Sanctions Evasion: The Lessons of Ukraine
By Matthew Redhead
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Part 1: Russian Evasion
More than a year on since the start of the invasion of Ukraine, western countries have continued to increase pressure on President Putin with new sanctions. Speaking on 13 April, Mairead McGuiness, the EU’s commissioner for financial stability, confirmed another package of EU measures, focused on Russian evasion efforts, with further tranches likely to follow. The US, UK and other western countries have also continued to tighten the screw on Russia with new designations. (See box for an overview of key western sanctions).
Much of the debate about sanctions has focused on why western measures have so far failed to convince Russia to desist from what has become a costly war of attrition. And while there are multiple reasons for this, not least among them has been Russia’s flexibility in working around western actions.
While this is a policy challenge for western governments, it is an immediate headache too for western financial institutions, which are required to ensure that they do not breach restrictions. Unfortunately, the tools commonly used to achieve this – screening and transaction monitoring – have serious limitations.
In this two-part article, we explore the issues arising from this key compliance problem; in this first part, we explore the ways in which Russia has sought to evade restrictive measures, while in the second, we move on to look at the vulnerabilities of the ‘screening-as-standard’ approach, and how this might be improved with a more proactive, intelligence-led mindset.
|Sanctions Against Russia|
The US, EU, UK, Canada, Australia and others have launched a range of coordinated sanctions against Russia, with four primary targets:
– Elites: Russian politicians, military leaders and economic elites.
– Commodities: Major Russian commodity exports such as oil and gas.
– Technology: Russian imports of technology with military applications.
– Finance: Russian state financial assets held overseas, and access to the SWIFT messaging system, used to facilitate international trade and finance, for state-linked banks.
For the Russian elite, a primary aim has been protecting personal assets held overseas. In the case of some static physical assets such as real estate, this has been difficult to achieve, but with more mobile items, such as planes and yachts, there has been the option to move them to a non-sanctioning jurisdiction as swiftly as possible.
Handling business interests has brought further complexities, as described in a recent analysis by the US Treasury’s Financial Crimes Enforcement Network (FinCEN). The simplest method has been to transfer assets to family, friends or associates, with some oligarchs signing over ownership rights in businesses prior to, or just after the invasion, to ensure that their stake falls below the 50%+ threshold used by the US and EU to indicate ownership or control. Others have sought to divest from overseas investments, but the process – which can often be lengthy – has risked the loss of funds, as Roman Abramovich found with the sale of Chelsea football club.
Where interests have been successfully liquidated, the oligarchs have then exploited tried-and-tested laundering and evasion techniques, moving their funds through complex international payment chains using accounts linked to shell companies, often located in secrecy jurisdictions. The illicit funds have then been channelled into opaque financial vehicles such as trusts, or invested again into new assets, including portable items such as art, precious metals and jewels, or property in non-sanctioning jurisdictions such as UAE and Turkey, rather than the previously preferred safe havens such as the UK. In arranging these schemes, ‘enablers’ – lawyers, accountants and consultants – have played a vital role, such as the British businessman charged by US authorities with helping Oleg Deripaska expatriate his artwork, or the Greek Cypriot lawyers recently designated by both the US and UK.
Russia has also sought to keep generating overseas income from sales of its major commodities, especially hydrocarbon products such as oil and gas, for which it has found willing customers across Asia – particular China and India. While there is some evidence of Russia using evasion techniques familiar to watchers of Iran and North Korea – onloading and offloading of goods at sea, renaming, repainting and reflagging ships, and turning off ship transponders – the nuances in western measures and the unwillingness of many major countries to follow the western lead on sanctions have provided sufficient scope for Russia to export commodities in a plausibly ‘legitimate’ way.
Oil is a major case in point. The oil price cap allows western businesses to provide services such as logistics and insurance to support Russian oil trading with non-sanctioning jurisdictions, as long as oil is priced below $60 a barrel. This has meant that some western companies – Greek shipping firms, for example – have been able to continue operating within existing commodity market structures.
Moreover, as The Economist has recently shown, the cap has also provided space for a new parallel market in Russian oil in the ‘grey zone’ of neutral and friendly states. According to its research, the trade has switched from traders, brokers and insurers typically based in Geneva, to new ‘pop up’ trading and shipping firms operating in UAE and Hong Kong, which have appeared since the start of the war. Run by third party nationals from former Soviet republics such as Azerbaijan, these firms have used credit and indemnity insurance from undesignated Russian financial institutions to buy and then sell on Russian oil to Asian firms – potentially at prices above the price cap. From there, the oil has been refined and used for domestic consumption, or re-packaged and re-exported. Similar patterns have been in evidence for other Russian commodities, with China now re-exporting record amounts of Russian natural gas, Liquified Natural Gas (LNG) and coal, potentially to countries with energy sanctions against Russia.
Buying Restricted Goods
Russia also appears to have used similar methods to buy restricted items via neutral jurisdictions. Research by the EU body Eurostat has shown that while Russian purchases of goods such as technology, machinery and vehicles from the bloc have naturally slumped, exports of the same to Russian neighbours such as Turkey, Armenia and the Central Asian republics have risen dramatically. At the same time, these countries’ own exports to Russia have grown, suggesting a surge in the re-exporting of Russian goods.
The Russian Elites, Proxies and Oligarchs (REPO) Taskforce, the multilateral investigatory group of the sanctioning jurisdictions, have suggested that the methods used to facilitate this trade have been relatively simple. Again using ‘grey zone’ jurisdictions in Asia and the Middle East, but also Latin America and Southern Africa, third country nationals have set up freight-forwarding businesses or import/export companies to order restricted goods, using documentation which erroneously states their location to be the final destination. However, once the goods are received, they are then sent on to Russia, either directly across borders, or via major trans-shipment hubs such as Hong Kong and Singapore, potentially repackaged as non-restricted goods.
Crypto’s Limited Role
One further channel of sanctions evasion many in the media expected to see at the outset of the war was via cryptocurrencies, and law enforcement agencies such as the UK’s National Crime Agency (NCA) have highlighted how some oligarchs and proxies have using crypto exchanges and mixer services in high-risk jurisdictions to move funds. But these activities seem relatively limited, and cryptocurrencies are unlikely to have played a significant role in facilitating sanctioned commerce; most cryptocurrency are traceable via the underlying blockchain ledger, and even the most successful of cryptocurrencies lack the liquidity and price stability to trade in commodities such as oil and gas at scale. As the US Treasury official Todd Conklin commented in March 2022, “you can’t flip a switch overnight and run a G-20 economy on cryptocurrency.”
Part 1 – Summary
Overall, therefore, Russia has not taken a radical or deeply clandestine approach to sanctions evasion – at least so far. Instead, it has sought ‘business as usual’ as much as possible, working around the rules created by international standards, and using the many loopholes and gaps provided by the western measures. In the absence of the imposition of sanctions by so many non-western countries, this has provided Russia and its elite with the opportunity to move many assets and commercial activities to different locations, helped by families, friends and associates, as well as less scrupulous members of the professional and business community.
Whether this will be a sustainable approach – especially if the US applies more secondary sanctions against third country individuals and businesses facilitating Russian activity – is open to question, but for the time being at least, Russia still enjoys greater room for manoeuvre in evading western measures than a North Korea or Iran. As a result, financial institutions will need to pay close and sustained attention to ensure that they are not facilitating activity evasion – a topic we will discuss in more detail in part 2 of this article.