Sanctions obligations and sanctions evasion techniques

Sanctions are used as an enforcement tool to maintain and restore international peace and security: these sanctions are made by the United Nations Security Council (UNSC) and must be implemented by all UN members.

Sanctions are also used as a foreign policy tool by individual states, or groups of countries working together, when all other diplomatic methods have failed. These sanctions are sometimes referred to as autonomous sanctions and are made outside the UNSC framework.

In addition to UNSC sanctions, the United Kingdom (UK) also implements its own autonomous sanctions. Jersey implements both UNSC sanctions and autonomous UK sanctions.

Breaches of financial sanctions (including the facilitation of a breach) are criminal offences, punishable upon conviction by up to 7 years in prison. There are both civil and criminal enforcement options to remedy breaches of financial sanctions. Law enforcement agencies may consider prosecution for breaches of financial sanctions.

The effectiveness of Jersey’s sanctions regime may be eroded by sanctions evasion efforts. Sanctions evasion techniques may be applied by bad actors seeking to circumvent sanctions obligations. Sanctions evasion may also be a consequence of lack of training, information and/or awareness.

How to mitigate the risks of sanctions evasion attempts and involvement

Examples include:

1. Take a top-down approach by building a culture of compliance from the Board to managers and employees.
2. Maintain up-to-date policies and procedures that evolve with the entire sanctions environment, from UN Security Council sanctions to those implemented by the UK.
3. Clearly communicate these policies and procedures to employees and any third parties operating on behalf of your organisation.
4. Actively train employees and third-party agents to ensure they understand sanctions compliance obligations, as well as how to recognise and address sanctions compliance. For example by making sure customers (or potential customers) are not appearing on the sanctions designations lists (designated persons) applicable in Jersey, or elsewhere (where relevant, e.g. where trade occurs internationally).
5. Implement a risk-based sanction screening process tailored to the specific nature, size, and risk of your business operations.
6. Align sanction screening to third-party due diligence procedures including consistent sanction, watch list and Politically Exposed Persons (PEPs) checks during customer due diligence and through ongoing risk monitoring.
7. Ensure procedures include escalation contacts, both for sanction enquiries and violation reporting.
8. Audit and regularly review sanction screening policies, procedures, and training to ensure your processes keep pace with change.
9. Reinforce policies and procedures with independent audits and testing.

Case studies: Application of sanctions evasion techniques and other non-transparent tactics

There are numerous ways whereby criminals seek to circumvent sanctions. Common examples include:

Direct and indirect ownership and control

To evade sanctions, sanctioned parties (designated persons) might:

• Seek to create complex ownership structures by adding multiple layers of ownership to disguise the actual beneficial owner and associates.
• Use proxies so that a person appears on the legal documentation of a company but, in reality, the individual is acting for or on behalf of another – the true controller. This could benefit a designated person through indirect means since the person referenced in the legal documentation will not be a designated person, but the true owner or controller will be. This is why sanctions screening must extend beyond simply screening against designated lists.

Front and shell companies:

Both front and shell companies are used to disguise the origin or destination of a transaction, making it appear legitimate.

• A front company has the characteristics of a legitimate business but is used to conceal illicit activity. For example, an IT consultant may receive legitimate commissions for explaining how block chain technology works. If it consults the Democratic People’s Republic of Korea (DPRK) on how to avoid sanctions legislation by using block chain technology however, this will breach the sanctions legislation.
• A shell company is an incorporated company which does not operate, carry out activities or have any employees, for a period. It can come across as being an ordinary low risk business. Then, often for a short period, its activities intensify. It may, for example, trade in dual use products with sanctioned parties or otherwise undertake illicit business.

 

Cyber-crime for example:

• Illegitimately obtaining access to knowhow (such as on how to enrich uranium)
• Orchestrating ransomware attacks to obtain money or cyber currency from victims. Illicitly obtained funds or assets have, for example, been used for proliferation financing purposes. It is widely believed that DPRK hackers have been behind several cyberattacks.

Avoiding use of the formal financial system:

Sanctions evasion may be achieved in various ways, for example:

• Bartering/swaps: For example, terrorist organisations are known to have swapped valuable looted antiquities intended for sale on the illicit market, in return for weapons.
• Anonymous/non-transparent payment methods: Criminals may use money remittance services that are less transparent and less well-regulated in certain parts of the world, such as hawala. It allows them to move money at speed across numerous jurisdictions, whilst remaining anonymous. Criminals and other bad actors may also prefer the use of cash since it is harder to trace.
• Currency threshold management: Moving currency across borders, carefully avoiding exceeding customs’ declaration thresholds.

