Euro SIFMANet Riga Report

Following the start of Russia’s full-scale invasion of Ukraine in February 2022, unprecedented and comprehensive sanctions have been imposed on it. Among the measures taken in the first several months of the war were the immobilisation of the Bank of Russia’s reserves, sanctions on several large Russian financial institutions and their disconnection from SWIFT, the EU’s embargo on Russian oil, the G7 oil price cap regime, and comprehensive export controls on dual-use goods. More restrictions have been added since. However, the focus of the work of governments, think tanks and wider civil society has shifted to questions of implementation and enforcement. As the Russia sanctions regime is likely to remain in place for years, these issues will continue to play a major role. In addition, they are of utmost importance for the future credibility of sanctions beyond the Russia case.

The coalition’s actions have had a significant impact on Russia – curtailing export earnings, reducing policy space and limiting access to critical inputs for its military industry. But clearly, they have not succeeded yet at achieving their ultimate objective: to bring the war to an end and rein in the threat to peace and prosperity in Europe – as well as to the rules-based international order – that Russia poses. In fact, serious issues hinder effective implementation and enforcement of key measures such as the oil price cap and export controls. Over a period of more than two years, the RUSI-led European Sanctions and Illicit Finance Monitoring and Analysis Network (SIFMANet) has contributed to efforts aimed at understanding which sanctions work, which are plagued by practical challenges, and what needs to be done to improve their effectiveness and ensure their credibility.

Previous SIFMANet events have established that all stakeholders – whether governments monitoring sanctions circumvention and evasion, private sector actors seeking to ensure their compliance with the restrictions, or civil society attempting to shed light on key developments – need more and better data. To gain further insights on this issue, the Centre for Finance and Security at RUSI hosted a roundtable discussion in Riga in March 2024, with the support of the Financial Intelligence Unit of Latvia, the National Endowment for Democracy and the Latvian Institute of International Affairs. The event gathered experts from public and private sectors across Europe to explore, under the Chatham House rule, the critical importance of data sharing and develop proposals for improvements in this area. This report summarises the main findings from the discussion.

Data is Critical for Effective Sanctions Implementation

The way sanctions are thought about has changed dramatically in recent years – and with it, the approach to implementation and enforcement. Participants of the roundtable agreed that, for many years, sanctions – if they were more than simply a foreign policy messaging tool – largely fell on to the compliance departments of financial institutions. A global economy made traditional trade embargoes much more difficult to enforce. In response, the US began to leverage the primacy of its financial system to extend the reach of its sanctions. The threat of disconnection from correspondent banking accounts and loss of access to the US dollar meant that most financial institutions around the world had no choice but to comply.

The discussion described the Russia sanctions regime as fundamentally different from past cases in several respects. First, the sanctions coalition’s measures target an economy more integrated into trade and global financial flows than in any previous case. Second, the measures go far beyond restrictions on the financial system – they include interventions into global energy markets as well as complex supply chains and distribution networks for dual-use goods. Third, the Russia sanctions aim to restrict an aggressor’s capacities during an ongoing military confrontation, putting a much greater sense of urgency on making them work.

As SIFMANet discussions have established previously, data is key. Governments need as much information as possible to guide the implementation of sanctions at home, to investigate and prosecute violators, and to target circumvention networks in third countries. But it is not only the public sector that relies on data. Financial and non-financial corporates can only ensure that their business activities comply with sanctions if they have access to a wide range of information. Finally, think tanks such as RUSI and its partners use data to complement governments’ efforts in the area of sanctions. The complexity of the issues at hand as well as resource constraints in the public sector mean that ensuring their effective implementation and enforcement truly must be a whole-of-society effort.

Participants of the roundtable recognised that the use of data has improved noticeably over the past two years. Many of the agencies involved in analysing and improving the effectiveness of sanctions now have access to a wealth of critical information. In addition, they have stepped up their efforts to analyse this data by linking information from different sources. Furthermore, cooperation between different agencies – within governments and across jurisdictions – has increased significantly over the past two years. Important challenges on data access and sharing remain, but participants agreed that substantial progress has been made in understanding how sanctions work in practice and on the operation of Russian evasion schemes.

A Changing Focus: From “Red Flags” to Actionable Evidence

The increasing complexity of the Russia sanctions regime poses major challenges for implementation and enforcement – and calls for a different approach to the use of data. For instance, assessing the effectiveness of the G7 oil price cap requires that government agencies not only establish that a certain transaction involving Russian oil as well as a coalition-based entity took place, but also identify the specific contractual terms – that is, the price – at which it did. This information must be collected from a variety of sources – which are not always publicly available and whose reliability raises legitimate concerns – and be merged to develop a comprehensive picture. Think tanks face essentially the same limitations and challenges when it comes to their work in this area.

