FinCEN and BIS Release Joint Alert Warning of Potential Russian and Belarusian Export Control Evasion
On June 28, 2022, the Financial Crimes Enforcement Network (FinCEN) and the US Department of Commerce’s Bureau of Industry and Security (BIS) published a joint alert reminding financial institutions to remain vigilant to Russian and Belarusian efforts to circumvent US export control restrictions. The alert provides a comprehensive overview of the export restrictions imposed by the US in response to Russia’s invasion of Ukraine. FinCEN and BIS also identified certain US export-controlled commodities with a higher risk of diversion to unauthorized Russian and Belarusian end users, as well as transactional and behavioral red flags that signal export control evasion activity.
Comprehensive Export Controls on Russia and Belarus
In response to Russia’s invasion of Ukraine, and Belarus’ material support thereof, the US government and 37 of its US allies have implemented a series of strict export controls intended to limit Russia and Belarus access to a wide-range of products and technologies. As a result, US and non-US companies exporting, reexporting, or transferring (in-country) items subject to comprehensive export controls to, or within, Russia and Belarus risk liability. This risk extends to financial institutions, particularly banks, that may inadvertently violate US laws by providing financial services that support efforts to circumvent US export control prohibitions.
Risk-Based Approach to Identifying Evasion Efforts
While banks may be particularly vulnerable to evasion measures due to their involvement in the vast majority of international trade transactions, other financial institutions, such as credit card operators and foreign exchange dealers, may also be implicated in Russian/Belarusian evasion tactics. There are several kinds of financial services that could potentially facilitate illicit transactions including:
- Processing payments for exported goods;
- Issuing lines of credit for exporters;
- Providing or handling the payments supported by letters of credit;
- Processing payments associated with factoring of accounts receivables by an exporter;
- Providing general credit or working capital loans; and
- Issuing or paying insurance on the shipping and delivery of goods to protect the exporter from nonpayment by the buyer.
Given the breadth of services that could be implicated, FinCEN and BIS advocate for a “risk-based” approach to identify suspicious transactions and urge financial institutions to rely on their internal risk programs in line with their underlying Bank Secrecy Act (BSA) obligations.
Under the BSA, a financial institution must file a Suspicious Activity Report (SAR) “if it knows, suspects, or has reason to suspect a transaction conducted or attempted by, at, or through the financial institution involves funds derived from illegal activity, or attempts to disguise funds derived from illegal activity; is designed to evade regulations promulgated under the BSA; lacks a business or apparent lawful purpose; or involves the use of the financial institution to facilitate criminal activity, including sanctions or export control evasion.”1 The alert also provides instructions on how to file SARs related to Russia/Belarus export restrictions evasions, including maintaining documents and records related to the suspicious activity.
Financial institutions should therefore carefully review any export-related financial activity as the collected information may provide insight into the transaction. This could include letters of credits, wire transfer payments, transmittal orders, end-use certifications, and other export-related documentation.
Potential Export Evasion Red Flags
In addition to detailing how financial institutions should report suspicious behavior, FinCEN and BIS also provide a non-exhaustive list of red flag indicators to assist financial institutions in identifying such behavior, including:
- The nature of a customer’s underlying business (specifically military or government-related work), type of service(s) or product(s) offered, and geographical presence pose additional risks of unintentional involvement in the evasion of export controls for Russia and Belarus;
- Transactions involving entities with little to no web presence;
- Transactions involving a change in shipments or payments that were previously scheduled to go to Russia or Belarus;
- Last-minute changes to transactions associated with an entity in Russia or Belarus;
- Parties to transactions with addresses that do not appear consistent with the business or are otherwise problematic (e.g., either the physical address does not exist, or it is residential);
- Rapid shifts to new purchasers of transactions involving restricted luxury goods.
- Transactions involving freight-forwarding firms that are also listed as the product’s final end customer;
- Transactions associated with atypical shipping routes for a product and destination.
- When combined with other derogatory information, large dollar or volume purchases, including through the use of business credit cards, of items designated as EAR99 (or large volume or dollar purchases at wholesale electrical/industrial merchants, electrical parts and equipment providers, or electronic parts providers), in the United States or abroad, especially if paired with purchases at shipping companies;
- Companies or individuals with links to Russian state-owned corporations (including shared ownership, as well as branches of, subsidiaries of, or shareholders in such state-owned corporations) involved in export-related transactions or the provision of export-related services; and
- Use of business checking or foreign exchange accounts by U.S.-based merchants involved in the import and export of electronic equipment where transactions are conducted with third-country-based electronics and aerospace firms that also have offices in Russia or Belarus.
A full list of the red flag indicators can be found here.
Commodities of Concern
The alert also identifies several items controlled under the Export Administration Regulations (EAR) that are of “special concern” because their potential diversion could support Russian and Belarusian defense capabilities. The list of items includes the following:
- Aircraft Equipment controlled under 9A991;
- Antennas controlled under 7A994;
- Breathing Systems controlled under 8A992;
- Cameras controlled under 6A993;
- GPS Systems controlled under 7A994;
- Inertial Measurement Units controlled under 7A994;
- Integrated Circuits controlled under 3A001, 3A991, or 5A991;
- Oil Field Equipment controlled under EAR99;
- Sonar Systems controlled under 6A991;
- Spectrophotometers controlled under 3A999;
- Test Equipment controlled under 3B992;
- Thrusters controlled under 8A992;
- Underwater Communications controlled under 5A991;
- Vacuum Pumps controlled under 2B999;
- Wafer Fabrication Equipment controlled under 3B002 or 3B991; and
- Wafer Substrates controlled under 3C00x.
All of the items listed above require a US export license authorization prior to being exported or reexported to Russia or Belarus. The alert also emphasizes that using these items to produce foreign-origin products destined for Russia or Belarus is also strictly prohibited. The identification of these particular items illustrates the US government’s concern that malicious actors may be circumventing US export controls with respect to exports related to maritime technology, microelectronics, and other items that may support Russia’s military and defense capabilities.
Both FinCEN and BIS have issued separate alerts warning against evasion efforts by Russian and Belarusian individuals and entities in the past. However, this joint measure came on the heels of the G7 summit announcement on June 27, 2022 where the US and its allies pledged to intensify sanctions measures and indicates the US’s intention to strictly enforce its export control restrictions. US Secretary of Commerce Gina Raimondo said at a recent BIS conference, “the U.S. and its allies and partners will continue to closely monitor backfill attempts and will not hesitate to act swiftly to hold parties accountable who attempt to circumvent our controls.”
We will continue to monitor the sanctions and export control restrictions as they emerge.
© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.