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State of Financial Crime 2023 Report

US Cracks Down on Intermediaries Used to Evade Russia-Related Sanctions and Export Controls

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In the first collective effort of its kind, on March 2, 2023, the Departments of Justice, Commerce, and the Treasury issued a joint compliance note on Russia-related sanctions and export control evasion. The practical guidance aims to inform the private sector about enforcement trends and convey the departments’ expectations related to “national security-related corporate compliance”. Specifically, the “tri-seal” compliance note focuses on detecting third-party intermediaries and transshipment points being used to evade sanctions and export control laws. 

The guidance follows an “unprecedented scope and scale” of restrictions that have been imposed since Russia invaded Ukraine in February 2022. Unsurprisingly, as a result of the war and subsequent sanctions, Russia topped our 2023 list of geopolitical hotspots that firms are most concerned about.

Detecting Sanctions and Export Control Evasion

In the guidance, financial organizations are reminded that they must adopt a risk-based approach to sanctions and export controls compliance, routinely reviewing and updating policies and procedures commensurate with the organization’s risk appetite, size, products, and geographic location(s). In particular, firms in the manufacturing, distribution, and freight forwarding sectors are highlighted as being in one of the best positions to determine whether certain activity is consistent with industry norms. In light of their potential proximity to sanctions and export control evasion, these sectors are reminded to undertake additional due diligence when potential red flags are detected. 

Financial Red Flag Indicators of Sanctions and Export Control Evasion

To effectively combat diversions set by third-party intermediaries to evade sanctions and export controls, the compliance note lists the following financial red flag indicators:

  • The use of corporate vehicles to obscure ownership, source of funds (SOF), and/or countries involved, particularly sanctioned jurisdictions 
  • A customer’s reluctance to share information about the end use of a product, including reluctance to complete an end-user form
  • The use of shell companies to conduct international wire transfers
  • A payment coming from a third-party country or business not listed on the end-user form
  • The use of personal email accounts instead of company email addresses
  • Transactions involving entities with little or no web presence
  • Routing purchases through certain transshipment points to illegally redirect restricted items to Russia or Belarus. Such locations may include China (including Hong Kong and Macau), Armenia, Turkey, and Uzbekistan

While no single red flag determines illegal or suspicious activity, the Financial Crimes Enforcement Network (FinCEN) reminds firms to consider each transaction’s relevant facts and circumstances.

Best Screening Practices to Mitigate Sanctions Evasion Risk

To effectively combat the threats posed by sanctions and export control evasion, the departments also encourage financial institutions to screen both new and current customers as well as intermediaries and counterparties. Each individual or entity should be screened against the Consolidated Screening List and the Office of Foreign Assets Control (OFAC) sanctions lists

Common Tactics Employed to Evade Detection

To contextualize the guidance, the compliance note also highlights several recent Russia-related sanctions and control evasion attempts that have faced enforcement action by the Department of Justice (DOJ). Among the common tactics employed to evade detection included:

  • Claiming that shell companies located in third countries were intermediaries or end-users
  • Dividing shipments of controlled items into multiple, smaller shipments to try to avoid law enforcement detection
  • Using aliases for the identities of the intermediaries and end users
  • Transferring funds from shell companies in foreign jurisdictions into US bank accounts and quickly forwarding or distributing funds to obfuscate the audit trail
  • Making false or misleading statements on shipping forms
  • Claiming to do business not on behalf of a restricted end user but rather on behalf of a US-based shell company

Increased Vigilance Needed

The joint compliance note builds on an alert produced by FinCEN and the Department of Commerce’s Bureau of Industry and Security (BIS) in June 2022. In the joint alert, financial institutions were urged to increase their vigilance for potential Russian and Belarusian export control evasion attempts, particularly surrounding a list of high-risk commodities that included, antennas, cameras, and GPS systems.

The alert also reminded firms of their Bank Secrecy Act (BSA) reporting obligations, highlighting how suspected sanctions or export controls evasion should be reported to FinCEN. When filing a suspicious activity report (SAR) related to these illicit activities, compliance staff should take note of the following key terms when completing SAR field 2:

  • Sanctions evasion: FIN-2022-RUSSIASANCTIONS
  • Export control evasion: FIN-2022-RUSSIABIS” 

Key Takeaways

Firms should continue to assess and update their compliance programs in light of increased sanctions and export control enforcement. Interactions with higher-risk customers and third-party intermediaries should also be carefully reviewed. For more information on adopting a risk-based approach to sanctions compliance, compliance staff should review OFAC’s “Compliance Considerations”.   

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Originally published 09 March 2023, updated 10 March 2023

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