Asset Tracing and Corporate Intelligence Techniques: What Financial Institutions Can Do to Prevent Russia Sanctions Circumvention | K2 Integrity

On March 16, 2022, K2 Integrity hosted our second webinar in our series on the evolution of sanctions against Russia and what it means for global markets and businesses. This article summarizes the key points and analysis of the event. If you would like to watch a recording of the webinar, please click here.

Everything about sanctions against Russia is very evolving and dynamic. In our second webinar in this series, sanctions and policy experts from K2 Integrity Poncy chip, Anna Gumowskaand Gabe Hidalgo provided an overview of recent developments as well as a deeper dive into asset tracing, sanctions evasion, and cryptocurrency. They also discussed the main implications for financial institutions, businesses, NPOs and jurisdictional authorities, focusing on the impact of these developments on day-to-day risk management.

RECENT DEVELOPMENTS

The sanctions campaign and the unprecedented response to the Russian invasion of Ukraine created the need for some type of monitoring and response task force. K2 Integrity has organized the volume of sanctions information into a six-point framework:

  • Targeted financial and economic sanctions against specific individuals and entities linked to the Putin regime, military actions in Ukraine and key institutions of the Russian economy: These sanctions are intended to pressure Putin to change, weaken or contain Russia’s ongoing aggression. Any actor subject to the jurisdiction of sanctioning authorities should monitor ongoing developments to ensure compliance and meet blocking requirements. These jurisdictions have expanded in recent days to encompass other countries that are doing more when it comes to targeting individuals and entities by blocking sanctions.
  • Increase in trade bans: What was not on the table regarding energy is now on the table, including a total ban on importing energy into the United States that is currently making its way through Congress. This effort has been replicated in other financial hubs, where trade bans have started on specific entities and sectors and spread to broader sectors, increasingly evolving into a complete trade ban.
  • Self-sanctions: More and more companies are deciding to self-sanction and withdraw from Russia as far as possible. This has been particularly prevalent in the energy sector, with Shell, Exxon Mobile, BP and others shutting down operations in Russia even before any applicable trade bans took effect.
  • Countermeasures by the Russian authorities: Russian countermeasures appear to follow the pattern of those used in 2014 after Russia’s annexation of Crimea, but with increased intensity and speed to include sanctioning senior leaders in the US and other centers financial. Additionally, law enforcement efforts are underway inside Russia, including the detention of US and other citizens on charges that do not appear legitimate, actions that are expected to intensify.
  • Efforts to expand regulatory coverage to bring greater transparency to vulnerable sectors: A new executive order from the White House last week directs agencies in Washington to work together in an interagency process to strengthen efforts to clarify obligations in a way that allows for greater transparency and accountability in the security sector. virtual currency. This effort is partly motivated by the fight against the circumvention of Russian sanctions through the emerging virtual currency sector. Jurisdictions can also speed up or intensify their efforts to improve transparency in other sectors vulnerable to circumvention of Russian sanctions, including real estate and capital markets.
  • Multilateral cooperation to fight Russian elites, proxies and oligarchs: The G7 and Australia have joined together in a political and tactical effort to share information on investigative targets. This cooperation is unprecedented in its speed of response as well as its effectiveness, with hundreds of millions of dollars of real estate already seized as a result of such cooperation.
Investigate illicit assets

The amount of illicit Russian money is estimated between 500 and 1,000 billion dollars. As the biggest tracing and research challenge is not knowing exactly what assets to look for outside of normal luxury items, investigators should broaden the asset classes they are looking for to include escrow, receivables and investments such as art and wine.

Another challenge is proving beneficial ownership, as a certain asset may be known to be owned by one particular person, but held by a series of offshore front companies. One tool to combat this is the proposed public registry of beneficial ownership of offshore property, although it only lists owners with more than a 25% stake.

In tracking sanctions evasion, many approaches are the same: be alert to fictitious entities, trusts, proxies, sudden changes in shareholder structure, and zombie companies that have been inactive and then show a strange activity.

