“Red alert” on Financial Sanctions Evasion Typologies Issued by OFSI and the National Economic Crime Centre

29 July 2022
Ellina Izotkina
Associate
Ksenia Skoromolova
Legal Trainee

The National Economic Crime Centre (NECC) and OFSI as one of its members in July 2022 published “red alert” to provide information on some common techniques designated persons are suspected to be using to evade financial sanctions against Russia. The National Economic Crime Centre considers that designated persons use various methods to protect their interests from negative influence of restrictive measures. That is why The National Economic Crime Centre issued the review covering the most widespread mechanisms of financial sanctions evasion.

The National Economic Crime Centre also draws the attention of financial institutions which are the main recipients of this alert to the need for detailed due diligence and controls on transactions and individuals that may look "suspicious" and that not all transactions are actually what they seem to be.

Assistance of third parties (“enablers”)

The National Economic Crime Centre notes that designated persons may use different combinations of relationships with third parties to mitigate negative effects of sanctions and to maintain control over assets. The National Economic Crime Centre names these persons “enablers”. Enablers are individuals or businesses facilitating sanctions evasion and associated money laundering. Key professions of enablers include (but are not limited to) legal and financial (including accountants, managers etc), estate agents, intermediaries/agents, private family offices and persons in senior positions (including London-based enablers).

The National Economic Crime Centre directly names the following “red flags” for detection of enablers:

  • transfer of assets such as shareholdings in holding companies to trusted proxies such as relatives or employees;
  • numerous transfers of shares from sanctioned entities to non-sanctioned entities incorporated by the same people and company/with a registered office at the same physical address);
  • use of banks and financial organizations owned by close associates of sanctioned persons;
  • extensive personal connections between designated persons and enablers;
  • the appointment of a nominee director or shareholders using the mechanism of “trust” to hide the actual managements of assets;
  • work for multiple sanctioned entities, such as multiple directorships.

Asset freeze evasion

The main restrictive measure against sanctioned persons is the freezing of their assets. Transfer of assets by sanctioned persons violates UK sanctions legislation. This violation is recognised as a criminal offence. In this regard, the National Economic Crime Centre points to a number of actions indicating the attempts of designated persons to protect their assets:

  • transfer of assets such as shareholdings in holding companies to trusted proxies such as relatives or employees;
  • use of trust arrangements or complex corporate structures involving offshore companies;
  • divest investments to ensure ownership stakes are below the 50%;
  • ownership transfers to previously unknown individuals, where that person’s economic consumption, displays of wealth or financial footprint (such as private jets, large addresses and fleets of luxury cars) does not correspond with their newly reported wealth;
  • new equity ownership secured by former equity owners;
  • multiple beneficial ownership changes synchronised with new sanctions designations;
  • clients connected with sanctioned persons seeking to move all their assets to other financial institutions and closing their accounts in the UK;
  • change in address and names for Russian entities in the lead up to the events of February 2022.

Use of alternative payment methods

Considering the issue of asset freeze evasion with taking into consideration restrictions on access to SWIFT-systems the National Economic Crime Centre notes that sanctioned persons may choose alternative payment methods, including the use of crypto-assets. At the same time, however, the National Economic Crime Centre points out the low attractiveness of such methods due to the specific nature of blockchain technology which is aimed at transparency of all transactions carried out using it.

That is why the National Economic Crime Centre name the following ‘red flags’ detecting of the financial sanctions evasion:

  • transactions of holding companies linked with designated persons with Swiss bank accounts and BVI / Cypriot legal persons;
  • companies` connection with assets in the former Soviet Union;
  • payments from venture capital and private equity vehicles, many located in offshore jurisdictions, Middle East, East Asia or other jurisdictions that continue to support the Russian government or expressed neutrality;
  • payments received by UK businesses owned in part by Russian nationals and/or others implicated in previous major trade-based money laundering schemes (often involving the Baltic and Nordic states);
  • use of Open Account Trade-Based Money Laundering (TBML) typology;
  • payments via a Fintech with Russian investor nexus including customer’s transactions that are initiated from or sent to IP addresses that have non-trusted sources or are located in Russia/Belarus or comprehensively sanctioned jurisdictions.