US Sanctions Focus on the United Arab Emirates
On March 2, 2023, the US government published a multi-agency notice setting forth red flags and warning of enhanced enforcement efforts related to third-party intermediary evasion of US Russia-related sanctions and export controls. The notice expressly cautioned against shipping US goods to Russia in violation of US sanctions, citing recent enforcement actions and criminal cases that involved the use of shell companies and transshipment points to export restricted US goods to Russia. The Financial Times subsequently reported that a senior Treasury official stated that the UAE was a “country of focus” for US investigators.
The Biden Administration’s focus on the UAE should come as no surprise. It has been widely reported that, since the Russian invasion of Ukraine, billions of dollars in Russian wealth has migrated to Dubai and the other Emirates. The presence of so many wealthy Russian nationals in the Emirates, with their extensive purchases of real estate and luxury goods, was bound to attract attention. As a result, we expect the United States to exert increased political pressure on the UAE to support sanctions enforcement.
Companies and individuals in the UAE and elsewhere in the Gulf doing business with Russia are well advised to take notice of the increased US attention, and bear in mind the red flags referenced in the recent advisory notice. Such red flags may not present in obvious ways, and Gulf citizens and entities must be aware of indirect or non-obvious Russian connections that the US will use as basis for enforcement actions.
The notice provides details of conduct that are red flags for sanctions evasion:
- Use of corporate vehicles (i.e., legal entities, such as shell companies, and legal arrangements) to obscure (i) ownership, (ii) source of funds, or (iii) countries involved, particularly sanctioned jurisdictions;
- A customer’s reluctance to share information about the end use of a product, including reluctance to complete an end-user form;
- Use of shell companies to conduct international wire transfers, often involving financial institutions in jurisdictions distinct from company registration;
- Declining customary installation, training, or maintenance of the purchased item(s);
- IP addresses that do not correspond to a customer’s reported location;
- Last-minute changes to shipping instructions that appear contrary to customer history or business practices;
- Payment coming from a third-party country or business not listed on the End-User Statement or other applicable end-user form;
- Use of personal email accounts instead of company email addresses;
- Operation of complex and/or international businesses using residential addresses or addresses common to multiple closely-held corporate entities;
- Changes to standard letters of engagement that obscure the ultimate customer;
- Transactions involving a change in shipments or payments that were previously scheduled for Russia or Belarus;
- Transactions involving entities with little or no web presence; or
- Routing purchases through certain transshipment points commonly used to illegally redirect restricted items to Russia or Belarus. Such locations may include China (including Hong Kong and Macau) and jurisdictions close to Russia, including Armenia, Turkey, and Uzbekistan.
The US guidance encourages companies to ensure they have adequate sanctions compliance programs to detect and prevent sanctions violations, and the failure to do so should be expected to magnify the significance of any enforcement action. We expect US agencies to act aggressively in bringing asset seizures, enforcement actions, and OFAC designations. These actions carry substantial financial penalties and operate under a strict liability standard, meaning that “we didn’t know” is not a defense if a company is inadvertently involved in a transaction that violates sanctions. In addition, sanctions violations can lead to indictment for criminal charges in the United States and the prospect of substantial prison sentences, even where the violator is not a US citizen and has never set foot in the United States.
It is a grave risk for non-US companies to ignore sanctions risk. The Iran stripping cases in the 2000s involved billions of dollars in fines and the disruption of a dozen foreign global financial institutions. Halkbank of Turkey has been indicted for its role in violating Iranian sanctions. The recent criminal cases involving Russian sanctions violations referenced in the US notice charged both US and non-US actors. OFAC actions and criminal cases have been brought against individuals, companies, and banks throughout the world. OFAC has also worked closely with authorities in the United Kingdom and the European Union to extend the global reach of sanctions against Russia in the wake of its war against Ukraine. There are lessons that can be distilled from these cases.
- US dollar-denominated transactions involve US financial institutions – and therefore carry risk of US sanctions enforcement.
- Goods produced in the United States or by US-owned or controlled companies, or their subsidiaries, are subject to US sanctions and export control regulations.
- Trade finance agreements, including credit facilities and US dollar-denominated letters of credit, or back-to-back agreements involving a sanctioned entity where the trade finance agreement is in a non-US currency but is backed up by a US dollar agreement, also carry sanctions risk.
- Shipments that are insured by global carriers, or reinsurers, may be exposed to sanctions violations. For example, many of the “Names” that are individual underwriters in the Lloyds market syndicates are US persons.
Finally, international corporates should understand that their exposure to sanctions risk can originate from points well beyond their control. For example, US intelligence agencies will work to spot shipments appearing in designated countries and then work backward to find the financing, insurance, and shipping records. Payments involving suspect intermediary countries will be flagged for investigation and review by US government analysts. Once the US government agencies find a loose thread, federal agents will keep pulling until the whole transaction unravels. Any false facts or omissions in the paperwork could lead to regulatory action, possible OFAC designation, and even criminal prosecution. It may also lead to referrals to UK or EU authorities.
The US guidance is clear: companies that maintain meaningful controls and who voluntarily report issues face lower fines and penalties than those that do not. Companies that want to protect themselves from sanctions risk should review their sanctions exposure and obtain advice from US legal counsel familiar with both the sanctions enforcement regime and the controls required to mitigate risk. It will be important to be ahead of this threat as US focus on the region grows.
LBKM has worked successfully on behalf of numerous persons and entities based in the Middle East, Southeast Asia and Eastern Europe on a variety of US sanctions issues, including advising multinational companies on sanctions compliance, obtaining the release of blocked funds, and convincing OFAC to remove sanctions on designated individuals. We have worked with semi-governmental bodies, NGOs, banks, corporations, political factions, corporate and bank officials, and high-level politically exposed persons. If you have questions or concerns about the scope or reach of US sanctions enforcement, please contact LBKM to have a privileged and confidential discussion.
For further information, please contact:
- Arthur Middlemiss (NY) at firstname.lastname@example.org or +1.212.822.0129
- Adam Kaufmann (NY) at email@example.com or +1.212.822.0128
- Tim Taylor, KC (Dubai/Doha) at firstname.lastname@example.org or +971502485354 or +447775681391
- Brett Walter (DC) at email@example.com or +1.202.420.8060
- Eric Lewis (DC) at firstname.lastname@example.org or +1.202.833.8900
- Nada Hachem (Beirut) at email@example.com or +961 79 185 178
The foregoing is for informational purposes only. It is not intended as legal advice and no attorney-client relationship is formed by the provision of this information.