The current crisis with Russia over the occupation of Crimea and Russia’s military build-up near eastern Ukraine has prompted various national governments, including both the U.S. and E.U., to impose additional sanctions on Russia, creating new challenges, to say the least, for both U.S. companies and their foreign subsidiaries.
Recent statements from those close to the crisis highlight how we got to this point and give clues as to where we are heading. In a recent statement, NATO Secretary General Anders Fogh Rasmussen publicly expressed his deep distrust of Putin’s intentions, stating “after what we have seen in Ukraine, no one can trust the so-called guarantees given by Russia about sovereignty and integrity.” While international distrust of Russia’s intentions is growing, this distrust is being followed by alarming calls for deeper sanctions by U.S. politicians. For instance, although current sanctions only target certain powerful individuals and an entity, Russia’s energy titan, Gazprom, has not of yet been targeted by sanctions due to their role in the international energy supply and Europe’s reliance on Gazprom to meet its energy needs. Even in the face of the major complications and sensitivities surrounding the sanctioning of a major company such as Gazprom, U.S. Senators such as Bob Corker are pushing for further sanctions, stating “unless Russia ends its destabilization of Eastern Ukraine and drastically reduces troop levels on the Ukrainian border immediately, further sanctions against strategic sectors of the Russian economy, particularly targeting Gazprom and additional important financial institutions, should be imposed.” Adding support to the possibility that Gazprom and other companies involved in other industries may be targeted for sanctions, German Chancellor Angela Merkel and French President Francois Hollande have recently indicated their willingness to support tougher sanctions depending on how the crisis plays out.
For all the shock and alarm surrounding President Putin’s actions in Ukraine, we should not be all that surprised. For some time now, Putin has demonstrated an aggressive agenda of expanding Russian military superiority in relation to the West. Yet, up until now, the U.S. only responded with subtle creeping export controls, impacting only those who exported specific goods to Russia. These export controls rarely, but occasionally, attracted media attention. One may recall the Arc Electronics and Apex Systems LLC enforcement case back in October 2012, which made it to the 2nd page of the Wall Street Journal. For us, this case particularly serves as a reminder of the U.S.’s trade position with Russia, since one of our attorneys was personally involved in this investigation nearly 9 months prior to the case making headlines.
We know from experience, that even before the Ukraine crisis kicked off, the U.S. government has been enforcing export controls against Russia for both civil technology and goods that can have military uses. In the Arc Electronics case, both U.S. and Russian companies carried out an elaborate scheme to funnel controlled technology to the Russian military. These companies served as “shell” companies, acting as legitimate buyers of both controlled and uncontrolled U.S. products and technology. Many of the U.S. based suppliers that inadvertently supplied controlled technology to these shell companies assumed that the risks associated with their transactions was low, given that the technology involved was civil, with little direct military application, and because the shell companies appeared to be domestic purchasers. Despite being misled by this elaborate Russian military intelligence procurement ring, the key civil and criminal charges and indictments (including over 160 individuals and entities being added to the Denied Parties Lists) involved civil technology and goods that can have military uses, and the U.S. based suppliers were not shielded from liability.
The Arc Electronics case is not the only case where the U.S. government enforced export controls on the export of civil technology to restricted parties. There have been several Office of Export Enforcement (OEE) and FBI investigations in the Midwest, and elsewhere, involving Russian re-exports and sales, both of civil and military goods. These investigations are not only focused on multi-national, multi-billion dollar companies, but on small trading companies as well; thus, the “net” cast out by the U.S. government on Russian sales, exports, and re-exports must be carefully approached by all companies, whether or not they export to Russia.
The rising concerns in the U.S. over exports to Russia long preceded the Ukraine crisis, and began with enforcement and investigations concerning direct and indirect sales of U.S. controlled and non-controlled technology and goods. Thus, even though you are merely selling “EAR99” products, if OEE and/or FBI come knocking on your door (both agencies typically partner together when paying a company a “visit”), you will likely be expending considerable resources to address their questions and/or provide requested information.
Thus, while companies should have already implemented certain procedures to address the risks of exporting to Russia, the current crisis calls for companies to take additional actions. Some affirmative defenses and controls that may help such companies is to keep constantly abreast of the changes affecting Russia, having a robust export compliance program in place, screening both domestic and international customers, and training sales and order management departments in identifying “red flags”. Some clients take it even further, by requiring End-User Certificates from all customers whom they know are affiliated with and/or selling to Russian customers/companies. This entails additional “investigative” work, such as running D&B reports on your domestic customers, researching the director’s and officers’ names to see if they are affiliated with other Russian companies, and researching their website for possible red-flags, and more.
U.S. exporters should realize this is an evolving crisis and their compliance programs should evolve with it. A recent statement by Secretary of State John Kerry in regards to Ukraine’s May 25th presidential election highlights where we are currently:
“Our hope is to de-escalate…but if Russia or its proxies disrupt the elections, stand in the way of the Ukrainian people being able to exercise their vote, that is when and if there would be additional sanctions.”
We suggest you stayed tuned.
By Christos Linardakis, Senior Counsel, and Contributing Editor Bob Brewer