Another example of the magnitude of the task concerns the private sector. Many large economies do not participate in the sanctions, pushing trade and financial transactions to places with far less transparency. For instance, participants highlighted that a large share of Russia’s imports of so-called “battlefield goods” continues to come from coalition-based producers but via third-country intermediaries in China, Turkey and the UAE, as well as countries in the Caucasus and Central Asia. Non-financial corporates are being asked to go well beyond traditional sanctions screening of business partners. Instead, they are tasked with controlling complex supply chains and distribution networks – a task for which they are neither prepared nor properly incentivised. In addition, the cross-jurisdictional nature of the transactions itself provides considerable room to conceal illicit activities.

For civil society, the task has also changed. Participating authorities emphasised that governments are looking for researchers and think tanks to identify much more than suspicious patterns or “red flags”. Rather, enforcement agencies are seeking actionable information that can be used to prosecute sanctions violators and/or target entities with new restrictions. In addition, they seek concrete and detailed assessments of how their measures impact transactions and sanctions compliance.

Key Challenges Surrounding Data Availability, Sharing and Use

From the discussion in Riga, several key points emerged on the challenges of acquiring, sharing and properly using data for effective sanctions implementation and enforcement.

Missing and Inconsistent Information

As mentioned above, the Russia sanctions regime differs from past cases (such as Iran and North Korea) insofar as it imposes complex restrictions on trade and financial transactions. In addition, it has led to multi-layered and cross-jurisdictional circumvention and evasion schemes. This means that authorities in coalition countries must acquire and merge information from a wide variety of sources. This is often challenging. For instance, identifying a violation of the G7 oil price cap requires data on the entities involved in oil transport as well as on the price of the transaction.

Even if access to the information is secured, it is often difficult to match it to other data and develop a comprehensive picture. On export controls, participants added that an understanding of the entire supply chain and distribution network is needed to determine if a coalition-based producer of battlefield goods has violated sanctions. As the physical shipments of such goods largely take place outside of coalition countries, their own customs data is of little help. And many countries through which the bulk of this trade is conducted do not share information because they do not participate in the sanctions.

Authorities can certainly establish that suspicious activities take place, but their ultimate objective of generating actionable intelligence is severely impacted by data constraints. To an extent, these are also the result of regulatory gaps. For instance, incomplete customs declarations can be penalised or prosecuted – but rarely are. And important fields in SWIFT are optional. This includes some that would be critical for the monitoring and identification of potential violations, including locations where physical shipments related to financial flows took place as well as trade codes identifying goods.

Access to and Quality of External Data

To a large extent, governments, the private sector and civil society have relied on Russian trade data to assess the effectiveness of sanctions. But with Russia increasingly restricting access to its data, representatives from these three sectors acknowledge that their ability to monitor developments is at risk. While some important information is commercially available, its reliability can be legitimately questioned. And such questions extend beyond Russian data. Outreach to countries that are strongly suspected to function as circumvention hubs – Turkey, countries in the Caucasus and Central Asia – has been a focus of coalition governments and the EU. One of the key objectives is to acquire data which can shine light on the extent of illicit transactions and the people and entities involved. Beyond capacity constraints that compromise the quality of the information, customs data is often incomplete (for example, due to smuggling) and/or subject to falsification. In fact, coalition authorities often find significant inconsistencies when comparing data related to the exact same transaction from different sources. Most often, codes identifying the goods in question – so-called Harmonised System (HS) codes – differ between exports to Russia as reported in coalition or third-country customs declarations and imports from those countries to Russia as reflected in the Russian trade data.

Data Sharing Within the Public Sector

Many of the countries that have imposed sanctions on Russia have decentralised implementation and enforcement structures. Participants provided several examples for responsibilities being divided between multiple institutions – ministries of foreign affairs, finance, and economy as well as customs services, banking supervisors, financial intelligence units (FIUs) and law enforcement agencies. This inevitably leads to a less-than-optimal exchange of information and can slow down procedures. Challenges related to data sharing go beyond issues related to institutional setup, however. In many countries, data protection standards are high, making it difficult for key agencies to access information. This can be the case, for instance, for information on physical flows of goods provided by customs services, and on financial transactions provided by central banks and FIUs. Barriers can generally be overcome in the case of suspicions of concrete illicit actions, but they often inhibit efforts to monitor sanctions-related developments more broadly. Detecting problematic patterns and developing strategies to improve the effectiveness of sanctions is, thus, made more complicated. Similar challenges exist for data sharing between governments. In addition, existing systems for information exchange – such as the Egmont Group, which facilitates cooperation between FIUs – are set up for very specific purposes and are limited to specific types of data.

