While international sanctions and economic pressure against Russia and other countries continue to escalate, there is a significant focus on targeting those who evade or facilitate the evasion of sanctions.
From Iran to Russia
Last February 2, 2024, the U.S. Justice Department announced the unsealing of three federal cases, the most recent in a series of efforts to combat the illicit trafficking of Iranian oil that funds Iran’s Islamic Revolutionary Guard Corps (IRGC), a designated Foreign Terrorist Organization (FTO), and its Qods Force (IRGC-QF), Iran’s primary mechanism for cultivating and providing lethal support to terrorist organizations abroad.
In the Southern District of New York, seven defendants, including a leader within Iran’s IRGC and officers of a Turkish energy group, are charged with terrorism, sanctions evasion, fraud, and money laundering offenses in connection with their trafficking and selling of Iranian oil to government-affiliated buyers in China, Russia, and Syria, to finance the IRGC-QF. In a related action, in the District of Columbia, a Chinese woman and an Omani man are charged with sanctions evasion and money laundering offenses in connection with the trafficking and selling of Iranian oil to Chinese government-owned refineries.
According to the prosecutors, Iran utilizes the proceeds of its black-market oil sales to fund its criminal activities, including its support of the IRGC, Hamas, Hizballah, and other Iranian-aligned terrorist groups. The Justice Department is targeting this funding source by seizing over $108 million and 500,000 barrels of fuel that would otherwise have enabled Iran to further its destabilizing activities that threaten U.S. national security. The goal is to shut down Iran’s pipeline of petroleum and profits.
Switching to Russia, on whom a raft of sanctions were imposed following its invasion of Ukraine in February 2022. While the sanctions were designed to weaken Russia’s economy and its ability to finance the military-industrial machine required to sustain the illegal occupation of its neighbor, a report issued in August 2023 found that Russia has been able to soften the impact of the sanctions through a series of informal and shadow trade networks with its neighbors, including Georgia, Belarus, and Kazakhstan.
By analyzing import and export data before and after February 2022 and cross-referencing with a series of products and commodities included in international sanctions, Dr. Alexander Kupatadze (King’s Russia Institute) and Dr. Erica Marat (National Defense University) were able to identify several red flags, where nations were reporting unexpected fluctuations in trade volumes, a lack of transparency in the reported origin of goods, and an absence of consignees.
The research has shown that sanctions have not cut supplies to Russia but have instead empowered trade networks and various intermediaries by creating additional income sources for them.
The researchers also found that Georgia and Kazakhstan were facilitating the transit and re-export of sanctioned Russian products, including oil, wood, and wheat, to third countries, which was helping to finance its military while providing sizeable boosts in income for their own countries.
Typologies of evasion techniques
An E.U. report issued in March 2023 describes techniques used to counter financial sanctions:
Use of family members and close associates to ensure continued access and control.
The beneficial ownership of legal entities and arrangements and other property is transferred to children or other family members to hide assets. Thus, the designated person avoids scrutiny from regulated industries and the competent authorities.
Use of real Estate to hold value and benefit from wealth.
There has been a significant increase in the use of real estate as a vehicle to hold Russian wealth. Some of these investments and purchases could be indicative of sanctions evasion activity.
Use of complex ownership structures to avoid identification.
This implicates the use of shell companies or other legal entities and arrangements to avoid detection, or even a combination of legal entities and legal arrangements such as trusts to ensure they remain undetected.
Use of enablers to avoid involvement and leverage expertise.
Sanctioned Russian individuals and entities may attempt to avoid direct participation in sanctions evasion activity by utilizing certain persons in key professions, including those that frequently interact with the international financial system. These enablers may leverage their ability to open bank accounts, send and receive money, and create corporate structures—among other functions—to, directly and indirectly, aid sanctioned persons’ evasion efforts.
Use of third-party jurisdictions and false trade information to facilitate sensitive goods shipment to Russia.
While the E.U. restrictive measures deprive the Russian regime of revenue and prevent access to sensitive goods—including dual-use goods —to support Russia’s military-industrial complex, some Russian end-users continue to seek—and, in some cases, gain—access to sensitive goods.
One method consists of listing a freight forwarding business, often located in third-party jurisdictions, as the final destination of a good when, in fact, those goods will be further shipped to their intended final destination in Russia. The entities facilitating these transactions may often appear to have no affiliation with the transaction and may be utilizing a known trans-shipment point. These Russian end-users may rely on false documentation, including bill of lading information and other supporting documentation, such as fraudulent trade finance information, to ensure the delivery of goods.
What to do as an economic actor?
Referring to OFAC’s recent guidance and others, the way to tackle sanctions evasion is through increased due diligence and improved internal organization. This may include the following:
- Update your sanctions risk assessments and customer risk rating criteria to consider risks related to Russia’s military-industrial complex.
- Assess whether you can implement appropriate controls to mitigate the risks identified as the sanctions risk assessment is updated or whether you should cease business with Russian persons due to the increased risks.
- Review your customer base to determine direct and indirect involvement with designated persons or persons that may be involved in providing the specified items to Russia or to jurisdictions previously identified as posing a high risk of Russian sanctions evasion. Jurisdictions that have been mentioned as posing a high risk of Russian sanctions evasion include Belarus, China, Turkey, Armenia, and Uzbekistan.
- Communicate your compliance expectations to customers, particularly those engaged in relevant business lines.
- Send questionnaires to relevant customers to better understand their counterparties.
- Take mitigating measures for high-risk customers and counterparties, from restricting types of account activity to existing relationships.
- Request attestations from higher-risk customers that they do not operate in the specified sectors, provide specified items to Russia, or conduct activities in Russia’s military-industrial complex.
- Put into place enhanced trade finance controls for specified items.
- Conduct proactive investigations into possible sanctions and export control evasion using open-source information and previous transactional activity.
- Train your staff on sanctions risks and common red flags. This includes compliance personnel, front-line staff, senior management, and business lines.
- Ensure that any identified risks or issues are escalated quickly to the proper level (e.g., senior risk committee) and promote a “culture of compliance.”
Sources
Under the Radar: How Russia Outmanoeuvres Western Sanctions with Help from its Neighbours, compiled for the Serious Organised Crime and Anti-corruption Evidence (SOC ACE) research programme, funded by the U.K.’s Foreign, Commonwealth & Development Office.
https://static1.squarespace.com/static/63e4aef3ae07ad445eed03b5/t/64e475c92e4c9a18a632ec63/1692693964468/SOCACE-RP18-UnderTheRadar-Aug23.pdf
Global Advisory on Russian Sanctions Evasion Issued Jointly by the Multilateral REPO Task Force March 9, 2023
https://finance.ec.europa.eu/system/files/2023-03/230309-repo-global-advisory_en.pdf
OFAC Sanctions Advisory, Guidance for Foreign Financial Institutions on OFAC Sanctions Authorities Targeting Support to Russia’s Military-Industrial Base, December 22, 2023
https://ofac.treasury.gov/media/932436/download?inline
