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Financial sanctions evasion typologies: Russian elites and enablers

  • United Kingdom
  • Financial services disputes and investigations

14-07-2022

The National Economic Crime Centre (“NECC”), a multi-agency unit within the National Crime Agency (“NCA”), the Office of Financial Sanctions Implementation (“OFSI”) and the Joint Money Laundering Intelligence Taskforce published a red alert on 12 July 2022, to provide information to law enforcement and the regulated sector in relation to the techniques designated persons and their enablers are suspected to use to evade financial sanctions.

Designated persons in the UK are persons who have been placed on the UK’s consolidated sanctions list and have been made subject to an asset freeze. UK persons are prohibited from dealing, directly or indirectly, with the funds and economic resources of these designated persons. The purpose of designations is to prevent certain persons’ access to the UK economic market by prohibiting movements of funds and assets to, from and within the UK.

With the recent rise in sanctions against Russia (see our previous updates here), many oligarchs, high-net worth individuals and politically exposed persons have been designated. The red alert identifies that many such designated persons have attempted to circumvent the asset freezes by using various methods, often relying on enablers within the regulated sector who play a role in facilitating sanctions evasion.

Sanctions evasion methods and enablers

The Russia (Sanctions) (EU Exit) Regulations 2019 (as amended) provides for various circumvention offences including for those who facilitate the circumvention (the “enablers”).

The red alert reports that designated persons are using relatives and close contacts, via enablers, to:

  • transfer assets (e.g. shareholding in companies) to trusted proxies such as family or employees;

  • sell or transfer assets at a loss to realise their value before the imposition of sanctions; and

  • divest investments and give up controlling stakes to ensure that their designations does not taint the entities they own or control.

To do so, designated persons may use enablers to facilitate the transactions. Enablers have been identified as being part of the regulated sector, such as the legal and financial sectors. The NECC has identified 3 types of enablers, categorised as “criminally complicit”, “wilfully blind”, or “unwittingly involved”. The third category makes it clear that it is irrelevant whether an enabler was aware that the purpose of their involvement was to circumvent or facilitate the circumvention of sanctions. This is in line with the recently imposed strict liability in relation to financial sanctions which came with the Economic Crime Act.

The red alert specifies that enablers can include: lawyers, those in the financial sector (including relationship managers, accountants, wealth managers, etc), estate agents, auction houses, company directors and private family offices.

In terms of evasion methods, the following is noted:

  • designated persons may seek to transfer assets and funds to jurisdictions where sanctions are not in place, notably Turkey, the UAE, China, Brazil, India and the former Soviet Union (excluding Ukraine and the Baltic States); and

  • alternative payment methods may be used, including the use of crypto-assets.

As the pace of sanctions against Russia slows down in the UK, it is expected that the UK will be imposing more asset freezes in relation to associates and close relatives of currently designated persons to close the loopholes and prevent sanctions evasions.

Criminal considerations beyond sanctions

The red alert reminds people that circumvention of sanctions and facilitation may involve money laundering where an enabler facilitates (i) a criminal activity which could not happen without them, (ii) assists the suspect in evading scrutiny by distancing the designated person from the offence, and (iii) allows the designated person to benefit by laundering proceeds or assisting with doing so.

Regulated firms in the red alert are reminded of their anti-money laundering obligations and of the roles and powers of the professional bodies supervising and monitoring them, such as HMRC, the Solicitors Regulation Authority (SRA), the Bar Standard Board, the Institute for Chartered Accountants for England & Wales (ICAEW), the Chartered Institute for Legal Executives (CILEX), the Chartered Institute of Management Accountant (CIMA), the Chartered Institute of Taxation (CIOT) and the Association of Taxation Technicians (ATT). The red alert warns firms that they must comply with the Money Laundering Regulations and conduct robust due diligence to mitigate the risks of being exposed to designated persons and frozen assets.

The alert has also emphasis the link between Russian designated persons and the risk of bribery and corruption. It has assessed that the priority for designation has been corrupt elites who are linked to or benefit from the Government of Russia and who are known for carrying higher corruption risks.  