Decentralised Enforcement in the EU

The issue of decentralisation extends beyond individual governments. In the EU, despite 13 sanctions packages at the union level, member states are responsible for carrying out these measures in practice. And, not surprisingly, participants of the discussion reported that the 27 countries do things very differently. This concerns the institutional setup (that is, who is in charge of sanctions-related issues), staffing and resources (that is, what capacities are available for the task at hand), legal frameworks (that is, national legislation and regulations, criminalisation of violations, among others), access to critical information and political priorities. Inevitably, this leads to the fragmentation of sanctions enforcement and implementation in the EU. The involvement of government agencies from 27 member states – where responsibilities are also often split up between multiple players (as outlined above) – and the EU’s own institutions poses serious practical challenges to an effective exchange of information.

Private Sector Capacity Constraints

In the past, sanctions implementation has often fallen on the private sector, especially the compliance departments of financial institutions. The Russia sanctions regime is only exacerbating this dynamic. For instance, non-financial corporates have to control their supply chains and distribution networks related to goods critical for the Russian military industry. While buy-in from the private sector is essential, participants pointed out that governments must recognise existing capacity constraints to develop a sanctions implementation approach that works in practice. Many of the producers whose goods continue to reach Russia are large multinational corporations with significant resources to establish compliance structures and carry out the due diligence that is required of them – but not all of the involved companies are. Many small and medium-sized enterprises (SMEs) are involved as well, especially in the manufacturing of hi-tech machinery such as CNC machines.

Slow Pace of Adaptation to Challenges

It is important to recognise that economic sanctions are not static. Rather, they require frequent adjustments as their target adapts to restrictions and establishes evasion and circumvention schemes. This is particularly relevant in the current case of a far-from-global sanctions regime and an adversary – Russia – that has considerable experience with manoeuvring around such restrictions. After all, it has done so for roughly 10 years since sanctions were first imposed in 2014. Participants expressed serious concerns about the ability of coalition government to react swiftly to Russia’s actions and, more fundamentally, questioned if the issue is treated with a proper sense of urgency. For Russia on the other hand, the existential nature of the challenge is clear. And, as an increasingly repressive dictatorship, Russia has more flexibility to act compared with the democratic systems of the coalition.

Leveraging the Role of the Financial Industry

A topic that had emerged at previous SIFMANet events was again the focus in Riga: the financial industry’s role in sanctions implementation and enforcement. As mentioned above, banks have been involved in these efforts for a long time, but their responsibilities are likely to grow significantly. US President Joe Biden’s Executive Order of 22 December 2023 sent a clear message to foreign financial institutions that they risk losing access to the US financial system if they facilitate significant transactions relating to Russia’s military-industrial base. This represents a clear threat of secondary sanctions in the area of export controls. However, it will likely also make banks much more careful when it comes to any other transactions that involve Russia.

Participants expressed support for leveraging the role of banks in cross-border transactions to improve the effectiveness of the Russia sanctions regime. But they also urged caution regarding such an approach’s practical execution. For instance, simply adding new requirements to the industry’s compliance efforts is unlikely to result in functional procedures without proper guidance. What is more, efforts to involve the financial industry will need to go beyond those global banks that have traditionally been tasked with the implementation of sanctions. Financial flows are fungible and, especially when related to illicit activities, will be quickly redirected through any entities not in focus. This concerns smaller traditional banks as well as non-bank financial institutions such as payments services providers or actors in the crypto sphere. These entities, however, are not insulated from sanctions. Many of them also rely on access to the US financial system and the US dollar. They are also connected, through correspondent accounts and other business dealings, with those large global banks that have substantial experience with sanctions compliance and could hand on due diligence requirements.

