Sanctions against Russia and Belarus – customs and tax inspections concerning the accuracy of customs declarations as an indirect tool for verifying compliance with the sanctions regime – Part 3

A customs and tax inspection formally initiated in respect of the accuracy of customs declarations may, in practice, become an instrument for verifying compliance with sanctions imposed on Russia and Belarus. The National Revenue Administration (KAS) authorities are increasingly examining the actual destination of exports, the role of intermediary countries, and the taxpayer’s due diligence, which may lead to further proceedings and exposure to penalties.

The legal basis for initiating a customs and tax inspection is Article 54(1)(2) of the Act on the National Revenue Administration. This provision grants the authorities broad powers to verify the correctness of cross-border trade in goods, including, in particular, customs declarations.

In practice, this means that an inspection may be formally initiated to verify the correctness of exports – without explicitly indicating that the scope of the inspection includes an assessment of compliance with sanctions regulations.

This does not, however, alter the fact that in the course of such activities the authorities very often also examine actual compliance with the sanctions regime.

Verification of the actual country of destination of goods

One of the key elements of the inspection is the confirmation of whether goods have in fact reached the countries of destination declared in the customs declarations.

For this purpose, KAS authorities use instruments of international legal assistance and request foreign customs administrations to confirm the importation of goods into their territory.

In practice, this verification is aimed at establishing whether:

• the declared country of destination was the actual place of delivery;

• or whether it served merely as an intermediary (transit) country;

• and whether the actual recipient of the goods was an entity based in Russia or Belarus.

Particular attention is given by the authorities to export routes such as Singapore, China, or Turkey – i.e. jurisdictions which may be used as intermediary nodes within supply chains leading to sanctioned countries.

Scope of requested documentation

During the inspection, the authorities require a broad range of documentation enabling the reconstruction of the actual course of transactions. In particular:

• sales invoices;

• commercial contracts;

• transport documents;

• original export customs declarations;

• IE599 messages (proof of export).

The analysis of this documentation is intended not only to verify the formal correctness of declarations, but above all to determine whether the transaction formed part of a scheme facilitating sanctions circumvention.

Assessment of due diligence

An important element of the inspection is also the assessment of whether the business operator exercised due diligence in its relationships with foreign counterparties.

In practice, the authorities expect answers to questions relating, inter alia, to:

• the application of customer (foreign recipient) verification procedures;

• methods of identifying the actual end-user of the goods;

• measures taken to mitigate the risk of goods being used unlawfully or contrary to their intended purpose;

• mechanisms for monitoring transactions and responding to suspicious circumstances.

As a result, customs and tax inspections increasingly go beyond a purely documentary review and extend to an assessment of the compliance frameworks implemented by the audited entity.

Conclusion of the inspection and further consequences

A customs and tax inspection concludes with the preparation of an inspection report where irregularities are identified. If no breaches are found, no report is issued.

Where the inspection reveals irregularities, the consequence is the initiation of formal proceedings. At this stage, a formal assessment of the breaches is carried out and any potential liabilities or sanctions are determined.

The factual findings and evidence gathered during the customs and tax inspection regarding the correctness of customs declarations may serve as a basis for initiating further proceedings by KAS authorities or for submitting a notification of suspected criminal offence. In particular, such information may in the future justify:

• initiation of proceedings to impose an administrative financial penalty for breaches of sanctions regulations;

• initiation of criminal or fiscal criminal proceedings, where there is a reasonable suspicion of a breach of the sanctions regime, including its circumvention.

Practical implications for businesses

Accordingly, it should be borne in mind that an inspection formally initiated in respect of the correctness of customs declarations may, in practice, constitute a starting point for a broader review of compliance with the sanctions regime.

For businesses, this entails the need to prepare not only for a review of customs documentation, but also to demonstrate that they:

• carry out robust identification and verification of counterparties;

• have knowledge of the structure and flow of the supply chain;

• are able to provide a reasonable justification for chosen export destinations;

• have implemented procedures designed to mitigate the risk of sanctions breaches or circumvention.

In practice, these elements may determine the authorities’ assessment of transactions, even where the formal scope of the inspection is limited solely to customs declarations.

How we can help

Effective sanctions risk management requires not only knowledge of the applicable regulations, but also the implementation of appropriate procedures and systematic verification of counterparties and transactions.

We invite you to contact us – our tax litigation and dispute resolution team supports businesses in sanctions compliance through:

• implementation of counterparty verification systems (due diligence) with respect to links to sanctioned entities;

• implementation of due diligence procedures (proper documentation and archiving of counterparty checks);

• review and updating of existing procedures and contractual arrangements (including sanctions clauses);

• active support during inspections and representation before KAS authorities.