A review of electronic components that are critical to Putin's war machine casts doubt on whether financial institutions can adequately detect export controls violations.
Sometimes the good guys win. In a stunning operation, Ukraine has launched a counterattack which erased six months of Russian gains in the span of two days. Ukraine is now attacking across two fronts, having used long range fires and careful planning to shape the battlefield for its success. The fighting remains bloody around Kherson, but Ukraine’s meteoric advance through Eastern Ukraine has even left Russian propogandists heads spinning.
The battle over the financial landscape has not changed significantly. Russia still maintains access to large amounts of currency and energy-related payments. Yes, this balance of payments is partially because Russia has more limited access to imports, but holes in sanctions already in place need to be plugged. Asset freezes against oligarchs have been bogged down in Europe’s courts, while maritime sanctions are inconsistently enforced (cough…Greece, Malta…cough). OFAC, the G7, and the EU have announced planned price caps for oil, set to be implemented on December 5th, but this process remains hot off the press and untested.
This advisory will focus on how financial institutions can comply with BIS and FinCEN’s joint guidance on detecting export control violations. We will:
Unpack the BIS/FinCEN joint advisory to clarify financial institutions’ compliance obligations to detect export controls violations, and which questions the agency’s interpretations of the regulations remain unresolved.
Examine two reports, one by the Royal United Service Institute (“RUSI”) and one by Politico which identify specific electronic components that were either found in Russian weapon systems or were identified by the U.S. government as some of the Russian’s top procurement priorities, and what this means for the future of export controls and banks’ ability to enforce them.
Provide our analysis of where we see export controls going and address the two paths forward that financial institutions have in enforcing export controls.
There is very little banks can do to stop Russia from procuring many of the electronic components used in their weapon systems unless banks significantly change how they interact with electronics manufacturers.
To be frank, our assessment is grim. The BIS advisory sets clear expectations that financial institutions should be able to detect a wide range of export control violations, but our analysis concludes that there is very little banks can do to stop Russia from procuring many of the electronic components that they desire. FinCEN and BIS’ hopes of actionable financial intelligence are dead in the water without a paradigm shift of how financial institutions approach their relationships with electronics manufacturers, and banks will require a greater level of government cooperation and approval to address the requirements of the advisory.
We have attached a spreadsheet that contains the electronic components of "critical importance" to Putin's war machine, their manufacturers, and our assessment of their overseas availability and obsolescence. As noted above, our research built on reports from both RUSI, who obtained Russian weapon systems in the field and identified the Western-made components in them, and Politico, who received a list of "critical components" from the U.S. government.