The Sanctions Evasion Threat

The global campaign of sanctions against Russia since February 2022 has turned sanctions evasion into one of the most important topics in the sanctions space.

• Authorities across the world have issued alerts and advisories, including detailed red flags, to inform the public—especially financial institutions—about Russian sanctions evasion in support of its war machine.
• Special offices and task forces have been launched to go after major sanctions evaders. Most notably, the Russian Elites, Proxies, and Oligarchs Task Force—known by its acronym the REPO Task Force—was created by Australia, Canada, the EU Commission, France, Germany, Italy, Japan, the United Kingdom, and the United States to enhance collaboration against sanctions evaders and violators.
• The U.S. has announced an unprecedented number of designations and prosecutions centered on disrupting, punishing, and deterring Russia sanctions evasion networks. In addition, the U.S. has warned foreign financial institutions that they run the risk of being targeted by secondary sanctions for helping companies or individuals evade U.S. sanctions on Russia’s military-industrial base.
• The EU has added a new criteria for designation associated with evading sanctions against Russia, and has made it illegal to circumvent any sanctions program.

Multiple industries are vulnerable to sanctions evasion activities, including exporters and importers, shipping, NGOs, insurance, and the financial sector. The financial sector is at particular risk because many of the industries vulnerable to sanctions evasion rely on the financial sector to help service, intermediate, or facilitate cross-border financial activity and trade. It’s more important than ever for compliance professionals to understand and recognize common sanctions evasion typologies.

Sanctions Evasion Typologies

Individuals and entities use several methods for circumventing sanctions. The methods they use are constantly changing in tandem with increased crackdowns on sanctions evasion. The following are six typologies describing some of the most used methods illicit actors use to evade sanctions.

1. Use of Front Companies and Shell Companies 

Sanctions evaders leverage their money laundering expertise, using front and shell companies to hide the origin of their funds and place them into financial institutions typically outside of their jurisdiction.

• A front company is a real business whose legitimate operations are used as a cover—or front—for money laundering, sanctions evasion, or other illegal activities.
• A shell company has no real operating activity or significant assets and is often used to hide the identities of the individuals involved to obscure the money trail.

A major benefit of using front or shell companies is to circumvent list-based sanctions. By doing so they can obscure (1) ownership; (2) source of funds; and (3) the countries involved.

2. Use of Family Members and Close Associates

Several Financial Intelligence Unites (FIUs) have issued alerts warning the public about the common practice of transferring assets to family members and/or close associates by sanctions targets to avoid their assets getting frozen. Such transfers have taken place in different forms:

• Transferring assets such as shareholdings in holding companies to trusted proxies such as relatives or employees.
• Selling or transferring assets to family members or close associates at a loss to realize their value before sanctions take effect.
• Divesting in investments to ensure ownership stakes are below a certain threshold, or relinquishing previous controlling stakes.

3. Falsifying Documents 

Examples of this are fake or falsified invoices, bills of lading, corporate agreements, or loan documents; obscuring the true nature of business activity by using wrong or catch-all corporate registry business identification codes; and issuing corporate agreements with no underlying business purpose, like unconditional or near-zero interest loans from one offshore company to another.

4. Domestic or Offshore Legal Adjustments

We’ve seen this with corporate restructuring to avoid the application of OFAC’s 50 Percent Rule or the EU ownership/control restrictions. For example, lowering the sanctioned party’s ownership from 51% to $47%.

We’ve also seen changes of corporate ownership through an intricate web of offshore companies, sometimes including the creation of so-called “one day” companies to further obfuscate ownership, and often using generic names like “Logistics Solutions LLC.”

5. Use of External Jurisdictions

This is a common typology especially for Russia sanctions targets, which have used jurisdictions outside of Russia for bank accounts, company formation, and indirect imports or payments.

What are some red flags financial institutions can look for?

• The use of bank accounts in a third country where the company doesn’t have business operations with large, almost immediate in and out transfers and near zero balance most of the time.
• Bank accounts in third countries that are experiencing a sudden rise in value being transferred, without a clear economic or business rationale or with support of falsified documents.
• Transaction layering and multiple movements of funds to/from jurisdictions that don’t enforce sanctions or have lax AML/sanctions controls.

6. Digital Assets 

While large scale evasion by governments is not necessarily achievable or practical because of liquidity and other limitations, we’ve seen Iran and Russia legalize the use of cryptocurrency for international payments to support cross-border trade that has been subject to sanctions and related restrictions.

We’ve also seen many examples of the use of digital assets and digital asset service providers to evade sanctions by illicit actors and networks—including terrorist groups and state-sponsored cyber hacking groups—looking to obfuscate the origin, destination, and counterparties of transactions. Much of this has been exposed by public designation actions by the U.S. and other governments.

These examples and typologies represent a sampling of some of the most common methods illicit actors have embraced to evade U.S. and multilateral sanctions. Understanding them is an important starting point for private sector firms in assessing and responding to their exposure.