As the war in Ukraine continues, the diversion of restricted goods and technology to Russia remains a risk for exporters. The Republic of Turkey has become a primary diversion point for such restricted goods. In the summer of 2022, while the U.S. and its allies were expanding sanctions on Russia that began in February 2022, Turkey was celebrating its increase in trade with Russia.¹ But increased trade creates increased risk: the Department of the Treasury’s Under Secretary for Terrorism and Financial Intelligence, Brian Nelson, explicitly referenced this situation in recent remarks in Turkey, “The marked rise over the past year in non-essential Turkish exports or reexports to Russia makes the Turkish private sector particularly vulnerable to reputational and sanctions risks.”²

Diversion in this context means the illegal shipment of goods controlled under U.S. export controls to a territory or party that is restricted under U.S. laws or regulations. Diversion has long been a concern of the U.S. export control agencies, the Department of Commerce Bureau of Industry and Security (“BIS”) and the Department of State Directorate of Defense Trade Controls (“DDTC”), as well as the Department of Treasury Office of Foreign Assets Control (“OFAC”), which administers U.S. economic sanctions programs. Of primary concern with respect to diversion from Turkey are reexports of dual-use items controlled under the Export Administration Regulations (“EAR”), which BIS administers. Nelson continues: Turkish businesses should “take extra precaution to avoid transactions related to potential dual-use technology transfers that could be used by the Russian military-industrial complex.”

This concern is well-founded. Various press reports show Russia continues to obtain U.S.-origin microelectronics and other dual-use items despite increasingly stringent export restrictions.³ Additionally, in FAQs published on August 16, 2022, BIS identified multiple commodities “presenting a special concern because of their potential diversion to and end-use by Russia and Belarus to further their military and defense capabilities.”⁴ The list included many items identified on the Commerce Control List (“CCL”) of the EAR, such as civil aircraft parts, antennas, cameras, GPS systems, integrated circuits (i.e., chips), oil field equipment, and vacuum pumps, among other items. Additionally, on May 9, 2022, BIS expanded export controls on multiple items not present on the CCL, known as EAR99 items, which generally have the lowest levels of controls of U.S. exports. (See our trade alert discussing this expansion of export controls, Commerce Expands Export Controls on Shipments of EAR99 Items to or within Russia.)

Other Points of Diversion

Due to its membership in NATO, Turkey has received the bulk of recent attention as a point of diversion, but it is by no means unique. The United Arab Emirates (“UAE”), also a traditional point of diversion for goods to Iran, also received a visit from Under Secretary Nelson to pressure the UAE to curtail its relationship with Russia. On January 26, 2023, OFAC added Emirati aircraft firm Kratol Aviation to the list of Specially Designated Nationals and Blocked Persons (“SDN List”), subjecting it to blocking sanctions for providing aircraft to the Wagner Group, the notorious Russian private military company.⁵

The prime minister of Latvia has also recently accused Armenia and Kazakhstan, along with Turkey, of being points of diversion for goods from the European Union.⁶ In addition to the above, BIS has identified the following countries as diversion points for the transshipment of restricted goods to Russia or Belarus: Brazil, China (including Hong Kong), Georgia, India, Israel, Kyrgyzstan, Mexico, Nicaragua, Serbia, Singapore, South Africa, Taiwan, Tajikistan, and Uzbekistan.

Risks to Exporters and Reexporters

Over the past year, many exporters have experienced a shift in their formerly Russian business to Turkey or other potential diversion destinations. Export to Turkey or other countries with the knowledge that the end destination is Russia, or its similarly sanctioned ally Belarus, can constitute a violation of the EAR. Importantly, “knowledge,” as defined by the EAR, includes “not only positive knowledge that the circumstance exists or is substantially certain to occur but also an awareness of a high probability of its existence or future occurrence. Such awareness is inferred from evidence of the conscious disregard of facts known to a person and is also inferred from a person's willful avoidance of facts.”⁷

The EAR does not merely control the single export of an item from the United States. Instead, control under the EAR attaches to U.S.-origin items and those containing more than a de minimis amount of U.S. origin content, and continues to all subsequent destinations. If a license is required for the export of an item to Russia, then a license continues to be required for its reexport from Turkey, or another third country, to Russia.

Diversion also poses risks under economic sanctions administered by OFAC. If the diversion results in the items being obtained by a party on the SDN List or in an embargoed region of Ukraine (i.e., Crimea, the Donetsk People’s Republic, and the Luhansk People’s Republic), then the exporter or reexporter may be subject to enforcement from OFAC or BIS, depending on the nature of the violation.

The risks of negative repercussions for diversion to Russia do not lie solely with persons located in the sanctioning countries. As referenced by Under Secretary Nelson, foreign companies, including those in Turkey, are also at risk of becoming subject to U.S. sanctions and reputational risks if they breach the U.S. export control or economic sanctions regimes. Engaging in activity that evades U.S. restrictions can lead to the designation of the foreign party on the SDN List or BIS’s Entity List, which can lead to the inability to obtain any items subject to the EAR, including EAR99 items, without a license.

Best Practices to Prevent Diversion

Because diversion undermines the goals of the export controls and sanctions imposed against Russia and Belarus, BIS and the Financial Crimes Enforcement Network (“FinCEN”) issued a joint alert urging “Increased Vigilance for Potential Russian and Belarusian Export Control Evasion Attempts” (the “Joint Alert”).⁸ The Joint Alert includes a list of 22 “red flags” that are potential indicators of export control evasion specifically related to diversion to Russia or Belarus. Exporters, reexporters, and financial institutions should familiarize themselves with these red flags and either seek additional clarification of a transaction that raises them or refrain from completing the transaction altogether if it poses an elevated risk of diversion. These red flags include:

• When the nature of a customer’s underlying business (specifically military or government-related work), type of service(s) or product(s) offered, and geographical presence pose additional risks of unintentional involvement in the evasion of export controls for Russia and Belarus.

• When transactions involving a change in shipments or payments that were previously scheduled to go to Russia or Belarus, or a company located in Russia or Belarus, are now going to a different country/company.

• When transactions involving payments from entities located in third-party countries not otherwise involved with the transactions that are known to be potential transshipment points for exports to Russia and Belarus.

• When there are last-minute changes to transactions associated with an originator or beneficiary located in Russia or Belarus.

• When parties to transactions have addresses that do not appear consistent with the business or are otherwise problematic (e.g., either the physical address does not exist, or it is residential).

• When combined with other derogatory information, large dollar or volume purchases, including through the use of business credit cards, of items designated as EAR99 (or large volume or dollar purchases at wholesale electrical/industrial merchants, electrical parts and equipment providers, or electronic parts providers), in the United States or abroad, especially if paired with purchases at shipping companies.

In addition to identifying and responding to red flag indicators, exporters and reexporters should generally adhere to export compliance best practices to mitigate risks associated with diversion, including:

• Creating and implementing an export compliance program tailored to the risks of the company;

• Classifying products according to the appropriate Export Control Classification Number (“ECCN”) of the CCL, or as EAR99 if not on the CCL, and determining relevant license requirements;

  • As referenced above, exports of some EAR99 items are also restricted to Russia and Belarus. Exporters must also classify these items pursuant to the relevant Harmonized Tariff Schedule (HTS) code or Schedule B number.

• Using open source information to “know your customer” and conduct other due diligence measures;

• Screening all parties to export transactions, including all freight forwarders, banks, and intermediaries, against denied party lists; and

• Obtaining end-use/end-user statements from customers to confirm the end user of exported items.

If an exporter discovers that an unlawful diversion has occurred involving one of its shipments, the exporter should carefully weigh its options and determine whether a voluntary self-disclosure of the violation is a prudent course of action. Such a decision depends on a number of factors, and it may be helpful to discuss options with an international trade attorney.

If you have questions about the risks of diversion to Russia or other restricted countries or parties, require assistance in creating an export control and sanctions compliance program, or need assistance after discovering a potential violation, do not hesitate to contact the attorneys at Torres Trade Law.