Sanctions evasion enforcement takes center stage

US, UK, and EU regulators are warning companies that even seemingly innocent activities can result in sanctions enforcement and penalties under widening theories of evasion and circumvention.

Since Russia’s further invasion of Ukraine in February 2022, the US, UK, and EU have swiftly aligned on a multifaceted sanctions and export controls strategy, developing the legal framework required to implement numerous and novel restrictions, and joining together in multinational efforts to identify and block or freeze assets of sanctions violators. Though some divergence in sanctions regulation and implementation persists, this wider geopolitically driven harmonization looks to be entering a critical new phase: shifting from sanctions and export controls implementation to coordinated efforts to investigate and prosecute those who violate or evade sanctions and export controls.

Strengthening enforcement of sanctions and export controls and curbing sanctions are driving international alignment and advances in financial crime regulation. This new chapter in enforcement requires companies, particularly multinationals and those engaged in financial services or international trade, to redouble their efforts and reconsider sanctions risks and compliance through a multijurisdictional lens.

US

The United States has taken a whole-of-government approach to sanctions and export controls in the wake of the Ukraine invasion, with the Departments of Treasury, State, Commerce, and Justice coordinating and issuing joint alerts to an extent previously unseen. The Biden Administration has demonstrated its commitment to international coordination, galvanizing allies and partners, in particular the G7, to support a broader sanctions strategy. One notable example is the multilateral Russian Elites, Proxies and Oligarchs (REPO) Task Force, which issued a Global Advisory on Russian Sanctions Evasion in March 2023 highlighting its impact and activities to date, identifying sanctions evasion typologies, and offering practical compliance recommendations. Financial intelligence units of the G7 and Australia, the Netherlands, and New Zealand have likewise banded together in the Russia-Related Illicit Finance and Sanctions (RRIFS) working group, with members issuing financial trends analyses and reports on indicators of Russia-related sanctions evasion.

US regulators have been vocal about the Department of Justice’s (DOJ) ramping up of resources to investigate and prosecute corporate crime, including in the sanctions evasion context. Deputy Attorney General Lisa Monaco noted in March 2023 that the DOJ is conducting corporate investigations into sanctions evasion “in industries as varied as transportation, fin tech, banking, defense and agriculture.” To effectively pursue investigations and enforcement at this key intersection of national security and corporate crime, the DOJ is restructuring and committing significant resources to its National Security Division (NSD) and has announced the hiring of 25 new prosecutors and a first-ever chief counsel for Corporate Enforcement. 

Sanctions circumvention can extend into various industries and geographies, including through the use of virtual assets and cryptocurrency. The US government is continuing to commit energy and resources to combat cybercrime, ransomware, and related money laundering activity as part of a coordinated approach, with the DOJ’s National Cryptocurrency Enforcement Team and the FBI’s Virtual Asset Unit collaborating with other agencies including the Treasury Department’s Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network (FinCEN).

Recently, during the G7 summit in May 2023, OFAC, in coordination with the G7 and other international partners, imposed extensive new Russia-related sanctions and export controls, while FinCEN and the Department of Commerce’s Bureau of Industry and Security (BIS) issued a joint alert urging continued vigilance in the face of potential Russian export control evasion attempts.  This alert updates FinCEN and BIS’s June 2022 joint alert and, in addition to reviewing the export controls implemented since that time:

• Highlights the use of third-party intermediaries and transshipment points to evade export controls;
• Offers a list of high-priority commodity items of concern;
• Reviews red flag indicators of export control evasion; and
• Emphasizes the need for financial institutions to apply a risk-based approach in the context of trade finance.

These collective measures followed on the heels of the DOJ’s May 16, 2023 announcement of the first five enforcement actions taken by the Disruptive Technology Strike Force, established in February 2023 and led by the DOJ’s NSD and BIS, in conjunction with the FBI, US Immigration and Customs Enforcement’s Homeland Security Investigations, and multiple US Attorneys’ Offices. The DOJ’s actions involved, among other things, the disruption of procurement networks created to assist Russian military and intelligence services in obtaining sensitive technology in violation of US laws.

