The 2021 Dan-Bunkering Case and Due Diligence

Posted on March 24, 2022 by Eric Woods under case studies

INTRODUCTION

In December 2021, a Danish court fined and convicted the Dan Bunkering shipping firm and its parent company, Bunker Holdings, millions for dollars and gave a four-month suspended prison to the company’s CEO over a European Union sanctions-busting scheme.[1] The company was convicted of selling jet fuel to Russian companies, which in turn transferred the fuel on to Syria in contravention of EU sanctions. The company, which is the largest bunker supplier in the world, is alleged to have made 33 sales of jet fuel worth $102 million between 2015 and 2017.[2]

The case was investigated by Danish authorities from 2016 on, and has attracted significant media and political attention, with serious reputational and financial repercussions for Bunker Holding and Dan-Bunkering.[3] The case rested on questions of negligence and wilful blindness. Did the jet fuel, supplied by Dan Bunkering contributed, even in a small part, to Syria’s civil war? In the words of lead prosecutor Anders Rechendorff, “even negligence can lead to a conviction, and the defendants should have analysed what was going on much more thoroughly”.[4]

In terms of maritime sanctions – it is one of the most high-profile cases of its kind. As a case study, it serves as an example of how lack of effective compliance, particularly with dual use goods, can lead to measurable harm. What lessons can other companies and organizations working with high-risk goods in high-risk environments learn from the Dan Bunkering example?

THE CASE

The European Union, United States, and other jurisdictions have imposed sanctions because of the civil war in Syria. These sanctions include elements that prohibit the supply of military equipment and materials, as well as specific provisions related to the maritime, oil, petroleum, and gas sectors. In December 2014, the EU expressly prohibited the supply of jet fuel to Syria from EU territory, regardless of the fuel’s origin.[5]

According to press reports from 2016, Russia had been transferring jet fuel to Syria through Cyprus before the EU prohibition. Once the sanctions were enacted, Russian tankers turned to at-sea transfers to avoid entering port. The Dan-Bunkering provision of fuel took place through such ship-to-ship transfers.[6] Reuters reported that such transfers saw a spike in October 2016, one of the deadliest periods of the conflict.[7]

The case was brought to the public’s attention through a series of exposés by the Danish Broadcasting Corporation (DR), drawing significant public and political attention. According to one segment, U.S. authorities had warned Denmark about Dan-Bunkering in 2016; the Danish Business Authority and Dan-Bunkering’s bank, Danske Bank, had also done so. The report by Danske Bank outlined transactions between Dan-Bunkering and a Russian company Maritime; the Russian Ministry of Foreign Affairs confirmed that Maritime was supplying jet fuel for Russian fighter jets operating in Syria.[8]

In November 2020, Bunker Holding, Dan Bunkering, and several company executives were charged by Danish prosecutors over these transactions.[9] The case had been under investigation since 2016, attracting significant media and political attention.[10]

GOING BEYOND THE BASICS

Screening against sanctions list is necessary but not sufficient for ensuring compliance and avoiding risk. In a press release following charges being brought in November 2020, Bunker Holding said that its internal investigation “revealed no signs that anyone within Bunker Holding or Dan-Bunkering had any knowledge of the alleged breaches of EU sanctions” and that it had “not supplied fuel to companies included in the EU sanctions list.”[11] Limiting due diligence checks to just screening against sanctions list leaves other relevant information out-of-view.

In addition to screening against sanctions lists, effective KYC (Know Your Customer) – and, ideally, also KYCC (Know Your Customer’s Customer) – due diligence is crucial to accurately assess sanctions risks. The link between the tankers and Russia was known and knowable. Had the company dug deeper into the parties to the transfer, it may have avoided the prolonged investigation and charges being brought against the company and its executives.

Given the operational and material reliance of the Syrian Air Force on foreign support, the risk of diversion to Syrian end users was extremely high. In addition to identifying the end user of cargo, it is also important to ensure that it is not diverted to sanctioned entities or jurisdictions. Contractual clauses requiring proof of the cargo’s final discharge are vital, particularly with goods that could be used for harm, such as in active conflict zones. But so is the knowledge that contracts might not be honoured by all actors, in all circumstances.

