A Rising Financial Crime: Sanctions Evasion

Introduction
The 2022 invasion of Ukraine resulted in an 816% increase in Russian sanctions.[1] With the significant rise in sanctions imposed on Russia, key actors in many sectors—especially energy, construction, and industrial sectors—are at risk of being designated. However, the potential for increased profits in trade chains has led some companies seeking to continue business with sanctioned parties to find ways to circumvent the sanctions. These methods of sanctions evasion are considered financial crimes.

Understanding Sanctions Evasion and Its Risks

Sanctions evasion refers to the deliberate attempt to circumvent trade restrictions through illicit activities while avoiding detection. It often involves exploiting legitimate processes and services to carry out prohibited actions. Revenue generated from sanctions evasion, which often involves other crimes like fraud and document forgery, is funneled into financial systems using money laundering techniques.

Perpetrators of sanctions evasion crimes may face financial penalties, criminal charges (including additional crimes like document forgery committed during the evasion), trade restrictions, and liability for damages resulting from breaches of contractual obligations. Additionally, they may suffer reputational harm and significant losses in both financial terms and sector volume, which could be irreparable.

Typologies of Sanctions Evasion

• One method of evasion involves decreasing ownership levels of business entities while retaining control. A common pattern observed in this method is the use of family members and close associates. For example, a sanctioned individual may transfer the beneficial ownership of legal entities and other property to their family members to maintain control and access to wealth before or after sanctions are imposed.
• Similarly, using complex ownership structures to avoid detection is a common typology of sanctions evasion. Trust arrangements are often employed, where sanctioned parties transfer some or all their assets to a third party (the trustee) to manage and disburse according to their wishes. The other party in this contractual agreement can include law firms, grantors, or beneficiaries. In this scenario, the sanctioned individuals behind the shareholders or subsidiaries continue to maintain their position as primary beneficiaries and evade trade restrictions.
• In transactions involving "enabler" persons and organizations, sanctioned individuals refrain from directly engaging in sanctions evasion activities by using people in high-profile professions. Due to the nature of their work, enablers may send and receive money, create corporate structures, or strike deals on behalf of sanctioned individuals. Enablers can include legal consultants, accountants, and company service providers.
• The use of indirect shipping routes, particularly in trade chains involving Russian end-users, often involves routing dual-use goods or price-capped cargo through apparent end-users in third-party jurisdictions not subject to sanctions. This is typically achieved using falsified documentation, such as altered bills of lading or fraudulent trade finance records. Once the goods reach the transshipment point, they are redirected to their intended sanctioned end-users. The US Bureau of Global Public Affairs has identified jurisdictions such as the PRC, Hong Kong, the UAE, Kyrgyzstan, Kazakhstan, and Türkiye as key locations involved in such practices.[2]
• In addition to indirect shipping routes, there is the method of deliberately falsifying the end-uses of traded goods. Third-party jurisdictions with less stringent sanctions controls are used to divert products, subject to trade restrictions, to sanctioned entities or territories by falsely stating that they are intended for civilian use. For example, a company may export high-tech dual-use components, like advanced semiconductors, claiming they are for medical devices in a non-sanctioned country. However, the components may secretly be diverted to a sanctioned nation for use in military drones, violating export controls and sanctions regulations.
• Sanctioned individuals and entities may also launder or conceal illicit proceeds, including those derived from sanctions evasion, through the purchase of real estate to hold value—often securing residency or citizenship in a country with lower illicit finance risks. This is frequently done through intermediaries, agents, or straw purchasers, and obscure corporate structures. With an increase in the use of real estate to hold Russian wealth, the REPO Task Force has identified some investments and purchases as potentially indicative of sanctions evasion activity.[3]
• The final typology involves using professional evasion networks to bypass established export controls and sanctions enforcement. These networks often leverage intermediaries, shell companies, and false documentation to obscure the origin, destination, or ownership of goods and funds. Operating across multiple jurisdictions, these networks exploit regulatory gaps, using complex trade routes, re-exports, or mislabeling to evade detection and continue sanctioned activities. Shell companies and front companies are especially used to launder illicit funds and conceal ownership of financial assets held in the name of sanctioned individuals.

A combination of these strategies may also be employed. In 2022, Australia, Canada, France, Germany, Italy, Japan, the United Kingdom, the United States, and the European Commission formed the Russian Elites, Proxies, and Oligarchs (REPO) Task Force to track sanctioned Russian assets and impose strict restrictions on sanctioned individuals and entities from accessing international financial systems. This effort resulted in the freezing of tens of billions of dollars and the seizure or freezing of high-value goods and property. However, as highlighted in the REPO Task Force Global Advisory, several sanctioned individuals and entities continue to generate revenue or procure export-controlled and sanctioned items.[4]

How Can Businesses Guard Against Sanctions Evasion?

In a dynamic sanctions environment, companies can take measures to avoid involvement in sanctions evasion and develop control mechanisms as part of their compliance programs. As a fail-safe option, companies may also participate in public-private partnerships with competent authorities. However, in the private sector, the first step when dealing with a new third party is to check whether the legal entity, its directors, or ultimate beneficiaries have been designated and cross-check new trading partners against reliable, independent sources and the company's own database. This may include verifying bank accounts or identifying directors and contacts through open sources.