Recommendations: Data is Key to Making Sanctions Work

The way sanctions are viewed has changed dramatically. Implementation and enforcement of an ever-more comprehensive and complex sanctions regime poses new and growing challenges to governments, the private sector and civil society more broadly. Data is key to making these measures work as effectively as possible and constrain Russia’s ability to continue its war of aggression against Ukraine. Specifically, access to data as well as its effective exchange and use are critical to assessing and improving the implementation of sanctions at home, investigating and prosecuting violations, and informing steps to rein in circumvention networks abroad. Throughout the roundtable, participants discussed ideas to improve data-related efforts. The specific recommendations from the event are as follows:

1. Centralise sanctions responsibilities within countries. Some EU member states are leading the way when it comes to centralising sanctions-related functions by designating competent authorities for implementation and enforcement. Participants expressed that cooperation and coordination within governments and across borders, including for data, would benefit from other countries following suit. As sanctions will remain a key element of foreign policy in the coming years, now is the time to equip institutions with proper resources and procedures. Clearly assigning responsibilities and mandates must be an integral part of this strategy.

2. Improve cooperation and data sharing across jurisdictions. One of the key findings of the roundtable is that authorities across the coalition have much better access to information now than two years ago. In addition, efforts are underway to link different data sources to develop a comprehensive view on the effectiveness of sanctions. However, improvements are needed when it comes to the exchange of information across jurisdictions. Existing systems require modifications so that they can be used to address the challenges emerging from the type of unprecedented and comprehensive sanctions that have been imposed on Russia.

3. Exchange best practices and learn from one another. Some jurisdictions, mainly the US, have significantly more experience with comprehensive financial and technology sanctions. All involved countries should cooperate closely on best practices and learn from one another’s successes and failures. Specifically, authorities across the coalition should look at jurisdictions where sanctions violations have been successfully prosecuted in the past and assess how they can implement the most-effective procedures.

4. Leverage the role of financial institutions in trade. Banks have emerged as a key player in sanctions implementation and enforcement and their role will only grow in areas such as export controls as it may be easier to trace trade-related financial transactions than physical shipments. While banks have established compliance resources and procedures and already provide much information to supervisory bodies and other enforcement agencies, it is critical to enable them to play an expanded role by adapting the regulatory framework. For instance, certain fields in SWIFT such as HS trade codes should be made mandatory. Otherwise, it will be extremely difficult for banks to identify red flags and stop illicit transactions in their tracks.

5. Expand interactions with non-financial corporates. Many coalition governments have taken steps to reach out to the private sector beyond the financial industry to provide guidance and offer technical assistance. It is critical that they continue to do so regularly and intensify this cooperation. With sanctions evasion and circumvention networks adapting rapidly to changing conditions on the ground, government agencies must engage in an ongoing dialogue with the private sector. Importantly, this should include establishing clear feedback mechanisms through which they can tap into companies’ expertise.

6. Work with trade organisations to extend reach. As more comprehensive and complex sanctions place growing responsibilities on the private sector, it is critical to make sure that SMEs can also play their role. Given their relative lack of resources and experience with sanctions compliance, governments should work closely with trade organisations to provide guidance and technical assistance to companies. Industry bodies should be leveraged to ensure that due diligence efforts go beyond large multinationals.

7. Involve civil society in sanctions monitoring efforts. The experience of the past two years has shown that civil society – including institutes such as RUSI and research networks such as SIFMANet – plays an essential role in using data to assess the effectiveness of sanctions and develop concrete recommendations for their improvement. Think tanks, NGOs and other similar organisations not only complement scarce resources in the public sector but can also provide a more strategic vision, which is often crowded out by governments’ urgent policy design and implementation tasks.

8. Continue diplomatic outreach to third countries. Considering the limits of data availability and important gaps in the tracing of supply chains and distribution networks, coalition governments need to undertake efforts to gain access to information from third countries. While not the case for all jurisdictions involved in sanctions evasion and circumvention (such as China and the UAE), many, especially in the Caucasus and Central Asia, can be incentivised to share more data as they are interested in deeper commercial ties with the EU and other coalition countries. Data sharing, however, will not be sufficient if not accompanied by technical assistance to public and private sectors alike to build capacities and improve data reliability.

Roundtable participants stressed that it will become clear in the coming months if coalition countries are up to the task of responding decisively and quickly to Russia’s attempts to work around the sanctions regime. Fundamentally, they were optimistic that, if the extraordinary wealth of information available is leveraged to assess the effectiveness of existing measures, identify and prosecute violators, as well as develop strategies to improve the implementation and enforcement of sanctions, Russia’s capacity to wage war on Ukraine and undermine the rules-based international order can be constrained. It will require improvements to institutional setups and the facilitation of information exchange within governments and across borders, as well as leveraging the role of the private sector and involving civil society. More fundamentally, it will need an understanding of the existential nature of the challenge.

Benjamin Hilgenstock is a Senior Economist at the Kyiv School of Economics Institute. Benjamin focuses on the Russia sanctions regime, in particular, in the areas of energy, trade, finance and export controls.