PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 1750 Pennsylvania Avenue NW, Suite 800 Washington, DC 20006
MEMORANDUM
May 5, 2022
To: Victoria Chambers, Responsible Partner, White Collar & Investigations Jasmine Thornton, Lead Associate, White Collar & Investigations
From: Conrad Reeves, Senior Counsel, Export Controls & Sanctions
Re: Export Control Analysis — Application of EAR §746.5 and ECCN Classifications to Oilfield Equipment Shipments by Dunmore Trading International Ltd. via Caspian Logistik GmbH
Matter No.: 1016-00009
Classification: Attorney-Client Privileged / Work Product — Do Not Distribute Outside Privilege Holders
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I. Executive Summary
This memorandum analyzes the application of the Export Administration Regulations (EAR), 15 C.F.R. Parts 730–774, to oilfield drilling equipment and components exported by Dunmore Trading International Ltd. ("DTI"), DIFC License No. CL-4827, through Caspian Logistik GmbH ("Caspian Logistik"), a Hamburg-based logistics intermediary, to end users in the Russian Federation between approximately August 2020 and January 2022. The total value of exports at issue is approximately $12.4 million across multiple shipments involving drilling assemblies, wellhead equipment, corrosion-resistant pumps and valves, downhole measurement instruments, and related components.
The key regulatory provisions at issue are EAR §746.5, which imposes license requirements on exports, reexports, and transfers (in-country) to Russia and Belarus, and the Export Control Classification Numbers (ECCNs) 2B350 and 2B999 under the Commerce Control List (CCL), 15 C.F.R. Part 774, Supplement No. 1. The principal enabling statutes are the Export Control Reform Act of 2018 (ECRA), 50 U.S.C. §§ 4801–4852, and the International Emergency Economic Powers Act (IEEPA), 50 U.S.C. §§ 1701–1706, both of which impose criminal penalties for knowing and willful violations of export control requirements.
Based on preliminary review of shipping documents, invoices, bills of lading, end-user certificates, and related records, our preliminary conclusion is that multiple shipments appear to have violated the EAR §746.5 restrictions on exports and reexports to Russia, and may also have involved false end-user certifications in violation of EAR §764.2(g) and potentially 18 U.S.C. § 1001. Additional investigation is required to confirm the ultimate end users and complete the item-by-item classification of all shipped equipment. In particular, we must determine whether the alleged ultimate end user — Volkhov Industrial Group JSC, a Russian industrial conglomerate designated under OFAC Directive 2 (sectoral sanctions, E.O. 13662) since November 15, 2019, and added to the OFAC SDN List under E.O. 14024 on April 6, 2022 — received some or all of the equipment in question.
This export control analysis runs in parallel with the OFAC sanctions analysis addressed in a separate memorandum dated April 27, 2022. Both analyses are directly relevant to the inquiry by the U.S. Department of Justice National Security Division, Counterintelligence and Export Control Section (CES), opened on April 19, 2022, pursuant to grand jury subpoena GJ No. 22-418 issued by the U.S. District Court for the District of Columbia (Grand Jury 22-2). This memorandum should be read in conjunction with the April 27, 2022 sanctions framework memorandum and Jasmine Thornton's forthcoming memorandum on corporate structure and jurisdictional nexus (dated May 10, 2022).
II. Background
A. The DOJ Inquiry and Grand Jury Subpoena
On April 19, 2022, the U.S. Department of Justice National Security Division, Counterintelligence and Export Control Section (CES), issued grand jury subpoena GJ No. 22-418 from the U.S. District Court for the District of Columbia (Grand Jury 22-2). The subpoena was served on Dunmore Energy Holdings Ltd. ("DEH") through its registered agent for service of process in the United States and was promptly forwarded to this firm by DEH General Counsel Marcus Wellbourne.
The lead prosecutor assigned to the matter is Assistant United States Attorney Meredith Calloway, with trial attorneys Samuel Kovacs and Diana Pressman serving as co-counsel. The investigative lead is Special Agent Paul Reinhardt of the FBI Counterintelligence Division, Washington Field Office. We understand from initial communications with AUSA Calloway's office that the investigation has been open for several months prior to the issuance of the subpoena, and that the CES may have received referrals from the Bureau of Industry and Security (BIS), Office of Export Enforcement (OEE), as well as from the Department of the Treasury's Office of Foreign Assets Control (OFAC).
The subpoena is broad in scope and encompasses, among numerous other categories: "(f) any export, reexport, or transfer of oilfield equipment, drilling equipment, wellhead components, pumps, valves, completion tools, or related components, parts, or accessories, to Russia, Belarus, or any entity identified on the OFAC Specially Designated Nationals and blocked Persons List (SDN List), the BIS Entity List (15 C.F.R. Part 744, Supplement No. 4), or the BIS Denied Persons List, from January 1, 2019 to the present." The subpoena also calls for all communications with Caspian Logistik GmbH, Petronova Trading FZE, Volkhov Industrial Group JSC, and various named individuals, as well as financial records, shipping documents, end-user certificates, compliance policies and procedures, and related materials.
Calderwood & Harkness LLP was retained by DEH on April 14, 2022, five days prior to the issuance of the subpoena, following an initial contact from General Counsel Marcus Wellbourne regarding "potential regulatory exposure" in connection with DTI's trading activities. The engagement was formally confirmed by letter agreement dated April 14, 2022, and supplemented on April 21, 2022, to encompass representation in connection with the grand jury subpoena and the parallel DOJ investigation.
The original return date on the subpoena was May 19, 2022. We have requested an extension to July 19, 2022, to allow adequate time for document collection, review, and privilege analysis. AUSA Calloway has indicated a willingness to accommodate a reasonable extension but has not yet formally confirmed the new return date. We anticipate a rolling production schedule will ultimately be negotiated.
B. Dunmore's Corporate Structure Relevant to Export Activities
A detailed corporate structure analysis is being prepared by Jasmine Thornton (memorandum dated May 10, 2022). For purposes of this export control analysis, the following corporate entities are relevant:
Dunmore Energy Holdings Ltd. ("DEH") is a Cayman Islands exempted company, with its registered office at Harbour Place, 4th Floor, 103 South Church Street, George Town, Grand Cayman KY1-1002. DEH's operational headquarters are located at 1200 McKinney Street, Suite 3400, Houston, Texas 77010. DEH is the ultimate parent holding company for the Dunmore group and reported fiscal year 2021 revenue of approximately $4.87 billion, with approximately 3,200 employees globally. DEH's majority shareholder is Greystone Capital Partners Fund IV, L.P., which holds approximately 62.5% of the equity. Minority shareholders include Dunmore management (approximately 22.5%) and Thornbury Infrastructure Fund II, L.P. (approximately 15%).
