The broad range of sanctions levelled on Russia, following its invasion of Ukraine, has made headline news. In this article Michael Barton and Septimus Knox outline the challenges companies face in managing their exposure to sanctioned entities and individuals and the crucial role intelligence plays in navigating this complex landscape.
In July 2019, the US Office of Foreign Assets Control (OFAC) reached a settlement with Apollo Aviation Group, a Florida aircraft engine lessor, for violating US sanctions on Sudan. Apollo had leased aircraft engines to companies in the UAE, which had subleased them to a Ukrainian airline. This airline had then installed the engines on aircraft which it subsequently subleased to Sudan Airways. Despite Apollo’s ignorance of these activities, the multiple layers separating it from the sanctioned entity, and a specific contractual clause with its primary counterparties forbidding sub-lease arrangements with sanctioned entities, OFAC determined that Apollo was in breach of the regime for not monitoring the ultimate destination of the engines. This incident demonstrates just how difficult sanctions compliance can be. Since Russia’s invasion of Ukraine in February 2022, which introduced an unprecedented level of sanctions against a state well integrated into the global economy, the importance of understanding sanctions exposure has never been greater.
changING SANCTIONS REGIMES
The recent Russian sanctions regime is so wide-ranging that numerous household names – including Disney, Goldman Sachs and IBM – have withdrawn wholesale from their commercial relationships with Russia. Historically, sanctions regimes amounted to near-total embargoes of entire economies, such as the US embargo of Cuba. However, today, the majority of regimes are more targeted, focusing on key individuals and entities linked to governments, militaries, or specific proscribed organisations. The consequence of this shift is that, in jurisdictions subject to targeted sanctions regimes, including Myanmar, Venezuela, Iraq and Nicaragua, the avoidance of entire jurisdictions is neither a necessary nor a sufficient approach to the management of sanctions risk. The example of Apollo Aviation aptly demonstrates this point. In order to mitigate the risk of sanctions exposure associated with a commercial relationship, firms must proactively engage with their partners’ operations and the commercial landscape of the jurisdictions in which they operate. This is greatly facilitated by obtaining clear and comprehensive intelligence regarding the facts on the ground.
sanctions – a complex problem
Today, many large firms operating internationally make use of compliance databases and screening tools to check the names of their counterparties against sanctions lists maintained by major states or supranational bodies. While these tools are vital, they cannot adequately account for the complexities of sanctions regimes and the jurisdictions to which they apply. The terms in which sanctions regimes are formulated are expansive, and the burden of compliance is a heavy one. Most modern formulations of sanctions regimes forbid the provision of any benefit to sanctioned individuals, whether directly or indirectly. They also typically designate the facilitation of sanctions-busting as an offence, whether it was done knowingly or in error. Modern sanction regimes are often applied extraterritorially – multiple US courts, for example, have adopted very broad interpretations of the global applicability of US sanctions protocols, ruling that companies with no direct US footprint can be found to have violated them.
Sanctioned individuals and companies often take active steps to transfer, relocate or obscure their commercial interests in order to continue deriving benefit from them. These measures range from the straightforward to the fiendishly complex. In the case of Myanmar, where personal naming conventions are highly malleable, many sanctioned individuals simply change their names. In other cases, individuals relocate to jurisdictions that do not recognise bilateral sanctions regimes. It is not entirely surprising that the UAE saw a 111 percent increase in property purchases by Russian nationals in the first five months of 2022.
State actors often implement complex and opaque schemes to evade sanctions. Several sanctioned states have been accused of operating front companies in Europe and the US, allowing them to buy and sell commodities on international markets. In March 2022, for example, the US imposed sanctions on a network of companies in the UK, Spain, Finland, Singapore, Malta and France for helping the Russian military to acquire advanced military technology in violation of sanctions.
"Sanctioned individuals and companies often take active steps to transfer, relocate or obscure their commercial interests in order to continue deriving benefit from them. These measures range from the straightforward to the fiendishly complex."
Sanctioned actors sometimes go a step further, seeking to elude national jurisdiction entirely. North Korean vessels, for example, have repeatedly evaded sanctions by carrying out ship-to-ship transfers of their cargo on the high seas, entangling unwitting onward buyers in sanctions violations.
