The Office of Foreign Assets Control (OFAC), which operates under the U.S. Department of the Treasury, has issued a new sanctions advisory highlighting a growing concern in the global financial system. The advisory focuses on “sham transactions” and how they are being used to evade sanctions imposed on certain individuals and entities.
Sanctions are rules that restrict access to financial systems for specific individuals, companies, or countries. These rules are meant to limit their ability to use or move money and assets. However, the advisory explains that some sanctioned individuals are attempting to bypass these restrictions by hiding their ownership of assets.
A sham transaction is described as a transfer that appears real on paper but is not genuine in practice. In such cases, ownership of money, property, or businesses is officially moved to another person or entity. However, the original sanctioned person may still control or benefit from those assets. This makes the transaction misleading and deceptive.
According to the Office of Foreign Assets Control, such practices are becoming more complex and harder to detect. This has raised concerns among regulators and financial institutions worldwide.
How Sham Transactions Work and Why They Matter
The advisory outlines several common methods used to carry out sham transactions. One of the most frequent approaches is transferring assets to family members or close associates. While the ownership appears to change legally, the sanctioned person may still retain control behind the scenes.
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The advisory also highlights another method involving the use of shell companies and layered ownership structures. These entities often exist only on paper and do not carry out real business activities. Assets are moved through multiple companies, sometimes across different countries, making it difficult to identify the true owner.
Trusts are also used in some cases. Assets may be placed in a trust managed by another individual. Even then, the sanctioned person may still influence decisions or benefit from those assets indirectly. This creates confusion about actual ownership and control.
Timing plays an important role in identifying such transactions. The Office of Foreign Assets Control notes that these transfers often take place just before or soon after sanctions are imposed. This timing suggests that the purpose of the transaction is to avoid restrictions rather than conduct legitimate business.
These activities weaken the purpose of sanctions. Sanctions are designed to restrict financial access and limit the use of wealth. When sham transactions are used, these restrictions become less effective, allowing sanctioned individuals to continue benefiting from their assets.
Red Flags and Compliance Responsibilities for Businesses
The advisory issued by the Office of Foreign Assets Control highlights several warning signs that businesses should watch for. These red flags can help identify whether a transaction may be a sham.
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One major red flag is when a transaction lacks a clear business purpose. Deals that do not make commercial sense or appear unusual should be examined carefully. For example, selling valuable assets at unusually low prices may indicate an attempt to hide ownership.
Another warning sign is the involvement of close associates or family members. Transfers to individuals with personal connections to a sanctioned person may not represent genuine ownership changes.
Complex ownership structures are also a concern. When assets pass through multiple entities, especially across borders, it may indicate an effort to hide the true owner. Businesses are expected to look beyond documents and understand who actually controls the asset.
The continued involvement of the sanctioned individual is another key factor. Even if ownership appears to change, businesses should assess whether that person still has influence or financial benefit.
The advisory stresses the importance of strong due diligence. Companies and financial institutions must carefully review transactions, verify ownership structures, and understand the source of funds. Relying only on documents is no longer sufficient.
Financial institutions are expected to monitor activities closely, identify suspicious patterns, and report concerns when necessary. Failure to comply with these expectations can lead to serious penalties under regulations enforced by the Office of Foreign Assets Control.
The advisory also calls for proper record-keeping. Maintaining clear documentation of checks and decisions helps demonstrate compliance with regulatory requirements.