Using Shell Companies to Try to Evade Sanctions

Using Shell Companies to Try to Evade Sanctions

Sanctions are restrictions placed on countries, organizations, or individuals by governments or international bodies like the United Nations. They aim to change behavior or punish illegal activities. Common sanctions include trade embargoes, asset freezes, and travel bans. However, sanctions are only effective if properly enforced. And some try using shell companies to evade sanctions illegally.

What are Shell Companies?

A shell company is a corporation or limited liability company (LLC) that exists only on paper, without active business operations or significant assets. Shell companies are legal in many jurisdictions. But they can also be used to conceal illicit activity, like money laundering, tax evasion, and sanctions evasion.

Shell companies have no real commercial purpose. They do not produce goods or services. They exist solely as a vehicle for financial transactions. The identity of the true beneficial owner is often obscured through complex ownership structures involving nominee directors and shareholders. This anonymity allows shell companies to transfer funds worldwide easily.

How Shell Companies Help Evade Sanctions

Sanctioned governments, organizations, and individuals can use shell companies to continue accessing the global financial system secretly. Common techniques include:

• Obscuring ownership of assets and companies through layers of shell companies in different jurisdictions
• Routing transactions through shell company accounts not obviously linked to sanctioned entities
• Using shell companies to buy sanctioned goods and ship them disguised as non-sanctioned goods
• Having a network of shell companies hold funds, securities, or property on behalf of sanctioned individuals

If the shell companies appear unrelated to the sanctioned entities, banks and regulators are less likely to detect and block suspect transactions. The complex corporate structures make it hard to identify who ultimately owns the shell companies or benefits from the transactions.

Recent Examples of Shell Company Sanctions Evasion

Shell companies have featured in several high-profile sanctions evasion schemes in recent years:

North Korea

North Korea uses an extensive network of shell companies to evade sanctions and generate income for its weapons programs, according to a 2019 report. Front companies based in China, Singapore, and elsewhere facilitate prohibited arms deals, trade coal and minerals, and conduct cybercrime. Many operate through China’s large informal banking sector to disguise transactions.

Russia

Russian oligarchs and politicians exploited shell companies to hide ownership of assets targeted by Western sanctions after Russia’s 2014 annexation of Crimea, per Dow Jones. For instance, sanctioned billionaire Arkady Rotenberg disguised his stake in companies through Cyprus-registered shell firms.

Iran

A 2016 report found the Iranian government controls a network of front companies in Turkey, Malaysia, and the UAE to bypass sanctions. They disguise transactions in sectors like oil, gas, and petrochemicals using falsified documents and intermediaries.

Challenges Detecting Shell Company Sanctions Evasion

Shell companies make sanctions evasion hard to detect. Some key challenges include:

• Limited transparency over company ownership in many jurisdictions
• Complex corporate structures spanning multiple countries
• Use of nominees and frontmen to hide beneficial owners
• Lack of resources for financial institutions to conduct full due diligence
• Short lifespan of many shell companies

Banks must screen customers and transactions against official sanctions lists. But if the shell companies have no obvious connection to sanctioned entities, payments may slip through. Similarly, customs agents may miss sanctioned goods concealed in shipments linked to unsuspicious shell companies.

Improving Detection of Shell Company Sanctions Evasion

Authorities have taken steps to crack down on shell company abuse, including:

• Creating centralized registers of company ownership – For example, the UK’s public register of beneficial owners
• Enhanced due diligence requirements for banks – Like identifying who owns and controls shell company accounts
• Improved information sharing between regulatory and law enforcement agencies
• Using technology like machine learning to detect suspicious transaction patterns

However, implementation remains patchy globally. And sanctions evaders constantly find new techniques. Continued regulatory and technological innovation is needed to keep pace.

The Role of Financial Institutions

Banks and other financial institutions are at the frontline of detecting shell company sanctions evasion. They must balance compliance obligations with commercial imperatives. Stringent due diligence to identify beneficial owners reduces risk but may lose business. Some recommendations for financial institutions include:

• • Document detailed ownership information for shell company clients by identifying nominee shareholders and directors
  • Conduct enhanced monitoring of transactions by shell company accounts to identify suspicious activities
  • Screen shell company owners and transactions against official sanctions lists to detect entities subject to restrictions
  • Analyze transaction history and account activity using technology like machine learning to identify suspicious patterns that may indicate sanctions evasion
  • Conduct enhanced due diligence on complex corporate structures and high-risk jurisdictions associated with shell company abuse
  • Verify legitimacy of business activities claimed by shell company clients to uncover false fronts
  • File suspicious activity reports with relevant authorities when potential sanctions evasion is detected
  • Adopt a risk-based approach, with extra precautions for clients posing higher sanctions evasion risks
  • Train compliance staff on typologies and red flags, like use of third-party intermediaries, so they can better identify evasion
  • Implement robust processes to determine beneficial ownership, looking beyond nominal directors and shareholders
  • Leverage information sharing between financial institutions to identify networks of connected shell companies
  • Apply enhanced due diligence retrospectively when new entities become sanctioned to uncover linked shell companies
  • Refuse to do business where unable to complete satisfactory due diligence on shell company owners and activities

Financial institutions have a crucial role as gatekeepers to the financial system. Preventing sanctioned entities from accessing funds limits their capabilities. With vigilance and continued innovation, the banking industry can stay at the forefront of detecting and disrupting shell company abuse.