Decoding Sanctions Evasion

Λογιστικά/Έλεγχος/Φορολογικά,⠀

Χρηματοοικ.-Ασφαλιστικά-Τραπεζικά,⠀

What are International Financial Sanctions?

International financial sanctions are measures imposed by countries or international organisations to restrict or control financial transactions and economic resources of certain nations, entities or individuals. These sanctions are a form of economic statecraft, utilised as a non-military tool to achieve various political, strategic or human rights objectives. The underlying rationale for imposing such sanctions often includes deterring illegal or unethical behaviour, promoting international security, enforcing international norms, and/or responding to perceived threats to peace or acts of aggression.

Financial sanctions can range from comprehensive economic embargoes affecting all trade and investment to targeted measures like asset freezes and travel bans aimed at specific individuals or organisations. Such sanctions are designed to exert pressure on governments or entities to change behaviour that is considered threatening or harmful without resorting to armed conflict. By targeting the financial capabilities of the sanctioned party, these measures aim to create a significant economic impact, thereby compelling compliance with international standards or resolutions.

The Sanction Landscape

In the intricate landscape of international finance, a myriad of financial sanctions exist. These sanctions, set forth by entities like the United Nations, the European Union, and individual countries such as the United States or the United Kingdom, aim to restrict financial transactions and freeze assets of targeted nations, entities or individuals. The most prominent international financial sanctions often revolve around pressing global issues like nuclear non-proliferation, terrorism and human rights violations.

Recently, significant sanctions have been introduced, reflecting the dynamic geopolitical landscape. For instance, in response to aggression, cyber-attacks and election interference, certain countries have faced stringent financial sanctions aimed at key sectors like energy and finance, as well as travel bans and asset freezes targeting specific officials. Additionally, sanctions related to human rights abuses in regions with internal conflicts have been imposed, focusing on military equipment and luxury goods, while also penalising individuals involved in oppressive regimes. These recent sanctions underscore the evolving nature of international conflicts and the corresponding financial measures used to address them.

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The legal and regulatory frameworks underpinning these sanctions vary considerably. The United Nations, for example, employs sanctions as a collective security tool, requiring member states’ compliance. In contrast, the United States, through bodies like the Office of Foreign Assets Control, independently imposes and administers sanctions based on its foreign policy and national security goals. The European Union’s sanctions are often aligned with UN directives but can also be autonomously established by the EU Council. These frameworks differ not only in their scope and targets but also in their enforcement mechanisms and exemptions, reflecting the diverse political and economic interests of the sanctioning bodies.

Getting Around Sanctions

Sanctions evasion, highly appealing to criminals, organisations and even countries for its lucrative potential, involves various tactics to bypass international financial sanctions. These sanctions aim to apply economic pressure and achieve political or social goals, but evasion techniques weaken their impact, threatening global financial integrity and security.

Common evasion methods include using shell companies and complex ownership structures to hide true ownership, allowing sanctioned entities to access the global financial system unnoticed. Falsification of trade documentation, such as mislabelling goods’ origin or destination, helps evade trade-related sanctions and disguises transaction nature to bypass financial restrictions.

The use of cryptocurrency and blockchain technologies has become a sophisticated evasion method. Offering anonymity and operating outside traditional banking regulations, these digital assets enable unsupervised cross-border transactions. Additionally, cyber operations like hacking financial institutions or deploying ransomware for revenue generation have emerged, sidestepping the traditional financial system.

The recent rise in using third-party intermediaries marks another evasion strategy. Sanctioned countries or entities engage allies or friendly nations to execute financial transactions or trade, complicating the traceability of transactions to the sanctioned parties. Trade-based money laundering, involving transaction value manipulation to move illicit funds, is increasingly used to mix illegal proceeds with legitimate trade, further complicating sanctions enforcement.

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Due Diligence in the Financial Industry

Sanctions due diligence in the international financial industry is a critical process that institutions undertake to comply with legal obligations and mitigate risks associated with sanctions violations. Effective due diligence practices involve a comprehensive approach encompassing various strategies and tools to identify, assess and manage potential sanctions-related risks. The most widely used and effective strategies are explored here:

Documentation Review | The cornerstone of due diligence is the thorough examination of documentation related to customers, business partners and transactions. This involves scrutinising corporate records, ownership structures and financial statements to ascertain the legitimacy of entities and their compliance with sanctions regulations. Proper documentation helps in verifying the identity of parties involved and their potential connections to sanctioned entities or countries.

Discrepancies in Information | Vigilance in detecting discrepancies or inconsistencies in information provided by clients or found in transactional data is essential. Disparities in business profiles, sudden changes in transaction patterns, or unexplained wealth are potential red flags that warrant further investigation. Institutions should have procedures in place to resolve these discrepancies and determine if they are linked to sanctions evasion.

Red Flag Identification | Financial institutions must be adept at identifying red flags indicative of sanctions evasion. These include transactions involving high-risk countries, dealings with entities in industries prone to sanctions violations, and payments that bypass customary banking channels. Regular training for staff on recognising and responding to such red flags is imperative.

Transaction Monitoring | Continuous monitoring of transactions is vital to detect and prevent sanctions violations. Automated systems should be employed to scrutinise transaction flows for patterns and links to sanctioned entities or geographies. Unusual transaction volumes, frequent cross-border transfers, and transactions with no apparent economic purpose should trigger alerts for closer examination.

Name Screening | Name screening against sanctions lists is a fundamental component of due diligence. Financial institutions must regularly screen their clients and counterparties against updated sanctions lists from various jurisdictions and international bodies. This involves not only initial screening at the time of onboarding but also ongoing monitoring to capture any new sanctions or changes in existing ones.

Restricted Securities | For institutions dealing with securities, it is crucial to ensure that they do not facilitate the trade of restricted securities associated with sanctioned entities. This requires robust systems to identify and block transactions involving such securities, including thorough due diligence on the issuers of these securities.

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A moving target

Sanctions evasion is constantly evolving, with perpetrators adopting new technologies and methods to stay ahead of enforcement efforts. This underscores the need for continuous adaptation and enhancement of international regulatory frameworks and enforcement mechanisms to effectively counter these evolving threats.

Sanctions due diligence is clearly a multifaceted and dynamic process that demands constant vigilance, up-to-date knowledge of sanctions regimes and robust internal controls. Implementing the best practices noted in this article is crucial if financial institutions are to navigate the complex landscape of international sanctions effectively.

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