Dunmore Trading International Ltd. ("DTI") is the principal operating entity relevant to this analysis. DTI is a Dubai-based subsidiary of DEH, with its principal office at Level 14, Gate Building 3, Dubai International Financial Centre (DIFC), P.O. Box 506774, Dubai, United Arab Emirates. DTI holds DIFC License No. CL-4827 and is the entity that conducted the oilfield equipment transactions at issue. DTI operates as a trading and intermediation company, facilitating the purchase and sale of oilfield equipment and related commodities through its trading desk in Dubai.
Dunmore Renewables GmbH is a German limited liability company registered at Überseeallee 12, 20457 Hamburg, Germany. Dunmore Renewables GmbH is tangentially involved in at least one suspect transaction with Caspian Logistik GmbH, the details of which are under investigation and will be addressed separately. The Hamburg registration places this entity in the same city as Caspian Logistik GmbH, which may be significant to the analysis of the relationship between the two companies.
Dunmore upstream Americas LLC ("DUA") is a Delaware limited liability company, EIN 84-2937561, with its principal office at the same Houston address as DEH's operational headquarters. DUA is a U.S.-organized entity and, as such, constitutes a "U.S. person" under the EAR. DUA's potential involvement in providing technology, financing, or operational support for DTI's export activities creates a direct U.S.-person nexus for export control jurisdiction purposes, as discussed in greater detail in Section IV.D below.
C. Key Individuals
The following individuals are relevant to the export control analysis:
Derek Hargrave served as President of DTI from approximately 2017 until his separation from the company. Hargrave supervised the trading desk from DTI's Dubai office and oversaw the oilfield equipment transactions at issue. He was responsible for approving major transactions and exercised supervisory authority over the senior traders and logistics personnel. Hargrave was placed on administrative leave effective July 1, 2022, and was subsequently separated from Dunmore effective October 1, 2022. He has retained James Overstreet of Overstreet & McClain PLLC (Dallas, Texas) as personal counsel.
Natasha Sorokin served as Senior Trader at DTI. Sorokin is a Russian-American dual national and, as a U.S. citizen, unambiguously qualifies as a "U.S. person" for purposes of the EAR. She was directly involved in arranging certain equipment transactions and maintained contact with counterparties including Sergei Volkov of Petronova Trading FZE. Sorokin was placed on administrative leave effective May 16, 2022, and was separated from Dunmore effective September 15, 2022. She has retained Philip Keane of Wexford Keane LLP (Washington, D.C.) as personal counsel.
Yves Leclerc served as Director of Logistics & Shipping at DTI. Leclerc is a French national based in Dubai and was the primary point of contact for arranging logistics and shipping for DTI's equipment exports. He served as the primary liaison with Klaus Weidemann of Caspian Logistik GmbH and was responsible for coordinating the preparation and submission of shipping documentation, including end-user certificates. An interview of Leclerc was scheduled and conducted on June 22, 2022, as part of the internal investigation.
Omar Al-Rashidi served as Head of Middle East Operations for DTI. Al-Rashidi has been identified as a cooperating witness who is knowledgeable about the trading desk operations and the relationships with counterparties, including Caspian Logistik GmbH and Petronova Trading FZE. His cooperation is ongoing.
Tobias Engel serves as Managing Director of Dunmore Renewables GmbH in Hamburg. Engel is tangentially involved in at least one suspect transaction with Caspian Logistik GmbH. The extent of his involvement and knowledge of the equipment shipments to Russia is under investigation.
Rajesh Malhotra served as Controller at DTI in Dubai and was responsible for payment processing, including payments associated with the oilfield equipment transactions processed through Crescent Commercial Bank PJSC.
Gerald Fisk served as Chief Compliance Officer of DEH at the Houston operational headquarters. Fisk departed Dunmore on June 10, 2022, and has retained Catherine Blackthorn of Blackthorn & Associates LLP (Houston, Texas) as personal counsel. As CCO, Fisk was responsible for overseeing compliance programs, including export control screening and sanctions compliance procedures, at the group level. His departure and retention of personal counsel are noteworthy and suggest potential personal exposure.
D. Counterparties
Caspian Logistik GmbH is a German-registered limited liability company (Gesellschaft mit beschränkter Haftung) with its registered address at Mönckebergstraße 22, 20095 Hamburg, Germany. Its Managing Director is Klaus Weidemann, a German national. Caspian Logistik served as the intermediary logistics provider that facilitated the transshipment of oilfield equipment from various origins through Hamburg, Germany, to end users in Russia. Caspian Logistik is itself reportedly under investigation for potential export control violations involving dual-use items under EAR Category 2, though the details of that investigation are not available to us at this time. The company's role as a transshipment hub and the routing of equipment through its Hamburg facilities are central to the anti-evasion analysis under EAR §764.2(e).
Volkhov Industrial Group JSC is a Russian industrial conglomerate headquartered at 12 Kutuzovsky Prospekt, Moscow 121248, Russian Federation. Its Chairman is Arkady Volkhov. Volkhov Industrial Group was designated under OFAC Directive 2 (sectoral sanctions applicable to entities in the energy sector, pursuant to Executive Order 13662) effective November 15, 2019. It was subsequently added to the OFAC Specially Designated Nationals and blocked Persons List (SDN List) under full blocking sanctions pursuant to Executive Order 14024, effective April 6, 2022. Volkhov Industrial Group is the alleged ultimate end user of some or all of the oilfield equipment shipments at issue in this memorandum. The company's designation under Directive 2 was in effect throughout the entire conduct period (August 2020 – January 2022), and its subsequent SDN listing is relevant to any shipments that may have occurred in early 2022.
