Compliance Officers Will Be Busy

Hundreds of new Russia designations are happening

Courtesy of: Pix4free.org

Whenever a big meeting or anniversary happens in the foreign policy realm, you can be sure that regulatory changes will follow. On the anniversary of Russia’s invasion of Ukraine, we saw hundreds of new sanctions from OFAC, the EU, and the UK. The United States and its allies also released numerous designations on the second anniversary of the coup in Burma that overthrew the country’s democratically elected government.

And this past week, as the G7 summit began in Japan, the United States released 323 new Russia designations, focusing on Russia’s ability to circumvent sanctions and targeting Russian and other foreign entities and individuals in numerous countries and jurisdictions that are helping Moscow do so. The UK has sanctioned 86 new individuals and entities that are involved in Russia’s military-industrial complex, energy, metals, and shipping industries, especially those who have allegedly been involved in stealing Ukrainian grain.

The Bureau of Industry and Security (BIS) on Friday added 71 entities to the Entity List for supporting Russia’s military and defense sectors. The entities are located in Armenia, Kyrgyzstan, and Russia. Mostly in Russia. New restrictions also target items that can help Russia’s military, including clothes dryers, snow plows, and milking machines, as well as contact lenses of sunglasses.

The G7 is also promising new restrictions, and the EU is apparently close on an agreement for an 11th tranche of sanctions against Russia, focusing on loopholes, evasion facilitators, and jurisdictions, actors, and entities that are helping Moscow get its paws on restricted or sanctioned goods and technologies.

And this is why compliance work is becoming more complicated and challenging.

It’s not just about the hundreds of new designations released, which in and of itself is significant. But the amount of research that needs to be done because of those designations is phenomenal!

Jurisdictional risk

Compliance officers who monitor news, understand that there are some jurisdictions that are going to be more risky for engagement, especially given the fact that third countries, such as Kazakhstan, Kyrgyzstan, and other Central Asian countries are increasingly being used as transshipment points through which Russia is gaining access to prohibited goods and technologies to support its continued aggression in Ukraine. Turkey, Belarus, Armenia, UAE, and China are also in the mix. Russia is also using third countries to ship oil above the $60 per barrel cap imposed by the West.

Third-party players in those countries, that are not sanctioned by the West, need to be monitored cautiously, and jurisdictional risk should alert compliance teams that they may need to take a closer look at clients and business partners in those countries.

Know Your Customers (KYC), clients’ customers, and end-users

Knowing who your clients are is no longer enough. Given the increased use of intermediaries to evade sanctions, all points of a supply chain need to be examined. Who is the end-user of your product? Does your product contain restricted technologies that could wind up in Russia helping enhance its military capabilities? Even goods that may seem innocuous, such as washing machines, breast pumps, and refrigerators, could help Russia’s war effort, although the extent to which this is happening is still unclear.

In a settlement with Microsoft last month, OFAC noted that “in certain volume-licensing programs involving sales by intermediaries, Microsoft was not provided, nor did it otherwise obtain, complete or accurate information on the ultimate end customers for its products from Microsoft’s distributors and resellers. At times, Microsoft Russia employees appear even to have intentionally circumvented Microsoft’s screening controls to prevent other Microsoft affiliates from knowing the identity of the ultimate end customers.”

This research is important not only when it comes to Russia, but also for importers of Chinese goods that may have links to forced labor. Department of Homeland Security’s (DHS) enforcement efforts are exposing underlying forced labor connections of goods imported by US companies, especially in the import apparel, footwear, textile, electronics, solar panels, and automotive spheres. US importers must examine supply chains with links to China, Malaysia, and Vietnam, which are at risk of ties to forced labor.

Does your business partner use a manufacturing facility that’s located close to the Xinjiang region, where China imprisons and enslaves its Uyghur population?

Do the goods you import take a circuitous route to the United States, especially through Malaysia or Vietnam?

Is the entity with which you’re transacting included on the DHS Uyghur Forced Labor Prevention Act entity list?

Compliance teams need to know and understand those supply chains.

Know your risky sectors

Cyprus is concerned about sanctions being imposed on its trust and corporate service providers (TCSP), as well as its financial sector, lawyers, accountants, and others who help Russian clients. The island recently received an 800-page dossier from the United States detailing sanctions violations by local individuals and entities that are alleged to have enabled the Russian billionaire, Alisher Usmanov, hide and move his assets. Cypriots were also involved in helping sanctioned Russian oligarch Roman Abramovich move money.

Thirteen Cypriot entities and individuals last month were included on US and UK sanctions lists for helping Russian oligarchs access the global financial system. The Bank of Cyprus has notified 4,000 Russian clients that their accounts will be closed.

Is the Cypriot financial sector risky? You bet.

The US real estate sector has also been known to help Russian elites obscure and move money. Real estate is considered relatively stable and safe, and right now, a relatively small number of jurisdictions in the United States are subject to FinCEN geographic targeting orders (GTOs) that require title companies to identify the natural persons behind shell companies used in non-financed purchases of residential real estate above a $300,000 threshold.

Is the real estate sector risky? Yes. Especially since the GTOs cover residential real estate transactions, and the commercial real estate sector is increasingly at risk for abuse by illicit Russian actors.

Subsidiaries, PEP links, and the like

Compliance teams are also going to be challenged to identify subsidiaries of Russian entities. Those 50 percent owned or controlled by a sanctioned individual or entity are blocked by force of law. But compliance officers will need to research what companies fall under that category.

I was recently asked whether we could just do a Google search to find these entities. I suppose we could, if we wanted to take weeks to identify ownership and control structures. Specialized tools help with those identifications.

But what about entities that are 48 percent owned or controlled by a sanctioned individual or entity? Does any US firm or financial institution want to be known as doing what is technically legal, but may be morally questionable?

Does your company want to be known as a firm that supports Russia’s bloodshed and war crimes in Ukraine by providing, equipment and even boots for the Russian military, however indirectly?

Recent reporting indicates that at least 25 European firms, including Germany’s Vansped Logistics, Jakob KECK Chemie GmbH, and Salamander SPS GmbH & Co. KG, Italy’s Suolificio Morrovallese, Formificio Milanese Team, Slovak companies companies Export-Import and MONETA SK spol, French Radiall SA, and others have been providing the Russian military with everything from combat boots to components for the GLONASS navigation system used by the Russian forces in Ukraine. The goods they provide to Russian defense contractors aren’t technically prohibited, and the companies, such as Stan LLC and Faraday (or Faradei), aren’t sanctioned by the United States… yet. But this cannot be good for these companies’ reputations.

Politically exposed persons (PEPs) also represent a risk, and although transacting with them is not illegal, it is playing with fire if no enhanced due diligence is performed.

Name variations—specifically from Cyrillic to Latin letters—can present a pitfall if not examined cautiously by those at least somewhat well-versed in the language.

Locations that appear to be outside of embargoed jurisdictions, but also present tax IDs or other location flags that show them to be registered in prohibited locations, can also result in violations.

If I wanted to detail every risk, I could write a book, and this article is already becoming a bit lengthy.

The bottom line is, more expertise is needed. Compliance is not just about list screening. It requires knowledge of language, culture, business environment, geography, politics, and other matters that could keep companies out of trouble.

And the regulatory environment is getting more and more complex. Hats off to those who take on that challenge!