August 1, 2022

The National Crime Agency (NCA) recently took the unusual step of issuing a Red ALERT notice covering its concerns in detail around financial sanctions evasion tactics being employed by ‘Russian Elites and Enablers’.

It’s a stark warning to all firms involved in financial transactions and international trade of how difficult it is to ensure strong compliance with international sanctions since the outbreak of conflict in Ukraine. Not only must firms ensure they don’t deal with any listed sanctioned entities (officially referred to as designated parties) directly, but now there is very high risk of unwittingly dealing with a designated party indirectly, as a result of the tactics deployed by individuals to disguise ownership of personal and commercial assets, and in some cases dispose of assets, even at a loss.

What is the impact of the red Alert?

At a high level, the Red Alert notice provides detailed guidance and a call to action to all AML regulated firms (both Financial and Professional Services) to step up risk management procedures and due diligence anywhere it’s suspected that the individual or company being onboarded may be linked – directly or indirectly – to a designated party. The same applies to any payment transactions or correspondent banking relationships.

Finding ‘hidden risk’ is challenging at the best of times, but in the current climate extra vigilance is needed to account for both the rapidly-changing nature of international sanctions lists and the ‘cat and mouse’ tactics employed by sanctioned entities, to avoid detection.

Essentially, all regulated firms are being warned to apply thorough due diligence when onboarding a new customer and when refreshing due diligence on existing customers (ongoing monitoring). As well as looking for both direct and indirect exposure to sanctioned entities themselves, the NCA encourages screening to look out for unusual patterns of activity that could indicate evasion tactics being deployed and provides compliance teams with a very detailed and helpful list of possible indicators of suspicious behaviours to look out for.

Common sanction evasion tactics

Sanctions evasion tactics vary widely but all essentially have one aim: to put assets beyond the reach of authorities and asset freezing or confiscation orders. The NCA alert highlights the most common tactics, which can include one or more of the following:

· Transferring assets into the names of family members, or trusted associates without any obvious formal links

· Creating complex corporate structures to hide assets behind, including offshore entities, shell companies and ‘fronts’

· Reducing their shareholding of businesses to below the 50% threshold, to avoid

· Moving assets into jurisdictions where there are no sanctions

· Transferring wealth into crypto-assets for easier transmission.

There are so many tools available to circumvent sanctions that AML compliance teams need to ensure their radar sweeps for the full range of possible suspicious activity.

One startling aspect of sanctions evasions tactics, and of great concern to the NCA, is the extent to which complicit professional enablers such as Law Firms, Accountants, Trust and Company Service

Providers, Wealth Managers, Estate Agents etc are all being used knowingly or unknowingly in the UK to facilitate these tactics.

Increased money laundering risks

As the NCA alert specifically calls out, the disposal or transferring of wealth in avoidance of sanctions is illegal and the assets are classed as the proceeds of crime. Therefore banks and other regulated entities also need to be aware of the need for heightened AML checks to ensure they’re not at risk of non-compliance with anti-money laundering rules.

The Alert reminds all regulated entities of the importance of applying a risk-based approach across the entire spectrum of their AML obligations. For professional services firms, it’s also a reminder to thoroughly identify and verify their clients and obtain clear evidence that the sources of wealth of high-risk clients and their businesses are legitimate.

Data is key to sanctions evasion risk detection..

n practice, standard sanctions screening is insufficient to find all of the ‘hidden risks’. Now, more than ever, AML regulated firms must supplement their screening using quality sources of specialist data to conduct negative information screening on high-risk individuals.

Adverse Media insight and intelligence from global providers like LexisNexis Risk Solutions is specifically designed to account for the full spectrum of potential financial crime risks. Teams of specialist researchers trawl through tens of thousands of global media sources, structuring the data into detailed profiles of actionable risk intelligence that compliance teams can use to evaluate whether an individual poses a real risk to their business.

The many firms that still rely on standard internet search engines to perform this analysis are leaving themselves extremely vulnerable in light of increased evasion tactics, particularly as media manipulation and misinformation are two very commonly-deployed tools and require considerable skill to interpret.

Similarly, understanding complex corporate structures requires that compliance teams have access to high quality business data, ideally sourced from a registry and supplied with tools to construct models illustrating how related entities and ultimate beneficial owners are linked.

The NCA’s red ALERT provides four specific recommendations for good practice:

1. Ensure your sanctions data is accurate and up-to-date: the best sanctions data sets include enhanced profiles on designated parties, the ability to visualise connected entities and workflow tools to help remediate alerts quickly and efficiently.

2. Carry out thorough risk assessments and conduct appropriate levels of due diligence: Much of this will be enhanced due diligence and when adverse media is needed for deeper investigation, take care to use data from trusted sources.

3. Assess complex corporate structures carefully: monitor and assess changes in ownership and UBOs.

4. Analyse your customer database: identify possible exposure to countries where sanctions don’t apply such as UAE, Turkey, China, Brazil, India and countries of the former Soviet Unit.

There is an increased risk in those countries in particular, as they are known to be the target of asset movements by sanctioned entities.

The Regulator is watching..

All of the UK’s AML regulators and supervisors are charged with ensuring this Alert and its requirements are fully communicated to and enforced by the firms they supervise. The alert details what each is doing in this respect.

It’s clear that AML Compliance Teams are in the midst of an exceptionally busy period and need as much training, guidance and support as possible to understand the complexities of sanctions evasion tactics so that they can continue to ensure their firm is exposed to minimal risk.

The best advice we can give to all involved in compliance is, prepare now and prepare thoroughly.

Adverse media screening is a critical part of any robust EDD program.

Request access today and discover how countless negative news stories are consolidated into single adverse information profiles, streamlining the adverse media search process.

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