The 2022 invasion of Ukraine caused an 816% jump in Russian sanctions, leading to more than 17,000 risk events recorded in Moody’s Grid database that year. And with the ongoing war, more sanctions were expected in 2023, and more sanctions came. This growth trend was observed in Grid last year, with Russian sanctions events equating to more than 14,000 risk events, just slightly lower than the previous year.
Two distinct trends are emerging: 1) Russia's persistent evasion tactics via third-party countries; and 2) the 13th European Union sanctions package aimed at curbing these tactics.
The 13th package proposes designating entities from India and China, but also Turkey, Thailand, Serbia, and Kazakhstan who may be contributing to Russia's arsenal by supplying critical equipment, such as electronics and microchips used to bolster military capabilities.
Despite concerted efforts between the US, EU, and their allies, circumvention of sanctions continues. This evasion can involve complicit financial intermediaries and those unaware of their involvement. Being unaware does not absolve a financial institution from culpability, as strict liability principles dictate accountability. Regulators retain the authority to levy fines without necessitating proof of awareness or deliberate violation.
Nicola Passariello, Industry Practice Lead – Financial Crime Compliance & Third-Party Risk Director for Southern Europe & Africa, observed: “The lack of oversight by financial intermediaries could be explained by the prevalence of Russia sourcing components from Western countries through outsourced production channels, particularly in regions with lax export controls. Consider the scenario of a prominent US tech company, whose global supply chain extends beyond domestic borders, including manufacturing operations in Asia. The re-export of US items to denied entities is prohibited as well as the export of critical items without a proper licence. Recognizing this vulnerability, the US Treasury has issued warnings to foreign financial institutions (E.O. 14114) potentially involved in financing or facilitating transactions related to critical components feeding Russia's military apparatus. Failure to address these concerns could result in severe repercussions, including exclusion from the US financial system.”
So, what of the enforcement actions for those evading these sanctions packages, and the penalties for those individuals and entities who failed in their compliance obligations?
At the end of December 2023, the US Department of the Treasury's Office of Foreign Assets Control (OFAC) had collected more than $1.5 billion in penalties related to sanctions, which was the highest ever recorded in a year. While 16 entities received fines, the majority of this record total was related to the enforcement action brought against one company, a cryptocurrency exchange.
2023 saw an increase in enforcement actions, which centered on Russian individuals and entities. This wave of enforcement action and reporting is likely to continue in 2024, but focus could also shift toward “non-traditional” sectors less used to sanctions scrutiny such as corporates, insurance, and asset management, which means now is the time to prepare.
Governments around the world have been establishing agencies to ramp up sanctions inspections and enforcement. Regulators may conduct thematic reviews - questioning organizations, reviewing the content of discussions, and issuing follow up questions. In other instances, a full-blown inspection may be launched, and these inspections can last for extended periods.
Businesses are given time to rectify any issues uncovered, but if major overhauls related to sanctions screening are needed, they can be long and costly to see through. However, the situation with sanctions compliance is non-negotiable - if actions aren’t taken to address issues, then fines, reputational damage, and even imprisonment can be the outcome.
For those countries with a sanctions agency in place, reviews and enforcement began in earnest in 2023 and will continue in 2024. Those countries without an agency will be hiring and establishing their frameworks and processes to capture sanctions evasion and ensure adherence to the law.
With this enforcement trend set to continue, all organizations – those well-versed in sanctions compliance such as banks, and those who may be subject to new scrutiny like corporates and asset managers – should establish or review their risk and compliance frameworks, including sanctions screening, to understand risk exposure and prepare to mitigate it.
As discussed, many of these sanctions’ events are related to Russian individuals and entities, but not all. For example, on January 29, 2024, the Department of State announced actions to “combat the Iranian regime’s transnational repression” as a response to escalating tensions in the middle east.
Recent events in the Red Sea have underscored the nature of hybrid threats, revealing a complex interplay of actors and interests. The Houthis' disruption of trade routes in the region serves as a reminder of how regimes allegedly exploit groups for gain, while clandestine organizations provide material support, including funding and arms.
Hybrid threat finance thrives on the collaboration between terrorist organizations, nation states, and money launderers. Detecting and combating these networks is challenging, necessitating the use of robust data analysis and investigative tools.
The key challenge lies in identifying and dismantling networks of individuals and entities through effective data analysis and investigative techniques. By leveraging advanced tools and methodologies, it’s possible to understand the intricate web of financial transactions and relationships that sustain hybrid threats, which can expand from one region to another.
The dynamic and evolving global geopolitical landscape has largely triggers this increase in the use of sanctions, along with the corresponding actions taken to evade those sanctions. Sanctions are often used as a tool of foreign policy and pressure. Moody’s Grid data - the most comprehensive risk database of adverse media, sanctions, watchlists, and PEPs - reports a global increase of 17% in sanctions events in 2023 versus 2022, which itself saw a 318% increase over the previous year in 2021.
While the number of new sanctions issued by world governments has slowed compared to the number seen in 2022, enforcement actions increased year-on-year from 2022 to 2023 according to Moody’s Grid data. In 2023, Grid reported a 114% increase in sanctions evasion events versus 2022, which itself saw a 71.5% increase over the previous year.
To explain the process in simple terms, as sanctions are issued and government agencies act against those attempting to evade sanctions, these confirmed reports appear in reliable and trusted media outlets, which are then verified and tracked as a sanctions evasion event in Grid. The data becomes available for screening and part of a curated risk profile, which can be reviewed and checked during due diligence and enhanced due diligence, so organizations can decide who they work with based on accurate data and their risk appetite.
As seen from Moody’s Grid data, and OFAC enforcement actions, sanctions evasion events are increasing. Different methods are being employed to evade sanctions, and they evolve in response to changing regulations. One such evasion tactic involves decreasing levels of ownership of business entities, while retaining control.
In 2022, Moody’s Orbis database reported a 38.8% decrease in subsidiary ownership among the top 11 Russian oligarchs (measured according to net worth). This could point to oligarchs, subject to sanctions, reducing their ownership below key thresholds set by OFAC and other regulators to try to avoid sanctions detection.
In this anonymized example:
Gaining this kind of clarity over beneficial ownership and control information is vital to effective sanctions compliance.
By integrating Moody’s datasets, automating screening workflows, and using our innovative solutions, such as Sanctions360 and Shell Company Indicator, organizations can understand their exposure to counterparty risk and make decisions with confidence about who to work with.
Moody’s automates perpetual monitoring of individual and entity risk – including sanctions – across global networks in near real-time. We work with customers to shape third-party risk management, anti-financial crime, and compliance programs around their risk appetite, operational needs, and strategic goals.
Customers build a risk management ecosystem, tailored to their policies and compliance obligations. Leveraging Moody’s digital-first solutions for efficiency, scalability, and flexibility, customers manage processes from due diligence to customer and supplier onboarding to ongoing monitoring.
We are helping customers automate onboarding and risk monitoring activity in 197 countries, across 211 jurisdictions: completing +800 million new customer and third-party checks each day on average in 2022, including screening against our database of +21 million risk profiles, +485 million entities, and +34,000 sanctioned entities.
If you would like to discuss your sanctions screening program, or risk management and compliance more broadly, please get in touch – we would love to hear from you.