Additional due diligence needed to address ‘red flags’ over Russian sanctions

Businesses exporting high-risk goods need to take extra steps in due diligence in these scenarios to ensure compliance according to the new guidance (8-page / 879KB PDF), issued jointly by the ‘Group of 7’ (G7) countries. The guidance, which comes after the G7 countries’ implementation of unprecedented export controls and sanctions on Russia, sets out a list of items that pose a heightened risk of being diverted to Russia and provides updated red flag indicators of potential sanctions evasion for companies and industries.

The publication by the G7 countries is a response to Russia’s elevated tactics capable of evading established export controls and sanctions enforcement. The guidance cites that Russian proliferators operate as “transshipment agents” and divert dual use technologies and controlled goods from third countries to Russia, and the Russian government has taken steps to support these illicit procurement efforts.

Businesses should conduct additional risk-based customer and transactional due diligence where they encounter any of the red flags detailed in the guidance, which also suggests certain steps businesses can take to try to mitigate any red flag indicators. This is particularly important for any parties that are involved in the supply chain of items that appear on the Common High Priority List (CHPL), which reflects items retrieved from Russian weapons found on the battlefield or identified as essential to Russia to manufacture its military equipment.

Rebecca Devaney of Pinsent Masons, who specialises in sanctions and export controls, said: “Those parties should be aware of the red flags detailed in the guidance. They should ensure that their due diligence processes are able to detect red flags indicators of sanctions evasion and make necessary improvements where any gaps in their compliance systems are detected.”

This guidance builds upon a previous red alert jointly issued in December 2023 by several UK government bodies, including National Crime Agency (NCA) and the Office of Financial Sanctions Implementation (OFSI). This red alert, while targeted at financial institutions and the role that financial institutions play in the procurement process, highlighted a number of red flags to be considered when determining whether a specific transaction or customer is suspicious or has hallmarks of potential sanctions evasion.

The list of red flags contained in the G7 guidance includes sudden changes in business activity following the invasion of Ukraine in February 2022, or following subsequent changes to sanctions and export controls; concealment of end users; last minute changes to parties involved in transactions; payments from entities in third countries that are not otherwise linked to transactions; and reluctance to provide certification that items will not be sold to Russia and sanctioned parties.

According to the “best practices” in the guidance, when encountering any red flags, businesses should run transaction parties against applicable public sanctions lists, inquire further regarding the end use and user, ask for more information about the customer’s history and business practices, and conduct open-source research on the customer. Other recommendations in the guidance include requesting the customer to sign written certification that items will not be sold to Russia or sanctioned parties, and updating distributor agreements requiring them to implement heightened due diligence measures.

It is important to analyse all available information after conducting further due diligence and reevaluate the red flag indicators, according to the guidance, which suggests businesses ask questions such as “can you explain or justify the red flags”, “can you establish bona fides of the party”, and “can you confirm the legitimacy of the transactions”?

“Where these red flags are present in a transaction, parties should conduct additional due diligence to try to resolve the red flags in line with the best practices detailed in the guidance. Where red flags cannot be mitigated, parties should refrain from transacting or otherwise run the risk of non-compliance,” said Devaney.

Sanctions expert Stacy Keen of Pinsent Masons added that the issuing of this guidance also highlighted that items on the CHPL will be an enforcement priority in the G7 jurisdictions.

“Enforcement bodies are likely to assess failure to recognise the presence of red flag indicator as an aggravating factor in circumstances where a CHPL item a company has supplied finds its way into Russia. This aligns with a focus on new and emerging technologies. In a September 2024 update to the US Department of Justice’s guidance on the Evaluation of Corporate Compliance Programs (ECCP), prosecutors were directed to consider whether a company had assessed the risk associated with such technologies and whether it had taken appropriate steps to mitigate any such risk”, said Keen.