russia is circumventing sanctions, even with the help of sex toy manufacturers

The key problem with the EU’s sanctions policy is that a company can be added to the list today, whilst a new legal entity can be set up tomorrow. This is clearly illustrated by NAKO’s new study, "Follow the Address". The researchers analysed over 180,000 customs declarations relating to shipments of priority microelectronics to russia and identified more than 8,000 foreign suppliers and their addresses. The conclusion is simple: companies may disappear, change their names or set up new legal entities, whilst their infrastructure – offices, business centres and corporate service providers – often remains in place.

The NAKO study identified over 200 addresses linked to companies already subject to sanctions or export controls. These addresses were used by more than 450 suppliers.

One of the most telling examples is Shenzhen NuanQin Technology. The company markets itself as a manufacturer of "smart sex toys", but customs records analysed by NAKO show that this company supplied russia not with adult products, but with integrated circuits and electric motors.

There are also less exotic examples. Companies dealing in pharmaceuticals, pipe fittings or other goods may simultaneously feature in microelectronics supply chains.

For the russian defence industry, this means the ability to replace one supplier with another. For a Western manufacturer, it poses the risk not only of breaching sanctions but also of losing control over where its products ultimately end up.

Of course, a shared address does not prove that all the companies at that address operate as a single network or are breaching sanctions. But it is an important risk indicator that a standard check based on a company’s name might overlook. In one case described by NAKO, there were at least 45 companies at a single address, of which only 14 were already subject to sanctions or export controls.

This is precisely where sanctions policy needs to shift its focus. If only the name is checked, the russians will simply change the front companies. If the address is also checked, it is possible to identify links between a new ‘clean’ legal entity and businesses that are already raising concerns.

Such checks are not only necessary for the state. Ukrainian and international companies working with microelectronics, equipment and dual-use goods should verify not only the counterparty’s name, but also its address, office neighbours, previous occupants of the premises, associated legal entities and corporate service providers.

The US has already begun adding to the Entity List (a list of organisations whose activities contravene national security or the country’s foreign policy interests) not only companies but also addresses that have repeatedly been used to circumvent export controls. NAKO proposes extending this approach at an international level and creating a joint list of high-risk addresses for the EU, the US, the UK, Japan and other partners.

Sanctions will always lag behind the creation of new companies. Therefore, the issue is not about adding more and more names to the lists, but about finding an infrastructure that allows these names to be constantly updated.

For businesses, the conclusion is simple: the absence of a company from a sanctions list does not mean there is no risk. Sometimes, the most important information about a counterparty can be gleaned not from its name, but from its address.

Source: NAKO, Forbes Ukraine