Sanctions against Russia – Circumventing the sanctions

G7 leaders met in Hiroshima last Friday 19 May to coordinate on new sanctions against Russia[1]. The heads of state and government placed particular emphasis on anti-circumvention measures for sanctions already in place. Indeed, the level of economic restrictions against Moscow seems to have reached a ceiling, making it necessary to address the main loophole in the system: the use of third countries and entities to circumvent Western sanctions.

• National measures to combat sanctions circumvention

The United States[2] and the United Kingdom[3] have followed suit by publishing updated sanctions regulations (with new entities and individuals targeted) and best practice guides for exporters. The EU is expected to adopt an 11th sanctions package in the coming weeks, adding new products to the ban on transit through Russia, a tool to combat circumvention of sanctions and a ban on exports to Russian “phantom” entities and third countries that re-export to Russia[4].

The aim is to reduce exports via intermediaries, by sanctioning entities and third countries strongly suspected of supplying and contributing to the development of the Russian military-industrial complex.

• Recommendations for exporting companies

It is recommended that companies put in place due diligence measures (i.e. vigilance procedures) to assess the risks of non-compliance before any export. The verification, more commonly known as “screening”, of recipient companies and end-users must now be systematic. It is imperative to ensure that the recipient company does not reship the goods to a Russian end-user under sanction. In addition, it is advisable for exporters to include a non-re-export clause (NRC) or an end-use certificate (EUC) in their sales contracts to ensure that the goods are not re-exported to a sanctioned Russian end-user.

In addition, exporters are advised to include a non-re-export clause (NRC) or an end-use certificate (EUC) in their sales contracts in order to commit their customers not to re-export the goods to sanctioned persons, and to justify their good faith to their authorities or even to their commercial partners and thereby protect themselves from possible fines[5].

The American[6], British[7] and European[8] administrations have listed “red flags” to alert companies. They concern all parties involved in the transaction (including the customer, the end-user, sometimes even carriers or intermediaries), the product being exported, and the country or countries involved in the export.

In particular, the following indicators can be considered as warning signals to be taken into account before exporting:

• The reluctance of the customer to provide accurate information on use and end-user,

• Disproportionate delivery costs,

• The use of complex arrangements to conceal the recipient (shell companies, multiple intermediaries),

• Inaccurate description of the product in the commercial and financial documentation

• Abnormal shipping routes via countries with active trade relations with Russia,

• Countries of destination with weak export control legislation.

Should you have any questions about sanctions or sanctions circumvention and due diligence measures feel free to contact the lawyers at CUSTAX & LEGAL.

Paris, 24 May 2023.

[1] Official G7 Leaders’ Communiqué on Ukraine, 19 May 2023 (Online)

[2] U.S. Department of State press release, 19 May 2023 (Online)

[3] UK Foreign, Commonwealth & Development Office press release, 19 May 2023 (Online)

[4] Press release by the President of the European Commission Ursula Von Der Leyen, 9 May 2023 (Online)

[5] Notice to economic operators, importers and exporters (2022/C 145 I/01) (Online)

[6] Red Flags indicators, BIS (Online)

[7] Notice of UK Department for Business & Trade, 22 May 2023 (Online)

[8] Annex 2 to European Commission Recommendation (EU) 2019/1318 on internal compliance programmes for the control of trade in dual-use items, 30 July 2019 (Online)