By Andrew Northage, Partner, Walker Morris
October 22, 2022
As the war in Ukraine intensifies, businesses must continue to keep up-to-date with constantly evolving sanctions legislation. We have seen this most recently with the further sanctions imposed by Western allies following Russia’s illegal annexation of four more Ukrainian regions.
At the same time, the UK government is strengthening enforcement efforts to boost the effectiveness of the sanctions regime. This includes targeting corrupt elites and their ‘enablers’ involved with assisting designated persons (DPs) to evade sanctions.
A red alert issued by the UK’s National Crime Agency and the Office of Financial Sanctions Implementation (OFSI) in July 2022 highlights how managing sanctions evasion risk is a key consideration for businesses.
What is an Enabler?
An enabler is an individual or business facilitating sanctions evasion and associated money laundering. Facilitation requires:
- the criminal activity not happening, or being more difficult, without the enabler;
- assisting a suspect to evade scrutiny by distancing them in some way from the offense; and/or
- allowing a suspect to benefit by laundering proceeds or assisting with doing so.
Enablers are almost certain to be in senior positions. Legal and financial professionals, company directors, intermediaries and agents are all key in the fight against sanctions evasion. There are three levels at which complicity is assessed: criminally complicit; willfully blind; and unwittingly involved. When it comes to Know Your Customer documentation on high-risk customers, willful blindness will not be tolerated and could lead to criminal prosecution.
An enabler could themselves be designated as a sanctions target if they are shown to be acting on behalf of, or at the direction of, a DP, for example in the obfuscation of assets.
Sanctions Evasion Techniques
Some DPs are using a range of techniques to evade sanctions impacting their personal and commercial holdings – usually before sanctions are imposed on them, but sometimes shortly afterward. While the UK, EU and US have sought to coordinate their sanctions measures, different timescales in designating individuals have created opportunities for DPs to facilitate the movement of funds and assets. Through enablers, they are using associates such as family members and close contacts to:
- transfer assets such as shareholdings in holding companies to trusted proxies such as relatives or employees;
- sell or transfer assets at a loss to realize their value before sanctions take effect; and
- divest investments so that ownership stakes are below the 50% threshold, or relinquish previous controlling stakes.
While the DP may claim to have relinquished the asset, the alert says it is highly likely the DP will retain their influence through trusted proxies and enablers.
DPs will try to transfer funds and assets directly and indirectly to jurisdictions where sanctions are not in place and are likely to explore alternative payment methods such as crypto assets to get around the problem of reduced access to the SWIFT system.
Sanctions Evasion Offenses
Sanctions legislation includes several offenses for dealing with a DP’s frozen assets and making funds or assets directly or indirectly available to them. It is also an offense to intentionally participate in activities knowing that the object or effect of them, whether directly or indirectly, is to circumvent any of the prohibitions or to facilitate their contravention.
This would catch enablers who try to obstruct other parties from carrying out the necessary due diligence to meet their own sanctions obligations, for example, by misrepresenting entities that are owned or controlled by the DP or adopting overtly aggressive and litigious strategies to deflect from the DP’s underlying ownership and control.
Crucially, UK financial sanctions apply not only to UK companies and individuals wherever they are in the world but also to non-UK companies and individuals in the UK. It is also essential to keep in mind that civil liability for breaching financial sanctions is now ‘strict’.
As these are criminal offenses, they also bring money laundering risks. The funds and assets would be proceeds of crime (and recoverable property) under the UK’s Proceeds of Crime Act, and any bank or professional services firm may be committing an offense by being involved in the arrangements.
What Should Businesses Look Out For?
These are just some of the indicators for sanctions evasion. For detecting frozen asset transfers:
- DPs communicating changes to the beneficial ownership of their corporate structures, such as private investment companies and joint stock companies to non-Russian or dual national family members or associates, or nominee directors/shareholders, before or shortly after sanctions take effect.
- Changes to ownership of a corporate holding to reduce ownership stakes to below the 50% threshold, shortly before or after sanctions designations.
- Use of trust arrangements or complex corporate structures involving offshore companies.
For the detection of enablers:
- Beneficial ownership changes notified to other firms in the regulated sector accompanied by an opinion of the client’s external counsel as to new sanctions disposition, potentially accompanied by correspondence from a senior UK company representative to convey authority.
For the detection of suspicious payments:
- Holding companies based in jurisdictions that are offshore or historically linked to assets in the former Soviet Union.
- Identification of transactions by holding companies linked with DPs with Swiss bank accounts and BVI/Cypriot legal entities.
Steps to Take Now
The aim of the alert is to promote awareness and to bring about preventative action. Businesses should use it to complement their existing knowledge and support improvements in their processes and procedures.
The following actions are recommended:
- Arms-length transactions should be documented and not taken at face value.
- A failure to undertake appropriate due diligence, for example, willful blindness concerning source of funds or wealth checks, should be considered a red flag for complicity and breach and circumvention offenses.
- You should assess complex corporate structures carefully as a component of your enhanced due diligence for high-risk clients, querying the commercial justification for such structures.
- Be aware that aggregation of ownership can be further complicated where different approaches are applied across the EU, UK and US and more than one owner seek to divest their shareholding.
- Where you are presented with documentation that purports to present a change in ownership by a company linked to a DP, you should conduct enhanced due diligence and follow up with OFSI to understand if there is reason to believe that ownership has not been transferred appropriately.
- Where companies have provided their own legal assessments regarding the transfer of ownership, you should carry out your own legal assessment and reach your own determination.
We have seen several of the red flags discussed above, in recent instructions. Enabler networks can be large and complex. Keeping up to date with developments, and following your procedures, should be taken as read in such a fast-moving regulatory environment.
You must also exercise vigilance and judgment, and, crucially, do not take explanations at face value. Sanctions breaches – even inadvertent ones – are a serious matter. If you are in any doubt, seek legal advice.
Andrew Northage is a member of the ACSS Editorial Task Force and partner in the regulatory and compliance team and head of international trade at UK law firm Walker Morris. Andrew specializes in financial services regulation and financial crime, including bribery, money laundering and sanctions compliance. Andrew has worked for an international firm in London and as an investigator and prosecutor for the Serious Fraud Office.