Article 2: Red flags: Mastering the indicators of sanctions risk

Introduction

Understanding whether your business transaction could potentially run afoul of EU sanctions restrictions can be complicated. That’s why the EU Sanctions Helpdesk aims to help SMEs with the process, offering bilateral, personalised support, resources, and knowledge-sharing guides. However, you can streamline and approach the situation with much more confidence if you have a good understanding of the red flags that may indicate risk. 

The European Commission and its international partners have produced various resources to inform the business community about red flags – that is, the indicators that a transaction or business relationship might be the result of an attempt to circumvent sanctions or restrictive measures. In this guide, we will highlight the key things you should consider when assessing your transactions for sanctions risk.

What are red flags? 

In the context of sanctions or restrictive measures, red flags are indicators that a transaction or business relationship might be the result of an attempt to circumvent the legal sanctions or restrictive measures imposed.  A red flag on its own is not always indicative of sanctions circumvention or that a particular transaction is illegal, but it is an indicator that an operator should undertake deeper due diligence. 

Some of the red flags listed below may be normal for many commercial transactions and may only become indicative of something more serious if they arise in transactions involving sanctioned goods or sanctioned countries.  In addition, some red flags are not exclusively indicators of sanctions circumvention but may be indicators of other forms of financial crime, such as money laundering.

The types of red flags to look for

As with other aspects of due diligence that are set out in Sanctions due diligence: Where to begin, the EU Sanctions Helpdesk considers four main questions about any economic activity or trade: 

• Who is involved in the supply? Including suppliers, customers, agents, distributors and representatives 
• What will you supply? Including goods, supply of services, and services ancillary to the supply of goods (e.g. servicing, warranties) 
• Where will you supply it to? Including country of final destination, transit countries, and sensitive regions 
• Why? What is the intended end-use and who is the intended end-user? 

You can find out more information about the Helpdesk’s ‘4Ws’ in Sanctions due diligence: Where to begin. 

Who?  

Who are the counterparties (buyer or seller)? Who else is involved? 

Red flags include: 

• A transaction is indirect (such as using intermediaries, shell companies etc.) for no or little economic reason; 
• Involvement of entities that have complex corporate or trust structures whose complexity is not justified by the business profile of the customer, or which uses trust arrangements or complex corporate structures involving offshore companies; 
• The customer has little or no business background or has been recently established; 
• A new customer or transaction with companies located in countries subject to EU restrictive measures or known to be used by those seeking to circumvent sanctions; 
• A party to a transaction is located in a country adjacent to a country subject to EU restrictive measures, or in a customs union with such a country, e.g. the Eurasian Economic Union (which includes Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia); 
• A party to a transaction has current or former links with a sanctioned entity or person; 
• A party to a transaction shares addresses with multiple different companies or the address is shared with a sanctioned entity or person, or the address is otherwise problematic (e.g., either the physical address does not exist, or it is residential); 
• A transaction involves entities with little to no web presence; 
• A transaction involves parties with phone numbers or country codes that do not match the expected country; 
• There has been a change of ownership of a corporate holding to reduce ownership stake below 50%; 
• There has been a change of ultimate beneficial owner shortly before or after sanctions were imposed; 
• There is potential control of an entity by a designated person despite apparent direct ownership being under the 50% threshold; 
• The CEO/manager is never available for discussions, i.e., all communications go via a regular employee or a representative who seems to have a general Power of Attorney; 
• A consignee of a shipment appears to be a mail centre, a logistics company, or a trading company; 
• One or more of the transaction parties is linked to state-owned corporations in countries where governments are subject to EU restrictive measures. 

What?  

What product or service is being offered? Does the transaction make commercial sense? 

Red flags include: 

• The transaction involves sanctioned, dual-use, proliferation-sensitive or military goods (including goods on the Common High Priority Goods List, or Economically Critical Goods List where diversion to Russia is a risk); 
• The description of the goods on the trade/financial documentation is non-specific or misleading; 
• There is evidence or suspicion that documentation or some of its contents are fraudulent; 
• The item or service does not fit the purchaser’s line of business; 
• The customer is significantly overpaying for an item based on known market prices; 
• The customer is willing to pay cash for a very expensive item when the terms of sale would normally call for financing; 
• The customer is unfamiliar with the product's performance characteristics but still wants the product. 

Where?  

What is the geographic destination, the payment or shipment routing and where are the parties to the transaction based? 

Red flags include: 

• Goods are delivered to, from or transit through a country subject to EU restrictive measures; 
• Goods are delivered to, from or transit through a country known as a “circumvention hub” or otherwise actively engaged with a sanctioned country; 
• Transaction involves individuals, companies or a shipment route located in a country with weak export control laws or weak enforcement of those laws; 
• The shipment or payment routing is inconsistent with normal geographical or trade patterns, or with the customer’s expected business activity. 

Why?  

What is the purpose or end-use, or who is the end-user of the product? 

Red flags include: 

• The end-use or end-user has not been disclosed, or the counterparty is reluctant to disclose that information; 
• The counterparty is reluctant to accept a “no re-export” or – where relevant – a “no export to Russia” clause in contracts; 
• The stated end-user is in a country different from where the order was placed;
• In the case of purchases, the vendor is vague about the source of materials or country of origin.

What should you do when you encounter a red flag? 

As mentioned above, a red flag on its own is not always indicative of sanctions circumvention or that a particular transaction is illegal. However, it is an indicator that an operator should undertake deeper due diligence to ensure that the product or service they are involved with is not being used to breach sanctions.  This is Enhanced Due Diligence, sometimes referred to as “EDD”. 

Undertaking EDD will provide you with further information that can help you determine whether the transaction or activity you are considering is lawful or not.  Enhanced Due Diligence is done in the same way – though more detailed – as you would with other sanctions due diligence. 

Ultimately, businesses and organisations need to satisfy themselves that the activity they are considering is lawful. The depth of the enquiries they undertake should be risk-based – the higher the risk the more detailed the enquiries should be.

What should I do if I am still unsure about a transaction? 

You can: 

• Contact the EU Sanctions Helpdesk.  We can support you in undertaking your due diligence, either by providing guidance on how you can ask your counterparty the right question, or by undertaking due diligence on your behalf. 
• Speak to your National Competent Authority (NCA). NCAs work in close contact with EU operators and provide them with guidance and support to ensure that any business conducted in environments subject to EU sanctions remains lawful.  You can find a list of all the NCAs in your jurisdiction [here]. 
• Get legal advice from a qualified professional.  Neither the EU Sanctions Helpdesk nor the NCAs are able to give you legal advice and both may, even after making their own enquiries, recommend that you obtain your own legal advice.  When seeking legal advice, as with any matter of specialist law, you should speak to a lawyer who has experience in EU restrictive measures. 

What should I do if I suspect or discover illegality? 

In short, if you know or suspect that a proposed transaction or other activity would breach EU restrictive measures you must not continue or participate.  The same is true if you know that a proposed transaction or other activity is likely to result in circumvention. 

Your reporting obligations will differ depending on which Member State you are located in and/or which other Member State’s legal jurisdiction your transaction or activity involves. If you have any concerns, you should initially contact the relevant National Competent Authority. 

Additionally, if you are aware of possible violations of any EU sanctions, you can bring this to the European Commission’s attention by voluntarily providing information using the EU Whistleblower Tool. 

Author

The EU Sanctions Helpdesk Team