On 8 June 2022, K2 Integrity and C4ADS hosted a webinar on the evolving sanctions against Russia. K2 Integrity sanctions and policy expert Chip Poncy, C4ADS Conflict Affected States Program Director Jack Margolin, and Anti-Corruption Action Centre Executive Director Daria Kaleniuk discussed the current Russia sanctions environment and evasion typologies and how publicly available data is being used to identify and track assets of sanctions targets, and the importance of the Russia sanctions campaign from a Ukrainian perspective. This article summarizes the key points and analysis from the event. To watch a recording of the full webinar and hear audience questions and responses from our experts, click here.
With the United States, EU, and UK working together to impose wide-ranging sanctions, there is not a single area of the Russian economy that has not been impacted. Key sanctions in place have prohibited transactions with the Central Bank of Russia and the Ministry of Finance, which is notable as these institutions are typically responsible for the payments of Russia’s foreign debts. In addition, the Office of Foreign Assets Control (OFAC) issued a new set of FAQs on 6 June that interprets investments very broadly, impacting the prohibition of new investments.
All the top officials of the Russian government have been designated, as well as senior executives for the largest Russian companies, members of the Russian parliament, members of different Russian TV channels that are considered to be using propaganda in Russia, and several hundred companies. And such governmental action is strongly supported by the private sector. More than one thousand businesses have exited Russia, and more are working on winding down activities.
Common Sanctions Evasion Typologies
Some examples of Russia sanctions evasion typologies include the following:
- Front and shell companies: Russia has a history of using company formation havens such as Cyprus, Malta, and the Seychelles to set up front or shell companies—a preferred tactic as it is fairly low cost and the setup is quick—in order to obscure ownership, sources of funds, and the countries involved.
- Falsifying documents: This shows up in most examinations of evasion typologies and may include fake invoices, bills of lading, and corporate agreements, or loan documents without any corporate headers, signatures, or seals.
- Domestic or offshore legal adjustments: A tactic is corporate restructuring to avoid the application of OFAC’s 50% rule. Additionally, there is the creation of so-called “one day” companies in Russia to further obfuscate ownership. Corporate services are inexpensive in Russia, allowing companies to be set up in bulk, and for assets to be easily transferred from one company to the next if an entity is designated.
- Use of external jurisdictions: Jurisdictions previously associated with Russian financial flows recently have seen a notable increase in new company formations. In addition, we are seeing transaction layering and multiple movements of funds to and from jurisdictions that did not implement strict Russian sanctions.
- Cryptocurrency: It was expected that once sanctions were imposed Russian money would flood into cryptocurrency; however, the markets are not liquid enough to provide massive sanctions evasion.
Companies that have a relationship with a person or entity that is on the sanctions list should not only stop the relationship with the designated actor but also strive to understand how that actor is connected to others, including gatekeepers acting for or on behalf of designated parties, family members and close associates, entities directly or indirectly owned or controlled by the designated party, and less wealthy business individuals not yet designated.
Tracking Illicit Activities Related to Russia Sanctions
Sanctions and other restrictions, such as export controls, are some of the most important tools that can be used to counter Russia, though these measures only work when they’re enforced effectively.
Examples of fundamental types of mutually reinforcing analysis or approaches include the following:
- Network analysis: Shows how sanction entities are seeking to evade sanctions.
- Activities-based analysis: Identifies previously unknown entities engaged in prohibited behavior.
Illicit actors tend to exploit listed systems of trade, finance, and transit. That exploitation, however, leaves a digital trail that can be traced and used to disrupt those networks. They also can be blocked from the international financial system, prevented from using these systems of trade and finance, and degraded in their ability to supply the Russian state the resources that it needs to continue its work in Ukraine.
Asset Tracing
Asset tracing is the act of connecting companies, real properties, and movable assets to sanctioned and high-risk persons and organizations. Bulk screening of high dimensional datasets is an approach to asset training that looks beyond corporate data and brings in other datasets to crack the code on obscure and complex networks. Another approach focuses on highly granular, individual investigations where deep dives into complex networks associated with key sanctioned individuals or organizations are conducted.
