Whenever something is declared illegal, people and entities will try to find ways to work around the prohibition. A recent trend has been businesses and foreign nations attempting to evade financial sanctions imposed by the Office of Foreign Asset Control (OFAC). The U.S. government issues these sanctions against nations and entities hostile to American interests abroad.

Sanctions typically prohibit American companies from engaging in business with banned countries, companies, or entities with ownership of banned countries. Criminal organizations may deliberately attempt to evade sanctions, but unintentional noncompliance has also become an issue. Financial institutions and other businesses are at risk if they fail to understand how sanctions operate and what evasion techniques are being used to circumvent them.

Sanctions Evasion 101: How They Do It

Whether they are small businesses or major government players, sanctions evaders use some standard techniques to avoid detection by the OFAC and other monitors.

Shell Companies

Shell companies are used for legitimate purposes every day. Their main function is to transfer funds from one country to another without interference from cross-jurisdictional regulations. As long as the companies act according to national and international law, using shell companies is not illegal.

Shell companies are used to launder money and evade sanctions by concealing the owners and beneficiaries of the funds. These entities count on other businesses skimping on their due diligence to help hide their origins and end points when transferring funds.

Trade Finance

Trade finance is a financial term that refers to the financial documents and strategies used to streamline international trade. As with shell companies, trade finance can be carried out legitimately. However, when evaders utilize trade finance, they intend to create a false paper trail to hide money transfers.

Trade finance evasion techniques use false shipping documents, transit logs, altered or amended documents, and shipments of sanctioned products or deliveries to blocked ports. A trade finance vehicle intends to confuse financial institutions and make it difficult to carry out due diligence because of the mountain of fraudulent documentation.

Cryptocurrency

When crypto giant FTX went bankrupt in November of 2022, and its CEO and founder Sam Bankman-Fried was arrested for fraud, attention was focused on cryptocurrency’s impact on the financial world. FTX had been in the process of being acquired by Chinese cryptocurrency exchange Binance, itself already under investigation for selling information to Russia, evading monetary sanctions with Iran, and other financial irregularities.

Cryptocurrency transactions work by a series of linked transactions known as “blockchains.” Individuals buy digital assets, which are “verified” by the purchasing and sending computers, and then appended onto a block of transactions which are joined together for encryption (hence “blockchain”). Cryptocurrency has no physical medium of exchange. It does not exist in the real world and has only the value that its buyers and sellers agree that it has.

Because cryptocurrency is decentralized and lacks any international government regulation or oversight, it is easy for nonstate actors to use it for trading with sanctioned nations and entities. Binance processed over USD 8 billion for Iranian firms in 2022 despite U.S. and global sanctions intended to punish Iran for nuclear and human rights violations. Since the war with Ukraine has escalated, Russian-based interests have increased their use of cryptocurrency to fund the war effort.

Red Flags and Ways to Avoid Sanctions Evasions

Legitimate businesses may run afoul of OFAC sanctions by inadvertently doing business with entities who are trying to evade the sanctions. Businesses can protect themselves by looking for warning signs.

• Use of shell companies located in or near sanctioned countries.
• Use of shell companies for international wire transfers and cryptocurrency exchanges.
• Use of personal email accounts rather than business accounts.
• Sudden changes to transfer instructions or shipping manifests.
• Large blockchain transfers or insistence on new cryptocurrency rather than established crypto.

The best way to protect your business is by carrying out due diligence at all transaction levels, even if you believe you know the company and have done business with them before.

Know-your-client (KYC) analytics is a standard financial policy used to identify a client’s identity and maintain the client’s background and financial profile. An expanded KYC system should be put into place with clients and partners to defend against possible interaction with banned or blocked entities.

Anti-money laundering (AML) KYC protocols have been in place for a long time, assisting financial industries and governments in spotting and stopping organized crime from using banks and other institutions to clean illegal funds. Similar protocols can be used to ensure businesses stay clear of sanctions and penalties.

• Raise awareness of sanctions evasion within the organization. All customer-facing employees should be aware of the potential for coming in contact with entities attempting to evade OFAC sanctions and have reporting guidelines in effect.
• Know your regular clients, customers, and suppliers. Businesses should use the same KYC policies for identifying their customers and suppliers and know who the end-users of their products and services are. When there are personnel changes, you should update your client files.
• Monitor all transactions. Be alert for deviations, late alterations, or changes in documentation, especially if your business creates handwritten paperwork. Last-minute changes should provoke a thorough scrutiny of the entire document.
• Keep an eye on overseas offices for signs of collusion or infiltration. Subsidiaries and franchises are at risk for interaction with third-party agents of sanctioned entities. Regular visits, audits, or reviews of outside offices should be conducted often, especially if there are personnel changes.

The Financial Crimes Enforcement Network (FinCEN) encourages financial institutions, businesses, and other interested parties to share information about known or suspected sanctions evaders via the “safe harbor” provision of the PATRIOT Act. If companies believe they have information relevant to sanctions evasion, it should be brought to FinCEN’s attention for the security of the company and the United States.

As always, due diligence, regular audits, and strict compliance with existing regulations are the principal ways to ensure a company remains safe from violating OFAC sanctions. A little additional care can protect you against threats from third-party violators attempting to evade sanctions by using you as a shield.