Obscuring the true recipient of funds/products (goods and technologies)/services:

• Omitting, deleting or altering payment information to avoid association with a designated person.
• Structuring transactions or corporate vehicles to conceal the involvement of a designated person, for example a beneficial owner or controller, and/or their associates, or a customer associate.
• Taking advantage of online payment facilities, raising funds for terrorists or other criminals via pop-up crowdfunding platforms or via social media sites.
• Sympathisers sending donations to terrorists in the form of prepaid cards which hold financial value. For example, a telephone card that may be charged and used globally. The card can be sold at an undervalue, releasing funds for the designated person, or it may be used directly by them.
• Trade near conflict areas/disaster zones/fragile states with porous borders. This may offer the opportunity to smuggle cash, dual use items or other assets of value to designated persons.
• Criminals may take advantage of proxies/nominees, placing monies into the names of persons who are not designated persons. Once the funds have been received by the proxy, they pass the cash amount on, keeping a small transaction fee for themselves.  Alternatively, bad actors may use false identification documents pretending to be someone else.

False invoicing and declarations:

• A business may apply under- or over-invoicing tactics to move funds in and out of a country at an inflated or deflated price, as opposed to at the true market value of the product. An invoice at:
  • Undervalue enables the importer to sell the goods in the recipient country at the market value, hence raising increased capital. The “hidden” funds making up the difference may be siphoned off/diverted for sanctioned activities such as investments into nuclear programs or to purchase weapons
  • Overvalue benefits the exporter in a similar way, with the “hidden” funds being siphoned off/diverted in the country of origin.
• False declarations of what is being imported or exported, their value, the timing of when goods were initially obtained, and the destination of goods, may be applied. The traded item may be described as non-restricted goods, or otherwise falling outside scope for the particular sanctions regime. For example, there are sanctions restrictions on importing or exporting cultural property from Syria and Iraq. To circumvent these sanctions, importers and exporters may fraudulently describe an ancient coin excavated there as being a coin that has been in circulation since before the time when restrictions became effective. They may also claim the item does not emanate from Syria or Iraq, but from elsewhere in the Near East.
• False invoicing may not just be used for goods, but also for the provision of services.

Ship-to ship transfers:

• This is when two or more ships decide to rendez-vous mid-ocean in order to secretly move prohibited cargo between themselves (e.g. weapons or oil).
• To avoid being tracked on global tracking systems they turn off their automatic identification systems. They may also change the flags they sail under, or the name of their vessels to hide their identities.
• Once the prohibited cargo has been exchanged it is harder to trace its origin, including whether it comes from a sanctioned territory. This means that sanctioned items may more easily “slip through the net”.

Red flags which may indicate sanctions evasion exposure:

• Recent changes to your customer’s trading partners or areas in which they operate. This may indicate that they previously operated with designated persons or in sanctioned areas, or that they may do so now.
• Sudden and unexplained changes in transaction volumes, frequency, or amounts, especially involving high-risk jurisdictions or counterparties.
• Transactions that appear unnecessary or unrelated to the customer's business activities.
• Rapid movement of funds between jurisdictions to obscure the origin or destination of funds.
• Your customer using an address which multiple other businesses also share. This could suggest it is a shelf company, rather than a business of substance. Pay particular attention if the address also houses designated persons, or if it is challenging to establish direct contact with the senior management of the business.
• Changes to your customer’s activities, structure, name, address, ownership and/or control which occur in close proximity to sanctions designations taking effect. The risk may also be heightened if the changes appear to suggest a change of convenience (e.g. change of ownership to a designated person’s family member), rather than a genuine arm’s length transaction.
• Inaccurate or inconsistent customer information, particularly related to beneficial ownership, business activities, or geographic locations.
• Adverse open-source information which may suggest that your customer, or their associates, are designated persons, or are associated with designated persons. They may be under investigation, or allegedly involved in criminal conduct or sanctions evasion.
• If a transport/freight business forms part of your customer’s organisational structure, this brings heightened risk.
• Unanticipated and irregular payment methods/currency/payees are being used.
• Secrecy, e.g. a customer requesting communications via encrypted messaging platforms only, or not answering reasonable questions about the end-use, or end user, of a product or service.
• Use of IP addresses or contact details suggesting connection to a sanctioned jurisdiction or designated persons.
• Use of crypto mixing services can bring heightened sanctions evasion risk.
• Use of private cryptocurrency wallets which appear associated with designated persons.
• Customer activity does not appear to align with their purchases of products/services/technology.
• Unusually short transit times for goods, suggesting potential misdeclaration of origin or destination to evade sanctions.
• Unanticipated or unusual routing of customer’s goods, e.g. if adding to the delivery time, rendering the transfer more expensive. Products passing through free ports can also bring heightened risk.
• Transactions involving unusual or unexpected financial products, services, or instruments that could potentially mask the movement of funds.
• Transactions involving multiple layers of intermediaries, shell companies, or offshore entities, especially if there is limited transparency regarding the beneficial owners/controllers.
• Inaccurate or misleading trade descriptors used by suppliers.
• Suppliers being unable to advise of where the parts that made up their product are sourced from. By way of example, an international case study reveal that the hairs used in false eye lashes (a product purchased in a non-sanctioned jurisdiction in the Far East by a beautician for their client services), emanated from animals in the DPRK. Hence it was in breach of proliferation financing sanctions.
• Transactions involving entities with minimal operations, assets, or employees, which could be indicative of front companies used to conceal the true beneficiaries.
• Presence of vessels and aircraft within customer structure can bring heightened risk.
• Unusual or unexplained diversion of funds or goods meant for humanitarian aid or charitable purposes.