Example: C4ADS used the bulk screen approach to examine Russian-owned properties in the UAE. The dataset was rich in identifiers (passport numbers, phone numbers, email addresses, etc.) that were used to join on datasets including the Russian corporate registry and the Russian property registry. C4ADS used that dataset—the Dubai property database—to wash a list of Russian and Belarusian politically exposed persons against it. That list was published by RuPEP, an incredibly powerful tool that those working in compliance should explore, and is a project of the Anti-Corruption Action Centre. Using this, C4ADS found $314 million in property and 76 individual properties linked to illicit Russian actors, along with 37 Russian property owners of interest.
Publicly available information in the aviation and maritime industries, such as tracking data, satellite imagery, and ownership records, can also be used to map out broader ownership networks. Such rigorous analysis can unearth risks that include sanctions exposure, trade and export control violations, insurance, and third-party concerns when dealing with companies servicing or providing parts to planes or sea vessels.
The Ukrainian Perspective on Russia Sanctions
Daria Kaleniuk from the Anti-Corruption Action Centre shared her views, as someone on the ground in Ukraine, about the impact the Russia sanctions are having. In Ukraine’s view, sanctions are not enough since Russia’s preparations for this war included how to avoid sanctions. For example, the Russia Central Bank is sanctioned; however, other Russia banks are not, and thus they are being primarily used. The bulk of all sanctions should be energy sanctions since this is a key source of the money that is being used to fund the war. As such, Ukrainians are advocating for sanctioning the Nord Stream 1 Pipeline, which transports Russian gas to Europe, bypassing Ukraine. Additionally, not all oligarchs and their family members are sanctioned. The sanctions are not tough enough to stop Russia from conducting the war.
Ms. Kaleniuk is advocating for the addition of Russia to the list of state sponsors of terrorism, which would effectively make doing transactions with Russia the same as doing a transaction with terrorists. The goal is to isolate Russia from the Western world and the global financial system.
Key Takeaways
- Russian illicit networks are extremely agile, so we need to stay ahead of them. That takes energy and is not always easy, but we have not only a legal but also an ethical obligation to do that.
- There are talks of fatigue around enforcement, even after this short time. This is a conflict that will likely not be over in the near future. Private sector actors, as well as enforcement actors, need to take a long view on how this is going to impact their business and investigative compliance due diligence approaches in the years to come.
- Know your obligations. Keep up with Treasury publications and K2 Integrity guidance. Remember that not all Russia sanctions are equal. Understand what types of transactions are prohibited to better understand your exposure.
- It is very important to take a holistic view on all the data within your company to understand where your exposure is and what are the potential networks. Even if you terminate a relationship with one company, you need to map the relationships that company had while they were your client. Understand your risks, your exposure, and the best way to mitigate the risks. Look for patterns, references to Russian area codes, email addresses, etc. This is an area where the use of Sanctions Explorer, C4ADS’ free-to-use sanctions database, can be helpful. It includes OFAC, BIS, EU, UK, and UN sanctions.
- On the operational level, this should underscore the importance of AML systems and controls for financial institutions to leverage internal data to identify risk. That internal data should be married with external data sets to provide patterns of sanctions evasions.
- On a policy level, remember why you are doing the work that you do and understand it is not going to be free for anyone; the ones really bearing the brunt of this are on the ground in Ukraine. Additionally, we need an integrated approach to isolate Russia. That requires a greater network across public/private sector and multilateral relationships to strengthen the pressure on Russia.
- In Ukrainians’ view, the way to stop the need for Russia sanctions is for all Russian troops to leave all Ukrainian occupied sovereign territories and for Russia to pay reparations for the disruptions and human losses.
Stay Tuned
As the Russia-Ukraine situation evolves, K2 Integrity will continue providing our clients with up-to-date information in the form of recent sanctions developments, policy alerts, additional webinars, and other means, including through our website and our DOLFIN platform.
