Russia Adjusting

How are sanctioned Russians evading sanctions?

Sanctions against Russia for its invasion of Ukraine that is entering its third month are at a fever pitch. OFAC yesterday added 124 entities, individuals, and vessels to the SDN list. On a Sunday, no less.

Kremlin-controlled media companies, several executives of Sberbank and board members of Gazprombank, and Moscow Industrial Bank and its subsidiaries have all been sanctioned, according to the Treasury press release. A state-supported defense company, Promtekhnologiya, which produces rifles that are used in Russian military operations, has also been designated. Media companies now included on the SDN list are Channel One, Russia-1, and NTV Broadcasting Company.

In addition, the United States is also taking action to cut off Russia’s access to certain key services from US companies, which Russian Federation companies and Russian elites use to not just hide and build wealth, but also evade sanctions. A determination pursuant to EO 14071 prohibits the provision of accounting, trust and corporate formation, and management consulting services to any person located in the Russian Federation. This prohibition will take effect June 7, 2022.

Ever since my days at Treasury, I’ve known that Russians are very good at evading sanctions and adjusting to the ever-changing sanctions environment. We used to call it “playing whack-a-mole.” From using numerous name variations to changing names altogether, like GMCS Management did after it was sanctioned in February, to altering addresses and submitting fake tax ID numbers, to divesting (ostensibly), malign Russian actors have been adept at accessing the global financial system after being ejected from it.

Recent reporting also indicates that Russian oligarchs turned to tried and true methods of transferring assets - hawalas - to move their assets out of sight. Hawalas are difficult, because they’re trust-based. There’s no documentation to trace, and no money actually changes hands. Hawalas exist outside traditional banking systems, making transfers difficult to trace.

These informal transfer systems are also difficult for users who want to move vast amounts of money. These transfers are generally small—we’re talking tens of thousands of dollars, as opposed to millions or billions. Smurfing that much money can become difficult, but for an oligarch desperate to keep his or her assets out of law enforcement reach, it may be a smart way to go.

US firms and financial institutions must adjust and be proactive. It’s not just about monitoring the latest designations from the United States, EU, UK, and others. It’s about tracking regulatory changes, possible legislative developments, and assessing what could be around the corner.

During a recent West Coast AML Forum panel in which I participated, I advised the audience of compliance professionals that they must not only monitor upcoming designations, ensuring that they are not transacting with sanctioned entities, but also watch developments, such as Russia’s invasion of Ukraine. The discovery of additional war crimes, atrocities and mass murders committed by Russian forces in Ukraine will almost certainly result in more stringent sanctions, and the changes will be quick. As we saw with Russia’s largest bank, Sberbank, it was first subject to correspondent account and payable-through account (CAPTA) restrictions, so it was not fully blocked, but US financial institutions were barred from maintaining or opening accounts, as well as processing transactions for the bank and its non-US financial institution subsidiaries. A few days later, after the atrocities in Bucha were discovered, Sberbank and Russia’s largest private bank, Alfa Bank, were included on the SDN list. So companies that had existing business with Sberbank and Alfa in the non-financial sphere and had few limitations under CAPTA restrictions had to quickly turn around and shift gears to completely block the two financial institutions and shut down all transactions.

This can become challenging, and numerous companies are choosing to simply withdraw and shut down their business in Russia.

But every company’s action will depend on its risk appetite. Companies watch developments in the news and make assessments about regulators’ priorities. They create internal assessments about what designations could be coming next and what kind, whether full blocks or financing restrictions. They decide how they will work to reduce their risk.

And then, there’s the tools. Just list-based screening is not enough. Companies using AI tools need to make sure they either tweak algorithms to ensure they are capturing possible name variations, or engage with regional and linguistic experts to help them do so. For example, you spell Crimea one way in Russian – Крым. In Latin letters, it can be Krim, Crim, Crimea, Krimea, Krym, Crym, etc.

And finally… crypto. Can cryptocurrencies help Russia evade sanctions? My sense is that they cannot prop up the entire Russian economy. It’s too big. But can Russian individuals and entities convert some of their assets to crypto to evade sanctions? I think so. Can Putin and his cronies? Probably. Can certain companies or subsidiaries of sanctioned entities? Sure.