FinCEN and BIS Issue Supplemental Joint Alert to Reinforce Continued Vigilance of Potential Russian Export Control Evasion Attempts

Key Notes:

• The May 2023 FinCEN/BIS Joint Alert supplements the Joint Alert published by FinCEN and BIS in June 2022.
• The Supplemental Joint Alert offers financial institutions new and updated information on export control restrictions imposed by BIS related to Russia.
• Included is a list of certain “high priority” items organized according to their Harmonized System (HS) Codes, which should prompt enhanced, risk-based customer and transactional due diligence.
• Nine new transactional and behavioral “red flags” are highlighted which should be considered in addition to the 22 “red flag” indicators of illicit or suspicious activity that were enumerated in the June 2022 Joint Alert.
• The Joint Alert requests that financial institutions continue using the existing SAR code—FIN-2022-RUSSIABIS—when submitting SARs specifically related to Russian export control evasion.
• Financial institutions are reminded of their Bank Secrecy Act (BSA) reporting obligations as well.

On May 19, 2023, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued a Supplemental Joint Alert reminding financial institutions to remain vigilant against individuals and entities attempting to skirt export controls related to Russia—a tool of economic statecraft maintained by BIS to advance U.S. national security and foreign policy interests—and to provide additional and updated information on “ongoing U.S. Government engagements and initiatives designed to further constrain and prevent Russia from accessing needed technology and goods to supply and replenish its military and defense industrial base.” The joint alert serves as an auxiliary to an earlier FinCEN/BIS Joint Alert published in June 2022.

The Supplemental Joint Alert focuses on financial institutions, particularly banks, but also credit card operators and foreign exchange dealers, and it reiterates that violations of U.S. sanctions and export controls can occur through seemingly ordinary services associated with international trade. For example, a financial institution can become embroiled in illicit international trade-related activities through processing payments for exported goods, providing financing through the issuance of 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 an exporter from nonpayment by a buyer.

The Supplemental Joint Alert also reminds financial institutions of their Bank Secrecy Act (BSA) reporting obligations and, when submitting a Suspicious Activity Report (SAR) Filing Request, to reference the Supplemental Joint Alert and the original Joint Alert in SAR field 2 (Filing Institution Note to FinCEN) and the narrative with the key term: “FIN-2022-RUSSIABIS.” FinCEN also requests that financial institutions check Box 38(z) (Other Suspicious Activity) and note “Russia Export Restrictions Evasion.”

Background

Following Russia’s invasion of Ukraine on February 24, 2022, BIS and other pertinent U.S. Government agencies implemented a series of unprecedented and sweeping sanctions, export controls, and other economic restrictions to “significantly degrade” Russia’s military-industrial complex and defense supply chains. The U.S. Government often has coordinated these efforts with allies and partners abroad, such as with the Global Export Control Coalition (GECC), an international coalition of 39 countries spanning North America, Europe, and the Indo-Pacific Region.

Recent U.S. Developments Since the Previous June 2022 FinCEN/BIS Joint Alert

The United States has firmly upheld its Russia-related sanctions and export controls package at home. For example, several enforcement actions have been brought as part of Task Force KleptoCapture, an interagency law enforcement task force dedicated to enforcing the economic countermeasures the United States, along with its allies and partners, have imposed against Russia.  Indeed, three of the agencies involved in Task Force KleptoCapture—the Department of Justice, Commerce, and Treasury, respectively—issued a Joint Compliance Note on March 2, 2023, to warn of a repeatedly encountered strategy employed by bad actors to evade Russia-related sanctions and export controls: the use of third-party intermediaries, which may be concealed further through shell and front companies, and transshipment points.ⁱ

Similarly, the Disruptive Technology Strike Force (DTSF), an interagency group created by BIS and the Department of Justice’s National Security Division in February 2023, has consistently been targeting illicit actors, strengthening supply chains, and protecting critical technological assets from being acquired or used by nation-state adversaries.  To be sure, the DTSF announced its first five enforcement actions just three days before the publication of the Supplemental Joint Alert on May 16, 2023.

Notably, the economic countermeasures imposed by the United States have expanded since the last FinCEN/BIS Joint Alert in June 2022 as well. In particular, these additional restrictions—also developed in concert with international allies and partners—“aim to cut off Russia’s access to critical components used for aircraft and tanks, semiconductors, and other items needed for advance military applications[.]” More recent restrictions also impair the procurement of hundreds of “EAR99 items”—a category generally referring to low-tech consumer goods not specified on the BIS Commerce Control List and so not necessitating a license for export, re-export, or transfer—that have been identified as commonly swindled to evade scrutiny from U.S. regulators yet necessary to sustaining Russia’s war effort. And finally, these additional economic countermeasures expand the targeting of certain goods’ supply chains flowing through third countries, such as Iran and China, that have become “supply nodes to the Russian war machine.”

The High Priority Items List

One of the most prominent additions to the Export Administration Regulations (EAR) maintained by BIS since the June 2022 FinCEN/BIS Joint Alert is the inclusion of the “High Priority Items List” developed in partnership with the European Union, the United Kingdom, and Japan (see Supplement No. 7 to Part 746 of the EAR). The High Priority Items List was created by studying Russian equipment lost or abandoned on the battlefield, and while it is not an exhaustive list of all types of items needed by Russia to sustain its war effort, “but provides prioritized targets for customs and enforcement agencies around the world[.]”