Petronova Trading FZE is a Dubai-based intermediary company registered in the Jebel Ali Free Zone, with its offices at Office 1407, Al Shafar Tower, Dubai Internet City, Dubai, United Arab Emirates. Its Managing Director is Sergei Volkov, a Russian national. Petronova is alleged to have functioned as a front company for Volkhov Industrial Group, facilitating the procurement and transshipment of equipment and other items on behalf of Volkhov-controlled entities. The relationship between Petronova's Managing Director Sergei Volkov and Volkhov Industrial Group Chairman Arkady Volkhov is under investigation; the surname similarity is noted but familial or business relationships have not yet been confirmed through documentary evidence.
E. The Conduct at Issue — Equipment Exports
Between approximately August 2020 and January 2022, DTI facilitated the export of oilfield drilling equipment and components valued at approximately $12.4 million through a series of transactions involving multiple shipments. The items shipped included, based on preliminary review of available shipping documents and invoices:
• Drilling assemblies and drill string components
• Wellhead equipment and related accessories
• Corrosion-resistant pumps (including centrifugal and positive displacement pumps constructed with nickel-chromium-molybdenum alloy components)
• Valve assemblies (including gate valves, ball valves, and check valves with special alloy compositions)
• Downhole measurement tools and instruments
• Completion equipment and related components
• Heat exchanger components and related parts
These items are classified or classifiable under EAR Export Control Classification Numbers (ECCNs) 2B350 and 2B999, as discussed in detail in Section III below. The classification of individual items requires further technical analysis, which is ongoing.
All identified shipments were routed through Caspian Logistik GmbH in Hamburg, Germany, to end users in Russia. The shipping and logistics for these transactions were arranged primarily by Yves Leclerc, DTI's Director of Logistics & Shipping, in coordination with Klaus Weidemann, Managing Director of Caspian Logistik GmbH. The routing through Hamburg appears to have been designed to obscure the ultimate Russian destination of the equipment, as the end-user certificates accompanying several shipments listed non-Russian end users.
End-user certificates (EUCs) accompanying the shipments may have contained false statements regarding the ultimate destination and/or end user of the equipment. Preliminary review indicates that EUCs for several shipments listed entities in Turkey, the United Arab Emirates, and Kazakhstan as the declared end users, when the equipment was in fact transshipped from Hamburg to Russia, potentially to Volkhov Industrial Group or entities controlled by Volkhov.
Payments for the equipment were processed through Crescent Commercial Bank PJSC in Dubai, with relationship manager Khalid Mansour overseeing the accounts. Some of the payments associated with the equipment transactions appear within the broader universe of $34.2 million in structured payments identified by Ridgeline Advisory Group LLC, our retained forensic accounting consultant (Engagement No. RAG-2022-0319, engagement led by Dr. Margaret Liu). The forensic accounting analysis is ongoing and is expected to trace specific payment flows associated with the equipment shipments to ultimate counterparties, potentially including Volkhov-controlled entities.
III. Applicable Regulatory Framework
A. Export Control Reform Act of 2018 (ECRA)
The Export Control Reform Act of 2018 (ECRA), codified at 50 U.S.C. §§ 4801–4852, is the primary authorizing statute for the Export Administration Regulations. ECRA was enacted as part of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (Pub. L. 115-232) and replaced the now-expired Export Administration Act of 1979, which had been continued in effect through successive presidential executive orders issued under IEEPA.
ECRA establishes the authority of the Bureau of Industry and Security (BIS) within the U.S. Department of Commerce to control the export, reexport, and transfer (in-country) of items subject to the EAR. The statute provides broad authority to the Secretary of Commerce, in consultation with other relevant agencies, to establish and maintain controls on items for reasons of national security, foreign policy, nonproliferation, and other purposes specified in the statute.
Criminal violations of ECRA carry significant penalties. Under 50 U.S.C. § 4819, any person who knowingly violates or conspires to violate, or causes a violation of, any provision of ECRA, or any regulation, order, or license issued thereunder, is subject to imprisonment of up to 20 years and fines of up to $1,000,000 per violation, or both. Civil penalties are also available and may be imposed administratively by BIS at levels up to $300,000 per violation or twice the value of the transaction, whichever is greater.
ECRA operates in tandem with the International Emergency Economic Powers Act (IEEPA), 50 U.S.C. §§ 1701–1706, which provides the President with authority to regulate or prohibit certain transactions in response to a national emergency declared under IEEPA. Many of the executive orders underlying the Russia-related export controls and sanctions — including E.O. 13662 and E.O. 14024 — are issued under IEEPA. IEEPA provides its own criminal penalties, including imprisonment of up to 20 years and fines of up to $1,000,000 for willful violations. The DOJ CES typically charges export control violations under both ECRA and IEEPA, providing overlapping bases for criminal prosecution.
B. EAR Overview — 15 C.F.R. Parts 730–774
The Export Administration Regulations (EAR), codified at 15 C.F.R. Parts 730–774, implement the controls established under ECRA and govern the export, reexport, and transfer (in-country) of items "subject to the EAR." The EAR are administered and enforced by BIS through its Office of Export Enforcement (OEE) and its Office of Export Services.
For purposes of this analysis, several key EAR concepts are foundational:
Items Subject to the EAR. The EAR apply to all items "subject to the EAR," a term defined at 15 C.F.R. §734.2. Items subject to the EAR include: (i) all items in the United States, including items in a U.S. Foreign Trade Zone or moving in transit through the United States; (ii) all U.S.-origin items, wherever located; and (iii) certain foreign-produced items that incorporate U.S.-origin controlled content or technology above specified de minimis thresholds, or that are produced using U.S.-origin technology or software under the Foreign Direct Product Rule. This expansive jurisdictional scope means that items manufactured outside the United States may nonetheless be subject to the EAR — a critical consideration in this matter, where the oilfield equipment may have been sourced from non-U.S. manufacturers.
Commerce Control List (CCL). The CCL, set forth at 15 C.F.R. Part 774, Supplement No. 1, classifies items subject to the EAR using Export Control Classification Numbers (ECCNs). The CCL is organized into ten categories (Categories 0–9), each of which is further divided into five product groups (A through E, corresponding to equipment/assemblies/components, test/inspection/production equipment, materials, software, and technology, respectively). Items on the CCL are assigned specific ECCNs that define the technical parameters of the controlled item and the reasons for control (e.g., national security, nonproliferation, anti-terrorism, regional stability).
