Sanctions Evasion Techniques

Question 1

The United States and the European Union have imposed sanctions on Company X. The company’s owners try to evade the sanctions by reducing their holdings in Company X to less than 50%. What is this evasion technique called?

Answer 1

Dilution of sanctioned ownership

Question 2

A bank employee completes a transaction for a company that is under EU sanctions. The employee does this by routing the payment through a bank that is outside the EU and removing the relevant information from the payment method. What is the name of this type of sanctions evasion?

Answer 2

Stripping

Question 3

What is stripping?

Answer 3

“Stripping is the intentional removal or modification of information from a record, either by a customer or by an organization’s staff, to avoid detection against a sanctions list.

The most common methods involve intentionally omitting or removing key information from a transaction, such as the sender’s name or the business name.”

Question 4

Which of the following is an example of dual-use goods?

Answer 4

Lasers that have uses in medical technology and in the construction industry

Question 5

Which of the following would be considered a red flag in a customer’s paperwork?

Answer 5

The paperwork states the shipment is of heavy machinery, but the shipment is refrigerated.

Question 6

Automated screening tools can detect many red flags, but which of the following red flags usually requires human assessment to find?

Answer 6

There is an abnormal shipping route for the product and destination.

Question 7

What was significant about the 2017 case of Access USA Shipping LLC?

Answer 7

Access USA set up an internal straw buyer to help a client evade sanctions.

Question 8

What was significant about the Technopromexport case?

Answer 8

The case involved a state-owned company concealing the final destination of goods.

Question 9

In which of these situations would transshipment most likely be legal?

Answer 9

When a large ship cannot navigate a small river and goods must be moved from the ship to a fleet of trucks

Question 10

A shipper conceals sanctioned goods by placing them underneath crates of vegetables that will be unsellable if held at port for too long or inspected too roughly. What is the name of this type of sanctions evasion?

Answer 10

Consolidation of goods

Question 11

What is sanctions evasion?

Answer 11

Sanctions evasion is the deliberate attempt to remove or conceal the involvement of sanctioned places, entities, or individuals in a transaction or series of transactions.

Question 12

Define counterparty.

Answer 12

A counterparty is the other side of a transaction—the seller where the customer is the buyer, or vice versa.

Question 13

Explain why the customer relationship is so important to a firm’s sanctions compliance program.

Answer 13

The customer relationship should be the primary defense against sanctions evasion. By fully understanding the nature of the customer, the businesses the customer is engaged in, the structure of the company and the individuals behind it, and where and with whom the company does business, an institution is better armed to detect any activity that does not have a valid business purpose and does not make sense for the customer.

Question 14

Define stripping.

Answer 14

Stripping involves omitting or removing key information, such as the sender’s name or the business name, from a payment message to avoid detection.

Question 15

List and explain the usage of the three common Society for Worldwide Interbank Financial Telecommunications (SWIFT) message types.

Answer 15

The three common SWIFT message types include: * MT103 (Serial Method): Payment message sent from an originating bank (on behalf of a customer) via intermediary banks to a beneficiary bank (on the behalf of a beneficiary customer). * MT202: Bank-to-bank instructions that are used solely by, for, and on behalf of financial institutions. * MT202COV (Cover Method): When a payment is sent via an intermediary bank to a receiving correspondent involving an underlying MT103 customer credit transfer.

Question 16

Define U-turn payment.

Answer 16

A U-turn payment is a payment in which a bank or other institution from country A sends a transaction through a bank in country B using an offshore bank.

Question 17

What is the function of Real Time Gross Settlement Systems (RTGS)?

Answer 17

In RTGS, money or securities are transferred between banks on a “real time” and “gross” basis, i.e., payment transactions are not subject to a waiting period, and each transaction is settled on a one-on-one basis.

Question 18

How do Society for Worldwide Interbank Financial Telecommunications (SWIFT) messages get separated as a sanctions evasion method?

Answer 18

Separating SWIFT messages involves incorrectly using the MT202 payment with an underlying MT103 payment instead of the required MT202 Cover Payment.

Question 19

Describe nesting as a sanctions evasion method.

Answer 19

Nesting occurs when a foreign financial institution accesses the US financial system through an account it holds with another foreign financial institution—without the parties within the US financial system understanding that they are facing a customer’s customer (nested accounts).

Question 20

What is a whitelist?

Answer 20

A whitelist is a firm’s internal list of individuals and entities whose characteristics trigger a hit or alert by an automated screening tool (AST) but who are found not to be a match to a sanctions list.

Question 21

How do sanctions evaders use the technique of concealment?

