The issue of global sanctions against Russian aggression has become a top priority for diplomats, political leaders, lawyers, economists, and the global community. Since its invasion of Ukraine, an unprecedented number of sanctions have been imposed upon Russia from many different countries.
Yet, through sanction circumvention tactics, Russia has been able to strategically evade many sanctions. Why is Russia using such methods to evade sanctions? What are the most prominent Russian sanction evasion schemes? What are the red flags organizations can look out for to identify potential evasion tactics? Speaking with Duncan Nott, the EMEA Region Head at IntegrityRisk and Tom Firestone of Stroock & Stroock & Lavan LLP, we’ll take a close look at the answers to these questions and more.
Between February and July 2022, Australia, Canada, the EU, France, Japan, Switzerland, the UK, and the US imposed a total of 8,716 sanctions on Russian individuals, entities, and vessels (Statista). While many of the sanctions have had varying effects, those focused on these areas have had the greatest impact on the Russian economy:
- Dual-use technology export bans
- Ban on imports of key Russian exports, including gold and oil
- Severing from global financial system
- Arrests of foreign assets of Russian oligarchs and politicians
According to Nott, “the sanctions are intended to ultimately stop the aggression by making the prolonged cost too high to bear. To counter this, the Russians have launched both diplomatic and economic initiatives to influence countries not aligned with the US/UK/EU sanctions.” Research from the International Monetary Fund published in May projects that these sanctions will have a significant impact on Russia’s economy in 2022 alone:
- Russia’s economy will contract by 8.5 percent
- Inflation will reach 24 percent
- Unemployment will double to 9.6 percent
With this extensive economic pressure, Russia’s goal in sanction evasion is to minimize the destructive impact of international sanctions by using strategic circumvention tactics with the help of allied countries. While it is difficult to determine an exact rate of occurrence of Russian sanction evasion schemes, the U.S. Department of the Treasury and the U.S. Department of State have issued several sanction evasion statements targeting hundreds of entities and individuals since March 2022. According to Firestone, “A lot of evasion is not detected. That’s the whole point – to make it impossible to detect. To address this problem, enforcement agencies are now very focused on the enablers who, unwittingly or otherwise, facilitate the evasion.”
The types of individuals that are most involved in Russian sanction evasion tactics include:
- Wealthy Russian individuals: These are most typically those individuals who are seeking to continue investing funds and protecting assets abroad
- Defense and security enterprises: This refers to security entities that require Western weapons and equipment and conduct trade through Russian-neighboring countries
- Energy companies: Hit hard by oil and gas sanctions, state-owned energy enterprises need to keep selling their resources as they are often a primary source of hard currency for the government
- Financial and legal entities and individuals: Enforcement agencies are focusing on entities and individuals that can facilitate sanctions evasions, such as banks, lawyers, wealth managers, accountants, realtors, and trust companies
- Ordinary people: Often more difficult to identify, these are individuals who need to send money across borders, want to move out of the country, or desire a level of financial security that Russian banks do not provide
There is a wide range of tactics that Russia uses to evade US sanctions, and it’s important to understand that there are both legal and criminal attempts to evade the consequences of Russian sanctions. Our experts, Tom Firestone and Duncan Nott, have drilled down to the 10 most common criminal sanction evasion schemes that organizations need to be prepared for.
Investigative journalists report that Russian oil is frequently mixed with oil from other countries in order to create an oil mix, commonly referred to as “Lithuanian” or “Turkmen” blends. If the percentage of Russian oil contribution is less than 50 percent, it is technically not of Russian origin, so buyers can skirt sanctions on a technicality of oil blend ratios.
In addition, willing buyers of Russian crude oil, such as China and India, will benefit from steep discounts relative to global benchmark prices despite risking internal condemnation. Nott explained that, in order to make these transfers work, purchasing countries have been engaging in ship-to-ship oil transfers at sea, a rarely used process that has risen as a result of fewer non-sanctioned oil tankers and regional docking sanctions.