EAR99. Items that are subject to the EAR but not specifically described by any ECCN on the CCL are designated "EAR99." EAR99 items are generally eligible for export without a license to most destinations, but remain subject to end-use and end-user restrictions under 15 C.F.R. Part 744 and destination-specific embargo and sanctions restrictions.
License Requirements. License requirements for the export or reexport of a particular item to a particular destination are determined by cross-referencing the item's ECCN with the Country Chart at 15 C.F.R. Part 738, Supplement No. 1, and by consulting any destination-specific restrictions imposed under Part 746. The Country Chart identifies, for each Reason for Control associated with a given ECCN, the countries for which a license is required. Destination-specific restrictions under Part 746 may impose additional or overriding license requirements, as is the case with EAR §746.5 for Russia and Belarus.
C. EAR §746.5 — Russia and Belarus Sanctions
Section 746.5 of the EAR, codified at 15 C.F.R. §746.5, imposes license requirements on exports, reexports, and transfers (in-country) of items subject to the EAR to Russia and Belarus. This section has undergone significant expansion and amendment, particularly in February and March 2022, following Russia's invasion of Ukraine. The regulatory history of §746.5 is important to understanding its application to the conduct at issue in this memorandum.
Pre-February 2022 Restrictions. Prior to the sweeping amendments of February–March 2022, §746.5 imposed license requirements for exports to Russia of items classified under specified ECCNs on the CCL, with a particular focus on items relevant to the Russian energy sector. These pre-existing restrictions were promulgated pursuant to E.O. 13662, which authorized the imposition of sanctions on specified sectors of the Russian economy, including the energy sector. Items classified under ECCNs in Category 2 — including ECCN 2B350 and ECCN 2B999, the two ECCNs most relevant to this analysis — were subject to license requirements for export to Russia during the pre-expansion period. The licensing policy for energy-sector items during this period was generally "case-by-case review," though licenses for items destined for sanctioned entities or end uses were frequently denied.
Post-February 2022 Expansions. In response to Russia's invasion of Ukraine on February 24, 2022, BIS issued a series of rules dramatically expanding the scope of §746.5. The February 24, 2022 rule (87 Fed. Reg. 12226) imposed sweeping license requirements for virtually all items subject to the EAR destined for Russia, with a general policy of denial for most license applications. Subsequent amendments further expanded the scope of the restrictions, the universe of items subject to control, and the geographic scope (extending to Belarus and certain occupied territories of Ukraine). These expansions significantly increased the likelihood that any item subject to the EAR destined for Russia would require a license, and that any license application would be denied under the presumption-of-denial policy.
Application to the Conduct Period. The conduct at issue in this memorandum spans from approximately August 2020 to January 2022 — a period that falls entirely within the pre-February 2022 regulatory framework. While the conduct predates the most sweeping expansions of §746.5, the pre-existing restrictions were already in effect during the relevant period and already required licenses for items classified under ECCN 2B350 and ECCN 2B999 when destined for Russia. Specifically, the Country Chart restrictions applicable to the Reasons for Control associated with ECCNs 2B350 and 2B999 — including Chemical & Biological Weapons (CB), National Security (NS), and Anti-Terrorism (AT) controls — required a BIS license for export to Russia during the entire conduct period. No License Exception was available for Russia-destined items under these ECCNs during the relevant period.
It is also important to note that the evolution of §746.5 through multiple BIS rules in 2022 is relevant to the current posture of the investigation and any remediation or voluntary self-disclosure considerations. Although the shipments at issue occurred prior to the most expansive February 2022 amendments, the current enforcement environment is one of heightened scrutiny of any exports to Russia, and the DOJ CES has made public statements emphasizing the priority of enforcing pre-existing export control restrictions on Russia-destined shipments.
D. ECCN 2B350 — Chemical/Biological Equipment and Related Items
ECCN 2B350 falls within Category 2 (Materials Processing) of the CCL, specifically within Product Group B (Test, Inspection, and Production Equipment). ECCN 2B350 controls certain toxic chemical precursor production equipment, chemical manufacturing equipment and components, and related items. The control parameters are keyed to the Chemical Weapons Convention (CWC) and Chemical & Biological Weapons (CB) nonproliferation controls.
The relevance of ECCN 2B350 to oilfield equipment may not be immediately apparent, but arises from the fact that certain equipment used in oil and gas drilling and production — particularly pumps, valves, heat exchangers, and related components — can fall within the technical parameters of ECCN 2B350 when they are constructed with specific materials or meet certain performance specifications. In particular, items made from corrosion-resistant materials (such as nickel, nickel alloys, tantalum, titanium, zirconium, and certain fluoropolymers), items with certain flow rate capabilities, and items with specific alloy compositions may meet the technical thresholds for classification under ECCN 2B350.
Based on preliminary review of the shipping documents and technical specifications available for the DTI shipments, the following categories of items may fall within ECCN 2B350:
• Corrosion-resistant pumps: Centrifugal and positive displacement pumps with wetted parts made from nickel-chromium-molybdenum alloys (e.g., Hastelloy C-276 or equivalent), which meet the alloy and corrosion-resistance parameters specified in the 2B350 control entry.
• Certain valve assemblies: Gate valves, ball valves, and check valves with bodies and internal components made from corrosion-resistant alloys that fall within the 2B350 parameters.
• Heat exchanger components: Shell-and-tube or plate heat exchangers with tubes, plates, or other wetted surfaces made from controlled alloys, meeting the technical parameters specified in the 2B350 entry.
The license requirement for items classified under ECCN 2B350 exported to Russia was in effect under EAR §746.5 and the Country Chart throughout the entire conduct period (August 2020 – January 2022). The Reasons for Control associated with ECCN 2B350 include Chemical & Biological Weapons (CB) controls, for which a license is required for Russia under the Country Chart. No License Exception was available for Russia for items classified under ECCN 2B350 during the relevant period.
E. ECCN 2B999 — "Specially Designed" Equipment for Specific End Uses
ECCN 2B999 is a broader classification within Category 2 of the CCL, covering items that are "specially designed" for the production of certain items or for certain end uses, including oil and gas exploration and production. ECCN 2B999 is a catch-all classification that captures equipment not specifically described by other ECCNs in Category 2 but that meets the "specially designed" threshold.