It is also key to keep track of events in the press that highlight potential risks. In Autumn 2016, a period in which a substantial number of transfers occurred, the Syrian civil war was one of the leading stories in the global press. An October peak in shipments occurred even after an emergency meeting of the U.N. Security Council and several extremely high-profile events regarding air attacks in Syria were occurring.[12] All this information was readily available on the front pages of major newspapers and reputable online resources at the time.

Violations of the EU Syria sanctions are punishable by a fine or up to four years imprisonment under the Danish Criminal Code, highlighting not only financial and reputational dangers to a company, but also the personal risk to its executives. The prosecution in the Dan Bunkering case sought two years in prison but was ultimately “very satisfied” with the conviction.[13]

CONCLUSION

The Dan Bunkering case is an extreme example of what can go wrong in the world of compliance. Insufficient due diligence led to deep financial and reputational harm to the company. Many a problem could have been avoided by requesting a little more information on end use, foresight of potential reputational issues, and a few cursory google searches.

[1] https://shipandbunker.com/news/world/381571-four-months-suspended-prison-sentence-for-keld-demant-over-dan-bunkering-syria-sanctions-breaches and https://www.france24.com/en/live-news/20211214-danish-firms-fined-for-embargo-busting-russia-fuel-sales

[2] ibid

[3] https://www.argusmedia.com/en/news/2159228-bunker-holding-charged-with-breaching-syria-sanctions.

[4] https://news.yahoo.com/danish-firms-fined-embargo-busting-115221733.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAAXLkctj51Iln1TuIFYK4MrNsOS3jfVuqNvGPMI1YyaZoGp-WgDT3CkGTjOvY2PHeHpJwww1uwpWebK_SmwDFXQiYyNMf_RYEJ5Q5MvAoh6M3MYE0Z9w9gTxtpYQgmX-HvjgIfzV5O7VzyjEVAysEoXnMv1n2R_AtRsP1YasweqR

[5] https://sanctionsnews.bakermckenzie.com/eu-publishes-ban-on-exports-of-jet-fuel-and-fuel-additives-to-syria/

[6] https://www.reuters.com/article/us-mideast-crisis-syria-fuel-exclusive-idUSKBN13H1T8.

[7] ibid

[8] https://www.dr.dk/nyheder/indland/danish-state-prosecutor-investigates-dan-bunkering-violation-eu-syria-sanctions.

[9] https://www.bunkerspot.com/global/49637-global-dan-bunkering-speaks-out-on-alleged-violation-of-eu-sanctions-against-syria.

[10] https://www.bunkerspot.com/europe/52349-europe-dan-bunkering-court-case-scheduled-for-october

[11] https://www.bunkerspot.com/europe/51763-europe-bunker-holding-and-dan-bunkering-charged-with-selling-jet-fuel-to-syria.

[12] https://www.reuters.com/article/us-mideast-crisis-syria-aleppo-warcrimes/syria-air-force-bombed-convoy-u-n-says-in-aleppo-probe-idUSKBN1684G0 and https://news.un.org/en/story/2016/09/540932-security-council-un-envoy-appeals-russia-and-us-cooperation-pull-syria-away and https://www.reuters.com/article/us-mideast-crisis-syria-fuel-exclusive-idUSKBN13H1T8

[13] https://www.france24.com/en/live-news/20211214-danish-firms-fined-for-embargo-busting-russia-fuel-sales

Russia’s Semiconductor Catastrophe: How Export Controls and Sanctions will affect Russia

Posted on March 23, 2022 by Eric Woods under analysis

Overview

New export controls on semiconductors to Russia, in combination with sanctions impacting the Russian economy. Some estimates put the trade of semiconductors to Russia at $50 billion.[1] But these impressive number bely the fact that Russia buys end products with chips and integrated circuits and does not have a strong industrial base to produce cutting edge semiconductors themselves despite attempts by the Kremlin to build a domestic production capacity.[2]

Russia’s Global Trade Flows

CNS analyzed trade flows of semiconductors and electronics into Russia to measure the current international supply chains Russia is relying on to keep her economy running. Firstly, we analyzed COMTRADE data from the United Nations using the Harmonized System data countries report they are exporting to Russia. We used two four-digit HS (Harmonized System) codes to filter for only goods relevant to the semiconductor and microelectronics industries. This meant using codes 8541 and 8542, for semiconductors and electronic integrated circuits, respectively. The goods were measured in U.S. dollars from the 2017 to 2021 period.

