Money laundering red alert shows UK’s sanctions priorities

Stacy Keen of Pinsent Masons said: “The red alert outlines the expectations of UK regulators and enforcement bodies on the interrogation that firms should carry out on data provided by businesses with links to Russian sanctions targets.” Her comments came after the National Crime Agency (NCA) arrested at least 10 individuals, including lawyers and security industry workers, suspected of helping ‘designated persons’ (DPs)  to evade sanctions.

The red alert warned that DPs are using associates, including family members and close contacts, to transfer assets to trusted “enablers” such as relatives or employees – and to sell or transfer those assets at a loss in order to realise their value before sanctions take effect. The JMLIT said DPs were also trying to divest investments to ensure ownership stakes are below the 50% threshold for an asset freeze to bite on a non-DP, or relinquish previous controlling stakes.

The JMLIT assesses enablers’ level of complicity at three common levels: ‘criminally complicit’, ‘wilfully blind’ and ‘unwittingly involved’. It said enablers may seek to circumvent sanctions by obstructing other parties from carrying out necessary due diligence checks to meet their own sanctions obligations. This could include misrepresenting entities that are owned or controlled by a DP, or by adopting overtly aggressive and litigious strategies to deflect from a DP’s underlying ownership and control.

The JMLIT said: “DPs will seek to transfer assets and funds directly and indirectly to jurisdictions where sanctions are not in place, such as the UAE, Turkey, China, Brazil, India and the former Soviet Union – excluding the Baltic States and Ukraine.” It said doing so on the behalf of a DP will involve the use of multiple laundering methods, including use of secrecy jurisdictions or citing Russian legal protection from sharing information, as well as the use of crypto-assets to circumvent sanctions and mitigate reduced access to the SWIFT payment system.

Keen said: “Divestment of interests in companies by sanctions targets to below the 50% threshold - the test for ownership in terms of the application of financial sanctions restrictions - should not be taken at face value. A failure to challenge or validate data and assertions made on the application of sanctions could be considered a red flag for complicity in sanctions evasion, or a breach or circumvention.”

She added: “Those provided with legal assessments by businesses with Russian touchpoints on the application of sanctions, and validity of continued dealings, are recommended to obtain their own legal assessment. The Red Alert urges those in doubt to seek guidance from OFSI.” 

Edward James of Pinsent Masons said: “Simply conducting sanctions screening and relying on what a Russian counterparty tells you about a divestment may not be enough given the tough stance that has been adopted. As the JMLIT has said in the red alert, you cannot take things on ‘face value’. If you find yourself dealing with a counterparty that has recently undergone a divestment to get ownership of a sanctioned person below 50%, or is currently doing so, you should take reasonable steps to satisfy yourself that the transaction is not a sham transaction where the sanctioned person still indirectly controls the company through proxies.”

Thorne Godinho of Pinsent Masons, added: “The role of specialist business intelligence research cannot be underestimated in the current climate. Companies do not want to be seen to be wilfully blind, and in higher risk engagements, standard due diligence checks will likely not be enough to ensure that potentially relevant information is identified that may suggest a transaction is a sham. Companies should ensure that their lawyers and compliance teams work alongside business intelligence experts to adopt a jointly coordinated approach to assessing the counterparty and the risk that it remains controlled by someone who is sanctioned.”

The red alert comes as the NCA, a member of the JMLIT, redeployed officers into the Combating Kleptocracy Cell (CKC) launched in February. The CKC is tasked with targeting “corrupt elites” through their assets in the UK as well as their key enablers, and identifying opportunities to strengthen UK policy on illicit finance, sanctions delivery and enforcement.