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It is often stated no one knows the sanctions lists as well as those who feature upon the same. Whilst financial crime professionals seek to find links between clients, prospective clients, and counterparties, there are enablers who seek to help sanctioned parties, including sanctioned countries.
Sanctions are political tools used to punish, restrict, and influence parties, including governments. They have been used successfully to prevent some governments from developing nuclear weapons and to deter others who sponsor or support terrorism. At an entity level, they restrict business, and at an individual level, they limit or deny access to assets, funds, and international financial services.
Evidence
The impact of reduced supply, set against an unchanged level of demand presents opportunities for those prepared to break laws and take risks. To stop these enablers and their sanctioned clients it is necessary to think like them and understand where as well as how they are likely to hide. As stated in a recent publication from the World Bank, Signatures for Sale, there are professionals who will provide nominee parties to act as owners, directors, and general front people of companies. These companies can be used to camouflage and hide third parties, including sanctioned individuals.
On 11 April 2022, the International Consortium of Investigative Journalists (ICIJ) published an update to the Paradise Papers, which focused upon Russian nationals in which they identified 800 Russians behind hundreds of offshore shell companies. The updated report drew information leaked from a professional enabler in Seychelles. More than 800,000 files were leaked to the ICIJ from a company called Alpha Consulting Ltd. The model and method used by the Russians were typical of those provided by offshore enablers and highlights the risks within offshore companies.
Gathering and using the data
Financial crime professionals can draw the data from the ICIJ leaks and use the same when screening existing client relationships, transactions, and prospective clients. It does not mean all companies from Seychelles are in any way criminal, but these leaks indicate there are increased levels of risk. Using a Covid-19 analogy, and the measurement of the R rate on a regional basis, some financial crime professionals may determine the addresses of some professional enablers have a very high infection risk, R rate, for money laundering and sanctions breaches.
Other financial crime professionals will not have resources available to undertake the research and identify the addresses, professional enablers, and nominees who have featured in the ICIJ leaks and papers, as well as the names and addresses presented within the Laundromat investigations published by the Organised Crime & Corruption Reporting Project (OCCRP). This is where third-party due diligence providers should be engaged to provide such lists and/or undertake specific due diligence for individual clients or prospective clients. There is reduced regulatory and public tolerance of firms turning a blind eye to client relationships and transactions or not actually knowing who they are undertaking business with.
Not in their name
The ICIJ leaks and papers have helped investigators to identify real estate transactions worth billions of dollars that have been undertaken on behalf of foreign nationals, oligarchs, and politicians. None of the superyachts owned by oligarchs are registered in their personal names, likewise most of their real estate holdings. The yachts and most of the real estate are registered in the names of offshore companies and the names of the politicians, oligarchs and other Russian beneficial owners are nowhere to be seen.
Offshore companies are potentially tax-efficient, but they have been abused and this has led to governments legislating for beneficial ownership declarations for real estate acquisitions undertaken by offshore companies.
These laws will take time to pass and longer still to embed. In the meantime, regulated firms need to know their clients and the third parties their clients are buying or selling real estate from/to. Once again, this is an area where firms may need to engage third-party due diligence providers because it is more difficult to obtain identity data for corporate entities that are not clients of a bank or firm.
Beneficiaries virtually invisible (BVI)
The British Virgin Islands (BVI) features more prominently within ICIJ leaks and papers than any other jurisdiction and on Friday 29 April the President of the BVI, Andrew Fahie, and his son were arrested in the U.S. within an undercover operation. It is alleged both men believed they were collecting a substantial cash payment from the Sinaloa cartel, but instead they were met by U.S federal agents and duly arrested. Of course, everyone is innocent until proven to be guilty, but this case does little to help the reputation of the BVI and undoubtedly increases the money laundering, corruption, and sanctions breach risk ratings for this country.
All the world is a stage
Regulated firms in any jurisdiction are not compelled to undertake business with or open accounts for a BVI corporate entity or a Limited Liability Partnership (LLP) from the UK. In the event a financial crime professional determines a UK LLP operating a bank account in Russia seeks to pay funds into or through a UK/U.S. bank presents an unacceptable level of risk, such a transaction can be rejected. It is adequate, some would assert, abundant intelligence which demonstrates offshore companies from numerous jurisdictions are provided by enablers to help politicians, money launderers, and criminals to hide, logically the same enablers can provide companies to sanctioned parties.
The war in Ukraine and the sanctions subsequently applied to Russians demand new thinking and an increased level of due diligence to ensure the sanctions achieve their objectives. For some firms, this will require a change of approach and an acknowledgment that offshore presents a higher risk than onshore, because offshore is where Russian sanctioned parties are likely to hide. Using data and screening third-party due diligence providers can provide intelligence that can be used to identify nominee parties.
Related to the payment of funds, a number of Russian banks have been directly sanctioned and denied access to the SWIFT (Society for Worldwide International Financial Transactions) system in order to ensure they cannot make or receive international payments routed through SWIFT member/user banks.
Nominee policy
As with the BVI companies and UK LLP entities, regulated firms are not compelled to undertake business with or execute transactions for nominees and the unknown parties hiding behind them. From a governance perspective, financial crime professionals may conclude, that now is a good time to update policies and prohibit business with any parties using nominee shareholders, because the risks are not known, and may be too high. Those seeking to breach sanctions and their enablers will be looking for the banks/firms with weak controls and policies which accommodate their nominees and consequently give them an opportunity to breach the sanctions designed to restrict them.
Success
Financial crime professionals who think like sanctioned parties and understand how they seek to breach sanctions will be better equipped to frustrate and block such parties from using their firms/banks to breach the sanctions imposed.
Martin Woods – May 2022
Contributor to Square Facts, Martin Woods, industry expert.
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