On September 24, 2024, the Group of 7 (G7) Sub-Working Group on Export Control Enforcement issued its first-ever joint industry guidance (Guidance) on detecting and impeding Russian attempts to evade sanctions and export controls. The Guidance summarizes key items on the Common High Priority List (CHPL), identifies red flag indicators of potential evasion tactics, and provides a list of steps traders should follow upon encountering warning signs. This publication was coordinated with the Global Export Control Coalition (GECC), which includes 39 member states that have collaborated on implementing controls in response to Russia's attack on Ukraine.

The Guidance begins by outlining several measures the Russian government has undertaken in recent years to facilitate unlawful procurement efforts. These include issuing various federal resolutions and decrees that, for example, authorize Russia's Federal Agency for the Administration of Public Property (Rosimushchestvo) to seize Russian assets owned by persons from "unfriendly states." A 2022 decree requires certain organizations, including companies based in GECC countries, to grant the Russian Federal Security Service (FSB) access to their information resources for monitoring. The Guidance stresses that "all parties of the supply chain" must be aware of Russian official policy in this area to mitigate risk.

Common High Priority List

The Guidance provides an overview of the CHPL, which catalogs 50 items that "pose a heightened risk of illicit diversion to Russia" due to their use in Russian military operations. The CHPL is divided into tiers by descending level of risk. As of the latest update in February 2024, Tier 1 includes electronic integrated circuits used in producing weapons systems that are of highest concern given the lack of production in Russia and limited manufacturing globally. Tier 2 includes other electronics, especially those used for wireless communications, for which Russia prefers external technology manufactured by G7 and GECC countries. Tiers 3 and 4 contain longer lists of mechanical components and equipment used in weapons systems. The Guidance emphasizes that, while Russia has domestic capabilities to produce some of these items, "Russia's military industrial complex relies heavily on technology originating from G7 or GECC countries to manufacture advanced weaponry."

Red Flag Indicators of Potential Evasion

The Guidance identifies red flags industry should look out for before exporting. Many of these evasion warning signs resemble those included in prior guidance regarding sanctions evasion issued by the U.S. government and, more recently, the Price Cap Coalition. The indicators can be divided into issues regarding customer business activity, documentation, and the identities of parties involved in a transaction.

• Customer Business Activity
  • Sudden changes in activity after February 24, 2022, or after updates to sanctions and export controls
  • Concealing end user through third country circumvention
  • Dealing in high-risk goods
  • One-and-done exporters
  • Unwillingness to provide certification with sanction requirements
• Documentation
  • False, inaccurate, inconsistent, or missing documentation
  • Transactional abnormalities (i.e., odd shipping routes, disproportionate goods-to-payment ratio)
  • Vague or incomplete information, particularly regarding end use
  • Invoices for sanctioned goods divided into smaller amounts
• Identities of Involved Parties 
  • Suspicious or conflicting customer information (addresses, internet presence, contact information)
  • Customer connections suggestive of business ties to Russia
  • Last-minute changes from an entity in Russia or Belarus to an entity elsewhere
  • Payments from third country entities that are not otherwise involved with transaction

Best Practices

Finally, upon encountering Red Flag Indicators, the Guidance recommends due diligence best practices. While acknowledging that there is no "one-size-fits-all" approach, the Guidance recommends traders considering potentially risky transactions take the following steps.

• Step 1: Run transaction party names and addresses against applicable public sanctions lists and non-profit watchlists, noting possible evidence of shell companies.
• Step 2: Conduct further due diligence as needed based on results from that initial search, including requesting additional information from the customer.
• Step 3: Analyze the risks of export control and sanctions evasion, reevaluating initial red flags in light of the information gathered from due diligence.
• Step 4: If there is still cause for concern, refrain from the transaction and pursue reporting to relevant government agencies where appropriate.

Takeaways

• The G7 continues, through the Guidance and public messaging, to highlight the seriousness with which industry should view the continuing threat of evasive Russian practices, such as diversion, to global security and trade, but also the importance of a unified framework in addressing such issues. Many recommendations noted in the Guidance have been seen before in individual publications from G7 and GECC countries, but the Guidance streamlines messaging about warning signs and best practices so industry participants can look to one source (as well as the Additional Resources included therein).
• The Guidance emphasizes that Russia has employed increasingly sophisticated evasion tactics that continue to evolve during the ongoing conflict. These include not only formal government action by Russia, but more covert methods that are less likely to set off warning bells. Industry should continue to maintain awareness of such everchanging tactics.
• As Russia develops new ways to evade sanctions and export controls, the Red Flag Indicators underscore the need for heightened due diligence regarding third party circumvention in addition to vetting prospective customers.

For more information, please contact:

Timothy P. O'Toole, totoole@milchev.com, 202-626-5552

Laura Deegan, ldeegan@milchev.com, 202-626-5942

Caroline J. Watson, cwatson@milchev.com, 202-626-6083

Melissa Burgess, mburgess@milchev.com, 202-626-5914

Manuel Levitt, mlevitt@milchev.com, 202-626-5921

Annie Cho, acho@milchev.com, 202-626-1570

Katie Cantone-Hardy, kcantonehardy@milchev.com, 202-626-5885

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.