On 7 January 2025, the Office of Trade Sanctions Implementation (OTSI) published guidance for exporters on countering Russian sanctions evasion. This guidance is designed to assist with the implementation of trade sanctions on Russia under The Russia (Sanctions) (EU Exit) Regulations 2019.

The UK sanctions regulations prevent UK exporters from selling goods designated as restricted to Russia, non-government-controlled Ukraine, or to a person connected with Russia. There is now growing concern regarding Russia’s ability to circumvent sanctions by buying through ‘third countries’. UK exporters must therefore be vigilant to ensure that their goods are not being bought by sanctioned Russian entities through deceptive tactics.

Information regarding which goods are restricted can be found here: https://www.gov.uk/government/publications/russia-sanctions-guidance/russia-sanctions-guidance

Enhanced Due Diligence

Exports to third countries may be in breach of sanctions if restricted goods are subsequently exported for use in Russia or non-government-controlled Ukraine, even if the immediate export country is not Russia. UK exporters must therefore rigorously assess the risk of their export transactions and engage in enhanced due diligence when necessary.

Electronic, mechanical and manufacturing goods such as microelectronics, motor vehicles and industrial machinery are at particular risk of being sent to Russia in circumvention of UK sanctions. OTSI advises enhanced due diligence checks on customers purchasing these types of goods from the following jurisdictions:

·         Armenia 

·         China, including Hong Kong and Macau 

·         India 

·         Israel 

·         Kazakhstan 

·         Kyrgyzstan 

·         Malaysia 

·         Mongolia 

·         Serbia 

·         Thailand 

·         Türkiye 

·         UAE 

·         Uzbekistan 

·         Vietnam

OTSI advises exporters to tailor their enhanced due diligence in response to red flags. Red flags include customers demonstrating sudden changes in business activity or inconsistencies in buying habits, customers with associations with sanctioned individuals or entities, customers that are evasive about their corporate structure or the end use of their purchases, and customers who have anomalous addresses such as in military facilities or multiple business premises.

OTSI advises the following steps where enhanced due diligence is necessary:

1.    Checking new customers against the UK Sanctions List;

2.    Enhanced Know Your Client data collection, particularly in relation to corporate structure and ownership details;

3.    Investigating the product’s end-user and use by obtaining the end-user certificate where possible, identifying any third-party involvement in the transaction, verifying the payment process and checking the transportation arrangements for irregularities; and

4.    Cross-checking new customers against existing internal customer databases and against records available at Companies House.

Further information on enhanced due diligence can be found here: https://www.gov.uk/government/publications/countering-russian-sanctions-evasion-and-circumvention/countering-russian-sanctions-evasion-guidance-for-exporters

No-Russia Clause

Where an exporter identifies that enhanced due diligence is required, OTSI has suggested that it might be suitable to insert a ‘no re-export to Russia’ clause, sometimes called a ‘no-Russia’ clause, into their contracts with customers. No-Russia clauses are envisioned as a deterrent to discourage importers in third counties from circumventing sanctions by diverting goods to Russia.

No-Russia clauses are not currently mandatory under the UK sanctions regulations, although they are required in some circumstances in EU export contracts under Article 12g of Council Regulation (EU) No 833/2014.

OTSI recommends that a no-Russia clause contain:

·         A requirement that the buyer does not sell, export or re-export any goods sanctioned under the UK sanctions regulations directly or indirectly to the Russian Federation;

·         An undertaking by the buyer to use its best efforts to ensure that the purpose of the clause not be frustrated by third parties;

·         Agreement by the buyer to implement monitoring mechanisms to detect such third-party activity;

·         A provision that any breach of the no-Russia clause could be grounds for termination of the contract;

·         A requirement that the buyer inform the seller immediately if there are issues with implementation of the no-Russia clause and make compliance information available to the seller within a specified timeframe; and

·         A right for the seller to notify relevant authorities if they believe goods have been supplied in breach of UK sanctions regulations.

Although OTSI provides template text for a no-Russia clause, it is important that exporters seek legal advice when drafting these clauses, as they will be subject to the usual rules of contract interpretation should a party wish to rely on the clause in a dispute.

Further information on OTSI recommendations for a no-Russia clause can be found here: https://www.gov.uk/government/publications/no-russia-clause/no-russia-clause-guidance

Conclusion

OTSI has made clear that a no-Russia clause is one part of a wider due-diligence model that it expects exporters of restricted goods to engage with.

Exporters must first establish whether their goods are restricted and at risk of export to Russia. If so, they should assess their customers to determine whether they are based in a jurisdiction seen to be at higher risk of re-export to Russia or have otherwise exhibited red-flag behaviour. Where a red flag is seen, exporters should implement the enhanced due diligence outlined above and consider including a no-Russia clause in new contracts.

To engage knowingly in sanctioned trade or circumvent sanctions may be a criminal offence, and there are reputational risks for companies who find themselves linked to sanctioned Russian entities. It is therefore imperative that companies assess their risk and undertake necessary due diligence exercises.

CANDEY is a boutique litigation law firm that has extensive experience and resources to evaluate and advise on international sanctions-related matters. We can guide individuals and companies through all aspects of sanctions compliance and disputes.

Note: This is a general summary of an evolving field of law, and is made available for general discussion purposes only between CANDEY and its clients and prospective clients. This memorandum does not constitute legal advice and must not be relied on as such. It should also not be cited as legal or academic authority.