Sanctions evasion: the art of hiding and not getting caught

• Uncover the main contributors relating to Russian sanctions.
  
• Explore what measures should be taken to mitigate the risk of exposure to evasion.

Since Russia’s invasion of Ukraine, the world has seen an exponential increase in sanctions issued by jurisdictions and regional bodies to deny sanctioned Russian individuals and entities access to the international financial system and trade. Sanctions against Russia aim to suffocate their economy and military powers to end its aggression against Ukraine. 

Since March 2014 with Russia’s annexation of the Crimean Peninsula in Ukraine, sanctions regimes have targeted Russia. However, in the last 3 years the increase has been staggering. The latest Global Sanctions Index published by LSEG Risk Intelligence in November 2023, highlighted that autonomous sanctions had a 25.4% inflation in the last 3 years, while the United Nations sanctions had a negligible increase of 1.7%.

The three main contributors relating to Russian sanctions are the European Union (EU) with an annual increase in designations of 22.9%, the Office of Foreign Asset Control (OFAC) at 21.1%, and the United Kingdom Her Majesty Treasury (UKHMT) at 16% - data reported in April 2023. While these figures fluctuate, it paints a picture that sanctions will likely continue to increase. We have not seen member states back down, and new packages continue to be released, with the EU announcing its 12th package in December 2023 and the imminent release of their 13th package in February 2024.

While there are legitimate reasons to avoid sanctions through restructuring and divestment, there is a fine line between avoidance and evasion, with jurisdictions making sanctions evaders and those facilitating the evasion, a target of criminal charges, asset freezes, hefty fines, penalties, as well as secondary sanctions designations. This means that obliged entities’ sanctions screening and due diligence programmes should continue to be a top priority. 

The Russian Elites, Proxies, and Oligarchs (REPO) Task Force issued a Global Advisory on Russian Sanctions Evasion in March 2023, to expose the many tactics used by Russia, its allies and proxies to evade sanctions, as well as, alert member states what measures should be taken to mitigate the risk of exposure to evasion. The typologies reported we will unpack as follows.

It has been observed that just prior or immediately following a designation, assets are transferred to family members and associates directly, or in many cases, using front companies in offshore jurisdictions with lax reporting and sanctions compliance regulations. Thus, the ongoing monitoring of family members and associates of designated individuals and entities is key to spot red flags.

Russian elites have a history of investing in properties around the world. However, since February 2022, there has been an increase by Russian nationals and their proxies, often facilitated by the use of middlemen and opaque corporate structures such as legal entities and trusts, a veil of obscurity to hide their true ownership. Typical money laundering methods have been used such as the purchase of property above or below the market value, and the use of offshore buyers potentially linked to Russia to provide an appearance of legitimacy. 

Now more than ever, the issue of ultimate beneficial ownership comes to the forefront in the fight against financial crime and sanctions evasion. 

If you wanted to mask the links to your assets, how would you do it? Well, legal entities would be the answer. You would want to add as many layers as possible to further distance yourself from your assets. What seems to go unnoticed is that behind every legal entity there is a person that ultimately benefits from it. In the sanctions evasion world, that person is a sanctioned individual.

While attempting to hide their identities, sanctions evaders use facilitators to do their dirty work. In some cases, the facilitators are not even aware they are being used, but in many cases, they are willingly aiding sanctions evasion. These facilitators are in key professions that grant them access to the international financial system, particularly, Designated Non-Financial Businesses and Professions (DNFBPs), such as lawyers, accountants, real estate agents and trust and company service providers, amongst others. Often these professionals are familiar with a high-net worth clientele and may fail to detect anything atypical in their business dealings. 

In this context sensitive goods are goods that can be used in military activities. Export controls and trade restrictive measures have been set in place to prevent these goods reaching Russia. However, evasion of export control regulations is being observed as several countries nearby or with links to Russia have been used as intermediaries in trade, particularly countries in the Eurasia region. Thus, ensuring that Russia continues to have access to military goods and equipment being used in its aggression against Ukraine. 

Drawing conclusions from the typologies identified, the Repo Taskforce issued the following recommendations:

• Regulated entities which include both financial and non-financial businesses and professions, should follow the Financial Action Taskforce (FATF) recommendations, which entails implementing appropriate risk mitigation measures to prevent facilitating sanctions evasion. 
• Ensure their compliance programs implement relevant AML and CFT laws, through identification and reporting of suspicious transactions to the relevant authorities.
• Update their internal risk assessments in line with the typologies identified and continue updating as per developments in the risk landscape.
• Participate in Public-Private Partnerships (PPPs) that aim to prevent sanctions evasion activity.
• Utilise information sharing mechanisms to enhance efforts to prevent and deter sanctions evasion when information sharing protocols are legally available. 

To prevent inadvertent facilitation of sanctions evasion, it is essential to stay informed and implement a robust sanctions screening and due diligence program in your organisation.

To assist our clients in their efforts to mitigate exposure to sanctions evasion, we have created a series of informational sessions on the topic. 

To register for the upcoming webinars, click the links below: