"Is Your Customer Diverting Sensitive Goods To Russia?"

As a consequence of the Russian conflict with Ukraine, the United States has sharply restricted trade with Russia, especially exports for use in Russia’s energy and defense sectors. The U.S. Commerce Department’s Bureau of Industry and Security, which regulates both commercial as well as “dual use” exports with military applications, has a “presumption of denial” on licenses to export controlled goods and technology to Russia for use in oil and gas exploration or production.

Regardless of classification, licenses are now required for many products (reviewed on a case-by-case basis) if the exporter has knowledge that the exports may be used by military end users or for military end uses in Russia.  Last year, the U.S. State Department’s Directorate of Defense Trade Controls announced a policy of denial for exports or re-exports of “any high technology defense articles or services” controlled under the International Traffic in Arms Regulations.  Finally, among other controls, the U.S. Treasury Department’s Office of Foreign Assets Control has imposed broad restrictions on all trade with Crimea, and targeted sanctions on the Russian energy and banking sectors and numerous individuals, including major Russian business leaders and former military and political leaders in Ukraine. The OFAC sanctions also apply across the board, regardless of a product’s export classification. Separately, the European Union has issued economic sanctions against Russia, recently extended to Jan. 31, 2016, with particular attention to the financial, energy and defense sectors and dual-use goods.

The restrictions on trade are absolute. Violations can carry substantial civil and criminal penalties, as well as denial of export privileges and debarment as a government contractor. Absent a license, no U.S. person may engage in trade with sanctioned persons or territories — directly or indirectly. Re-exports or transshipments to sanctioned end users or territories are also unlawful under the ITAR and the Export Administration Regulations and can expose the U.S. exporter to liability, even if the exporter did not know that Russia was the ultimate intended destination of the items. For these reasons, it is essential for U.S. exporters to exercise vigorous due diligence on their customers.

Recently BIS expressed concern that Russian buyers of controlled goods, unable to trade directly with U.S. suppliers, have resorted to third country intermediaries that operate as “fronts” funneling unlicensed defense and energy exports from the U.S. to Russia. The agency posted guidance on May 18 in an attempt to arrest this problem: “Guidance on Due Diligence to Prevent Unauthorized Transshipment/Reexport of Controlled Items to Russia."  In doing so, BIS noted that export controls “are a shared responsibility between government and industry.” In addition to serving as a salutary warning against the risks of dealing with intermediaries, the new guidance puts an added burden on exporters to be vigilant.

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