On June 28, 2022, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and the Department of Commerce’s Bureau of Industry and Security (BIS) issued a Joint Alert entitled “FinCEN and the U.S. Department of Commerce’s Bureau of Industry and Security Urge Increased Vigilance for Potential Russian and Belarusian Export Control Evasion Attempts” (“Joint Alert”). The Joint Alert marks the first time FinCEN and BIS have collaborated on an alert of this nature and has important implications for both financial institutions and exporters/international trade parties.
The Joint Alert was prompted by concerns over “efforts by individuals or entities to evade BIS export controls implemented in connection with the Russian Federation’s (Russia) further invasion of Ukraine.” As noted in prior updates available on Steptoe’s International Compliance Blog, BIS has recently taken a number of measures to significantly heighten export controls restrictions on Russia and Belarus as destinations, as well as military and military-intelligence end uses and end users (some of which are included on the BIS Entity List, Supplement No. 4 to Part 744 of the EAR).
Commodities of Concern
The Joint Alert lists several items deemed to be “commodities of concern” because of “potential diversion to and end use by Russia and Belarus to further their military and defense capabilities.” Such commodities include: aircraft parts/equipment, antennas, breathing systems, cameras, GPS systems, inertial measurement units, integrated circuits, oil field equipment, sonar systems, spectrophotometers, test equipment, thrusters, underwater communications, vacuum pumps, wafer fabrication equipment, and wafer substrates.
These items, some of which appear on Supplement No. 4 to Part 746 of the EAR, require a license for export or reexport to Russia or Belarus. The Joint Alert notes that these are not the only items subject to U.S. export controls with respect to Russia or Belarus nor are they the only items for which diversion and similar risks exist. However, the list is intended to “assist in the risk-based screening of export-related financial transactions” by financial institutions.
Therefore, while U.S. financial institutions likely have focused on U.S. economic sanctions and financial restrictions directed at Russia and Belarus, the Joint Alert underscores the importance of U.S. financial institutions being cognizant of U.S. export and reexport controls that may underlie financial transfers or other transactions and require licenses from BIS.
Risk-Based Approach to Trade Finance
The Joint Alert notes that a variety of financial institutions may be involved in financial transactions related to export violations, including those involved in “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.”
The Joint Alert notes that financial institutions providing such services and dealing with customers that deal in maritime technology, microelectronics, other technologies used to support Russia’s military, defense, or intelligence sectors, or export/import industries should conduct risk assessments and employ appropriate risk mitigation measures consistent with their underlying Bank Secrecy Act (BSA) obligations and consistent with the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC) Determinations regarding certain sanctioned sectors of the Russian Federation economy (e.g. the aviation sector). Among other measures, this may include customer due diligence and beneficial ownership measures, including those required by FinCEN rules, where applicable.
The Joint Alert notes that, in addition to know your customer (KYC) measures, financial institutions may have visibility into export controls violations, evasion of license requirements, or various other red flags, causes for concern, or other suspicious conduct through their access to “customers’ end-use certificates, export documents, or other more extensive documentation associated with letters of credit-based trade financing,” as well as information associated with transaction parties made available through mechanisms such as payment transmittal orders they receive or handle as an intermediary institution, such as SWIFT messages.
As a result of the Joint Alert, U.S. financial institutions, particularly those involved in trade finance, should consider how to update their compliance programs, policies, and procedures to address increased export/reexport controls targeting Russia, Belarus, and restricted end users and end uses under the EAR.
Red Flags for Export Control Evasion
The Joint Alert notes there are a variety of means through which persons can seek to acquire controlled items subject to the EAR, including attempting to procure items not specified on the U.S. Commerce Control List, known by the designation “EAR99,” which are then exported without BIS authorization. Such EAR99 items generally are not subject to extensive licensing controls for most countries, but now may require an export, reexport, or transfer (in country) license for Russia or Belarus under Sections 764.5 or 764.8 of the EAR. According to the Joint Alert, persons may engage a complicit shipper or customs broker to “obscure either the nature of the goods or their ultimate destinations” as a tactic to evade U.S. export/reexport controls.
