Sanction Evasion Techniques are used by affected entities to circumvent economic sanctions. They are part of the broader concept of sanctions.
The Office of Foreign Assets Control is the main US body that slaps sanctions on foreign countries, organizations, and individuals. However, if the OFAC has put sanctions on countries like North Korea, Iran, and Russia, how are these countries still able to partake in the trade of goods and move money outside of their borders?
Introduction to Sanction Evasion Techniques
Many individuals and organizations within the countries may be using banks and other financial institutions within the country to facilitate their illegal activities. Most of the time, these institutions do not even know the true purpose of these transactions. As the sanction are imposed on different countries the Sanction Evasion Technique is flourishing these days. This can be extremely risky for them, as the consequences for not adhering to Sanction Evasion Techniques are very heavy.
So, what are the most common Sanction Evasion Technique these organizations use to evade sanctions and continue partaking in financial activities that are essential for their country’s economic health?
Common Sanction Evasion Technique
Following are the Sanction Evasion Techniques:
Creating Shell Companies
This is probably the easiest and most common way for organizations to bypass sanctions. Criminals usually use shell companies as fronts for money laundering operations. When countries want to move funds from one country to another without detection, it is essentially a form of money laundering. They set up shell companies to transfer money to the sanctioned entities under the cover of anonymity. The sanctioned countries set up shell companies in quick succession. They each one for a short period of time for heavy activity, then closing them down and moving on to the next one.
Many countries actually use their government-operated businesses to open up these companies as branches in neighboring countries to conduct their operations. These companies fool financial institutions into thinking they are legitimate companies. They then finance them and provide them with the means to transfer funds. Hence, law enforcement advises that financial institutions must always conduct thorough due diligence on the companies they provide funds to. In doing so, they may be able to trace the company’s actions back to the ultimate patron. The source may very well end up being a sanctioned individual or entity.
Some details financial institutions must look out for when screening potential shell companies are their registered address, whether they have any legitimate online presence, and common directors across a network of companies. If the address of the company is in a tax haven area or area bordering a heavily sanctioned country, has zero online presence when searched for, and has persons with political affiliations on its board of directors, then it counts as a red flag.
Using Correspondent Banks
Correspondent banks refer to banks and financial institutions that offer services to other banks. This usually includes institutions in other countries. Countries looking to evade sanctions may conduct their activities through these banks to make sure their funds cross international borders. Sanctioned entities or governments create accounts in the name of various corporates in foreign countries. Correspondence banks usually do not probe much into the activities of corporate accounts, which decreases the level of security applied to their transactions. This helps sanctioned entities perform activities without detection, through the means of US dollars. There Sanction Evasion Techniques come into existence.
Using dollars helps to repel suspicion as well. Large transactions made in the sanctioned country’s currency are bound to attract attention. With the use of corporate accounts, entities and individuals are able to shield their real identities. They hide under the guise of a corporate entity. This diverts the attention of U.S. regulatory and financial institutes away from them.
In this case, monitoring the area of jurisdiction of the corporate behind the bank account may prove to be useful in identifying sanctioned entities.
Using Trade Finance Vehicles
Entities may use trade finance vehicles like ships and aircraft to facilitate the movement of funds and other goods across borders. Trade finance Vehicles refer to those vehicles that help make international trade and commerce possible. They have the authority to move across international borders either by land, air, or sea.
Most entities use shipping links to move along the trade of laundered money or transport goods from their country to another. These activities may not be possible normally due to sanctions. They also provide manipulated or falsified documentation and pay off shipping agencies. This helps make it look like the transports are legitimate. In fact, these documents help to create an intricate paper trail. It is extremely difficult for involved financial institutions to follow and prove the original purpose of the shipment. Financial institutions usually grant funds and loans to shipments based on documents. So, providing documents indistinguishable from legitimate documents make it easy for sanctioned entities to receive safe passage.
Russia and North Korea are regular offenders when it comes to using Trade Finance Vehicles for evading sanctions.
Red Flags of Sanction Evasion
Financial institutions would be advised to keep these red flags in mind when approving transactions for cross-border shipments.
- If a regular shipment appears to be much smaller or larger in quantity than expected.
- When official documents show discrepancies regarding the value and volume of the shipment. They do not match after inspection of the shipment.
- If the shipments take long detours or pass through countries that are not related to the nature of the shipment. This is especially suspicious if the countries the goods pass through are known for being at high risk of being illicit trade finance vehicles.
- If the products themselves are considered to be at high risk for trade-based money laundering and similar activities. This includes goods like alcohol, cigarettes, clothes, edible products, etc. This usually includes goods that individually are low in cost, but are transported in large numbers at a time.
- When organizations pay for large shipments in cash, it throws up a lot of red flags. Launderers usually dispose of illegally obtained cash using such methods.
- If the payment is provided for by individuals or companies who do not seem related to the nature of goods in the shipment, then it may raise some concerns.
Conclusion
Governmental bodies may put sanctions on offending countries to show their disapproval of their actions. However, the sanctioned countries do not always follow these restrictions. Sanction Evasion Techniques play an important role in sanctions. Many sanctioned countries like Iran, North Korea, and Russia are still very much present in international trade. This is thanks to ingenious methods that make their activities difficult to detect.
Unfortunately, they often rope in unsuspecting financial institutions, which face the brunt of the consequences when these activities are detected. Countries and organizations will always keep coming up with innovative Sanction Evasion Techniques to bypass sanctions. Hence, it is up to financial institutions and the attached law enforcement entities to keep up with these methods. They must always perform adequate screening.