The relevance of ECCN 2B999 to the DTI shipments is direct: drilling equipment, drill bits, downhole tools, wellhead equipment, completion equipment, and certain production equipment used in oil and gas operations can be classified under ECCN 2B999 if the equipment is "specially designed" for oil and gas exploration or production, as determined under the definition of "specially designed" at 15 C.F.R. §772.1.
The "specially designed" definition, as revised in the 2013 CCL restructuring, employs a two-part test: (1) an item is "specially designed" if it, as a result of "development," has properties peculiarly responsible for achieving or exceeding specified performance levels, capabilities, or other characteristics; or (2) it is identified in the relevant ECCN as being "specially designed." Certain exclusions apply, including for items that are described in a released ECCN controlled for the same or higher level of control, or items that are standard commercial products not modified for a controlled end use.
Based on preliminary review of the DTI shipments, the following categories of items potentially fall within ECCN 2B999:
• Drilling assemblies and drill string components, including bottom hole assemblies and directional drilling tools
• Wellhead components, including christmas tree assemblies and related pressure control equipment
• Downhole measurement instruments, including measurement-while-drilling (MWD) and logging-while-drilling (LWD) tools
• Completion equipment, including packers, screens, and related downhole completion tools
The license requirement for items classified under ECCN 2B999 exported to Russia was in effect under EAR §746.5 and the Country Chart throughout the entire conduct period. No License Exception was available for Russia-destined items under ECCN 2B999 during the relevant period. As with ECCN 2B350 items, any export or reexport of items classified under ECCN 2B999 to Russia required a BIS license that, based on preliminary review, was neither applied for nor obtained by DTI or any other Dunmore entity.
F. De Minimis and Direct Product Rules
Two additional jurisdictional provisions of the EAR are relevant to this analysis: the de minimis rule and the Foreign Direct Product Rule (FDPR).
De Minimis Rule. Under 15 C.F.R. §734.3 and §734.4, items manufactured outside the United States that incorporate U.S.-origin controlled content are subject to the EAR if the value of the U.S.-origin controlled content exceeds specified de minimis thresholds. For Russia, the applicable de minimis threshold is generally 25% of the total value of the foreign-made item, calculated as the ratio of the value of U.S.-origin controlled content to the total value of the foreign-made item. This means that even if the oilfield equipment at issue was manufactured by non-U.S. manufacturers (e.g., sourced from European, Middle Eastern, or Asian suppliers), the items are subject to the EAR if they incorporate U.S.-origin controlled components, technology, or software with a value exceeding 25% of the total item value.
Foreign Direct Product Rule (FDPR). Under 15 C.F.R. §734.9, certain items produced outside the United States using U.S.-origin technology or software may be subject to the EAR regardless of the level of U.S.-origin content incorporated into the finished product. The FDPR has been significantly expanded in connection with the Russia-related controls, with new Russia-specific FDPR provisions added in the February 2022 amendments. However, even under the pre-existing FDPR framework, items produced using U.S.-origin technology classified under certain ECCNs could be subject to the EAR.
Application to DTI Shipments. These provisions are critical to establishing EAR jurisdiction over the oilfield equipment at issue. If the equipment was manufactured outside the United States — as appears to be the case for at least some items, based on the available procurement records — the de minimis rule and FDPR may provide the jurisdictional basis for subjecting those items to the EAR. DTI's procurement records, currently under review by Nexagen Analytics Inc. (Project No. NX-DEH-2204, project manager Brian Cavanaugh), must be analyzed to determine the country of origin, manufacturing source, and U.S.-origin content of each shipped item. This analysis is ongoing, with a target completion date of October 15, 2022. Preliminary indications suggest that multiple items in the shipments incorporated U.S.-origin components, including electronic control systems, sensors, and specialized alloy components sourced from U.S. manufacturers.
G. End-Use and End-User Controls — 15 C.F.R. Part 744
Even for items classified as EAR99 — i.e., items subject to the EAR but not specifically described by any ECCN on the CCL — end-use and end-user restrictions under 15 C.F.R. Part 744 impose significant limitations on exports.
General Prohibition. Section 744.1(d) of the EAR provides that no person may export, reexport, or transfer (in-country) any item subject to the EAR with knowledge that the item will be used in activities described in Part 744, including activities related to weapons of mass destruction, military end uses, or other proliferation concerns.
Entity List. Supplement No. 4 to Part 744 sets forth the Entity List, which identifies foreign entities that have been determined to be acting contrary to the national security or foreign policy interests of the United States. Exports of items subject to the EAR to entities on the Entity List require a license, and license applications are reviewed under the specific licensing policy set forth in the Entity List entry for the relevant entity. We are reviewing whether Volkhov Industrial Group JSC, Petronova Trading FZE, or any related entity was listed on the Entity List during the conduct period (August 2020 – January 2022). Our preliminary review indicates that Volkhov Industrial Group was not added to the Entity List until 2022, but we are continuing to verify this timeline.
Denied Persons List. Exports are prohibited to persons on the Denied Persons List, which identifies persons who have been denied export privileges by BIS.
Military End-Use / Military End-User (MEU) Restrictions. Under §744.21, a license is required for the export, reexport, or transfer (in-country) of certain items when there is knowledge that the items will be used for a military end use in Russia (and certain other countries). "Military end use" is broadly defined to include items for incorporation into, or for the use, development, production, or operation of, military items. If any of the oilfield equipment was known or reasonably known to be destined for a military end use in Russia, this provision would impose an independent license requirement, regardless of the item's ECCN classification.
Application to DTI Shipments. These end-use and end-user controls are significant because they may provide an independent basis for EAR violations even if certain items are ultimately classified as EAR99 rather than under ECCN 2B350 or 2B999. If the end user of the equipment was Volkhov Industrial Group or a Volkhov-controlled entity — an entity designated under OFAC Directive 2 for activities in the Russian energy sector — the end-user restrictions may apply regardless of the item classification. The interplay between ECCN-based controls and end-user-based controls provides overlapping and reinforcing bases for potential violations.
