This case was presented to us. In order to determine whether the money paid by the Russian company could be transferred to the customer, the bank required a detailed explanation from their customer. This situation started a full examination of the export of the products and services.
What was/is prohibited?
In this specific case, the export took place between November 2021 and March 2022 in various partial deliveries. It concerned (parts of) a machine that develops (paper/cardboard) boxes. The parts were exported individually and the machine was assembled at the destination. Because the export took place in partial deliveries, different sanction packages were applicable at the specific time of export.
For example, Implementing Regulation (EU) 2019/1163 (extension of the ‘old’ sanctions regulation no. 833/2014) was applicable on the first shipments, whereby (broadly) a ban on dual-use goods to ‘sanctioned persons or entities’ was in force. That list - included in Annex IV of the implementing regulation - consisted (then still) of 9 persons/entities. In addition, that prohibition did not apply to the sale, supply, transfer or export of dual-use goods and technology intended for aviation and space applications, or related technical or financial assistance, for non-military use and for a non-military end user, as well as for the maintenance and safety of existing civilian nuclear capacity within the EU, for non-military use and for a non-military end user.
Regulation (EU) 2022/262 applied to follow-up shipments. However, this did not cause many problems as this new extension of Regulation No 833/2014 mainly concerned additional financial restrictions. On the last shipments (in March 2022), the incorporation of the new dual-use regulation (EU 2021/821) had to be dealt. On top of that the list of sanctioned parties was expanded. The new dual-use regulation manely provided an extension to technological goods/services. The extension of the sanctions then did not yet relate to a complete ban on the export of dual-use products/services to Russia as is currently the case.
What did that mean for the exported products/services?
The parts of the machines exported by the customer seemed - at first glance - to be included in the renewed dual-use regulation. This would mean that - in retrospect - the export could not, or not without further ado, have taken place. However, upon further study (and after inspection at the customer's premises), it appeared that the goods could not be placed under the footnotes. The goods were therefore not dual-use goods.
The goods were also not intended for military use and were exported to a non-military end user.
So far, so good. But now we need to actually get paid, meaning: the bank actually transfers what has been paid.
Why is the bank making things difficult?
Financial institutions serve as 'gatekeepers' for unusual transactions. They have a duty to ensure that no unusual transactions are carried out. Unusual transactions are include those transactions involving the export of dual-use goods. Therefore, if a financial institution receives transactions from Russia for an exporter, then that financial institution can/must check whether dual-use goods are supplied. This may be evidenced by:
- the transaction description (what goods are involved);
- the registration in the Chamber of Commerce (what kind of company is it);
- the compliance investigation at on-boarding (what investigation was carried out and what was the result);
- by further investigation on the exporter's website, for example;
- by requesting a list of goods from the exporter that is related to the transaction.
If dual-use goods are exported outside the European Union, a financial institution may/must request documents from the exporter's ICP (Internal Compliance Program) file, such as an End User Declaration or information about the end user. If this investigation does not sufficiently demonstrate that the goods are solely for civilian use, or if the end user is unclear, a report of an unusual transaction must be submitted to FIU-Nederland.
Conclusion
In this case, not all documents were 'available'. In retrospect, a lot could be reconstructed and confirmed. However, that takes time and this means the financial institution is holding onto the money for some time (in this case, months). Even if the customer is very much in need of it.
It is therefore extremely important to not only look at the order for export and arrange the export logistically, but to ensure that all documentation is available as well. If a financial institution requests documentation, it can be provided immediately and that saves a lot of hassle afterwards.
Do you have any further questions regarding this article? Please contact Lidwina Hoekstra.