Financial Sanctions Evasion Typologies: Russian Elites and Enablers
The UK’s National Crime Agency (NCA) and HM Treasury’s Office of Financial Sanctions Implementation (OFSI) have issued a Red Alert, in conjunction with the Joint Money Laundering Intelligence Taskforce (JMLIT), on techniques currently being utilized to evade Russian sanctions. The Red Alert focuses specifically on efforts to mask ownership by selling, transferring, or relinquishing assets to trusted associates, often with the help of ‘enablers’ such as solicitors. Common indicators identified by the NCA/OFSI include but are not limited to:
- Transfers of ownership equity to non-Russian or dual national family, associates, or previously unknown individuals.
- Reductions of ownership stakes below 50%, often through equity transfers to close associates the Russian individual may be able to influence.
- Movements of assets to secrecy jurisdictions. This includes, especially, transactions by holding companies with links to Swiss bank accounts and British Virgin Islands / Cypriot legal persons.
- Use of holding companies in jurisdictions linked to the former Soviet Union (with the exclusion of the Baltics and Ukraine).
- Use of trust arrangements or complex/circular corporate structures, potentially involving shell companies or close associates’ financial service providers.
- Payments from venture capital or private equity vehicles in the Middle East, East Asia, or other jurisdictions that support the Russian government or have expressed neutrality in international forums (e.g., the United Nations).
- Payments received by UK businesses via financial technology companies, such as payment service providers or electronic money institutes, owned at least in part by Russian nationals and/or others implicated in money laundering schemes.
The NCA/OFSI also note that Russian money launderers have increasingly been observed using alternative payment methods such as crypto. Further, they provide an illustrative example of a typical Enabler Network that might be utilized by a Russian Ultra High Net Worth Individual and/or Politically Exposed Person. The Alert concludes with a list of recommendations for the industry, which highlight the convergence of AML and sanctions, to which we now turn.
Why it matters to our clients
Regulated firms that observe any of the indicators outlined by the Red Alert may need to submit Suspicious Activity Reports to the NCA. Further, the document outlines a series of recommendations that regulated firms should take into consideration when performing Anti-Money Laundering (AML) checks on clients. These include:
- Documentation of Arms-length Transactions: Financial institutions and professional service firms should not assume without evidence that counterparties are acting independently. Rather, documentation should be obtained to evaluate if any preexisting relationships are present that might allow a sanctioned individual to exert undue influence on a third-party.
- Willful Blindness: Firms should monitor whether clients or professional service firms may be purposefully performing substandard due diligence to assist the evasion of sanctions, which would constitute criminal complicity.
- Assessing Complex Corporate Structures: It has long been expected under AML regulations that regulated firms query the economic purpose of complex corporate structures. The Red Alert re-emphasizes this step, and firms may wish to pay special attention to complex or circular ownership structures involving Russia-friendly jurisdictions.
- Understanding Aggregated Ownership: Like complexity, regulated firms have long been expected to consider whether individuals are spreading their equity across numerous entities to mask their total ownership. The Alert highlights how Russian elites may engage in this tactic by transferring equity to family or close associates, reiterating the importance of understanding clients’ ownership structures.
- Event-driven Reviews: When clients’ beneficial ownership structure changes, firms would normally be expected to perform an event-driven due diligence review under AML regulations. The Red Alert reiterates the importance of this step for clients associated with Russian elites and their close associates.
- Independent Legal Assessments: The Red Alert cautions against taking at face value any legal assessments clients provide in support of ownership transfers, suggesting instead that firms carry out their own independent reviews.
How can Exiger help?
Exiger has extensive experience of working with entities across regulated industries to provide solutions to the most complex due diligence, compliance and risk management challenges. We are equipped to assist financial institutions, corporates, and fintechs tackling the challenges posed by the fast-moving global sanctions environment with services such as:
- Sanctions Screening and Monitoring: We perform initial batch processing to screen your current or new third-party relationships against updated sanctions lists, which are recommended to be enrolled in DDIQ monitoring as sanctions lists continue to receive updates. Exiger also offers a managed service to adjudicate and remove or escalate alerts on your behalf.
- Entity Unwrapping: We identify direct and indirect ownership, key personnel and management. identified subjects are then screened, monitored, and adjudicated.
- Foreign Ownership, Control or Influence (FOCI) Analysis: Corporate structure, foreign ownership and controlling interests, operational risks, high risk foreign transactions and M&A are identified and analyzed. Identified subjects are screened, monitored, and adjudicated.
- Specially Designated Nationals (SDNs) or Designated Persons (DP) Network Analysis: We identify the entire network associated with an SDN or DP including jurisdictions and connections to parties associated with the SDNs or DPs such as family members and business partners. We then identify all directorships and ownership of related companies and investment vehicles. Finally we screen the entire structure.
- AML & Sanctions Compliance Managed Services: We help regulated firms to manage backlogs and unexpected spikes in volumes related to customer due diligence reviews and sanction screening alerts by providing high quality managed services via our low-cost service centres.
- AML & Sanctions Compliance Expertise: We help review and uplift AML and Sanctions policies, procedures and controls to ensure they are fit-for-purpose in enabling regulated firms to identify and evaluate their client’s sanctions exposure as part of initial and ongoing customer due diligence and ongoing monitoring processes.
Don’t play guess who. Mitigate your risk today:
For more on Exiger’s Sanctions Response:
How to Ensure Your Company is Russia Sanctions Compliant
Critical Vendor Flags Russian FOCI Risk Months Before Russia-Ukraine War
Never the Same: 5 Ways Russia’s Invasion of Ukraine Will Impact Business Forever