As seasoned investigators, we are routinely engaged by our clients to carry out due diligence investigations to minimize the risk of exposure to sanctioned parties. These parties include individuals/companies appearing on government blacklists such as the US Office of Foreign Assets Control (OFAC) list of Specially Designated Nationals (SDNs). For example, any companies that are 50%-owned, either directly or indirectly, by an SDN, are considered blocked by OFAC (and in the EU, the threshold is even lower, at 25%). As a result, merely checking international sanctions lists may not prove sufficient when deciding whether to proceed in conducting business with new customers. And even though it may be tempting not to carry out a due diligence investigation into shareholders with stakes below these thresholds, should it later come to light that a minority shareholder is a sanctioned, high-profile politician, the media and the court of public opinion will not be swayed by technicalities.
With this in mind, it is important to understand that circumvention goes hand in hand with sanctions regimes, and typically entails a combination of “tried and tested” techniques alongside evolving strategies. While the current round of multi-lateral sanctions being imposed against Russian targets is unprecedented in terms of speed and breadth, the sanctions circumvention “playbook” does not need to be rewritten. Russia has had a head-start, having had to respond to the more limited sanctions introduced following the 2014 annexation of Crimea. What is more, Russian companies can also look to their peers abroad — for example, Iranian energy companies — for historical examples of how to evade international sanctions.
Some typical methods to evade sanctions include:
A recent example of these practices appeared in 2019 when the US Treasury reported that Stanley Black & Decker had reached a USD 1.8 million civil settlement regarding alleged violations of Iranian sanctions regulations committed by the board directors and senior management figures of a Chinese-based subsidiary it had acquired. The Chinese subsidiary engaged in “non-routine business practices” in order to conceal and facilitate prohibited exports to Iran. The Chinese subsidiary used six trading companies (in the UAE and China) as conduits for these sales. Employees of the Chinese subsidiary created fictitious bills of lading, with inaccurate data regarding the ports used for transporting goods, and instructed their customers not to write “Iran” in the bills of lading. At the time, OFAC noted that “the enforcement action highlights the importance for US companies to conduct sanctions-related due diligence both prior and subsequent to mergers and acquisitions, and to take appropriate steps to audit, monitor, and verify newly acquired subsidiaries and affiliates for OFAC compliance.”
Against this backdrop, the first line of defense is to identify the immediate red flags. For example, are shell companies being used to obfuscate the true ownership of the company? Assuming the ownership can be identified, have the company and its key officers/shareholders ever been historically linked to any sanctioned country? Was the company in question only formed recently? If the company is established, has it recently changed ownership? If it has changed ownership, are the new owners family members/loyal associates who have served as nominees for individuals associated with sanctioned jurisdictions? Do payment terms appear unusual?
Of course, even identifying these red flags can be difficult without the proper experience and resources (including language capabilities and the ability to work in all relevant jurisdictions). Checking compliance databases is only a first step in a due diligence investigation involving sanctions parties.
Nardello & Co. covers sanctions regimes across the globe and have in-house speakers of the gateway “sanctions regime languages,” namely, Russian, Arabic, Persian, Spanish, Mandarin, and Korean.