UK

Sanctions circumvention and evasion are the key enforcement priorities for UK sanctions authorities in 2023. Indeed, they are among the key enforcement priorities in the UK more generally: the UK’s second official Economic Crime Plan, published in March 2023, named combating kleptocracy and curbing sanctions evasion as one of the UK’s top three economic crime enforcement priorities over the next five years, and Prime Minister Rishi Sunak has announced a £50m Economic Deterrence Initiative dedicated to tackling sanctions evasion across the UK’s trade, transport, and financial sanctions regimes.

This focus on evasion builds on the transformational developments in the UK sanctions landscape in 2022. In June 2022, the UK enacted amendments to the Policing and Crime Act 2017, which enable civil fines to be imposed for sanctions breaches on an effectively strict liability basis. The UK also enacted arguably the most expansive and strictest set of trade and financial restrictions on Russia in the world, including many innovative measures (such as professional services bans) without precedent in UK law. As soon as the stream of new restrictions targeting Russia started to slow in summer 2022, the UK’s civil and criminal financial sanctions enforcement authorities (the Office of Financial Sanctions Implementation (OFSI) and the National Crime Agency (NCA)) published, jointly with the private sector, its first “Red Alert” highlighting typologies which may be indicia of sanctions evasion involving Russian elites and enablers. The resulting combination of structural changes to the law, expanded and more innovative sanctions, and a more collaborative, proactive approach to messaging by enforcement authorities introduced in 2022 has transformed the enforcement environment for 2023 and beyond.

In addition to the UK authorities’ sustained focus on detecting and investigating circumvention involving Russian elites and enablers (which has not abated), the lens is now broadening to include circumvention of Russia sanctions other than asset freezes on kleptocrats. Of particular note is a May 22, 2023 publication by the Export Control Joint Unit (ECJU) (the civil enforcement authority for UK trade sanctions) setting out key risk indicators for goods diversion and other unlawful evasion of trade sanctions, and a complementary May 30, 2023 publication by the Foreign, Commonwealth and Development Office (FCDO) (which enacts UK sanctions) identifying “high priority” items that Russia is using in its weapons systems and which are particularly at risk for sanctions evasion. These publications are noteworthy both because they suggest a common focus on evasion across multiple UK government bodies and different sanctions regimes, and because they illustrate the UK’s devolved approach to sanctions guidance and enforcement across a range of agencies and organizations likely to be close to sectors of interest.

The take-home points from the UK in 2023 are threefold. First, we are in a new, more proactive and better-funded era of sanctions enforcement, which is intended to push sanctions compliance up the agenda for corporates and firms doing business here. Second, sanctions compliance is a key risk not only for financial institutions but for corporates and firms across a diverse range of sectors. And third, although there is a common focus on sanctions compliance to prevent circumvention, corporates and firms should stay alert to developments, guidance, and statements on compliance specific to their sectors, which may provide clues to enforcement priorities and guide diligence and compliance efforts.

EU

As in the US and the UK, following the rapid expansion of sanctions against Russia in 2022, the EU is currently shifting its focus to enforcement, and in particular to preventing sanctions circumvention. In February 2023, the European Council stated that a key focus for the coming year is that “anti-circumvention measures will be reinforced" and shortly afterward, ten EU Member States, including France, Germany, and Italy, called for a crackdown on sanctions evasion, noting that “2023 must be the year of success in countering circumvention."

The EU is attempting to tackle two distinct areas of circumvention risk: first, differing levels of enforcement between EU Member States, and second, sanctions evasion via third countries.