IV. Analysis of DTI's Oilfield Equipment Shipments
A. Shipment Inventory and Classification
Based on our preliminary review of shipping documents, invoices, bills of lading, and related records collected from DTI's Dubai office and Dunmore Renewables GmbH's Hamburg office, we have identified the following:
The total value of shipments across multiple consignments during the period from August 2020 to January 2022 is approximately $12.4 million. The items shipped fall into several broad categories, as described in Section II.E above: drilling assemblies, wellhead components, corrosion-resistant pumps and valves, downhole measurement tools, completion equipment, and heat exchanger components.
Each individual item must be classified on an item-by-item basis to determine whether it falls under ECCN 2B350, ECCN 2B999, another ECCN on the CCL, or EAR99. This classification requires analysis of the technical specifications of each item, including its construction materials, performance characteristics, and design parameters, against the technical control parameters set forth in the relevant ECCN entries. Our preliminary classification review, based on the limited technical specifications available in the shipping documents and invoices reviewed to date, indicates that a significant portion of the items are classifiable under ECCN 2B350 or ECCN 2B999, though the exact proportion cannot be determined until the full technical specifications are obtained and analyzed.
A detailed item-by-item classification table is being prepared in coordination with Nexagen Analytics Inc. and will require technical input, either from an outside technical consultant with expertise in oilfield equipment classification or from Dunmore's engineering staff. The target completion date for this classification table, contingent on the completion of the Nexagen document review and the availability of technical specifications, is October 15, 2022. This table will be attached as Appendix A to a supplemental memorandum upon completion.
It is important to note that the classification analysis may result in some items being classified as EAR99 rather than under a specific ECCN. However, as discussed in Section III.G above, even EAR99 items are subject to end-use and end-user restrictions under Part 744, and the export of EAR99 items to a sanctioned end user or for a prohibited end use can constitute a separate violation.
B. Routing and Transshipment Through Germany
All identified shipments of oilfield equipment were routed through Caspian Logistik GmbH in Hamburg, Germany. Caspian Logistik served as an intermediary logistics provider, receiving shipments at its Hamburg facilities and arranging onward transshipment to destinations in Russia. The routing and logistics were coordinated by Yves Leclerc at DTI in coordination with Klaus Weidemann at Caspian Logistik.
The shipments originated from various locations, including the United Arab Emirates and potentially other jurisdictions, and were consolidated at Caspian Logistik's Hamburg warehouse facilities before onward shipment to Russia. The transshipment through Hamburg is significant from an EAR perspective for several reasons:
First, the shipment of items subject to the EAR from one foreign country (e.g., the UAE) to another foreign country (e.g., Germany) and then to a third foreign country (Russia) constitutes a "reexport" as defined at 15 C.F.R. §734.14. The EAR's definition of "reexport" broadly encompasses any shipment or transmission of an item subject to the EAR from one foreign country to another foreign country, including the shipment of such items through an intermediate country. The transshipment through Hamburg to Russia therefore triggers the EAR's reexport controls, and the license requirements applicable to exports to Russia under §746.5 apply equally to reexports.
Second, German export control law (the Außenwirtschaftsgesetz, or AWG, and implementing regulations) and EU Regulation 833/2014 (EU restrictive measures concerning Russia) may independently apply to the transshipment of controlled items through Germany to Russia. While the focus of this memorandum is on U.S. EAR jurisdiction, we note that the German and EU export control regimes are relevant to the overall legal exposure analysis and to the investigation of Caspian Logistik GmbH. Coordination with our London office (Amara Osei) on UK/EU export control overlaps is ongoing.
Third, and most significantly, the use of Caspian Logistik GmbH as an intermediary transshipment point in Hamburg appears to have been designed to obscure the ultimate Russian destination of the equipment. By routing shipments through Germany and using a German intermediary, the transactions could be made to appear as intra-EU or non-Russia-destined shipments, thereby avoiding the export control scrutiny that would apply to direct shipments to Russia. This pattern raises serious concerns under the EAR's anti-evasion provisions at §764.2(e), which prohibit any person from taking any action with knowledge that the purpose is to evade the requirements of the EAR.
Evidence supporting the evasion analysis includes the shipping routes themselves (origin → Hamburg → Russia), the use of Caspian Logistik's Hamburg facilities for intermediate warehousing and consolidation, and preliminary indications that shipping documentation may have been re-labeled or re-documented at Caspian Logistik's facilities to obscure the Russian end destination.
C. End-User Certifications — Potential Falsification
Shipping documents reviewed to date include end-user certificates (EUCs) accompanying several of the identified shipments. End-user certificates are commonly required by export control authorities and by contracting parties to certify the identity of the ultimate end user and the intended end use of exported items. The accuracy of EUCs is critical to the export control process, as they form the basis for export control classification decisions, license determinations, and sanctions compliance screening.
Preliminary review of the EUCs by Liam Donahue (Calderwood & Harkness working associate assigned to the Caspian Logistik document set) and analysis of interview notes from Yves Leclerc indicate that EUCs accompanying several shipments listed non-Russian entities as the declared end users. Specifically, entities in Turkey, the United Arab Emirates, and Kazakhstan were listed as end users for items that were subsequently transshipped through Hamburg to Russia. If the true ultimate end user of the equipment was Volkhov Industrial Group or a Volkhov-controlled entity in Russia, as is alleged, then the EUCs contained materially false statements regarding the identity of the end user and the ultimate destination of the equipment.
The knowing falsification of end-user certificates constitutes a separate and independent violation under EAR §764.2(g), which prohibits any person from making any false or misleading representation, statement, or certification, or falsifying or concealing a material fact, in connection with the export, reexport, or transfer of items subject to the EAR. Each false EUC constitutes a separate violation.
In addition, if any of the false EUCs were submitted to BIS in connection with a license application, a commodity classification request, or any other official proceeding, or if they were relied upon by a government agency in connection with an export control determination, the preparation and submission of false EUCs may also constitute a violation of 18 U.S.C. § 1001 (false statements to a federal agency), which carries penalties of up to five years' imprisonment and fines.
Several critical questions must be addressed through the witness interview workstream and document review:
(i) Who prepared the EUCs — DTI personnel, Caspian Logistik personnel, or third parties?
(ii) Whether DTI personnel, including Leclerc, Hargrave, and/or Sorokin, directed or approved the inclusion of false end-user information in the EUCs.
(iii) Whether Caspian Logistik GmbH or Klaus Weidemann prepared the EUCs at DTI's direction, or independently, and whether DTI had knowledge of the false statements.