What we found was two distinct trade flows. The larger of the two routes stretches towards the Atlantic, constituting primarily the Netherlands, Germany, and United States to a lesser extent. The Netherlands was the leading reporting of trade, with totals reaching $1.48 billion in goods. Germany and the United States came in second with $856 million and $366 million in goods, respectively from 2017 to 2021. The smaller, but still extremely significant of the two trade flows stretches towards the Pacific, constituting supply chains from China and Hong Kong. The dominance of trade from China and Hong Kong fluctuated based on year, but $973 million in goods were reported by Hong Kong over the four-year period with $746 million coming from the Chinese mainland.

Graph of Russian electronics trade. — Graph of Russian Electronics Trade Over Time

It is important to note the breadth and variety of semiconductors and integrated circuits. The goods Russia imports run the gamut of sophistication levels and are not all the high-end semiconductors that are the focus of the U.S.-China technology arms race, but lower end electronics for all number of industrial applications.

Asian Supply Chains

Logically, given geography and geopolitical leanings, there is concern China itself may step in to provide a workaround for getting semiconductors into Russia. This would mean higher prices for Russian end users and increased risk for any Chinese supplier. Fearing this, U.S. Secretary of Commerce Gina Raimondo came out on March 8^th and threated to further cut-off China from American goods and software if Chinese companies served to undermine U.S. export restrictions and sanctions. U.S. officials have specifically threatened to punish the Shanghai-based and partially state-owned Semiconductor Manufacturing International Corporation (SMIC) for any trade with Russia.[3] SMIC is already on the US ‘entity list’ meaning that all US trade with the entity must be referred to the licensing agency.[4]

The impact of Taiwan joining the export controls could be extremely consequential for its success. Given TSMC’s outsized role in the high-end semiconductor industry, market cut-off alongside U.S. decoupling cuts off Russia’s basic electronic manufacturing base is virtually nonexistent much less a capacity to manufacture high-end chip manufacturing equipment akin to Dutch EUV innovators at ASML.[5] This is all despite government subsidies to push forward Russia’s chip manufacturing abilities.[6] This is due to several factors, including lack of development during the Soviet period, lack of qualified staff, lack of basic research, and theft by state officials.[7]

Nvidia, AMD and Intel have also pulled out of the Russian market, defacto locking Russia out of personal computers, laptops, and supercomputers.[8] AMD specifically referred to U.S. “sanctions” as the reason for the company’s pullout, without elaborating if export controls or financial restrictions were more to blame.[9] This is a direct blow to Russia’s participation in the machine learning race, as Sberbank’s Christofari supercomputer was created in collaboration with Nvidia.[10]

Impact on Global Semiconductor Markets

A secondary risk is that as a major commodity exporter, Russia’s invasion of Ukraine could impact the availability of raw materials needed to produce some semiconductors. The most relevant components to the Russia context being neon gas and pallidum.[11] Russia supplies half of the world’s neon gas, much of which is then further processed in Ukraine before entering global supply chains.[12] This supply chain provides 90% of the neon gas used by the U.S. semiconductor industry to produce chips.[13] Dutch semiconductor giant ASML reduced their reliance on neon gas in their processes after the Crimea annexation.[14] One business analyst told Fortune magazine, “Unless Ukraine becomes a long, drawn-out war, lasting over a month, there should be little impact on neon supplies”.[15]

Conclusion

Since Peter the Great traveled the European shipyards 300 years ago, opening the so-called window to Europe, Russia has relied on Western technology transfers for modernization. The world is more globalized now, but Russia continues to rely on technology transfers for development. Russia attempted import substitution of electronics after the 2014 annexation of Crimea, but many of these attempts were marred by corruption and failure.[16] The semiconductor export controls stand to leave Russia weaker, poorer, and more isolated in a way the country has not seen since the Soviet Union.

