How to spot sanctions evasion

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.

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.
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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.  
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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.
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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.
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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.
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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.

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.
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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.
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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.
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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.

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.

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