This is an edited transcript of JVC’s Compliance Briefing, held on Friday, April 8th, 2022. The entire recording is available exclusively to JVC Members Only on the Member Dashboard. To watch the whole, live conversation and join future Compliance Briefings, join JVC as a member today! Apply here now.

Background information on Alrosa, Putin, and India is provided by Matthew Bockner, TD International.

Speakers:

Tiffany Stevens, Esq., President, CEO & General Counsel of JVC
Sara Yood, Esq., Deputy General Counsel JVC

Guest Speakers:

Matthew Bockner, Partner at TD International
Laura Hurley, Managing Director at TD International

On February 24th, 2022, Russia invaded Ukraine. The U.S. Treasury Department has issued multiple sanctions since that time. As of Thursday, April 7th, 2022, Alrosa is now fully blocked and listed on the Office of Foreign Assets Control (OFAC) Specially Designated Nationals (SDN) list. This is in addition to the existing import ban on diamonds, limiting U.S. businesses from directly importing rough or polished diamonds from Russia. This means that all U.S. transactions are now fully blocked. Any entities that Alrosa owned 50% or more, directly or indirectly, are now blocked, even if they’re not specifically named on the SDN list. These blocks are part of the diplomatic package that the U.S. is working with other countries to cut off financial support and revenue for the government of the Russian Federation. The goal of these sanctions and business prohibitions is to hinder Russia’s efforts in Ukraine.

Why was Alrosa added to the OFAC SDN list?

Alrosa supplies about 30% of the world’s diamonds. It’s important to understand who is managing Alrosa – a man named Sergei Ivanov Jr., and the company’s relationship with Vladimir Putin. Sergei’s father, Sergei Ivanov Sr., comes out of the intelligence services in Russia, just like Putin. They both grew up in Leningrad or St. Petersburg at the same time and entered service at the same time. Once Putin was tapped to move into work with Boris Yelstin in Moscow and then became Prime Minister and then President, he pulled Ivanov in to be his number two. He was the PM for a while, the head of the FSB, which is the follow on from the KGB, and then he’s bounced around within Putin’s inner circle for the last 20 years, where he has been the minister of defense, deputy prime minister, first prime minister, and back and forth.

Most recently, Ivanov Sr. has been made the environmental activities and the ecology of transport minister, a shift in 2016/2017, when Putin started to take all the people he grew up with and moved them out of positions of significant power. Ivanov was often thought of as potentially being the next president or the next prime minister. This move puts younger people in positions of power who only see Putin as a viable president of Russia. Putin moved Ivanov’s son into the position of Alrosa’s CEO, a very young man in a position of power with Russian influence and facility. Through a diamond operation it is possible to launder money for financing the Kremlin, or Putin and his cronies, where there is a lack of transparency internally and no way to really track where those diamonds are going within the inner circle of Russia.

This is one of the main reasons that OFAC has put Alrosa on the SDN list and specifically named Sergei Ivanov’s son on the sanctions list. Given their ties to Putin, it is unlikely they will be off the list until there is significant regime change in Russia.

How is Putin connected to Indian diamonds?

 Alrosa has been part of Russia’s efforts to have a special strategic partnership with India, one of the biggest importers of Russian diamonds. Putin kicked off the diamond expo in India, and now there’s a Bharat diamond course in Mumbai, which is handling everything through a custom zone that’s specifically included, benefiting Russia.

Russian diamonds exported to India, or somewhere else, cut and polished, then the substantial transformation occurs. These diamonds would have been considered India-origin, and therefore not subject to the ban. As for right now, we don’t know exactly how OFAC is going to interpret this and whether these products will still be allowed. We recommend hedging on the more conservative side as OFAC may ban these products and see them as Russian-origin and therefore sanctioned. JVC’s guidance is to go to your suppliers abroad and make it known that you will no longer purchase anything originating from Alrosa because of these sanctions. We will keep our members updated if anything changes, but we believe this is the safest way of operating for now.

It’s important to know who in India is utilizing Alrosa diamonds and what their plans are. You don’t want to be breaking sanctions laws by utilizing diamond cutters who use Russian diamonds.

