No Russia clause: How to identify and minimize risks

The withdrawal of many European companies from the Russian market has driven Russia to find new ways to get its hands on the EU products it needs, particularly those for its war economy. This involves a wide variety of procurement channels that are not always easy for companies in the EU to recognize.

The latest analyses of trade and customs data show that Russia is finding ways to obtain sanctioned Western products to feed its war machine. The discovery of Western products in Russian munitions launched into Ukraine often generates a great deal of buzz in the media.

Many companies take extensive precautions to avoid the risks of sanctions evasions. These include everything from researching business partners and supply routes to requiring appropriate contract language and declarations of final destination.

These voluntary due diligence measures are augmented by legal requirements for minimizing the risk of sanctions evasion. A common example is the “No Re-Export to Russia” clause in Article 12g of the Council Regulation (EU) No 833/2014 of 31 July 2014 concerning restrictive measures in view of Russia’s actions destabilizing the situation in Ukraine – often referred to simply as the “No Russia” clause.

Below you will find examples of red flags indicating a possible re-export to Russia plus tips for how you can minimize your risk of evasion and avoid the threat of criminal prosecution. “Evasion” refers here to all shipments of sanctioned products that reach Russia indirectly.

Export control authorities are currently focusing on the following three channels for evasion:

1. Re-exports: Goods under sanction for Russia are exported from the EU to a non-critical third country, such as Kazakhstan, and shipped on to Russia from there.
2. Startups: New companies established in the EU are designed to give the appearance of intra-Community commerce but are actually backed by Russians.
3. Foreign subsidiaries of EU companies: Products are manufactured outside the EU – at Chinese or Turkish facilities of EU companies, for example – and then directly exported from there to Russia.

Many European companies are receiving an increasing number of inquiries from Eurasian countries such as Kazakhstan. Some of the inquiries come from new business partners, but some are also from existing customers requesting different products or larger quantities.

At first glance, such requests seem appealing and, taken individually, do not require a license. The standard sanction and export control check – looking at whether the business partner or goods are listed, any of the countries involved are under sanctions, or the known use requires a license – does not reveal any bans on the provision of economic or financial resources against the business partner, nor any restrictions specific to the country, goods, or use.

At second glance, however, the general export control regulations (in the EU: Dual-Use Regulation No. 2021/821) may require further review and due diligence activities, despite the existing exemption from license requirements, to guard against the risk of sanctions evasion. The exact nature of such activities will vary depending on the type of business.

Before you start implementing extensive safeguards, however, it’s worth looking at the current EU embargo regulation 833/2014 against Russia.

The key question is whether the scope of EU sanctions against Russia extends to the planned business with transit countries such as Kazakhstan and the other “stans,” China, the UAE, Turkey, and others that have not joined the Western sanctions.

If so, the company should use the specific information available for this transaction to develop a company-specific strategy of appropriate precautions.

The situation is different for business that doesn’t fall within the scope of EU sanctions against Russia. From a legal perspective, any transaction that would also be possible directly with Russia does not require safeguards against sanctions evasion under the No Russia clause.

For many companies, just finding the current version of the EU embargo against Russia is a challenge, making it all the more difficult to protect against sanctions evasion.

The EU information sheet “Guidance for EU operators: implementing enhanced due diligence to shield against Russia sanctions circumvention” offers overviews and examples of red flags that may indicate evasion shipments.

The EU document “Commission Consolidated FAQs on the implementation of Council Regulation No 833/2014 and Council Regulation No 269/2014” also provides answers and extensive FAQs.

Transactions involving goods that fall under the scope of the embargo regulation against Russia should be investigated further on a case-by-case basis – especially if multiple red flags are present. The list of red flags is constantly evolving due to Russia’s ever-expanding procurement channels, so it should not be regarded as exhaustive.

The following section presents examples of risk indicators, grouped by customer-specific, product-specific, geographical, and transaction-specific criteria. To learn more, please refer to the EU information sheets.

