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Banks have detected almost US$1bn worth of transactions suspected to have facilitated exports from the US to Russia in possible violation of sanctions, the US financial crime enforcement agency says.

Since Russia’s February 2022 invasion of Ukraine, US exporters of sensitive goods have received payments directly from Russia or through intermediary companies in other countries in transactions that could contravene US export controls, an analysis of reports filed by banks under the Banking Secrecy Act shows.

The findings, published by the Financial Crimes Enforcement Network (FinCEN) on September 8, further confirm that since the outbreak of the war Russian importers have been able to circumvent export controls and other sanctions by routing trade with Western economies through a handful of third countries.

While previous trade data highlighted the role of ex-Soviet countries such as Armenia, Georgia and Kazakhstan in facilitating trade with Russia, FinCEN found that China and Hong Kong were more frequently involved in suspected financial flows, followed by Turkey, the UAE, the UK, Canada, Singapore and Cyprus.

The US and many other countries control where goods considered sensitive, such as those which have military purposes or contain cutting-edge technology, can be exported to.

Many of the filings concerned exports by the US electronics industry and the sale of products such as microelectronic components, imaging technology, electronic filters and electromechanical instrumentation, according to the FinCEN analysis. Electronics companies in Hong Kong also featured heavily in lenders’ reports.

The filings revealed several networks of companies, often based in China, Hong Kong and the United Arab Emirates, which sourced electronics from countries such as the US and routed them to Russia.

In one case, FinCEN says banking data identified a US maker of radio frequency products which was wired funds from companies in Azerbaijan and China between March 2022 and January this year.

The bank filing the report “noted that this US-based company may be selling products within the airline, electronic warfare, government, military, and wireless industries” to companies in Azerbaijan and China that are then on-selling the goods to Russia.

The filings also revealed potential sanctions evasion by industrial machinery providers in the US, China, Hong Kong and Singapore suspected of “potentially” supplying dual-use goods to Russia, in addition to US providers of professional and “export-related” services to Russia’s defence industry, military and intelligence services.

The analysis found that after the invasion, Russian importers that had previously dealt directly with companies in the US or elsewhere may have turned to intermediaries or subsidiaries in Central Asia and the UAE to take over the trade relationships, with Russia remaining the ultimate destination of the goods.

In another case, reports provided by one bank suggested that a UAE electronics retailer was transacting with Russian-linked firms in countries such as Azerbaijan, the British Virgin Islands, Estonia and Serbia, which had no consistent lines of business and where the bank could not determine the reasons for the payments.

 

Bank reporting prized

The apparent involvement of companies located in US-allied countries such as the UK, Germany and Belgium in suspected sanctions evasion suggests that vigilance to Russia-related export control violations needs to extend beyond Moscow’s neighbours, says Tyler Grove, an international trade partner with law firm Akin Gump.

“Goods flowing through intermediaries in Europe may violate EU and UK export controls and sanctions as well as US regulations,” Grove tells GTR. “This highlights that suppliers must conduct due diligence on their customers and the end-users of their products even in countries that, on the surface, pose a relatively low risk.”

FinCEN, alongside other US government agencies, has previously urged banks to be alert to transactions and trade-related services which may facilitate the movement of goods in violation of export controls.

In May FinCEN warned banks to make sure they have strong controls in place to detect such trade, noting that Russia’s intelligence apparatus has been tasked with finding new ways to import equipment that can be used in its military campaign against Ukraine.

The uptick in reports, known as suspicious activity reports (SARs), provided by banks in response to the alerts has been instrumental in generating investigation leads for US law enforcement bodies and identifying foreign companies that may be subject to sanctions, FinCEN says.

In addition to providing direct services to US and overseas clients, many US banks process a large volume of payments in their role as US dollar correspondent banks, meaning they have visibility of transactions between overseas companies and financial institutions.

“We appreciate our strong partnership with financial institutions and their continued efforts to provide significant financial intelligence leads and indications of potential Russia-related export control violations,” acting FinCEN director Himamauli Das said last week.

Overall, the 333 reports made by banks scrutinised by FinCEN for its analysis detailed almost US$1bn in suspicious activity. The figure “seems like a high amount for illicit diversion in the export control context,” says Anthony Rapa, co-chair of law firm Blank Rome’s international trade practice, noting that it only represents what has been detected.

Lawyers see banks as unlikely to face enforcement action for handling payments with links to export control violations unless there are indications of systemic defects in their internal financial crime processes.

“In the absence of egregious misconduct by the bank, it is probably unlikely,” says Grove.