It is important to note that the presence of one or more of these red flags does not necessarily indicate wrongdoing. However they should prompt businesses to exercise enhanced due diligence and reporting measures, as required by their Anti-Money Laundering (AML)/ Countering Terrorist Financing (CFT) and Countering Proliferation Financing (CPF) obligations. Regular training of staff and a robust risk assessment framework are essential for effectively identifying and responding to sanctions evasion risks.

Examples of questions that may assist effective compliance:

• Are customer profiles regularly updated and verified to ensure accuracy of information?
• Do you conduct risk assessments to determine the appropriate level of due diligence for each customer?
• How do you identify PEPs and assess their potential risk?
• What processes are in place to identify and verify the beneficial ownership of corporate entities and legal arrangements?
• Is your customer a designated person?
• Is a shareholder of your customer linked to designated persons or sanctioned jurisdictions?
• Is your customer, or their business partners, associates, beneficially owned or controlled by a designated person?
• How do you define and update your risk-based transaction monitoring parameters?
• Do you monitor for unusual or suspicious transactions, including those that exhibit red flags for sanctions evasion, money laundering, terrorist financing, proliferation financing or other financial crime?
• Is your transaction monitoring system equipped to detect patterns consistent with trade-based money laundering or structuring?
• Does your customer deal with goods, or provide services, that may be subject to sanctions?
• Does your customer operate in a sanctioned jurisdiction?
• Is a senior management member of your customer (e.g. a board member) a designated person?
• Is your customer dealing with dual use goods?
• Is your customer trading in products (goods/technology) subject to import/export restrictions?
• Who will the end-user of your product/service be? Is there an end-user certificate available?
• Who is your supplier and are they a designated person?
• Are any of your products, or the parts that make up your product, emanating from a sanctioned jurisdiction or a dual use product?
• What payment route are funds taking? Is it aligned with what could be expected from the transaction or is the routing of funds unusual? Is it in close proximity to areas with porous borders?
• Are funds paid by the person you expect, i.e. your customer?
• Is the money remittance services provider (e.g. a Bank) a designated person?
• Are goods to or from your customer or supplier taking the route you would expect?
• Does your customer’s telephone number (jurisdictional/area code), domain name, or email domain, align with what you expect to see? Is it suggesting the involvement of a sanctioned jurisdiction?
• Is your customer State-owned? Do sanctions apply?
• How frequently do you update your sanctions and watchlist databases to ensure they are current?
• How do you ensure that staff members understand and recognise red flags associated with sanctions evasion and other illicit activities?
• Are employees encouraged to report suspicious activities, and is there a clear mechanism for doing so?
• Have you checked the sanctions status of your trade (product or service)?
• Have you included a clause in your business contracts that obliges the contracting party to adhere to sanctions screening processes?
• Are your customer trading in products (goods/technology) subject to import/export restrictions?
• How often are AML/CFT/CPF assessments conducted, and are the findings communicated to senior management and the board of directors, or their equivalent?
• Do you maintain records of suspicious transactions or activities and relevant supporting documentation?
• How do you ensure that your compliance systems keep pace with evolving sanctions evasion techniques and other financial crime trends?
• Have you conducted periodic reviews and testing of your AML/CFT/CPF program's effectiveness?
• How do you incorporate lessons learned from incidents or weaknesses identified during internal and external audits?

These questions can serve as a starting point for evaluating and enhancing your compliance practices. It is important to customise them based on the specific nature of your business, and the latest guidance from relevant regulatory authorities, including the Financial Action Task Force (FATF).

Other information

We periodically update our information sources. Further examples of sanctions evasion techniques and case studies can be found on Additional information sources – ML/PF/TF.