Russia has managed to maintain many trading opportunities through intermediary agreements with other countries. For example, sanctions prohibit the supply of certain equipment from Germany. So, two agreements are concluded: one between a Russian company and a Turkish company; the other between the Turkish company and a German company. The Turkish firm buys the prohibited equipment and then ships it to the Russian firm via Turkey or Azerbaijan.
There has been significant verified success with these agreements, especially from neighboring countries, such that FinCEN and the U.S. Department of Commerce’s Bureau of Industry and Security have released joint statements urging vigilance from financial institutions for potential Russian and Belarusian export control evasion attempts.
Russian banks automatically re-issue Visa and Mastercard cards through the MIR payment system, a well-known Russian card system that some countries accept. Customers will not even need to visit their bank — the card will be delivered by courier and will work in Russia, Turkey, Vietnam, etc.
Russians also travel to Minsk to get Visa and MasterCard cards from Belarusian and other banks from neighboring countries. Even without traveling there, Russia and allied countries have been able to open large numbers of bank accounts in countries that have abstained from voting for sanctions against Russia. In fact, Russia and Belarus have opened nearly 12,000 bank accounts in Kazakhstan since February 2022. They cannot use them on Russian platforms and in Russian stores but will be able to pay for international services and online subscriptions.
Russian legislation prohibited the import of goods that were dispatched to markets of other countries without the consent of the trademark owner. A new government document, however, has allowed the import of certain goods – vehicles, technology, metals, pharmaceuticals, and clothing — without the consent of the trademark owner, expanding the number of types of goods that can be imported.
While certain electronics imports are prohibited by sanctions, Russian companies can purchase electronics components and parts elsewhere in other countries such as China, import them, and have the parts assembled once within Russia.
While Visa, Mastercard, and other prominent payment systems refuse to work with Russia, other alternatives exist. MIR, the Russian bank mentioned earlier, UnionPay from China, and cryptocurrency exchanges are still functioning in Russia. Payment systems have been limited by sanctions, but certainly not eliminated for those working to get around them.
A bilateral company or organization is one that is established to serve one sole country, and in the case of Russian sanction evasions, that country is Russia. The primary example of the creation of a bilateral company that serves only Russia is Turkey’s development of an airline that only provides flights to Russians, circumventing EU and US sanctions and boosting Russian tourism in Turkey.
It’s clear some EU companies are contributing to Russian sanction evasion activity to gain access to Russian business and resources. An incredibly important resource, Russian gas, has EU entities looking for opportunities to evade the sanctions. EU companies can pay for gas in Russia while avoiding sanctions by paying in Russian rubles. Several countries have already opened Russian accounts to pay for gas in rubles, including Italy and Germany.
Russian companies can restructure to either eliminate or hide the specific individuals upon which sanctions are posed, disguising the ultimate beneficial owner (UBO). Without the accurate identity of the UBO, it can be challenging for sanctions to have the desired impact on the Russian company. According to Firestone, “For those singled out for personal sanctions, it’s all about disposing of or concealing their assets.” Nott says that, to protect assets, a sanctioned oligarch may liquidate all assets but transfer funds through proxies or allocate funds for maintenance, protecting them from depreciating.
In May, Russian media reported that state-owned Sberbank, the country’s largest financial institution, had sold some of its assets to an obscure company established in March. The sale likely reflects an attempt to shield those assets from Western sanctions. The U.S. Treasury Department sanctioned Sberbank in February, barring U.S. financial institutions from processing transactions for the Russian bank or providing it with correspondent or payable-through accounts.
SWIFT sanctions on Russian banks are a high priority for high-net-worth Russians to find a way around. Banning a bank from SWIFT effectively freezes, at least temporarily, its ability to transact with the rest of the world. In response, Central Asian countries such as Kazakhstan, who benefit from redirected Russian business, are permitting Russians to open accounts and create subsidiary companies to subvert Western SWIFT sanctions.