Moreover, the products on the High Priority Items List are organized by Harmonized System (HS) Codes, a global classification system administered by the World Customs Organization for customs authorities to identify goods, determine applicable duties, and gather trade data more readily; this purposeful structure, therefore, underscores the U.S. Government’s desire and willingness to have its economic countermeasures against Russia serve as a baseline for other countries to copy or emulate.ⁱⁱ

Thus, to thwart potential export control evasion attempts, the Supplemental Joint Alert enumerates the HS Codes for nine items included on the High Priority Items List because they often “have been found in multiple Russian weapons systems used against Ukraine[.]” In particular, these HS Codes are:

1. 18542.31 (Electronic integrated circuits: Processors and controllers, such as microcontrollers);
2. 8542.32 (Electronic integrated circuits: Memories, such as SRAM);
3. 8542.33 (Electronic integrated circuits: Amplifiers, such as op-amps);
4. 8542.39 (Electronic integrated circuits: Other, such as FPGAs);
5. 8517.62 (Machines for the reception, conversion and transmission or regeneration of voice, images, or other data, such as wireless transceiver modules);
6. 8526.91 (Radio navigational aid apparatus, such as GNSS modules);
7. 8532.21 (Tantalum capacitors);
8. 8532.24 (Multilayer ceramic capacitors); and
9. 8548.00 (Electrical parts machinery or apparatus, not specified or included elsewhere, such as EMI filters).

Nine New Transactional and Behavioral “Red Flags”

Finally, the Supplemental Joint Alert concludes by highlighting nine “red flag” indicators of possible export control evasion, which “should be read in conjunction with those [22 previous red flags] set out in the [June] 2022 [Joint] Alert.” No single red flag is necessarily indicative of illicit or suspicious activity, consequently, all surrounding facts and circumstances must be considered before determining whether a transaction is associated or suspected of being associated with export control evasion. Specifically, the nine new transactional and behavioral red flags are:

1. Transactions involving a company incorporated after February 24, 2022, and based in a non-GECC country;
2. A new customer (likely incorporated after February 24, 2022, and based in a non-GECC country) whose line of business is in the trading of products associated with the nine HS Codes listed above;
3. An existing customer who did not receive exports associated with the nine HS Codes prior to February 24, 2022, but who is receiving such items now;
4. An existing customer based outside the United States who did receive exports associated with the nine HS Codes prior to February 24, 2022, but who is requesting or receiving a “significant increase” in such items now;
5. Customers significantly overpaying for a commodity based on known market prices;
6. A customer lacking or refusing to provide details to banks, shippers, or third parties, including about end-users, intended end-uses, or company ownership;
7. Transactions involving smaller-volume payments from the same end-user’s foreign bank account to multiple, similar suppliers of dual-use products;
8. Parties to transactions listed as either ultimate consignees or in the “consign to” field on trade documents who do not typically engage in business consistent with consuming or otherwise using commodities; and
9. Customers who supply an address similar to one belonging to a party on a U.S. Government proscribed parties list, such as the BIS Entity List, the SDN List, or the U.S. Department of State’s Statutorily Debarred Parties List.

Given these nine new “red flags,” the Supplemental Joint Alert advises financial institutions to conduct due diligence that considers, in particular: (1) a customer’s date of incorporation; (2) the end-user and the end-use of an item (especially whether the customer’s line of business is consistent with the ordered item), and (3) whether a customer’s physical location and public-facing website raise any concerns (e.g., when a customer has no website available or the business address provided is actually a residence). By contrast, due diligence for existing customers, the Supplemental Joint Alert notes, should also factor “anomalous increases in the volume or value of orders[.]”

Conclusion

As U.S. economic countermeasures against Russia continuous to change, the FinCEN/BIS Supplemental Joint Alert serves as a valuable reminder to financial institutions to apply a risk-based approach for potential export control evasion when providing financing, processing payments, or performing other services associated with international trade.

Indeed, a financial institution must file a SAR if it knows, suspects, or has reason to suspect a transaction conducted or attempted by, at, or through a financial institution designed to evade U.S. sanctions and export controls.  Other relevant BSA reporting requirements in connection with the FinCEN/BIS Supplemental Joint Alert may apply as well, even if there is no obvious connection to Russia-related illicit finance.

Financial institutions who wish to report suspected export control evasion activity directly to BIS may also do so through the confidential “Enforcement Lead/Tip form” located on the BIS website.

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[i] A full list of common transshipment points through which restricted or controlled exports have been known to flow through before reaching destinations in Russia (or Belarus) can be found in Footnote 21 in the June 2022 FinCEN/BIS Joint Alert.

[ii] Often, HS Codes can be found on trade documents, including commercial invoices, packing slips, airway bills, sea bills, and other supporting trade documentation.

FinCEN and BIS Issue Supplemental Joint Alert to Reinforce Continued Vigilance of Potential Russian Export Control Evasion Attempts (Download)