Key Takeaways:
- The objective of this guidance is to provide all parties involved in the export, reexport, or transfer (in-country) of CHPL items the required tools to identify and address the risks of diversion of these Items in Russia and Belarus.
- This guidance sheds light on the focus of G7 countries on these items which are critical to support Russia’s war efforts. We are expecting to see growing enforcement actions from competent authorities to ensure that this guidance has been properly implemented and relied upon.
- In this context, we recommend to all parties involved in the export, reexport, or transfer (in-country) of these CHPL items to update their internal compliance framework to (i) identify if they export CHPL Items; (ii) integrate those specific red flags in their economic sanctions and export control due diligence framework; and (iii) conduct the required enhanced due diligence and reinforce their existing contractual undertakings when required.
CHPL analysis
On September 24, 2024, the G7 has updated its Export Control and Sanctions Evasions Guidance to provide assistance to industrial companies in order to prevent the diversion, notably through third countries, of controlled items in Russia.
This guidance sets out:
- a list of items presenting the highest risk of diversion to Russia (Common High Priority list – CHPL);
- a non-limitative list of red flags relating to potential sanctions and export control evasion;
- a list of best practices to address these red flags; and
- a list of publicly available screening tools and guidance documents issued by G7 countries (which does not contain any new element).
1. The Common High Priority List
The G7 countries set up the CHPL list to identify items sought by Russia to procure for its war efforts and which pose a major risk of being diverted to Russia.
Source https://finance.ec.europa.eu/
2. Export control and sanctions evasion red flags
The G7 encourages companies to rely upon the red flags listed below to conduct enhanced due diligence prior to any export of CHPL items, to ensure that the items exported are not diverted to Russia.
- Sudden change in business activity following the imposition of the various sanction’s packages against Russia/Belarus:
- new importers/exporters of CHPL items located at the same address as a sanctioned entity.
- an importer of CHPL items has a significant increase in imports volume/value.
- an exporter/re-exporter of CHPL items which used to ship to Russia prior to the imposition of the sanctions is shipping to partners in third countries.
- False inaccurate or missing documentation:
- false declarations of export authorization.
- misclassification of goods through the use of non CHPL HS codes to conceal CHPL items.
- undervaluation of goods.
- change the HS code during the export process.
- wrongful qualification of the goods as civil goods when exported to military entities.
- Concealing the end user:
- circumventing shipments through a third country or multiple third countries, which may include the use of shell companies, front companies, intermediaries, brokers, and/or layered letters of credit / Multiple third country freight forwarders and/or shippers.
- listing a freight forwarder or an operator of charter aircraft as the end user.
- using an unclear transportation route for an exported item.
- transporting an item through Russia to an end user in a third country.
- circuitous routing of goods or financial flows.
- changing an item’s shipping instructions when the item arrives at a freight forwarder, without the knowledge of the exporter.
- Inconsistencies in the transaction:
- shipping route is abnormal for product and/or destination.
- the volume and value of goods do not match the volume of payments.
- transaction includes unusually high quantities of goods.
- inconsistent information in trade documents and financial flows (names, companies, addresses, and/or final destination).
- Vague details and/or incomplete information:
- incomplete information concerning the end user/end use.
- customer is reluctant to provide the information including (including end use assurance).
- Dividing invoice value into smaller amounts (to remain under value limits of sanctioned goods/export controls):
- main focus concerning luxury goods.
- items may arrive in small, frequent shipments to a central location, such as a warehouse in a third country, where they are combined into one shipment.
- Suspicious customer information:
- addresses do not appear consistent with the business (resident address).
- goods ordered are inconsistent with the customer’s industry.
- customer has little to no internet presence.
- customer’s company website does not function and/or contains limited information.
- customer’s website has changed since 2022 to eliminate links to Russia, however customer has not attested that they no longer export to Russia.
- IP address does not match customer’s reported location. For example, a company in a third country may host websites from a Russian IP address.
- personnel, address, or telephone number match or are suspiciously similar to information found on sanctions lists or watchlists.
- Customer has connections of concern:
- customer has business ties in Russia (parent company in Russia, Russian or Belarusian shareholders, customer has business with Russian company, customer is associated with people or entities related to the defense sector).
- customer is co-located at the same address as an entity designated or sanctioned by a G7 member state.
- new customer is co-located with and has a mutual shareholder and/or secretarial firm as an entity designated or sanctioned by a G7 member state.
- customer has previously had dealings or maintains relationships within individuals or entities now subject to sanctions.
- customer is associated with companies that are suspected or known to be selling sanctioned goods and/or technology to Russia (entities notably designated on sanctions lists for sanctions circumvention).
- Business practices:
- customer is involved in the supply, sale, purchase, or delivery of restricted or high-risk goods, particularly CHPL items.
- customer exports once and disappears from the trade.
- Last-minute changes relating to the transaction from an entity in Russia/Belarus to a third country.
- Payments from entities located in third countries not involved in the transactions (notably stemming from sanctioned countries).
3. Best practices
This joint guidance also provides for best practices to be implemented to limit the risk of sanctions violation/circumvention relating to the export of CHPL items. These best practices notably include:
- screening the information collected on the counterparties involved in the transactions (name, address) against existing sanctions lists.
- when one or several of these red flags is/are identified, implementing additional due diligence. This additional due diligence may comprise:
- obtaining additional information relating to the end use, end user, country of final destination of the CHPL items exported.
- obtaining additional information on the counterparty (history of business, former business practices, past transactions structures, etc.).
- conducting open-source research on the counterparty.
- obtaining a written affidavit from the counterparty certifying that the CHPL items exported will not be used in Russia/Belarus or sanctioned parties in third countries or in a way that would infringe sanctions and export controls measures.
- updating agreements with distributors to ensure distributors conduct additional due diligence mirroring the one conducted at your level to avoid any diversion of the CHPL items to Russia/Belaris or to a sanctioned counterparty.
- analyzing the sanctions/export circumvention risks based on the results on the additional due diligence conducted and determining if the red flags can be cleared.
- if the additional due diligence conducted does not enable to clear the red flags identified:
- implementing a process to stop the transaction and providing for a justification to the counterparty.
- terminating the business relationship to avoid any further risk of sanctions evasion/circumvention.
- reporting the relevant information concerning the counterparty to the competent national authorities.
In this context, we recommend you amend your existing sanctions and export control policies and procedures and dedicated operational processes to include those red flags and complementary due diligence measures to be implemented.
It could notably take the form of a complementary due diligence form relating to the export of items presenting specific risks or CHPL items. We could assist you to the extent required to set up this form and train the required personnel to identify and address these red flags.
On top of the formal due diligence required, we also recommend reviewing and amending contractual undertakings which counterparties having triggered those red flags. This will provide you contractual protection in the event a sanctions violation/circumvention is identified.
While these guidelines relate to CHPL items, some of the best practices laid out are of great relevance to companies seeking to assess and mitigate circumvention risk. By way of reminder, the European Commission published some related guidance in 2023.