(iv) Whether any of the declared non-Russian end users (entities in Turkey, UAE, and Kazakhstan) were aware of or complicit in the misrepresentation of their identities as end users.
(v) Whether any EUCs were submitted to BIS or any other U.S. government agency in connection with any license application, commodity classification, or other official proceeding.
The first round of witness interviews commenced on May 18, 2022, and this area of inquiry is a high priority within the interview protocol.
D. Jurisdictional Nexus — U.S.-Person Analysis and EAR Jurisdiction
The establishment of U.S. jurisdiction over the oilfield equipment exports is a threshold issue for the EAR analysis. This section should be read in conjunction with Jasmine Thornton's memorandum on Corporate Structure & Jurisdictional Nexus (dated May 10, 2022), which addresses the jurisdictional analysis in greater detail across multiple regulatory frameworks.
EAR Jurisdiction Over Items. As discussed in Sections III.F and III.G above, items are subject to the EAR if they are in the United States, of U.S. origin, or manufactured outside the United States but incorporating U.S.-origin controlled content above de minimis thresholds (generally 25% for Russia) or produced using U.S.-origin technology or software under the FDPR. The analysis of whether the specific items shipped by DTI are "subject to the EAR" based on their U.S.-origin content is ongoing and depends on the detailed procurement analysis being conducted by Nexagen Analytics. Preliminary indications are that multiple items in the shipments incorporated U.S.-origin components, including electronic control systems, measurement sensors, and specialized alloy components sourced from U.S. manufacturers.
EAR Jurisdiction Over Persons — "U.S. Person" Analysis. The EAR imposes obligations and prohibitions on "U.S. persons," a term that, while defined somewhat differently under the EAR than under OFAC regulations, broadly includes U.S. citizens and permanent residents, entities organized under U.S. law, and any person in the United States. The EAR also prohibit non-U.S. persons from exporting, reexporting, or transferring items subject to the EAR in violation of the EAR, and from causing U.S. persons to violate the EAR.
Several bases for U.S.-person jurisdiction exist in this matter:
Natasha Sorokin. As a Russian-American dual national and U.S. citizen, Sorokin is unambiguously a "U.S. person" under the EAR. Her direct involvement in arranging oilfield equipment transactions and her contact with Sergei Volkov of Petronova Trading FZE provide a direct U.S.-person nexus for EAR jurisdiction. Any actions taken by Sorokin in furtherance of the unlicensed exports constitute violations by a U.S. person.
Dunmore upstream Americas LLC (DUA). DUA is a Delaware limited liability company and is therefore a U.S. entity. If DUA provided technology, financing, logistics support, or any other form of assistance for the equipment exports, there is direct U.S.-person involvement. The relationship between DUA and DTI's trading activities — including whether DUA personnel directed, approved, or had knowledge of the exports — is under investigation.
DEH Operational Headquarters in Houston. DEH's operational headquarters at 1200 McKinney Street, Suite 3400, Houston, Texas 77010, is the location from which senior management directed the company's global operations. Personnel based in Houston who directed, approved, or had knowledge of the oilfield equipment exports may create additional U.S.-person nexus, regardless of the corporate entities through which the transactions were formally conducted. Key individuals based in Houston include:
• Callum Renshaw, Chief Executive Officer
• Sandra Whitfield, Chief Financial Officer
• Gerald Fisk, former Chief Compliance Officer (departed June 10, 2022)
If any of these individuals directed, approved, or had knowledge of the equipment exports to Russia, their actions from within the United States would provide an independent basis for U.S. jurisdiction.
U.S.-Dollar Financing and Banking. DEH's $750 million revolving credit facility with Meridian National Bank, N.A. (New York) provides another potential jurisdictional nexus. If the credit facility or any U.S.-dollar transactions facilitated the equipment purchases — whether directly (through drawdowns to fund the purchases) or indirectly (through general corporate liquidity) — this U.S. banking nexus strengthens the jurisdictional case. Additionally, payments processed through Crescent Commercial Bank PJSC in Dubai for U.S.-dollar transactions would typically need to be cleared through U.S. correspondent banks, providing a further nexus. Ridgeline Advisory Group's forensic tracing is expected to confirm whether USD payments associated with the equipment transactions were cleared through U.S. correspondent banks.
E. Relationship to OFAC Sanctions Violations
The oilfield equipment exports analyzed in this memorandum overlap substantially with the OFAC sanctions violations analyzed in the April 27, 2022 sanctions framework memorandum. The two analytical frameworks — EAR export controls and OFAC sanctions — operate in parallel and are not mutually exclusive; a single transaction can violate both regimes simultaneously.
Volkhov Industrial Group JSC was designated under OFAC Directive 2, which imposes sectoral sanctions on entities in the Russian energy sector pursuant to Executive Order 13662, effective November 15, 2019. Directive 2 prohibits U.S. persons from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity (subsequently reduced to 14 days) of identified entities. The sectoral sanctions designation was in effect throughout the entire conduct period (August 2020 – January 2022). If the equipment was ultimately destined for Volkhov Industrial Group or Volkhov-controlled entities, and if U.S. persons or U.S.-nexus transactions were involved, the sectoral sanctions restrictions may have been violated concurrently with the EAR restrictions.
Volkhov Industrial Group was subsequently added to the OFAC SDN List under full blocking sanctions pursuant to E.O. 14024, effective April 6, 2022. While this SDN listing postdates most of the shipments at issue, it is relevant to any shipments that may have occurred in the final weeks of the conduct period (January 2022) and to the overall enforcement posture of the government.
The dual-track nature of the analysis — simultaneous EAR export control violations and OFAC sanctions violations — is significant because the DOJ National Security Division (CES) prosecutes both categories of violations, and the grand jury subpoena GJ No. 22-418 encompasses both export control and sanctions-related conduct. The government's ability to charge under multiple statutory and regulatory frameworks provides significant leverage in any potential plea negotiations or enforcement proceedings.
V. Potential Violations Identified
A. EAR §746.5 Violations — Unlicensed Exports/Reexports to Russia
Based on the analysis set forth above, each shipment of items classified under ECCN 2B350 or ECCN 2B999 to Russia without a BIS license constitutes a separate violation of EAR §746.5. No person may export or reexport items subject to the EAR and classified under these ECCNs to Russia without first obtaining a license from BIS, and no License Exception was available for Russia-destined items under these ECCNs during the relevant conduct period.