Red flags and indicators

The alert sets out a list of 34 indicators which firms should be aware of in order to detect (i) frozen assets transfers, (ii) enablers and (iii) suspicious payments.  These include:

  • 15 indicators in relation to detecting frozen assets transfers, which includes (but is not limited to):
    • changes of ownership from a designated person to a third party (non-Russian or dual nationality relatives or associates, or nominee directors or shareholders), or a reduction of ownership stakes to below the 50% threshold, or multiple ownership changes, where these steps take place prior to or shortly after sanctions are issued.  Where transactions are not at arms-length, this may indicate that the designated person is still able to exercise some sort of undue influence;

    • the use of complex corporate structures or trust arrangements, which could involve circular ownership structures (as is legal in Russia), shell companies, and including combinations of relatives or closed associates of the designated person, as well as holding companies based offshore or in jurisdictions connected to the former Soviet Union (save for Baltics and Ukraine). The purpose of these corporate structures may be for the original owner to retain indirect control, with the structure making it difficult to assess;

    • movement of assets including to offshore jurisdictions or through secrecy jurisdictions, which make the assets hard to track or identify;

    • movements of funds and assets by Russian high-net worth individuals already on international lists but not yet on the UK list, or by clients connected to a designated person;

  • In relation to enablers, 12 indicators which includes (but is not limited to):

    • notifications of beneficial ownership changes to regulated firms accompanied by the client’s external counsel’s opinion or correspondence to give it authority, which has the purpose of making regulated firms rely on the notification and not conduct their own due diligence. The legal sector has seen instances of letters and public statements being issued by parent companies to announce that designated person have reduce their stake in the parent company, or has relinquished control. These statements cannot be relied on by themselves for the purpose of due diligence and KYC;

    • material which indicates that the enabler’s due diligence relies on a further layer of due diligence not actually conducted by them or on an apparently trusted but unsubstantiated source;

    • use of financial institutions owned by close associates of the designated persons, or use of pooled accounts in the name of the enabler rather than the client;

    • multiple off-the-shelf corporations with no trading records with nominee ownership, or material on open source such as Companies House, indicating links to multiple sanctioned entities such as multiple directorship;

    • trust services providers offering nominees and trustee services to designated persons and their associates and relatives, or the use of complex trust structures for the ownership of an assets which is overseen by a trust company and its trustees for no apparent legitimate reasons.

  • Finally, 7 indicators in relation to suspicious payments, including:
    • payments involving holding companies based in offshore jurisdictions, or linked to designated persons with bank accounts and legal persons set up in jurisdictions affording high level of privacy;

    • payments from venture capital or private equity vehicles located offshore or in jurisdictions supporting Russia;

    • payments received by UK entities owned in part by Russian nationals or by others previously implicated in trade-based money laundering schemes;

    • payments via a fintech with a Russian investor nexus, including where they are initiated from or sent to IP addresses of non-trusted sources or located in Russia, Belarus, or AML deficient or sanctioned jurisdictions;

    • the use of open account trade-based money laundering typology, such as increases in third party open account payments.

Recommendations

The red alert includes a list of recommendations for firms to consider to avoid being enablers in circumventing sanctions and to address the issues arising out of the indicators above. These include;

  • arms-length transactions should be documented and not be taken at face value, and firms should seek guidance from OFSI if in doubt;
  • failure to undertake appropriate due diligence should be considered a red flag for both a breaches and/or circumvention offences;
  • firms should assess complex corporate structures as a component of enhanced due diligence in relation to high-risk clients and challenge the commercial justification for such structures;
  • firms should conduct enhanced due diligence when there is a change of ownership in a company linked to a designated person but also engage with the relevant competent authority to understand whether there are reasons to believe the ownership has not been transferred appropriately;
  • firms should conduct their own legal assessment in relation to a transfer of ownership, even where the companies have provided their own.

The red alert demonstrates that the UK competent authorities and law enforcement are determined to implement and enforce the sanctions imposed against Russia to stop the UK economic market from being accessible to Russian designated persons, including by tackling sanctions evasions. We expect to see more in this space, including enforcement action, in due course.