Illicit Assets Case Study

(this case study has been anonymized to protect the privacy of our clients)

At the beginning of March 2014, a large Russian public company in the financial services sector (Company A) had two groups of shareholders: a Russian company (Company B) which owned 51% of Company A, and another group of shareholders who owned together the rest. 49%. On March 20, 2014, following Russia’s annexation of Crimea, Company B was sanctioned by the United States, making Company A subject to sanctions as well. Company A’s shareholding structure suddenly changed, with 2.5% of the shares being sold to a subsidiary of Company A, thereby bringing ownership of Company B below the 50% threshold.

Now the company effectively owned a part of itself. It was not a share buyback as such, due to the indirect ownership of the subsidiary. However, what is interesting is that this transaction was made public on March 31, when Russian state-owned companies are required to file quarterly returns, but it dates back to March 14, i.e. before penalties. This was discovered when a Western financial institution blocked a payment to Company A due to sanctions. This is an example of how sanctions monitoring actually works to identify sanctions evasions.

virtual currency

Historically, virtual currencies may not have been widely used to circumvent sanctions (with the possible exception of North Korea and perhaps Iran). The reason is that to move large sums of money through virtual currencies, the underlying blockchain will reveal these movements. To take advantage of this, the United States is setting up crypto watchdog programs to track assets on associated blockchains.

Companies providing services to Virtual Asset Service Providers (VASPs) should be aware that they may provide operational accounts for VASPs who may have established front companies. Many front companies have been created specifically to hide both the origin and destination of assets. Front companies are one of the biggest tools that sanctioned entities and individuals use to move funds around the international market. Additionally, zombie entities (entities that have been dormant for years and suddenly activated) can also be used to move assets. Every financial institution has the ability to detect this type of activity through fairly typical customer due diligence and transaction monitoring systems and controls. When they detect such activity, financial institutions should contact their customers to understand the purpose, determine whether the customer’s organizational structure has changed, and investigate whether there is a change in the customer’s asset flows or whether the client’s business has increased transactional activity. quickly. Finally, organizations should incorporate the Panama Papers, Paradise Papers, and Russian Laundromat databases into their due diligence research.

Key Risk Management Implications and Best Practices: Sanctions
  • Jurisdictions, financial institutions and businesses should accelerate the development, implementation and integration of sanctions regimes into broader anti-illicit finance frameworks.
  • Civil society/NPOs, financial institutions, and adjudicative authorities should collaborate to clarify, expand, and operationalize information-sharing capabilities to identify and prosecute sanctioned parties and their supporting networks and assets.
  • Financial institutions should work with strategically important and high-risk customers and sectors to develop shared sanctions risk management expertise and controls and to create an expanded sanctions compliance network.
  • Jurisdictions and companies should accelerate their efforts to understand and minimize exposure to sanctioned countries and parties as countermeasures continue to mount against those issuing, supporting or enforcing these sanctions.
Key Risk Management Implications and Best Practices: Asset Tracing
  • Understand the ownership structure of assets and monitor changes, such as the appointment of new shareholders or the issuance of new shares (dilution of share capital).
  • Improve understanding of the use of proxies, proxies, and shell companies.
  • Focus on relationships with third-party facilitators: incorporation agents, trustees, legal and financial advisors.
Key Risk Management Implications and Best Practices: Cryptocurrency
  • Review best practices for Virtual Asset Service Providers (VASPs).
  • Review current KYC practices with a focus on Russia, Ukraine, and countries that have generally facilitated Russian transactions (Cyprus, Serbia, etc.).
  • Identify other types of high-risk digital currency customers.
Technology as a driver

While the technology has enabled more complicated transactions that happen much faster, it has also introduced the ability to track and trace the blockchain. People may hide the name on an account transaction, but the transaction doesn’t lie, and the patterns of behavior revealed by those transactions become very important to understand. President Biden’s executive order directing agencies to work together to provide a well-maintained regulatory framework for oversight of digital assets is a signal that as cryptocurrency adoption becomes more mainstream, we need to oversee it and make it more transparent.

Michael J. Birnbaum