• Customer names, addresses, or phone numbers that match or are suspiciously similar to sanctions lists, including key sources such as the entries of the US SDN list in the E.O. 14024 sanctions program, which tracks Chinese and Turkish entities linked to Russian companies
• Companies founded within and outside the EU after the start of Russia’s war of aggression, particularly if their main activity is trading in sanctioned goods
• Existing customers who suddenly alter their purchasing patterns or request high volumes of products for no discernable reason
• Obfuscating customer behavior, such as refusing to provide information about the end-use of a product or an end-use declaration

• Items on the list of common high-priority items of Appendix XL of Regulation (EU) No. 833/2014 and the economically critical goods list
• Customers who order atypically large volumes
• Goods and/or volumes that are not plausible for the stated or otherwise known use

• Customers who request unusual labeling, identification, or marking of ordered goods
• Ordered goods that are unusual for the industry of the customer or the indicated or otherwise known end user
• Complicated structures that may indicate concealment, such as the use of previously unknown corporate vehicles (legal entities such as shell companies, like the eight Hong Kong addresses in the US Entity List)
• Unusual payment methods, such as cash or cryptocurrencies.

While restrictive measures in the UK largely align with EU sanctions, the local UK sanctions regime applies to UK traders since Brexit. Dedicated guidance for UK exporters is therefore also on this topic available from the UK government – Department for Trade, Office of Trade Sanctions Implementation and the Foreign, Commonwealth & Development Office: 

• No-Russia clause guidance
• Countering Russian sanctions evasion - guidance for exporters
• Russia Sanctions – Common High Priority Items List
• The Russia (Sanctions) (EU Exit) Regulations 2019

If a company receives requests with one or more red flags, reasonable efforts must be made to obtain further information. Appropriate measures must then be taken to prevent sanctions evasion.

Export control experts and authorities agree that companies cannot prevent their products from ending up in Russia. This is expressed in Article 10 of the EU embargo regulation 833/2014 against Russia:

“Actions by natural or legal persons, entities, or bodies shall not give rise to liability of any kind on their part if they did not know, and had no reasonable cause to suspect, that their actions would infringe the measures set out in this Regulation.”

Art. 10 defines the scope of liability: What matters most for companies is to take due diligence measures that are appropriate and in keeping with their business activities. This means measures adapted to the company with regard to relevant transactions and the identified risks of evasion. There is no one-size-fits-all model for this.

The No Russia clause in Article 12g requires EU companies to include a contractual clause with appropriate remedies when trading in certain goods. The EU places the main emphasis on the high-priority goods already mentioned in the red flags in Annex XL of the EU Regulation on the Russia embargo.

The goods found in Russian weapons systems in Ukraine are listed here under their customs tariff numbers. A contractual clause satisfying the requirements of Art. 12g must be included in almost all exports of these goods from the EU. A sample clause can be found on pages 198ff of the EU document “Consolidated FAQs on the implementation of Council Regulation No 833/2014 and Council Regulation No 269/2014.”

In practice, the inclusion of this clause poses significant difficulties that vary considerably in nature. While some have difficulty even finding Annex XL, others struggle with contractual issues such as the content and placement of the No Russia clause.

The aim of the clause is to minimize EU shipments of war-related goods ending up in Russia. This should be kept in mind despite all the difficulties with the No Russia clause.

Exporters of shipments must use all the information available to them to determine any actual sensitive use. A conscious decision to shut oneself off from the circumstances that impose themselves on those affected can, depending on the case, be equated with knowledge. Such knowledge may, under national law, constitute the criminal offense of embargo violation.

This risk should be minimized by various safeguards applied cumulatively. Provisions similar to the No Russia clause contractually prohibit business partners from reselling the products to or for use in Russia. Another very popular option is the final destination declaration – an individual document between two business partners that defines the whereabouts of the goods, their use, and any other specifically agreed conditions.

The company-specific safeguards required by the authorities are possible only if all employees who receive relevant information are aware of the risks and have the appropriate guidelines for action. This is another example of how export controls impacts other areas beyond exports, most notably sales, order processing, and product development.

Each company can decide for itself whether the departments in question should be provided with checklists to be completed by hand or software-based questionnaires. AEB’s Risk Assessment software uses questionnaires to support risk identification, indicates the necessary corrective actions, and provides comprehensive documentation. This significantly minimizes the liability risk for criminal offenses.