In this regard, the Joint Alert provides a list of 22 specific red flags. The red flags should be considered “in conjunction with conducting appropriate risk-based customer and transactional due diligence” and “all the surrounding facts and circumstances.” The Joint Alert states that “no single financial red flag is necessarily indicative of illicit or suspicious activity.” However, an identified red flag may warrant further investigation in the absence of a readily apparent or known explanation. Examples of red flags include “transactions involving entities with little to no web presence” and “last-minute changes to transactions associated with an originator or beneficiary located in Russia or Belarus,” among others.
Suspicious Activity Reporting
The Joint Alert directs financial institutions to file SARs, as warranted, for potential export controls violations or evasive activity and to use the key term “FIN-2022-RUSSIABIS” in SAR field 2 when filing a SAR with respect to activities highlighted in the alert. It also directs filers to include the “connection between the suspicious activity being reported and the activities highlighted in this alert” in the SAR narrative field and to provide, if known, the North American Industry Code(s) (NAICs) for the involved product. Filers should also check box 38(z) (Other Suspicious Activity) and note “Russia Export Restrictions Evasion” in the SAR form.
Notably, a transaction need not be a violation of the EAR or export/reexport license requirements for a suspicious activity to be identified. Thus, by utilizing the red flags list indicative of potential evasive activity in the Joint Alert or other BIS guidance, a U.S. financial institution may determine that a SAR should be submitted to FinCEN even if a potential violation of the EAR itself is not identified. If such a determination is made, the U.S. financial institution cannot disclose to the involved parties that a SAR has been filed. SARs can be a catalyst for law enforcement or other governmental investigations regarding the exporter’s conduct.
Implications for Financial Institutions
This is the first time FinCEN and BIS have issued an alert of this nature and financial institutions should carefully review the alert and consider whether revisions to their existing compliance programs, including its underlying risk assessment, are warranted in light of the alert. For example, financial institutions involved in trade finance should consider in what circumstances they will ask for and review underlying documents associated with a financial transaction such as a purchase order, bill of lading, or letter of credit, as well as how they will handle transactions for entities subject to heightened export controls restrictions (e.g. entities on the BIS Entity List) and where specific licenses or applicable license exceptions under the EAR may be required. To the extent follow up inquiries are warranted about the facts underlying a transaction, the U.S. financial institution may need procedures and internal controls to request, obtain, review, and document additional information. Institutions that act as intermediaries in trade finance transactions should consider whether additional measures are warranted to enable the identification and reporting of potentially suspicious activity related to export controls evasion.
Many financial institutions have compliance personnel with expertise in U.S. anti-money laundering and economic sanctions laws, executive orders, regulations, and published guidance, but such individuals may not have expertise in BIS export controls, which operate under a distinct and complex legal regime. Identifying financial transactions potentially linked to export controls violations as well as related red flags and suspicious conduct requires an understanding of the applicable rules under the EAR, which can apply to a broad category of conduct – including to persons outside the United States that are reexporting or transferring (in country) controlled items subject to the EAR to restricted countries, end users, and end uses – and in other manners that are not necessarily intuitive. Financial institutions should also consider whether additional training or similar educational measures are warranted concerning BIS export/reexport controls.
Implications for Exporters/International Trade Parties
Exporters and persons engaging in international trade with Russia and Belarus may face additional questions and scrutiny from financial institutions as such institutions enhance their compliance programs with respect to U.S. export controls. This may include additional requests for documentation, information about potential license requirements, and/or delays in processing financial transactions. Exporters and other parties to international trade transactions who believe their transactions related to Russia or Belarus may be subject to additional scrutiny should consider collecting and preparing documents that may be requested by financial institutions prior to initiating transactions to avoid delays. Even if certain international trade is lawful and does not require a U.S. export/reexport license, financial transfers associated with items destined for Russia or Belarus will attract more attention from U.S. financial institutions and government agencies.
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