[1] https://fortune.com/2022/02/25/biden-ban-chip-semiconductors-exports-russia-ukraine/

[2] https://www.kommersant.ru/doc/5029560?query=%D0%B0%D0%BE%20%D0%BC%D0%B8%D0%BA%D1%80%D0%BE%D0%BD and https://www.kommersant.ru/doc/4955528?query=%D0%B0%D0%BE%20%D0%BC%D0%B8%D0%BA%D1%80%D0%BE%D0%BD

[3] https://www.nytimes.com/2022/03/08/technology/chinese-companies-russia-semiconductors.html

[4] https://www.federalregister.gov/documents/2020/12/22/2020-28031/addition-of-entities-to-the-entity-list-revision-of-entry-on-the-entity-list-and-removal-of-entities#:~:text=This%20rule%20adds%20SMIC%20and,)%20Co.%2C%20Ltd.%3B

[5] https://fortune.com/2021/10/19/asml-chips-euv-silicon-valley-biden/

[6] https://www.kommersant.ru/doc/4978092?query=%D0%B0%D0%BE%20%D0%BC%D0%B8%D0%BA%D1%80%D0%BE%D0%BD

[7] https://novayagazeta.ru/articles/2018/02/26/75605-synki-otechestva and

[8] https://www.pcworld.com/article/619357/amd-officially-halts-chip-sales-to-russia.html

[9] ibid

[10] https://www.sberbank.com/news-and-media/press-releases/article?newsID=be3c0f17-e57a-49f7-bf64-900e6e81cb3f&blockID=7&regionID=77&lang=en&type=NEWS

[11] https://www.wsj.com/articles/chip-makers-stockpiled-key-materials-ahead-of-russian-invasion-of-ukraine-11647167582

[12] https://www.smh.com.au/business/markets/semiconductor-squeeze-likely-as-sanctions-on-russia-melt-supply-20220311-p5a3to.html

[13] https://www.smh.com.au/business/markets/semiconductor-squeeze-likely-as-sanctions-on-russia-melt-supply-20220311-p5a3to.html

[14] https://www.aljazeera.com/economy/2022/3/3/amid-ukraine-fallout-crisis-hardened-chipmakers-race-to-adapt

[15] https://fortune.com/2022/02/25/biden-ban-chip-semiconductors-exports-russia-ukraine/

[16] https://novayagazeta.ru/articles/2018/02/26/75605-synki-otechestva

Russia’s Aerospace Catastrophe: How Export Controls and Sanctions will affect Russia

Posted on March 22, 2022 by Eric Woods under analysis

Eric Woods, March 22 2022

Overview

Russia’s civil aviation sector is already in a deep crisis due to the growing package of export control and sanctions leveled against the country. The sanctions and export controls are affecting the country’s civil air fleet on multiple levels and exacerbating decades of neglect in key sectors of the country’s industrial base. The U.S. and EU sanctions, in particular, have led companies to freeze technical support, spare parts, supply of aircraft, leasing of aircraft, and maintenance to Russia. Around 700 of Russia approximately 900 aircraft designed for civil aviation will be affected in one way or another.[1]

Russia’s civil air fleet is overwhelmingly reliant on Western manufactured engines. Previous rounds of sanctions have stimulated Russia’s domestic development of composite materials and avionics, but full commercial engines will be a difficult transition in conditions of near autarky.[2] Aviation data acquired by the Wall Street Journal shows that of commercial aircraft serving of in storage in Russia, there are 370 Boeing aircraft and 345 Airbus.[3] The third most-popular planes are produced by Sukhoi, but these airframes are reliant on joint Russian-Western partnerships. According to the analysis of the Wall Street Journal, only 17% of Russia’s domestic air fleet is domestically produced.

