Authorities in the US have warned trade finance lenders they may be unwittingly facilitating exports of sanctioned goods to Russia, with funds potentially moving through the US financial system.
The Kremlin’s intelligence service has been tasked with “finding ways to circumvent sanctions and export controls” to replace military equipment damaged in its war with Ukraine, according to a joint alert from the Financial Crimes Enforcement Network (FinCEN) and the Bureau of Industry and Security.
The US says Russia is using covert procurement agents and front companies to orchestrate purchases of banned goods from legitimate suppliers, which receive payment through non-Russian bank accounts.
Buyers “may transmit funds through a US correspondent bank account to route funds back to the supplier”, the alert says.
“The front company will then route the goods to Russia, often through permissive jurisdictions such as known transshipment points. Such a procurement network may also involve additional layering to create complexity and further obfuscate the buyer and end user.”
Procurement agents are also creating shell and transshipment companies that order banned goods from multiple similar suppliers, reducing the value of payments to any single seller “with the intent to attract less attention than would large-volume transactions”.
The alert targets all financial institutions involved in trade, including those providing export credit facilities, working capital loans, factoring solutions and payment processing, as well as companies providing or making insurance-related payments.
Those banks should deploy appropriate risk-mitigation measures consistent with the Bank Secrecy Act, the two authorities say, including by carrying out thorough customer due diligence and beneficial ownership checks.
The alert identifies nine HS codes, corresponding to various electronics or machinery-related products, that require a licence to be exported to Russia, Belarus, Crimea or Iran.
Financial institutions that encounter one of those nine codes are “strongly encouraged to conduct due diligence… to identify possible third-party intermediaries and attempts at evasion of US export controls”.
Patterns that could indicate risky activity include companies trading those goods that did not do so in the past, or whose import volumes have spiked since Russia’s invasion of Ukraine, authorities add.
Banks should also assess when companies involved in a transaction were incorporated, as well as whether their usual business activities are consistent with the goods ordered.
The alert suggests that red flags include a customer that does not provide details on the intended end use of goods being imported or on company ownership, or a buyer significantly overpaying based on commodity market prices.
The alert was followed by similar guidance from the UK government this week, warning exporters that Russia “will seek to procure restricted goods via other routes” since the introduction of restrictions on direct trade between the two countries.
Traders should examine company information, including historic trading activity and geographical ties, as well as whether products being sold could have military uses even if not subject to any licensing regime.
The crackdown on Russian attempts to evade export controls follows findings by the Financial Times that between February and December 2022, more than US$1bn of exports from the EU effectively disappeared in transit to countries with economic or trade ties to Russia.
Of a sample of goods worth around US$2bn, only half arrived at their stated destinations in Kazakhstan, Kyrgyzstan and Armenia, according to the newspaper’s analysis of public import and export data.
It says a disproportionate share of those goods left from Baltic countries bordering Russia and Belarus, likely indicating that Russia is continuing to import materials including aircraft components and gas turbines.
FinCEN and the Bureau of Industry and Security threaten enforcement action against companies found to have breached rules on exports to Russia.
It cites a case study of two US citizens who were arrested in March this year, charged with facilitating the illegal export of aviation-related technology to Russia.
The duo operated KanRus Trading Company, a supplier of electronics installed in aircrafts, and are accused of concealing the end users, final destinations and values of the company’s exports.
After a shipment to Russia was detained in February last year, one of the defendants is accused of telling the Russian buyer that “things are complicated in the USA” and this “is NOT the right time” for more paperwork and visibility.