Lessons on sanctions evasion

Introduction

In recent decades, sanctions have become a standard instrument in international politics and a headache for compliance teams. Sanctions take different forms, from restrictions to additional rules on specific services and trade deals (such as price caps), and can be applied to individuals, entities, or jurisdictions.

Sanctions compliance is easily the most risky regulatory environment. Sanction evaders create complex schemes to access financial instruments and employ new technologies to launder and transfer money.

Compliance officers should understand how such actors operate to abide by national and international sanctions without over-compliance, establish an effective Regtech stack to analyze transaction patterns and cooperate with national financial intelligence units to secure themselves from potential noncompliance fines.

Here, we review several cases elaborating on old-school and novel sanctions evasion approaches and provide advice on how to react to them.

Case one: Tracking Cryptocurrencies

The generous promise of anonymity and privacy made cryptocurrencies widespread among illegal actors. Still, it took stablecoins (pegged to traditional currencies) to make them genuinely convenient for money laundering, illegal trade, and sanctions evasion.

Just like bank accounts, cryptocurrency wallets can store significant wealth. A non-custodial wallet not operated by a platform like Binance or Coindesk requires no KYC checks to create and manage and can’t usually be traced back to its beneficial owner. A single person can control a virtually unlimited number of wallets, which means assets belonging to a single person can be distributed across numerous accounts, making them hard to trace.

However, blockchain is transparent by design, meaning that a high-net-worth sanction evader won’t be able to quietly transfer all his wealth through crypto. The lack of liquidity in the cryptocurrency market means that crypto isn’t reliable as a replacement for traditional financial instruments on a large scale. However, crypto is suitable for smaller-scale transactions, such as payments for smuggled goods between private entities working on procurement for sanctioned organizations. There are many crypto exchanges with lax or lacking AML controls that are specifically suited for such clientele.

Case Two: Informal Connections

One crucial challenge in sanctions compliance is identifying ties between designated entities and proxies that facilitate sanctions evasion. One year ago, we emphasized this problem in the context of PEP screening in jurisdictions with widespread government corruption. Sanctioned individuals may conceal ownership of assets and actual beneficiaries of transfers behind distant relatives, close associates, and other trusted individuals, such as lawyers or consultants.

Case Three: Revealing Schemes

Large-scale sanctions evasion, such as international trade with a sanctioned country or corporation, often requires complex schemes, including numerous legal entities in different jurisdictions (including off-shore and mid-shore financial centers), multiple international bank transactions to conceal the beneficiaries, and shady practices related to movement of the goods.

Compliance-wise, such activities pose a significant risk to financial intermediaries. On the one hand, they can’t see the whole picture and may be convinced that the transactions between parties are legit. Even though sometimes the people behind sanction evasion schemes are well-known wealthy individuals with a lobbying potential, often the global sanction evasion and money laundering networks are orchestrated in secrecy and managed by seemingly quiet people living simple lives, which can’t usually be connected to high-risk activities.

On the other hand, once an illegal scheme is revealed, the regulators may consider that a financial intermediary (such as a bank) failed to take sufficient measures to prevent money laundering and sanction evasion, resulting in noncompliance fines. The well-known cases include Standards Chartered, Deutsche Bank, HSBC, Danske Bank, Societe Generale, Commerzbank, Credit Suisse, and BNP Paribas, with cumulative fines totaling 20 billion dollars in the last two decades.

Conclusions

In 2024, compliance teams should go far beyond standard anti-money laundering frameworks to ensure full enforcement of international sanctions. There are several key recommendations:

• Fintech companies that enable the convenient use of traditional money and cryptocurrencies for everyday payments should employ on-chain analysis and risk assessment for crypto assets to prevent illicit transactions and ensure compliance. Such an approach is essential to avoid over-compliance and enable legitimate money transfers over the blockchain.
• Advanced Regtech solutions automate complex compliance tasks, such as adverse media searches, which allow the identification of informal ties between designated individuals and legal entities and facilitators of sanctions evasion.
• Financial intermediaries lack instruments to identify complex sanctions evasion schemes, so related noncompliance risks can’t be mitigated. That’s why it’s crucial to cooperate with the national financial intelligence units and independent financial crimes investigators (such as OCCRP) and be proactive in reporting potential sanction evasion cases.

Dataspike platform leverages compliance teams’ ability to identify high-risk individuals and entities and prevent sanctions evasion, money laundering, and other illicit activities. It aggregates information from various sources, assesses risks, and helps compliance officers make informed, evidence-based decisions.