Harmonization between EU Member States is an added challenge for the EU (as compared to the US and the UK) because while the EU centrally imposes sanctions that directly apply to all EU Member States, sanctions enforcement is managed by the national competent authorities (NCAs) of each individual Member State. This can lead to differing interpretations of EU sanctions and differing degrees of enforcement, which can create gaps that can be exploited for evasion. The EU has adopted various measures to counteract this:

• In March 2022, it introduced an EU Sanctions Whistleblower Tool through which sanctions violations can be reported anonymously to the European Commission, which will if found credible, share an anonymized report with the relevant NCA (in addition, sanctions violations can, of course, be directly reported to the NCA).
• In November 2022, the European Council added the violation of EU sanctions to the list of “EU crimes.” As a result, the European Commission has proposed a directive setting out common minimum rules concerning the definition of criminal offences for sanctions breaches and related penalties, which, once adopted, all Member States will have to implement. The Commission has announced that this will be critical to harmonizing enforcement to combat evasion and that the criminal sanctions offences will also cover sanctions circumvention, including the failure to report information on funds or economic resources of a designated person that should be, but have not been, frozen.
• Over the course of the last three sanctions packages imposed on Russia, the EU progressively increased the requirements for NCAs to cooperate with each other, with the aim of encouraging NCAs to arrive at consistent decisions.

In February 2023, the Netherlands published a “non-paper” which sets out proposals for combating sanctions circumvention, including: (i) strengthening cooperation between NCAs and other relevant agencies; (ii) improving the EU’s capacities for analyzing circumvention at a central (rather than Member State) level, for example by using the (yet-to-be-established) EU Anti-Money Laundering Authority; (iii) diplomatic outreach to third countries involved in circumvention; (iv) publishing warnings about specific sectors or companies suspected of circumvention to enable better due diligence; and (v) imposing restrictions on trade with third countries that are responsible for widespread circumvention while failing to address the issue. While not an official EU proposal, it is nevertheless intended to spur debate about these suggestions at the EU level.

In addition, in April 2023, the EU required the reporting of any changes in a designated person’s assets or asset structure in the two weeks prior to designation. This measure aims to capture changes in the holding structure of assets that designated persons may have made to conceal their assets and to provide NCAs with the information required to detect and freeze those assets.

As noted above, this year the EU’s focus on curbing sanctions evasion appears to be shifting from harmonizing internal standards between Member States to also tackling circumvention via third countries. Notably, in December 2022, the EU appointed an International Special Envoy for the Implementation of EU Sanctions, who will engage with third countries to encourage them to cooperate in sanctions implementation. Circumvention by third countries is also a key topic in the 11^th package of EU sanctions against Russia adopted on 23 June 2023, which focuses on preventing sanctions circumvention by:

• “blacklisting” a series of foreign companies suspected of supporting Russia’s military – including, for the first time, Chinese and UAE companies – so that permission to export controlled items to them will, in general, be refused;
• expanding the requirement for EU persons to report information that would facilitate the implementation of EU sanctions (e.g., information on suspicious trades) to NCAs;
• including a new mechanism, which, if activated, would allow the EU to restrict exports to third countries suspected of assisting with Russia’s sanctions circumvention (this is only foreseen as a “last resort”); and
• restricting access of ships suspected of certain trade sanctions circumventions to EU ports.

While the 11^th sanctions package, as adopted, has been toned down somewhat from the initial proposals that were discussed in May, in particular with respect to targeting third countries complicit in sanctions circumvention, it nevertheless represents a willingness on the part of the EU to ramp up anti-circumvention measures going forward.

Key Takeaways

Western governments have dramatically increased their level of coordination and communication in response to the war in Ukraine and are mobilizing enforcement to combat and deter the circumvention of the many novel and complex sanctions and export controls that have been implemented over the past year and a half.

While the contours of future alignment and divergence across sanctions regimes remain to be seen, companies have been put on notice of the activities, geographies, commodities, and industry sectors associated with higher sanctions-evasion risk. Accordingly, companies should consider revisiting their risk assessments and compliance programs to take into account the changing sanctions risk landscape.