The estimated number of individual violative shipments cannot be definitively determined until the item-by-item classification analysis is complete. However, based on the shipping documents reviewed to date, our preliminary estimate is that between 8 and 12 separate shipments contained items classifiable under ECCN 2B350 or ECCN 2B999 that were exported or reexported to Russia without a BIS license. The total value of the items at issue is up to $12.4 million, though this figure may be adjusted upward or downward as the classification analysis progresses.
We have found no evidence, in the records reviewed to date or through interviews conducted to date, that DTI or any other Dunmore entity applied for or obtained a BIS license for any of the identified shipments. The absence of any license application is itself significant, as it suggests either a deliberate decision to proceed without a license or a fundamental failure of export control compliance procedures.
With respect to the element of willfulness — a requirement for criminal liability under ECRA and IEEPA — evidence must be developed through the witness interview workstream. Preliminary document review, including internal email communications, suggests awareness at the Hargrave and Sorokin level that the equipment was destined for end users in Russia. The degree of that awareness, and whether it rose to the level of "knowing" conduct sufficient to establish willfulness, remains to be determined.
B. EAR §764.2(e) — Anti-Evasion
The use of Caspian Logistik GmbH as a transshipment intermediary to obscure the Russian end destination of the equipment may constitute evasion of EAR requirements in violation of §764.2(e). That section provides that no person may take any action with knowledge that such action is intended to evade the requirements of the EAR, including by ordering, buying, removing, concealing, storing, using, selling, loaning, disposing of, transferring, transporting, financing, forwarding, or otherwise servicing any item subject to the EAR with knowledge that a violation of the EAR has occurred, is about to occur, or is intended to occur in connection with the item.
The routing pattern — origination from the UAE or other jurisdictions, consolidation in Hamburg at Caspian Logistik's facilities, and onward shipment to Russia — is consistent with a classic transshipment evasion scheme designed to avoid the scrutiny that would attach to direct shipments to Russia. Additional evidence supporting an evasion theory includes:
• The use of an intermediary logistics provider (Caspian Logistik) with no apparent legitimate business reason for the Hamburg routing, given that direct shipment routes to Russia were available;
• The intermediate warehousing and consolidation of shipments at Caspian Logistik's Hamburg facilities before onward shipment;
• Preliminary indications of re-labeling or re-documentation at Caspian Logistik's facilities to replace origin-country documentation with German-origin documentation;
• The falsification of end-user certificates to list non-Russian end users (discussed separately below).
The evasion theory is closely related to, but legally distinct from, the false statement violations discussed in Section V.C below. An evasion violation under §764.2(e) can be established based on the routing and transshipment pattern itself, even if the false EUCs are treated as a separate violation category.
C. EAR §764.2(g) — False Statements and Misrepresentations
If end-user certificates accompanying the shipments were knowingly falsified to list non-Russian end users for equipment actually destined for Russia, each false EUC constitutes a separate violation of EAR §764.2(g). That section prohibits any person from making any false or misleading representation, statement, or certification, or falsifying or concealing a material fact, in connection with the export, reexport, or transfer of items subject to the EAR.
Each individual false EUC constitutes a separate count of violation. Criminal liability attaches under ECRA, 50 U.S.C. § 4819, for knowing violations, and potentially under 18 U.S.C. § 1001 if the false statements were made to a federal agency or in any matter within the jurisdiction of the executive, legislative, or judicial branch of the United States government. The penalties for violations of 18 U.S.C. § 1001 include imprisonment of up to five years and fines.
The key factual questions bearing on this violation theory — who prepared the EUCs, whether DTI personnel directed the inclusion of false information, and whether Caspian Logistik acted independently or at DTI's direction — are set forth in detail in Section IV.C above. Even if Caspian Logistik prepared the false EUCs independently, DTI may be liable for causing the misrepresentation under the EAR's "causing" theory of liability, particularly if DTI personnel knew or had reason to know that the EUCs contained false information.
D. Potential IEEPA Criminal Violations
The International Emergency Economic Powers Act (IEEPA), 50 U.S.C. §§ 1701–1706, provides an independent statutory basis for criminal penalties for willful violations of sanctions and export control regulations promulgated pursuant to IEEPA. Many of the Russia-related export control restrictions are issued under executive orders promulgated under IEEPA authority (including E.O. 13662 and E.O. 14024), and violations of the EAR that implement those executive orders can be charged as IEEPA violations.
Under IEEPA, any person who willfully commits, willfully attempts to commit, or willfully conspires to commit, or aids or abets in the commission of, a violation of a license, order, regulation, or prohibition issued under IEEPA is subject to a fine of up to $1,000,000, imprisonment for not more than 20 years, or both. The DOJ CES typically charges export control violations under both ECRA and IEEPA, providing overlapping bases for criminal prosecution and potentially allowing for multiple counts based on the same underlying conduct. This dual-charging approach maximizes the government's leverage and expands the range of theories of liability available at trial.
VI. Individual Exposure Assessment
A. Derek Hargrave
Derek Hargrave served as President of DTI during the entire conduct period and exercised supervisory authority over the DTI trading desk. As President, Hargrave had both the authority and the responsibility to approve major transactions, including the oilfield equipment shipments at issue. Preliminary evidence suggests that Hargrave was aware that the equipment shipments were destined for end users in Russia. Internal communications identified to date include email threads in which Hargrave discussed the equipment transactions with Natasha Sorokin and Yves Leclerc, though the full scope of his knowledge of the Russian end destinations, the involvement of Volkhov Industrial Group, and the falsification of end-user certificates remains to be established through the ongoing document review and interview process.
Hargrave was placed on administrative leave effective July 1, 2022, and was subsequently separated from Dunmore effective October 1, 2022. He has retained James Overstreet of Overstreet & McClain PLLC (Dallas, Texas) as personal counsel. Calderwood & Harkness is not representing Hargrave individually, and all communications with Hargrave should be coordinated through his personal counsel.
Hargrave faces potential individual criminal exposure under ECRA (50 U.S.C. § 4819) and IEEPA (50 U.S.C. §§ 1701–1706) if the government can establish that he knowingly and willfully participated in, directed, or approved the unlicen