CIPE’s work to support democratic resilience and economic security includes educating business communities on practices that put them at risk. Newer efforts involve raising private sector awareness about growing schemes to circumvent the international sanctions put in place following Russia’s full-scale invasion of Ukraine in early 2022.
There has been a steady rise in so-called “enabler networks” of companies that ignore sanctions or do not realize they are helping evade them. Private sector associations and companies in non-sanctioning countries say they lack information and understanding about situations that could lead to blacklisting. CIPE is identifying opportunities to support that need.
Identifying Loopholes and Tactics
As part of this initiative, CIPE has launched a series of roundtable discussions with global partners and experts to examine common evasion mechanisms such as shipments and sales through non-sanctioning third countries. The group is studying how existing sanctions regimes apply to local businesses, assessing potential loopholes, and exploring avenues for private sector-led collective action to strengthen compliance.
Based on these discussions and other recent developments, CIPE’s outreach plans center around sectors with the potential to feed Russian war capabilities. This includes makers of technology and goods outlined in the Common High Priority List of sanctioned materials from the Global Export Control Coalition and international partners. Cited products include microelectronics, wireless communications components, and equipment for weapons systems.
Recent trade statistics give clear indications of how Russia is circumventing sanctions and maintaining its war efforts. Trade in durable goods, such as cars, washing machines, and refrigerators between Russia and neighboring countries has surged to double or triple the previous levels. These machines have microchips and other vital mechanical parts that can have dual uses or be repurposed. For example, the same smart technologies can be used for washing machines, tanks, and missile navigation. Media investigations have uncovered coordinated smuggling systems through third countries. The shipments often hide packages of sanctioned items and industrial goods, from semiconductors to luxuries such as jewelry.
Vulnerabilities and Incentives
To mitigate exposure to such types of evasion and facilitate compliance, regulators in sanctioning countries offer business advisories and guides to help explain the multitude of new rules, as well as share common red flags and best practices. Businesses in non-GECC countries report that they do not receive such guidance and are often unaware of how they are expected to conduct themselves, including in third country arrangements. While some are willfully blind and incentivized by the quick financial rewards of illegal activity, others are striving to gain greater understanding of the broader ramifications. Smaller local banks and professional service providers are especially vulnerable to requests for concealing or misrepresenting information. Among these providers are lawyers, accountants, consultants, and tax advisors.
As CIPE prepares to engage business groups in non-sanctioning countries, it will be important to further assess operating environments and identify incentives for compliance. Laws and regulations may need to change in some states to align with the GECC sanctions and establish export controls. However, even where some necessary regulatory provisions are absent, businesses may choose to proactively adopt stronger due diligence practices to detect sanctions evasion attempts.
A key driver may be a company’s ability to gain access to and benefit from entering global supply chains where sanctions compliance is required, regardless of domestic legal obligations. This proactive approach could ultimately protect not just companies but also national economies from running afoul of legal and regulatory regimes with global reach, while also maintaining a more attractive environment for investment.
Published Date: November 27, 2024