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Spotting and preventing sanctions circumvention

Posted on 28 July 2022

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In July the National Crime Agency, National Economic Crime Centre, the Joint Money Laundering Intelligence Taskforce and the Office of Financial Sanctions Implementation jointly published a 'red alert' on sanctions evasion typologies. The alert is intended to provide the private sector with information gathered by law enforcement about the common techniques used by designated persons to evade sanctions.

Background

Sanctions against Russia were first introduced in early 2014 following the occupation of Crimea. Since the Russian invasion of Ukraine in 2022, the scope and intensity of these sanctions increased dramatically.

The Russian sanctions introduced in 2014 covered two areas. The first was a prohibition on the sale or supply of military goods, or goods that could be used for a military purpose. The second area was a prohibition on certain transactions involving Russian state banks. At the time it was unlikely that many business sectors in the UK were impacted by these restrictions.

The sanctions imposed in 2022 are more complex and broader in scope by several orders of magnitude covering both sectoral sanctions and targeted sanctions. The prohibitions include travel bans, asset freezes, prohibition on certain brokering services, banning correspondent banking relationships, banning imports from or exports to Russia of iron and steel products and banning provision of UK trust services. They even require social media services to take reasonable steps to prevent content that is generated by a designated person being encountered by a user in the UK. Some of these sanctions apply to persons connected with Russia, regardless of their political affiliation, for example, the prohibition on making luxury goods available to a person "connected with Russia".

The Russian sanctions are now so wide-ranging that they touch on almost all business sectors. This has been accompanied by an increase in attempts to circumvent the prohibitions.

Circumvention methods

Circumvention of the sanctions prohibitions is a criminal offence, however this does not always deter designated persons from attempting to hide or retain their assets.

In the case of the Russian sanctions, corrupt elites who have obtained a benefit from the Government of Russia have been prioritised for designation. These relationships have allowed these individuals to secure and retain control over misappropriated assets. Although a designated person may claim to have relinquished the asset, it is highly likely that they will retain their influence through trusted proxies and enablers. Enablers are often individuals or businesses facilitating sanctions evasion often by assisting a designated person to evade scrutiny by distancing the suspect in some way from the asset.

The red alert draws on case studies identified through financial intelligence and other sources to highlight multiple techniques used to evade the restrictions within the UK's Russian sanctions regimes. The methods identified include:

  1. Transferring assets such as shareholdings in holding companies to trusted proxies such as relatives or employees;
  2. Selling or transferring assets at a loss in order to realise their value before sanctions take effect; and
  3. Divesting investments to ensure ownership stakes are below the 50% threshold, or relinquishing previous controlling stakes.

The red alert suggests it is likely that designated persons will explore alternative payment methods, including the use of cryptoassets, to move funds to circumvent sanctions. This is also often an attempt to mitigate reduced access to the SWIFT payment system, a practice that has been observed by UK intelligence.

What can you do to spot and prevent circumvention

The alert suggests monitoring the following 'red flags' to detect possible sanctions circumvention:

  1. Designated persons communicating changes to the beneficial ownership of their corporate structures such as Private Investment Companies (PICs) and Joint Stock Companies (JSC) to non-Russian or dual national family members or associates, or nominee Directors/shareholders, prior to, or shortly after sanctions taking effect. These new individuals could be a front, with the designated person maintaining indirect control.
  2. Changes to ownership of a corporate holding to reduce ownership stakes to below the 50% threshold, shortly before or after sanctions designations. Where the transaction does not appear to be at “arms-length”, the designated person may still be able to initiate undue influence through associates or existing corporate governance, or through a joint arrangement with an associate or another designated person in the ownership chain.
  3. Ownership transfers to previously unknown individuals, where that person’s economic consumption, displays of wealth or financial footprint (such as private jets, expensive properties and fleets of luxury cars) does not correspond with their newly reported wealth.
  4. High-net worth individuals (HNWI) who are already on international sanctions lists, but not the UK list, who anticipate that they may become a sanctions target, transferring assets to family members and/or close associates such as employees.
  5. Beneficial ownership changes notified to other firms in the regulated sector accompanied by opinion of client’s external counsel as to new sanctions disposition, potentially accompanied by correspondence from a senior UK company representative to convey authority.
  6. Suspicious consulting invoices at exorbitant or clearly non-market rates from enablers that could facilitate the release of funds available for the designated person.
  7. Material indicating that an enabler’s own due diligence relies on a further layer of due diligence not actually conducted by themselves or relies on an apparently trusted (but unsubstantiated) source.

There are no easy preventative measures to put in place. Many of the recommendations offered in the red alert focus on not taking information at face value and conducting independent and comprehensive due diligence. The only true recourse will be to have adequate compliance systems in place, including training of staff, to ensure that when a transaction does involve a red flag it is identified and appropriate advice sought. As the scope of Russian sanctions increases in complexity, it is important that these systems are in place and are appropriately futureproofed to deal with more rigorous prohibitions in the future.

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