Answer 21

To avoid sanctions, fines and scandal, sanctions evaders may obscure the origin of certain goods, funds, or the path of a vessel. They may hide the identity of the receiver/end-user of goods, transfer letters of credit, or remove the names of financial institutions involved in the backing instrument. The most challenging method of evasion can be concealment of beneficial ownership and control information.

Question 22

How is consolidation of goods a method of sanctions evasion?

Answer 22

Consolidation of goods is a method of sanctions evasion in which a person or organization groups small shipments into one larger shipment or mixes restricted items in with other goods and does not declare those restricted items in shipping documentation.

Question 23

What is the role of “loitering” in trade-related sanctions evasion?

Answer 23

Through loitering, a ship from the selling country arranges with a ship from a sanctioned location to meet in international waters to transfer cargo on the open water, beyond the jurisdiction of any of the surrounding countries’ coast guard or naval forces. Sanctions evaders seek to avoid detection by turning off Automatic Information System (AIS) transponders and providing false buyer, destination, and delivery documentation.

Question 24

How is “spoofing” used in trade-related sanctions evasion activities?

Answer 24

Through the manipulation of Automatic Information System (AIS) data, a ship can “spoof” the system by continuing to transmit AIS data while hiding its identity or manipulating its location.

Question 25

How does the falsification of documents aid sanctions evaders?

Answer 25

When a sanctions evader falsifies details, shipments “fly below the radar,” with the contraband goods or sanctioned parties involved passing unnoticed.

Question 26

Define letter of credit.

Answer 26

A letter of credit is a credit instrument issued by a bank that guarantees payments on behalf of its customer to a third party when certain conditions are met.

Question 27

How are back-to-back letters of credit used as a sanctions evasion technique?

Answer 27

Back-to-back letters of credit are used in sanctions evasion in this way: Bank A issues a letter of credit as collateral to Bank B in order to issue a separate letter of credit to the beneficiary. The sanctions evader uses the back-to-back letter of credit to remove the name of a sanctioned bank from the documentation.

Question 28

Define front company.

Answer 28

A front company is a business that is set up and controlled by another organization.

Question 29

What are shell companies?

Answer 29

Shell companies are companies without active business or significant assets.

Question 30

What are shelf companies?

Answer 30

Shelf companies are companies created months or years ahead of time, often by a law firm or an accounting firm, and then the “aged” companies go “on the shelf” until needed.

Question 31

What is a red flag?

Answer 31

A red flag is a warning signal that should bring attention to a potentially suspicious situation, transaction, or activity.

Question 32

Explain the term “sham divestment.”

Answer 32

A sham divestment is a transaction in which a sanctions target sells assets or equity to close associates or other affiliated persons.

Question 33

Explain how an institution establishes a counterparty relationship.

Answer 33

An institution establishes counterparty relationships with other third-party participants in a transaction for an established customer. Another way to establish a counterparty relationship is to provide a service to an individual or entity that has not established a full customer relationship.

Question 34

Explain the importance of understanding the customer’s geographic footprint in relation to a firm’s sanctions compliance program.

Answer 34

A key risk area related to customers is jurisdiction or geography. It is important to understand a customer’s geographic footprint, e.g., information about individuals such as current/former nationality, place of birth, current/former place of residence, place of employment, tax residency and occupation/travel for work.

Question 35

How can jurisdictions prevent stripping?

Answer 35

Most jurisdictions have enacted laws that require payments to contain certain “basic” information, including the sender’s and recipient’s names and addresses.

Question 36

Describe downstreaming as a sanctions evasion method.

Answer 36

Downstreaming occurs when the downstream correspondent has a motive to evade sanctions for a customer, or a customer conceals information before presenting the transaction for processing, resulting in the upstream correspondent bank being exposed. That bank will process a transaction for which it has incomplete or incorrect information, and it could unwittingly participate in sanctions evasion.

Question 37

What measures can help reduce the impact of document falsification?

Answer 37

Spot checks by customs authorities identify some fraud. In addition, authorities rely on every party involved in a trade transaction to consider all other parties and all details involved in the transaction and to identify when something seems out of place.

Question 38

How are shell companies used by sanctions evaders?

Answer 38

Sanctions evaders often use shell companies to disguise business ownership and to hide the identity of end-users or the final destination of goods. For example, evaders can incorporate a front or shell company in a third country and arrange for citizens of that third country to manage it, making it seem as though the company buying the goods (the end-user) is operating in a third country.

Question 39

Why are shelf companies used?

Answer 39

Some investors use shelf companies to gain a clean business record. A company with an older date of incorporation often seems more reliable and is less likely to raise red flags.