With many successful Russian sanction evasion tactics in play, certain entities are uniquely at risk for identified connections to sanction evasion schemes. Some of these organizations include suppliers of key Russian industry components, as well as companies with large amounts of exports in Central Asia and financial institutions in Central Asia. As noted by Firestone, “One of the challenges in the current environment is distinguishing legal attempts to avoid the consequences of sanctions from criminal attempts to conceal ongoing operations. That is why it is so important to do thorough due diligence on every transaction with the assistance of qualified experts.”
According to Nott, companies risk being banned from trades, imports, and financial systems if identified in connection with Russian sanction evasions. In order to remain in compliance, organizations with even subtle connections need to be able to know what to look out for when it comes to Russian sanction evasion. Nott expresses three primary categories of sanction evasion red flags:
To detect the transfers of frozen assets, look for:
- A company change in UBO shortly before or after sanctions are initiated. The new individuals are likely a front, with the designated person (DP), or sanctioned individual, remaining in control.
- Changes to the ownership of a corporate holding to reduce ownership stakes to below the 50 percent threshold, shortly before or after sanctions designations. The DP may still be able to initiate undue influence through associates or existing corporate governance.
- Movement of assets previously associated with the DP, such as the sale of high-value assets, where funds are then disbursed offshore through secrecy jurisdictions.
- Russian high-net worth individuals (HNWI) who are already on international sanctions lists transferring assets to family members and/or close associates such as employees.
- Complex corporate structures that involve former USSR states, especially Central Asia.
To detect potential enablers of Russian sanction evasion schemes, look for:
- Pooled accounts, in which the financial institution sees only the name of the enabler and not the client, transferring funds to entities associated in open source with DPs.
- The use of banks and financial organizations owned by close associates of DPs.
- Numerous transfers of shares from sanctioned entities to non-sanctioned entities.
To detect possible suspicious payments by or on behalf of sanctioned individuals or entities, look for:
- The identification of transactions by holding companies linked with DPs.
- Payments received by UK businesses, often in innovative areas, such as fintech companies owned in part by Russian nationals.
- Holding companies based in jurisdictions that are offshore and/or historically linked to assets in the former Soviet Union.
- Newly formed or unknown companies in red-flag regions that suddenly import large degrees of sanctioned goods.
Tom Firestone is the co-chair of Stroock’s White Collar & Internal Investigations practice and a member of the firm’s National Security/CFIUS/Compliance Practice Group. He specializes in complex transnational investigations and international risk management and represents companies and individuals before the Department of Justice (DOJ), the Securities and Exchange Commission (SEC), the Office of Foreign Assets Control (OFAC) of the Department of Treasury and other U.S. agencies. His matters often involve the Foreign Corrupt Practices Act (FCPA), the International Emergency Economic Powers Act (IEEPA) and other sanctions laws, the Bank Secrecy Act (BSA) and other anti-money laundering laws, the Foreign Agents Registration Act (FARA), and other federal criminal statutes related to business crime and national security. He regularly advises clients on the Russia/Ukraine crisis including helping them with issues related to sanctions compliance, obtaining OFAC licenses, and the risks of doing business in Russia. He has also represented individuals in proceedings before Interpol and the European Court of Human Rights (ECHR). He also regularly advises foreign governments on issues relating to anti-corruption and the rule of law. He also advises clients on risk and compliance in the cannabis industry. Tom can be reached at [email protected].Duncan Nott is based in London and leads the EMEA region for IntegrityRisk. He has been helping multinational organizations manage risk for three decades. He came to IntegrityRisk from UBS AG, where he served as Global Head of Security. During his 14-year tenure with the Swiss bank, Duncan managed multiple high profile Enhanced Due Diligence projects across the capital markets, private wealth, and supply chain arenas, as well as led numerous complex and sensitive corporate investigations and major operational risk events. Duncan previously served as the Head of Global Security at the World Bank Group in Washington DC. During his seven-year tenure, he developed and managed the international executive employment screening programs and represented the Institution at the United Nations High Level Committee on Management focusing on operational risk and crisis management challenges in post conflict and developing economies in Eastern Europe, Africa, and the Middle East. Duncan can be reached at [email protected].