6 October 2023

Since February 2022, the United States has sanctioned thousands of individuals and companies and imposed export controls on most strategic goods as punishment for Russia’s all-out invasion of Ukraine. Enforcing those sanctions and trade controls has required regulators to identify an evolving series of tactics being used to move financial assets and supply controlled goods to Russia or Belarus. To do so, the Departments of Commerce, Treasury, and Justice have publicized “red flags,” or potential indicators that a party in a transaction is trying to evade government scrutiny. Red flags are warning signals that indicate an increased risk of fraudulent or illicit activity, like a connection to a sanctioned individual or abrupt changes in buying or shipping patterns.

The Bureau of Industry and Security (BIS) within the Department of Commerce maintains a list of general red flags on its website, as well as a compendium of enforcement investigations titled “Don’t Let This Happen to You!” Since early 2022, BIS has also released periodic guidance on new red flags as export evasion practices have evolved. Treasury’s Financial Crimes Enforcement Network (FinCEN) has released similar lists of red flags specifically targeting financial transfers. The red flags listed in this report are compiled from the above sources.

Red flags aren’t just guidelines – they also have legal implications. Exporters or financial institutions who encounter red flags are obligated to investigate and verify the transaction by “Know Your Customer” requirements within the U.S. Export Administration Regulations (EAR) or “Suspicious Activity Reporting” (SAR) requirements under by the Bank Secrecy Act. Ignoring red flags, or worse, “self-blinding” by discouraging customers from sharing information about the ultimate end use or destination of the transaction, does not protect the exporter against liability. In fact, doing so may increase the consequences of any enforcement action by the U.S. government.

Red flags can arise in connection with many aspects of an export transaction, including (1) the product to be exported, (2) the customer buying the product, (3) the network or corporate structure of the customer, (4) the export destination, (5) the logistics of the transaction, and (6) the alleged end use.

This report reviews the evolution of U.S. sanctions and trade restrictions since Russia’s 2014 invasion of Ukraine and annexation of Crimea. It then illustrates common red flags using examples from ten recent U.S. enforcement cases involving illicit exports or financial transfers to Russian entities, as well as several other investigations. What emerges is both a picture of the growing complexity of sanctions evasion and the corresponding importance of export compliance by exporters and financial institutions.