Efforts to subvert sanctions often include the nominal transfer of assets to proxies in the form of family members, business partners, or other associates, a phenomenon which habitually follows the implementation of a new sanctions regime. In March 2022, the sanctioned Russian metals magnate Alexey Mordashov transferred his assets – including a stake in travel company TUI – to his wife, Marina Mordashova. Sanctions regimes have evolved over time to account for such attempts to circumvent them, and Mordashova’s stake in TUI is now the subject of an investigation by the German authorities.
"companies must pay close attention to the individuals behind their counterparties, including possible proxy ownership and any commercial relationships they may hold."
Tactics such as these mean that simply avoiding transacting with individuals and entities explicitly designated as sanctioned is insufficient. The risk of conferring indirect benefit to a sanctioned individual or entity persists. To mitigate that risk, companies must pay close attention to the individuals behind their counterparties, including possible proxy ownership and any commercial relationships they may hold. Ultimately, the question of sanctions exposure is a complex legal and commercial judgment, and should be based on an informed understanding of the commercial and political realities surrounding a given transaction.
the role of intelligence
High-quality intelligence is vital in unpicking complex sanctions exposure. Mapping a counterparty’s corporate connections, commercial relationships and ultimate beneficial ownership, can develop a holistic understanding of the networks of commercial benefit with which they operate. And efforts should focus not only on direct counterparties, but also on their in-country advisors and local service providers.
Good intelligence will unearth difficult-to-access sources of corporate information and can help develop a detailed picture about a subjects’ corporate position well beyond what is readily apparent. This includes the use of corporate and documentation leaked online or accidentally uploaded; the retrieval of documents from offshore jurisdictions in order to determine the true ownership of opaque entities; and the identification, interpretation, and preservation of crucial documentary evidence in local languages and hard copy. In a recent case, S-RM uncovered leaked contracts detailing stakes held in a mining asset by sanctioned entities and individuals, demonstrating a significant sanctions risk.
open-source and human intelligence
Modern open-source intelligence techniques provide unprecedented opportunities to establish the facts on the ground at key sites and assets, including in difficult-to-reach or conflict-stricken regions. By carefully examining social media content, body-worn camera footage, live video streams and satellite imagery, it is possible to understand events on the ground almost in real time. Applied to sanctions exposure, such techniques can be crucial in identifying violations.
"Modern open-source intelligence techniques provide unprecedented opportunities to establish the facts on the ground at key sites and assets, including in difficult-to-reach or conflict-stricken regions."
In recent years, satellite imagery has been used repeatedly to track ships which have turned off their AIS locators in order to obscure their involvement in sanctions-busting. Using such imagery, it is possible to expose the routes of vessels and therefore the true provenance or destination of their cargos. Recently this has been used to demonstrate the illicit sale by Russia expropriated Ukrainian grain to sanctioned Syrian buyers. In other cases, radar data can be used to detect interference from military radar systems, indicating the location and movements of military forces and revealing information relevant to sanctions exposure, such as the requisitioning of private infrastructure by sanctioned military actors.
Human intelligence can also identify the true owner of an asset or the beneficiary of a transaction. This is particularly vital in jurisdictions where the informational environment is challenging. In Venezuela, for example, comprehensive, up-to-date corporate information is rarely available. But human sources such as local business and political figures, journalists, and present and former employees of target companies, can often fill in the gaps. The reality on the ground usually diverges from what is inked on corporate documents. Sanctions regimes can make the act of intelligence gathering more challenging, preventing the purchase of information from state-run corporate and land registries and making it difficult to contract with local companies - investigators need to tread as carefully as their clients.
Ultimately, sanctions regimes give rise to a highly complex and dynamic economic landscape, imposing broad and rapidly-shifting obligations on the firms subject to them. It becomes both a practical and a legal necessity for companies to equip themselves with the information necessary to guide their decision-making. Jurisdictions which become subject to sanctions are – almost by definition – politically complex and operationally challenging for investigators. It is impossible to make informed decisions in such environments without an accurate understanding of their internal workings. Comprehensive, sophisticated intelligence will therefore remain crucial to the navigation of sanctions regimes for years to come.