What does all of this mean for U.S. businesses? 

U.S. businesses should now cease all business with Alrosa. Any goods in-house that were on memo from Alrosa are now frozen and you should speak with a lawyer about how to proceed.

U.S. businesses that have a direct ownership relationship with an Alrosa site holder abroad, or have a direct buying relationship with Alrosa, should seek counsel to ensure that they are transacting appropriately given the sanctions in place.

What should I do as a U.S. business to protect myself and my consumers?

We recommend U.S. businesses tell their suppliers they’re no longer purchasing products that originated from Alrosa.

These sanctions and restrictions are not just applicable to the jewelry industry, they are applicable to every U.S. business. Banks are likely going to be asking jewelry customers if they are in compliance with these sanctions. Your business should be prepared to answer this question.

The most important thing you can do for your business is to make sure you have a healthy anti-money laundering (AML) program. This is how you’re going to find out if you shouldn’t be dealing with a supplier or individual. If you want to go deeper into your AML program, JVC recommends TD International. TD International can take your AML program to the next level and investigate some of the companies you’re dealing with, including those in India, to ensure you’re comfortable with the origin of supplies.

What is happening with the products that originated from Russia?

We haven’t seen any interpretations from The Office of Foreign Asset Controls (OFAC) or from Customs and Border Patrol (CBP) about how Russian-origin products are going to be treated. Hopefully, OFAC will issue answers to frequently asked questions soon and we can find out how they’re going to interpret this information. The safest choice is to stop purchasing Russian goods for now, even indirectly.

If you currently have products that are of Russian origin, consider calling the OFAC hotline to get help. If you want to unwind that transaction, we recommend getting in touch with OFAC and having them help you figure out what you are currently allowed to do.

What is the risk if I continue to purchase Russian-origin goods indirectly?

Continuing to purchase Russian-origin goods indirectly puts your business at risk of import issues and asset freezing. Evasion of sanctions is a crime that has many penalties. There can be civil monetary fines in the millions of dollars and criminal prison sentences.

Aside from the financial risk of continuing to do business with Russian products, there are also reputational risks. And, reputational harms will last a lot longer than sanctions and can outlast your ability to expand, sell goods, and survive if you’re labeled as a “Putin sympathizer.” Reputation takes a lifetime to build, and seconds to destroy.

Where can I find out more information about these sanctions?

OFAC runs a hotline where you can call and ask questions about certain transactions or specific situations. The hotline provides information on how to get a general license to wind down something that you’re doing or how to make sure that a specific transaction you’re in the middle of is okay to complete. You should feel encouraged to call the OFAC hotline, this is not a hotline to catch you in a transaction and they’re not going to prosecute you. They are here to work with you to make sure that you are doing business within the guidelines of these sanctions.

JVC is also here as an intermediary and is happy to call the OFAC hotline on your behalf. If you want us to call and feel comfortable disclosing your question to us, we can do it for you, so your question is even more anonymous. We are a neutral body here to help all of the jewelry industry during this confusing time.

What is JVC doing to keep its members informed?

We are not passively waiting for OFAC to give us more detail. We’ve already sought guidance from OFAC for our industry. With these new sanctions, there’s a gray zone and we’re trying to get some clear answers on what exactly is and isn’t allowed with the Indian supplier that might have the Russian origination of rough diamonds. We’ll come back to you and our members with clarity, whether that’s through answers to OFAC’s FAQs or through direct answers from some of our government contacts.

We are hoping to get additional guidance from OFAC from our contacts at The Departments of Treasury and State, so stay tuned. JVC members get this information directly into their email inbox early, so become a member today if you haven’t joined JVC yet.

Key takeaways for businesses:

  1. Make sure your AML policy is up to date!
    1. Check out our AML products and services here
    2. Contact TD International if you’d like to go further in-depth with your AML program: Matthew Bockner and Laura Hurley.
  2. Let JVC know what situations you’re currently experiencing: we can provide OFAC with examples of open-ended questions and situations for their guidance.
  3. Become a JVC member to receive these timely updates early, and directly in your email inbox. Become a member today!

 

TD International