Enhanced Due Diligence (EDD) plays a critical role in investigating high-risk entities and transactions to uncover potential compliance risks. Given the risks of sanctions evasion—such as strategic location and increased trade frequency with Russia—businesses should consider conducting EDD on customers, particularly those based in specific jurisdictions or with destinations at risk. Combined with sanctions screening, which identifies individuals or entities subject to restrictions, EDD helps ensure a robust defence against sanctions evasion. When conducting EDD, the following key aspects should be considered:

• Product Details: Origin, intended use, and primary supplier.
• Company Information: Ownership structure (including ultimate beneficial owners), web presence, branches, and countries of operation.
• Logistics: Shipping routes, transportation methods (e.g., vessel or aircraft), and third-party involvement.
• Documentation: Product descriptions, financial records, and other transaction-related documents.
• Final Destination: End user or destination country.
• Payment Route: Flow of payments, documentation, and associated financial institutions.

It is important to note that no single red flag definitively indicates illicit activity, and transactions should be assessed holistically as part of a comprehensive due diligence process. To be pragmatic, due diligence screening should target transactions involving high-risk products and destinations. Additionally, even with established trading partners, the risk categorization for transactions or third parties should be regularly updated to reflect current developments and risk levels. If the risk level increases, additional information, and documents may need to be requested, and management should be informed.

In addition to trade control clauses in company contracts, companies should include precautionary clauses to prohibit activities aimed at evading or circumventing sanctions prohibitions. Undertakings can also be included in contracts for the end-user, primary supplier, or product origin, depending on the nature of the business.

Instead of directly contacting international suppliers or actual end-users of goods, perpetrators often take a layered approach by introducing multiple intermediaries into the supply chain to conceal procurement activities. Therefore, examining intermediaries and end-users in high-risk trade chains may help identify inconsistencies.

Regularly monitoring business trade flows and customer patterns can help detect discrepancies in the export and import of high-risk products from specific destinations. These inconsistencies may signal that intermediaries are sourcing products for transshipment to sanctioned countries or entities. Additionally, monitoring existing business partners with a risk-based approach and frequency using screening tools can help identify red flags and reduce the risk of sanctions evasion. Using this data, companies should develop and implement robust controls, processes, and procedures tailored to mitigate risks specific to their operations. Furthermore, authorities with broader sanctions impact, such as the US, UK, and EU, publish High Priority Lists identifying products at high risk of being illegally transferred to prohibited jurisdictions and therefore more likely to be subject to sanctions evasion.[5] Companies trading in these products or their components must exercise heightened vigilance throughout their trade chains, ensuring due diligence obligations are rigorously followed from the primary supplier to the end user.

Finally, if there is evidence that products are being supplied to or diverted to sanctioned parties or countries, companies should cease trading, block and terminate the business relationship with the relevant third party, and notify the authorities through voluntary disclosure lines.

Conclusion
As sanction regimes increase and evolve, sanctions evasion has gained prominence in international trade, with individuals and organizations seeking to increase trade with sanctioned parties and profit from the risk of sanctions. Many companies recently subjected to sanctions were part of the same trade chain as sanctioned parties or jurisdictions. Therefore, companies must not only comply with trade controls and restrictions but also conduct due diligence on third parties, trade destinations, and products. Contracts and commitments should account for sanctions risk and evasion. Simultaneously, third parties and company processes should be monitored with a risk-based approach, and measures should be implemented and updated within the compliance program to address deficiencies in high-risk cases. This will allow companies facing increased sanctions risk in international trade to ensure financial, operational, and reputational sustainability while managing sanctions risk.

References

2024 Update of the EU Control List of Dual-Use Items. (2024, September 5). Retrieved from European Commission: https://policy.trade.ec.europa.eu/news/2024-update-eu-control-list-dual-use-items-2024-10-01_en

Bribery, corruption and sanctions evasion. (n.d.). Retrieved from National Crime Agency: https://www.nationalcrimeagency.gov.uk/what-we-do/crime-threats/bribery-corruption-and-sanctions-evasion

Commerce Control List (CCL). (n.d.). Retrieved from Bureau of Industry and Security: https://www.bis.doc.gov/index.php/regulations/commerce-control-list-ccl

Countering Russian sanctions evasion - guidance for exporters. (2025, February 25). Retrieved from GOV.UK: https://www.gov.uk/government/publications/countering-russian-sanctions-evasion-and-circumvention/countering-russian-sanctions-evasion-guidance-for-exporters

Financial Sanctions Evasion. (2022, July). Retrieved from National Crime Agency: https://www.nationalcrimeagency.gov.uk/who-we-are/publications/605-necc-financial-sanctions-evasion-russian-elites-and-enablers/file

Global Advisory on Russian Sanctions Evasion Issued Jointly by the Multilateral REPO Task Force. (2023, March 9). Retrieved from U.S. Department of the Treasury: https://home.treasury.gov/system/files/136/REPO_Joint_Advisory.pdf

New Measures to Degrade Russia’s Wartime Economy. (2024, August 23). Retrieved from U.S. Department of State : https://2021-2025.state.gov/new-measures-to-degrade-russias-wartime-economy/

Russia Sanctions – Common High Priority Items List. (2024, August 8). Retrieved from GOV.UK: https://www.gov.uk/government/publications/russia-sanctions-common-high-priority-items-list/russia-sanctions-common-high-priority-items-list

Sanctions compliance and sanctions evasion – Increased enforcement and evolving tactics. (2024, Februaty 20). Retrieved from Moody's: https://www.moodys.com/web/en/us/kyc/resources/insights/sanctions-compliance-sanctions-evasion-increased-enforcement-evolving-tactics.html

Wahdatehagh, S. (2024, August 21). Sanctions Evasion Through Shell Companies. Retrieved from Descartes Visual Compliance: https://www.visualcompliance.com/blog/sanctions-evasion-through-shell-companies/#:~:text=For%20clarity%2C%20sanctions%20evasion%20is,involved%20in%20such%20business%20dealings