In April 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control designated Alrosa on the OFAC Specially Designated Nationals list, blocking all U.S. transactions with or benefiting Alrosa. Additionally, all entities owned 50% or more directly or indirectly by Alrosa are blocked, even if they are not specifically named. The Biden-Harris administration had already announced in March that the direct import of rough or polished diamonds from the Russian Federation was prohibited by executive order. The goal of these actions was to cut off additional sources of support and revenue for the government of the Russian Federation due to its unjustified war in Ukraine. The U.S. government remains focused on ensuring that U.S. funds do not contribute to the ongoing conflict as evidenced by this statement about an interagency meeting held earlier this week by the U.S. Department of State and the U.S. diamond industry.
Addressing the risk of these sanctions can be challenging, especially when dealing with companies that have affiliates, parents, or subsidiaries that deal directly with Alrosa. Because many other countries with significant diamond trading continue to allow business directly with Alrosa, careful analysis is necessary to ensure a U.S. company is not dealing in property in which Alrosa maintains an interest. Enhanced due diligence is also required to ensure transactions are not being deliberately structured to evade sanctions.
Separate from the Alrosa designation, under existing customs regulations determining country-of-origin, Russia-mined rough diamonds that are cut and polished in another country remain legal to import into the U.S. because of the “substantial transformation” that is deemed to occur during the manufacturing process. However, given that these regulations could change and the above-noted challenges in analyzing the impact of the Alrosa designation, the safest course of action for all U.S. businesses remains to decline purchasing any goods that originated from Alrosa or Russia. Businesses could be at risk for derivative sanctions by contributing funding to a company that does direct business with Alrosa, and many U.S. customers are demanding goods from their suppliers that are not Russia-origin.
JVC encourages businesses to evaluate their supply chains for potential risk of sanctions as well as concerns related to money laundering, corruption, and financing of conflict (currently addressed through due diligence standards developed by the FATF and OECD.) In addition, businesses are tackling the issue of sourcing confirmation by layering compliance with the Kimberley Process, the World Diamond Council’s System of Warranties, third-party verification audit systems, brand source warranty protocols, and new services such as the GIA Source Verification Service which provides verified diamond source information. Each individual business must determine how to ensure they are not sourcing goods that violate sanctions or put themselves at risk for derivative or secondary sanctions, or other financial crimes.
Evasion of sanctions is a crime and a serious threat to national security and foreign relations. Violations of sanctions are punishable with significant civil monetary fines (often in the millions of dollars) and criminal prison sentences. Businesses are strongly encouraged to report any potentially unlawful transactions and seek assistance by calling the OFAC hotline at 1-800-540-6322 or, in the case of money laundering concerns, filing a Suspicious Activity Report via www.FinCEN.gov. For members with additional questions or who wish to discuss this further, please contact info@jvclegal.org or schedule a Member Chat on through the JVC Member portal at www.jvclegal.org.