structure” after sanctions are imposed
  • A company, its beneficial owners or directors have a “strong connection” to Russia
  • A company changes its activities after the Russian invasion of Ukraine
  • A company transfers its ownership or control to third parties, such as family members, friends or known business associates, “without appropriate compensation"
  • A company transfers its ownership or control to third parties, but the transfer is funded by a sanctioned party.

Other red flags may stem from suspicious “financial behavior” of customers, including:

  • Entities that are shipping the goods aren’t the same as those transferring funds to pay for the goods
  • Payment is handled by a third party not involved in the transaction
  • The goods are shipped through the sanctioned jurisdiction “by using a fictive end-user in another country”
  • The goods are shipped to countries bordering Russia, such as Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan
  • The goods are shipped to Turkey, China, Hong Kong and the United Arab Emirates, which are “known to be used as re-export conduits” for Russia
  • Invoices are backdated to suggest the trade was part of older contracts that are eligible for exemptions
  • A company with “previously large export volumes to Russia shows no decline in transaction activity post-invasion”
  • Obfuscation of the beneficial owners by a company -- including through listing corporate entities as director, officers or shareholders or the use of nominees -- that is trading dual-use goods and/or operating in high-risk jurisdictions.

One case example included in the advisory describes a business that bought sanctioned dual-use goods in South Korea and tried to have them sent directly to an end user in Russia. The advisory said that case involved a company that back-dated the bill for the delivery of the shipment “to a moment prior to the sanctioning of the goods.”