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How to spot sanctions evasion

Episode
/
May 4, 2022

Various methods are used to circumvent sanctions. Knowing what they are and how to spot them can help you avoid doing business with sanctioned entities.

Following the Russian invasion of Crimea in 2014, the US imposed sanctions against Russia. Since then, the country’s elite have used various strategies to protect their financial interests.

Documented evasion tactics

  1. Ownership transfers to relatives or friends
    A Russian billionaire sanctioned by the US in 2018 transferred ownership of properties in Connecticut and Manhattan to his wife. Another billionaire and industrialist maintains real estate in the US through three companies registered in Delaware, which are owned by family members.
  2. Shell companies
    Establishing a shell company is a well-known money laundering and sanctions evasion tactic. A shell company holds no significant assets and has no meaningful operations. Illicit actors use shell companies to obfuscate asset ownership or corporate identities.  
  3. Corporate ownership of less than 50%
    Under its 50 Percent Rule, the US Treasury’s Office of Foreign Assets Control (OFAC) prohibits companies from doing business with organizations in which ownership by sanctioned parties exceeds 50% in the aggregate. Sanctioned individuals commonly keep their equity below 50% to avoid the company being sanctioned by extension.
  4. Offshore-registered companies or assets
    Offshore tax havens allow foreign individuals and businesses to bank with the country’s local institutions. The purpose of doing so is often to conceal assets or obscure ownership. The British Virgin Islands, the Isle of Man, and Cyprus remain popular among wealthy, sanctioned Russians to register high-value assets to avoid financial complications.

    In 2018, the Russian government established two offshore “special administrative regions” to lure foreign-registered Russian companies to repatriate their businesses. Oktyabrsky Island is near Lithuania and Poland, and Russky Island is near China and North Korea. Both offer tax relief incentives and help shield companies from US and EU sanctions.
  5. Trusts and lawyers as shareholders
    To hide their assets and move money more easily, those evading Russian sanctions use lawyers to quickly setup trusts and act as de facto shareholders.
  6. Undisclosed corporate ownership data
    Russia’s Federal Tax Registry states that firms at risk of sanctions, registered in Crimea, or in the defense sector are not obliged to publicly disclose ownership structures. This lack of disclosure makes it difficult to assess their involvement in the international financial system.

Possible future tactics

  1. Blockchain transfers
    With the surge of alternative financial channels such as cryptocurrencies, non-fungible tokens, and other blockchain transfers, Russia may take advantage of the relative anonymity and global reach of these transactions. Most parties in a blockchain transfer can eventually be identified on a blockchain ledger, but this identification can take time and special expertise. Criminal organizations can use cryptocurrencies as a financial mechanism to complicate fund origins and integrate them into the traditional financial system.
  2. Alternative international banking systems
    After the invasion of Crimea in 2014, Russia began experimenting with an alternative to the SWIFT banking system. The System for Transfer of Financial Messages (SPFS) had 23 foreign banks at the end of 2020, from Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan, and Switzerland. However, it remains in development. If the scheme proves successful, SPFS will enable access to the international financial system, avoiding the aims of global sanctions programs, which have cut Russia off from SWIFT.
  3. Amplified financial and diplomatic alliances with China
    Russia will seek new ways to access the trillions of dollars of Russian capital held in Western banks. China has been silent on global sanctions against Russia; it could establish financial partnerships to reunite Russia with its funds. China could deposit money on behalf of Russia in foreign banks, provide them with new technologies, and participate in Russia’s SPFS banking program.
  4. Use of foreign passports and illegal passport sales
    A person opening a bank account in Europe must present a passport, but they are rarely asked for all their passports. Russians with foreign passports might seek to access the global financial system in this way, leading to a market for foreign passports. Many Western countries have avenues to citizenship or special visas for wealthy individuals who invest into their economies. Such avenues could be another method to obtain a foreign passport and access to international markets.

Spotting red flags

In response to the Russian invasion of Ukraine in February 2022, on March 7 the US Financial Crimes Enforcement Network (FinCEN) published a list of red flags that could indicate attempts to evade sanctions.

  • Use of shell companies and legal arrangements to obscure ownership, source of funds, or countries.
  • International wire transfers through shell companies, often involving financial institutions outside the jurisdiction in which the company is registered.
  • Use of third parties to shield the identity of sanctioned or politically exposed persons (PEPs) to hide the origin or ownership of funds.
  • Accounts in jurisdictions or at institutions with a sudden rise in inward transfers without a clear economic or business rationale.
  • Jurisdictions previously associated with Russian financial flows in which company formations are rising rapidly.
  • New accounts that attempt to send or receive funds from a sanctioned institution or an institution removed from the SWIFT system.
  • Non-routine foreign-exchange transactions that may indirectly involve sanctioned financial institutions.
  • Transactions from or to IP addresses that are not trusted, IP addresses in Russia or Belarus, or IP addresses in jurisdictions that are comprehensively sanctioned or previously flagged as suspicious.
  • Transactions connected to virtual currency addresses listed on OFAC’s Specially Designated Nationals And Blocked Persons List.
  • Use of a virtual currency exchanger or money service business in a high-risk jurisdiction.
  • A customer receiving virtual currency from an external wallet, and immediately initiating rapid trades among several virtual currencies with no apparent related purpose, followed by a transaction off the platform. Such behavior may indicate attempts to break the chain of custody on the respective blockchains or further obfuscate the transaction.
  • Fund transfers involving a virtual currency mixer.
  • Transactions identified by blockchain tracing software as related to ransomware.

How Moody’s Analytics KYC can help

KYC sanctions solutions

Moody’s Analytics KYC sanctions solutions enable you to determine if organizations or individuals in your network are sanctioned or sanctioned by extension, applying OFAC’s 50 Percent Rule. Because sanctions go beyond OFAC and EU lists, our GRID database includes all relevant sanctions lists and watchlists. These number more than 1,600 and ensure comprehensive, international coverage. Moody’s Analytics KYC sanctions solutions go beyond lists by identifying ownership, control, and association networks, as well as offering proactive monitoring and complimentary exposure checks.

Sanctions Connect

Combining our Orbis database with GRID’s Sanctions Connect datasets shows relationships between corporate structures and individuals to ensure compliance with sanctions by extension rules such as OFAC’s 50 Percent Rule and the EU’s “control” rule. Sanctions data is updated frequently, and customers benefit from proactive monitoring that delivers an alert when they are exposed to changes in sanctions.

GRID helps you by:

  • Immediately showing any links to a sanctioned entity
  • Showing the nature of the relationship, including ownership percentage, narrative description, and links to sanctioned profiles
  • Listing organization relationships such as subsidiaries, affiliates, board members, senior officials, affiliated entities, and family members
  • Including individual relationships such as affiliated entities and family members
  • Being updated frequently – its watchlist coverage data has grown by 19% since mid-February

PEP Connect

Moody’s Analytics PEP Connect determines precise risk for PEPs and their associates by:

  • Generating alerts based on risk scoring that classifies PEPs by entity risk, position risk, country corruption ratings, and event risk such as new adverse media coverage
  • Including relationship-level information about the individuals connected to PEPs,
  • Covering 193 countries with emphasis on countries that pose a higher risk, including PEP spheres of influence and opposition party members

Get in touch

If you are managing risk associated with sanctions against Russian individuals or entities, please get in touch – we would love to help.

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