Recently, some countries have become key players in evading sanctions, enabling covert exports and imports of sanctioned goods with Russia. This trend has caught the attention of banks, which are now halting and scrutinizing these transactions, leading to financial losses, delayed operations, and tense business relationships. Moreover, the newly implemented 14th EU sanction package specifically targets these evasion tactics, including those involving subsidiaries in non-EU countries. This article explores the unseen risks posed by sanction evasion hubs, the impact of bank interventions on transactions and 14th sanction package, and discusses strategies to protect businesses from these risks while preserving supply chain integrity.

THIS ARTICLE IS WRITTEN BY HERMAN ANNINK ([email protected]) AND SEFA GECIKLI ([email protected]). HERMAN AND SEFA ARE BOTH PART OF RSM NETHERLANDS BUSINESS CONSULTING SERVICES WITH A SPECIFIC FOCUS ON SUSTAINABILITY AND INTERNATIONAL TRADE.  

Background

The EU’s sanctions against Russia has been in force for a long time. Currently, sanctions cover various goods and services:

Sanction Evasion Hubs

It's widely recognized that entities in certain countries bypass sanctions by re-exporting goods initially imported from the EU to Russia. Additionally, the reverse is also true: products from Russia are exported to these countries and then re-exported to the EU. This trend is starkly reflected in trade data. For example, IMF data highlights a surge in EU exports to Kyrgyzstan, with exports from Hungary skyrocketing by up to 1000% since March 2022, when sanctions were intensified. Similar upward trends are noticeable in Germany, Poland, the Czech Republic, Italy, Austria, and Spain. Armenia provides another clear example; since March 2022, Armenia's imports from Russia have increased sevenfold, likely due to the re-export of goods subject to EU import restrictions. In the same line, Armenia's export trends closely mirror its rising imports from the EU. Additionally, since the onset of the Ukraine conflict, China’s exports of transportation equipment to Russia have also increased by 1000%, with overall exports to Russia and other potential evasion hubs like Kyrgyzstan remaining high. Meanwhile, Turkey and Kazakhstan, which also served as evasion routes, have seen a decrease in high-tech exports to Russia following a recent U.S. executive order, demonstrating the global impact of tightened sanctions enforcement on international trade patterns.

Oversight by Banks

Under the EU's regulatory framework, financial institutions, including banks, are mandated to conduct due diligence on their clients to ensure that transactions do not facilitate breaches of sanctions. This process involves scrutinizing transactions for any links to blacklisted entities, prohibited goods, and restricted destinations. Additionally, EU banks are required to report any suspicious activities to the relevant national authorities.

Reflecting these requirements, banks across the EU have begun to intensify their monitoring of transactions that may be directly or indirectly connected to known sanction evasion routes. They routinely halt suspicious transactions and question the involved parties to confirm compliance with sanction regulations. This scrutiny is not confined to specific transactions; banks also expect that entities engaged in trading sanctioned products and services maintain robust compliance programs, complete with thorough due diligence procedures.

Measures under 14th Sanction Package by the EU

On 24th June 2024, EU Council announced that EU adopts 14th package of sanctions against Russia, strengthening enforcement and anti-circumvention measures. To further limit Russia's ability to access restricted goods and technology, this package contains several measures meant to boost private sector compliance, support enforcement by national competent authorities, and hamper sanctions circumvention, including by keeping in check the foreign subsidiaries of EU operators. The goal is to prevent any loopholes or indirect methods that could be used to sidestep the sanctions.

In this regard, EU entities should undertake their best efforts to ensure that legal persons, entities and bodies established outside of the EU that they own or control do not participate in activities that undermine the restrictive measures in Russian sanctions. Such activities are those resulting in an effect that those restrictive measures seek to prevent, for example, that a recipient in Russia obtains goods, technology, financing or services of a type that is subject to prohibitions. Best efforts should be understood as comprising all actions that are suitable and necessary to achieve the result of preventing the undermining of the restrictive measures under the Russian Sanction Regulation. Those actions can include, for example, the implementation of appropriate policies, controls and procedures to mitigate and manage risk effectively, considering factors such as the third country of establishment, the business sector and the type of activity of the legal person, entity or body that is owned or controlled by the EU entities.

In line with this, it is prohibited for individuals or entities to knowingly engage in activities that are designed to circumvent the prohibitions set by the regulation. This includes participating in activities that may not directly seek to bypass sanctions but still have the potential to do so, if the participants are aware of this possibility and accept it. Essentially, this means that if a person or entity is involved in actions that could help avoid sanctions, and they are aware that their involvement could lead to this outcome (even if it is not their direct intention), they are still liable under this regulation. 

Further, the regulation specifies obligations for exporters, particularly concerning the re-exportation of certain goods and technologies to Russia or for use in Russia. Exporters must contractually prohibit such re-exportation to ensure compliance. If a breach of these contractual obligations occurs, entities will have to take measures including notifying the competent authority in the Member State where they are established.

Forward Thinking

The evolving landscape of international sanctions requires businesses to adopt forward-thinking strategies to safeguard their operations. The emergence of sanction evasion hubs poses a silent yet significant threat to business transactions, compelling companies to reassess their supply chains. The EU's 14th sanction package underscores the increasing scrutiny across the entire supply chain, rather than focusing solely on companies' direct activities. To navigate the complexities of international sanctions, businesses must establish robust compliance programs. Companies should conduct thorough risk assessments of their supply chains to identify and evaluate the risks. This critical step may necessitate reconsidering partnerships and supply chain dependencies, opting for more secure and compliant alternatives.

Collaboration with financial institutions and regulatory bodies is vital for maintaining compliance and ensuring smooth operations. By working closely with banks, businesses can ensure their transactions are transparent and compliant. This relationship also helps promptly address any issues that arise during the scrutiny of transactions.

RSM is a thought leader in the field of Sustainability and International Trade consulting. We offer frequent insights through training and sharing of thought leadership based on a detailed knowledge of industry developments and practical applications in working with our customers. If you want to know more, please contact one of our consultants.