FinCEN Alerts Industry to Russian Sanctions Evasion Red Flags
Last week, the Financial Crimes Enforcement Network (FinCEN) published an alert to notify financial institutions of the various tactics that may be used to evade recent US-imposed sanctions related to Russia’s further invasion into Ukraine, and to remind financial institutions of their reporting obligations under the Bank Secrecy Act (BSA), including with respect to convertible virtual currency (CVC).
FinCEN listed 10 “red flag” indicators, each falling into one of two categories: (1) sanctions evasion using the US financial system or (2) sanctions evasion using CVC.
Red Flags for Sanctions Evasion Using the US Financial System
FinCEN underscored the importance for financial institutions to be aware of and understand the various methods used by Russian and Belarusian actors to evade sanctions through shell companies, non-sanctioned Russian and Belarusian financial institutions, financial institutions in third countries, and third parties. FinCEN provided seven specific red flags to be on the lookout for:
- Use of corporate vehicles (i.e., legal entities, such as shell companies, and legal arrangements) to obscure (i) ownership, (ii) source of funds, or (iii) countries involved, particularly sanctioned jurisdictions.
- Use of shell companies to conduct international wire transfers, often involving financial institutions in jurisdictions distinct from company registration.
- Use of third parties to shield the identity of sanctioned persons and/or politically exposed persons (PEPs) seeking to hide the origin or ownership of funds, for example, to hide the purchase or sale of real estate.
- Accounts in jurisdictions, or with financial institutions, that are experiencing a sudden rise in value being transferred to their respective areas or institutions, without a clear economic or business rationale.
- Jurisdictions previously associated with Russian financial flows that are identified as having a notable recent increase in new company formations.
- Newly established accounts that attempt to send or receive funds from a sanctioned institution or an institution removed from the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
- Non-routine foreign exchange transactions that may indirectly involve sanctioned Russian financial institutions, including transactions that are inconsistent with activity over the prior 12 months. For example, the Central Bank of the Russian Federation may seek to use import or export companies to engage in foreign exchange transactions on its behalf and to obfuscate its involvement.
Red Flags for Sanctions Evasion Using CVC
Although large-scale sanctions evasion by the Russian government using CVC is unlikely, FinCEN warned that sanctioned individuals and their facilitators may use CVC to evade sanctions. CVC exchangers, administrators, and other financial institutions should monitor for the following red flags:
- A customer’s transactions are initiated from or sent to the following types of Internet Protocol (IP) addresses: non-trusted sources; locations in Russia, Belarus, Financial Action Task Force-identified jurisdictions with AML/CFT/CP deficiencies, and comprehensively sanctioned jurisdictions; or IP addresses previously flagged as suspicious.
- A customer’s transactions are connected to CVC addresses listed on OFAC’s Specially Designated Nationals and Blocked Persons List.
- A customer uses a CVC exchanger or foreign-located money services business (MSB) in a high-risk jurisdiction with AML/CFT/CP deficiencies, particularly for CVC entities and activities, including inadequate “know-your-customer” or customer due diligence measures.
As the government alerts the industry about sanctions evasion tactics, it is also ramping up efforts to identify and hold accountable sanctions evaders and their facilitators, including those who use CVC to circumvent US sanctions. For example, as we posted here, on March 2, 2022, the US Department of Justice launched Task Force KleptoCapture, which will target, among other tactics, the use of CVC to circumvent sanctions. The same day, New York Governor Hochul announced that the New York State Department of Financial Services (DFS) will strengthen its sanctions enforcement efforts through the “expedited procurement of additional blockchain analytic technology” to detect the exposure of DFS-licensed CVC businesses to sanctioned Russian entities.
For more information on the sweeping sanctions, export control, and other economic countermeasures that the US government has imposed in recent weeks, please refer to Arnold & Porter’s coverage here. Financial institutions seeking further information or advice on sanctions compliance should feel free to contact the authors of this post.
© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.