US, EU Officials Collecting Better Sanctions Evasion Data, Preparing New Measures

The U.S. and the EU in recent months may have had a breakthrough tracking export-controlled goods being illegally diverted through third countries to Russia, senior sanctions officials said this week. They also said the U.S., the EU and other Group of 7 nations are preparing to take new “legal action” against parties transporting Russian oil using shadow fleets in violation of the price cap.

Speaking during a virtual event hosted by the Atlantic Council, David O’Sullivan, a sanctions envoy for the European Commission, said the EU and its allies are now able to “fairly quickly” identify “new channels of circumvention and try to intervene to shut them down.” Part of that progress has been due to new information gleaned from tax data and “other sources that give us a much more immediate picture of flows,” said James O’Brien, a State Department official who previously led the agency’s Office of Sanctions Coordination.

O’Brien said the U.S. and its partners have begun to use that data just “over the last few months,” adding that it has been a major improvement over the trade data they had been tracking, which often “runs on a two, three month lag.” Now, “it's much more possible to identify, at an individual corporate level, who is actually moving the goods from one place to another and to respond to that,” he said. “So it's a different skill set, a different database that's now allowing us to interdict some of the very high-end of items that Russia may previously have gotten access to.”

O’Sullivan pointed to several countries as diversion risks, including Kazakhstan, Uzbekistan, Armenia, Serbia and Turkey. He said the EU has specifically noticed a surge in exports of items to those countries that they had “never” bought before Russia’s invasion of Ukraine. “It's not rocket science,” he said.

Although O’Sullivan wants to be “respectful” of countries that don’t want to implement sanctions against Russia because some have “very good reasons why they're not,” he said the bloc has still tried to persuade them, at the very least, to prevent reexports of sensitive goods that could be used by Russia’s military. He said he tells those countries: “You don't want to get the reputation of being a country where there is sanctions evasion,” because that could hurt those countries’ ability to attract investment.

“I think we have managed to persuade quite a number of these countries that it is not in their best interest to be a platform for the reexport of these goods,” he said.

But O’Sullivan also said companies looking to supply Russia’s war effort are getting more creative. Some items exported to those third countries are now being “re-diverted” before being shipped to Russia, O’Sullivan said, including to the United Arab Emirates.

Tracking the shipments is a “constant daily work of catching up with the latest new channels of circumvention,” he said. “This will be never-ending.”

Both O’Sullivan and O’Brien also warned about the risks of shadow fleets, which typically include older ships with false registrations being used to transport sanctioned goods, including oil trading above the G-7 price cap on Russian oil (see 2212050014). The U.S. earlier this month published an advisory to alert the maritime industry of some of the practices of shadow vessels (see 2310120029), and in that same announcement, the Treasury Department sanctioned ship owners in Turkey and the United Arab Emirates for violating the price cap.

More sanctions could be coming, O’Sullivan said. “The G-7 are actively working on a new set of measures,” he said. “I think we will probably take some additional legal action in the coming weeks.”

He said the shadow fleets could lead to a “maritime disaster,” adding that they often operate “very poor quality ships” that are “probably no longer seaworthy.” They also often falsify their shipping documents to inflate their transport costs and reduce the costs of their cargo, O’Sullivan said, a tactic used to justify the high charges caused by the value of their cargo being traded above the price cap.

“It's something that the G-7 are looking at very actively to see how we can take actions to address these kinds of issues,” O’Sullivan said. O’Brien added: “As David says, I expect to see us do more.”