Screening potential third parties to avoid sanctions violations has always been a challenge for third-party risk managers. Now, breaking news of sanctions evasion on an immense and unprecedented scale has cast a spotlight on the need for escalated due diligence in a climate of expanding uncertainty.
A recent investigation helmed by the Organized Crime and Corruption Reporting Project (OCCRP) in collaboration with a group of more than 60 journalists has uncovered the mind-bogglingly complex and sophisticated efforts of Russian oligarchs and associates to evade sanctions and cling onto companies and assets. The report, released June 20, presents the findings uncovered from the acquisition of 50,000 leaked documents and emails spanning the period between 2013 and 2020. Dubbed “The Rotenberg Files”, these leaks concern Boris and Arkady Rotenberg, billionaires with childhood ties to Russian President Vladimir Putin. The two are revealed to have used myriad of tactics to evade the mounting sanctions imposed against some of Russia’s richest individuals since 2014.
The complexity of the evasion is hard to conceive. The strategy employed everything from asset transfers to corporate restructuring and special investment vehicles, allowing the brothers to retain properties and companies in offshore tax havens. Their evasion efforts relied on an extremely secretive network of both Russian and Western businessmen, employees and contracted specialists to keep assets available and away from the prying eyes of regulators.
Simplicity within a complex strategy
While the Rotenbergs undoubtedly relied on their amassed wealth and the connections it has afforded, they also used a simpler tactic that can be used by just about any company to obscure wealth and associations. This strategy is to switch the ultimate beneficial owners (UBOs) of companies to break any visible association with the sanctioned parties. This plan drew the attention of the British Virgin Islands (BVI), which until 2016 was previously known to be lax in investigating companies.
However, in 2016 BVI’s regulators began asking for the identities of UBOs for more than 18 of the Rotenbergs’ companies–pushing the brothers to find proxies that could sign deeds of trust. This would position the proxies as the companies’ UBOs, keeping the Rotenbergs out of the view of regulators while still allowing them to control the companies’ assets.
Possibly the most alarming aspect of this strategy is that it’s something nearly any individual or company can do to evade sanctions, and many companies don’t have due diligence and monitoring tools powerful enough to catch such actions during third party screenings.
Consequences of working with sanctioned entities
The fallout of being caught dealing with sanctioned individuals and companies can be dire, to say the least. Anti-money laundering (AML) compliance for businesses in the European Economic Area (EEA) requires organizations to review sanctions watchlists and ensure they don’t do business with sanctioned entities under threat of financial penalties and even prison sentences.
The EU, U.K. and U.S. look to the Office of Foreign Assets Control’s (OFAC) Specially Designated Nationals and Blocked Persons List (SDN), and penalties are issued for doing business with a company that is half-owned or more by a sanctioned individual. OFAC sanctions breaches carry consequences of up to several million dollars and prison sentences all the way up to 30 years.
Additionally, if a company violates AML or OFAC requirements, that violation will come up under due diligence screenings, making it more difficult to secure third-party partnerships. With no clear resolution to the Russia-Ukraine conflict, sanctions continue to rise. After 2022’s invasion, the EU issued an 11th round of new sanctions, applicable to 241 companies and 1,571 individuals–making sanctions risk an even more unwieldy threat to handle.
Leveraging technology for efficient risk mitigation
The release of the Rotenberg Files is a sobering reminder of how far some will go to fly under the radar in terms of doing business while sanctioned. The reveal may be a sign that there is more of this activity going on than has yet been uncovered, and the report is sure to ignite further investigation from regulators. It’s more crucial than ever to take preemptive action on expanding screening and monitoring of third-party networks.
To that end, Ethixbase360 offers a comprehensive third-party intelligence tool called Premium Corporate Data. This tool covers more than 500 million entities, allowing you to verify key information such as addresses and executives. Crucially, Premium Corporate Data monitors your network participants for activity that may raise red flags in regards to sanctions evasion–such as changes in company details or ultimate beneficial ownership. As an extra layer of defense, you have the ability to select associated individuals for additional ongoing monitoring.
As the conflict continues and further sanctions may descend on Russian entities, remaining open to business opportunities while complying with sanctions law will become a more delicate balancing act. Contact us today to learn more about how the Ethixbase360 platform and Premium Corporate Data will make your business more resilient against sanctions risk and other third-party threats.