Sunday, October 25, 2020

Understanding Sanctions Evasion Schemes, Prevent and Detect


As U.S. multinationals expand their reach, it’s important for executives and compliance teams to understand how sanctions violations and avoidance schemes can play out in practice and what steps to take to mitigate risk.

In the face of rising trade tensions and an uncertain economic outlook going into 2020, U.S. organizations continue to expand their cross-border business relationships. New risks and complexities can accompany that expansion, including the possibility of noncompliance with regulations from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC).

OFAC is responsible for enforcing economic and trade sanctions against certain foreign jurisdictions, sectors, entities, or individuals. U.S. companies across industries can encounter potential sanctions violations or sanctions evasion schemes that bring unwanted OFAC scrutiny. More specifically, companies ought to be aware of how the schemes could unfold.

Consider three scenarios: affiliate transactions, payments to or from shell companies, and black market peso exchange, all of which can be used to circumvent sanctions laws.

Affiliate risk. When a U.S. multinational organization has subsidiaries and affiliates operating in other jurisdictions, affiliate sanctions risk arises from the difference in those regulations. To address OFAC issues prudently, organizations will want to ensure the compliance needs of their U.S. parent company supersede affiliate jurisdictional laws. That perspective can help prevent certain transactions—such as those involving third parties domiciled in a sanctioned jurisdiction, owned by sanctioned individuals, or involved in the movement of sanctioned goods—from taking place.

Think about a producer of alcoholic beverages that exports products from the United States to legitimate affiliates in a nonsanctioned country. If the non-U.S. affiliates then use American products to fulfill orders from buyers in countries sanctioned by the U.S. government, OFAC could charge the U.S.-headquartered beverage producer with unlicensed sales and exports to each destination country, imposing millions in civil fines.

Shell companies. Sanctioned entities and jurisdictions use shell companies because they’re relatively anonymous and easy to set up and because they can facilitate the movement of money quickly—before a sanctions avoidance scheme is detected.

For example, a U.S. equipment manufacturer might expect payment from an overseas industrial company for a shipment of heavy machinery. The equipment manufacturer receives payment from a shell company in an offshore location with a name and visual identity very similar to that of a legitimate supplier. The U.S. company’s machinery may have been rerouted to a sanctioned entity or location, and the payment may be a means to disguise the origin of the money. Because the vendor’s invoice looks legitimate, however, the U.S. company accepts payment—and finds itself responding to a formal OFAC inquiry.

Black market peso exchange. Drug cartels typically leverage this scheme, using a “peso broker” to help convert the proceeds of overseas sales of illegal drugs back into the currency used in the jurisdiction where the drugs originated, skirting economic sanctions on the exchange of blocked currencies.

[su_pullquote]Intentionally or not, a company that finds itself in the middle of commercial activity with sanctioned entities could face significant losses, fines, and even criminal prosecution.[/su_pullquote]

Imagine a situation in which a medical supply company is fulfilling a large order from an overseas customer. The customer is a legitimate importer and distributor of the medical supply company’s products, and the customer’s payments come from legitimate bank accounts. However, the importer places its U.S. dollar payment order at a discount through a local broker. It turns out that the broker purchases its pesos from the company while ordering dollars from local drug cartels that sell dollars in the United States. As a result, customs agents freeze payment for the order.

Raising Awareness of Sanctions Evasion

To effectively address the risk of OFAC economic sanctions violations, organizations can draw on anti-money-laundering techniques and strategies to help identify and mitigate potential liability.

Know the organization’s business partners. Check registered addresses for entities located solely in jurisdictions that are tax havens or that border a sanctioned country. Also look for entities with limited—or no—identifying information or online presence. Another red flag: entities that have owners or directors in common across multiple companies.

Monitor transactions for deviations. Verify that pricing and other transaction details match what is expected. Invoices that reference a third party, have incorrect or missing information, or don’t match where the payment schedule, products, or services originated all merit a closer look.

Make use of analytics and cognitive intelligence. Analytics and AI-based solutions can, for example, identify patterns of procurement activity. Such technologies can raise alerts for anomalies that require further examination. Irregularities could include unusual shipping routes, goods misclassification, and unconventional payment methods such as checks, prepaid cards, and money orders from a large company.

Watch for signs of collusion. In the context of OFAC violations, collusion can involve employees who trade company goods, services, or information with a sanctioned entity. These transactions often take place offline and show up in the system as a manual entry, leaving it up to the sanctioned entity to move any goods across the border. Activity such as the use of anonymous email servers and unusual spikes in travel or expenses may point to potential collusion. Confirming it, however, might take visual verification and addition investigation.

Staying Ahead of OFAC Compliance Risks

As organizations broaden their cross-border relationships, OFAC compliance becomes an important consideration. Intentionally or not, a company that finds itself in the middle of commercial activity with sanctioned entities could face significant losses, fines, and even criminal prosecution.

Staying ahead of sanctions-related issues often requires a risk-based OFAC compliance program with clearly defined steps executives and the compliance team can take to protect the business from sanctions violations or evasion schemes. These steps can be taken at various levels of the organization: Procurement can charge sales teams with identifying entities that lack an economic purpose, internal auditors can be involved to examine irregularities, and the board can set a strong tone at the top.

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by Josh Hanna, principal; Katerina Popova, senior consultant; and Darrell Zlotnick, senior manager, Deloitte Risk and Financial Advisory, Deloitte Transactions and Business Analytics LLP

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