Import Substitution

The natural instinct for Russian leaders, and Putin in particular, is to involve Russia’s expansive military industrial base in the creation of domestic products. Russia has a number of research centers with wind tunnels that test hypersonic flight and cutting-edge aircraft. In fact, civil aviation engines under development such as the PD-8 and PD-14 are being developed under the auspices of state arms manufacturer Rostech.[4] Despite these competitive advantages in research and design of cutting-edge aerospace technology, Russia’s debt-laden and unwieldy defense enterprises are not able to produce globally competitive products despite years of government efforts.[5]

Compounding problems is Russia’s lack of a robust domestic electronics industry. Modern airplanes are reliant on a great deal of integrated circuits and advanced electronics. Despite robust attempts to build a domestic manufacturing capacity, Russian chipmakers were already struggling to meet orders for domestic import substituted chips before February 24^th.[6] Deliveries of the Irkut-produced MC-21 domestic airliner, a self-declared replacement for these foreign aircraft set was set for mass production in 2022, but may be delayed due to chip shortages.[7]

Safety and Maintenace

Russia’s Air Ministry is extending the licenses of aircraft creating fears that the ministry is simply lowering safety standards for flights.[8] There are early indications that this approach may already be putting passengers in danger. The semi-independent Russian business daily Kommersant, carried reports that there have been at least two incidents of autopilot failures on Airbus 320 flights made by the Russian carrier Ural Airline.[9] Some in Russia hope older Airbus 320s and 747s using the older CFM56 engines will be easier to maintain via secondary markets. A professor at Moscow’s Higher School of Economics told the newspaper, “We are in a situation where there are no good options. Either don’t fly at all or take risks”.[10]

Russia has domestic maintenance crews in place, but without the proper parts, tools and materials it will be difficult to maintain the fleet over the long haul. Some companies have looked to the UAE and Turkey for more advanced repairs that cannot be done in Russia, but fear of secondary sanctions has thwarted this according to managers at Russian airline companies.[11] Aeroflot in particular has pointed to the UAE and China as potential destinations for critical repair and maintenance.[12] Creative attempts to avoid the sanctions and export control regime, such as putting dozens of Russian aircraft into foreign registries, has so far, been prevented by the Kremlin.[13]

Chinese investment and intervention to prop up or save Russia’s economy from collapse remains the million-dollar question. With access to vast capital reserves and technology, China is theoretically poised to step into the gap left by Western providers if there is the political will to do so in Beijing. Fears of secondary sanctions have put a damper on investment so far. Officials from Russia’s air ministry told Interfax that attempts to procure replacement parts so far have been rebuffed.[14] Absent political will from top leadership in Beijing, there is little reason for profit-oriented companies to invest their money in a market with a business environment as toxic as Russia’s.[15]

Conclusion It may take years for Russia to bring its domestic Boeing and Airbus equivalents into serial production enough to make up for the losses.[16] Officials are speeding up the certification process of domestically produced engines.[17] But the problem remains that in relying on global supply chains for domestic civil aviation has put Russia in a place, where an entire sector of the economy is now at a breaking point. Without the involvement of foreign companies in the market, and without the ability to procure spare parts, Russia’s civil aviation sphere faces nothing short of catastrophe.

[1] https://www.kommersant.ru/doc/5239501

[2] https://www.kommersant.ru/doc/5236969

[3] https://www.wsj.com/articles/russia-cant-fly-without-the-westbut-may-eventually-propel-china-11646738302

[4] https://rostec.ru/news/rostekh-izgotovil-uzly-dlya-demonstratora-dvigatelya-dlya-ssj-new/ and https://rostec.ru/news/odk-i-gazprom-dogovorilis-o-sotrudnichestve-pri-sozdanii-dvigateley-na-baze-pd-14/

[5] https://ridl.io/en/the-inner-workings-of-russia-s-military-industrial-behemoth/

[6] https://www.kommersant.ru/doc/5009185?query=%D0%B0%D0%BE%20%D0%BC%D0%B8%D0%BA%D1%80%D0%BE%D0%BD

[7] https://www.kommersant.ru/doc/5236969 and https://trends.rbc.ru/trends/industry/622b2d7b9a7947dd4d90bc07

[8]https://www.kommersant.ru/doc/5249920

[9]https://www.kommersant.ru/doc/5249920

[10] ibid

[11] https://www.kommersant.ru/doc/5239501

[12] https://www.kommersant.ru/doc/5236969