Financial sanctions are restrictive measures imposed by governments and international bodies to achieve foreign policy and security objectives, preventing individuals, entities, or countries from accessing financial services and resources. Restrictive measures can take the form of asset freezes, trade restrictions, travel bans, and so on. Although significant attention has recently been given to sanctions targeting Russia after its invasion of Ukraine, multiple sanctions regimes exist, which target a wide range of threats, such as terrorist groups.

When sanctioned individuals or entities deliberately attempt to bypass restrictive measures preventing them from accessing financial markets, or engaging in trade, this is known as sanctions evasion. It is crucial for businesses to be aware of methods of sanctions evasion, in order to detect and prevent attempts to circumvent restrictive measures. Failure to address such risks can lead to severe legal penalties, significant financial losses, and reputational damage.

The following are examples of the methods which are used to circumvent restrictive measures, in the financial and trade sectors:

  • Using shell companies or third-party intermediaries in transactions

These tactics aim to enable sanctioned individuals/entities to conceal their identities and their involvement in transactions. This often involves creating overly complex ownership structures, such as layers of holding and subsidiary companies, to obscure the flow of funds or assets, making it difficult for regulators to trace the origin or destination of such funds or assets. Such tactics often involve jurisdictions with weak AML laws, and financial transparency practices, or even offshore jurisdictions, which offer more anonymity, and less regulatory oversight.

  • Layering transactions across multiple jurisdictions

This tactic is frequently used to disguise the origin, movement, and intended recipients of funds. This is typically achieved by routing payments through a series of intermediary accounts, banks, or entities located in countries with varying regulatory standards. Each jurisdiction introduces an additional layer of complexity, exploiting inconsistencies in AML and sanctions laws across jurisdictions. For example, funds may pass through jurisdictions with limited financial transparency or minimal AML regulations, making it harder for regulators to connect the transactions to sanctioned entities.

  • Unusual payment patterns for goods on the Common High Priority List

This may involve payments from unexpected or unrelated third parties, inconsistencies between payment amounts and trade documents, or the use of intermediaries in high-risk jurisdictions. Another example is when a customer makes multiple smaller value payments from the same bank account to several similar suppliers of such items, especially if these payments involve significant overpayment compared to known market prices. These patterns may indicate attempts to evade sanctions measures.

  • Using crypto assets to transfer funds linked to sanctioned entities

This involves tactics like using privacy coins to hide transaction details or moving money through multiple wallets without clear justification. Another common approach is using decentralized mixers to obscure the transaction trail, making it harder for authorities to track the origin and destination of funds. Other red flags include unusually large transactions from newly created accounts, as well as transfers routed through jurisdictions with weak crypto regulations. The inherent anonymity of virtual assets only amplifies these risks, making it more difficult to trace the actors involved.

The above methods illustrate how sanctioned parties use various tactics to bypass restrictive measures. It is important for businesses to apply robust AML controls, to ensure that they do not inadvertently assist in sanctions evasion. A comprehensive due diligence process is essential to ensure that businesses are fully informed about their clients’ activities, enabling them to identify any suspicious or inconsistent behavior, such as unusual business activities or the use of unrelated high-risk jurisdictions, without justification. By doing so, they can quickly detect any potential attempts to bypass sanctions and take appropriate action, reducing the risk of non-compliance and financial crime.

In addition, businesses must stay updated on changing sanctions regulations. Helpful guidance is also frequently published by governments, and regulators, which provide further insights, and practical examples of common sanctions evasion tactics. For example, OFSI’s guidance, published on 07.01.2025, titled ‘Countering Russian sanctions evasion – guidance for exporters’, assists UK exporters in understanding how Russian sanctions circumvention takes place, to help them reduce the risk of unintentionally enabling sanctions evasion. In September 2024, the G7 released a similar industry guidance, containing red flag indicators, and best practices to remain compliant. It is crucial for businesses to regularly review such guidance and integrate it into their compliance procedures to ensure that they remain ahead of emerging evasion tactics.

MK Compliance Limited can provide daily/weekly/monthly updates on sanctions, and AML regulatory developments. These updates ensure that you are kept informed about the latest regulatory changes, therefore ensuring comprehensive compliance.

In addition, we provide sanctions-related consulting services, including transaction reviews, screenings and background checks on your clients and related individuals/entities/counterparties, to ensure your business operations remain fully compliant with all applicable sanctions, mitigating the risk of breaches.

For more information, you may contact our team at info@compliancemk.com or me personally at stella.hadjiloucas@compliancemk.com.