Intensified Iran sanctions will trigger historically complex evasion, laundering tactics

A recently announced U.S. plan to impose unprecedently stringent economic sanctions on Iran will likely trigger an equally historic effort to evade those restrictions and launder resulting proceeds. While past sanctions have wreaked havoc on the Iranian economy, Tehran still managed to sell vast quantities of oil in global markets, using a wide array of sanctions-evasion tactics.

Yet the severity of this round of sanctions, coupled with a political landscape quite different from a few years ago, suggests that the level of money laundering involved in evading the new measures will reach new heights in complexity and creativity.

Numerous options remain available to those evading sanctions or those offering financial services to sanctioned entities. Some of these tried and true methods will have a similar complexion to the techniques employed over past decades. Others will be assisted by new technology and changing political circumstances. For financial institutions wishing to avoid the ire of American regulatory authorities, increased levels of investment in technology solutions and training are inevitable. Financial institutions will need to increase their awareness of the various money laundering techniques used to circumvent sanctions, lest they become unwitting participants in evasion efforts. With penalties now reaching billions of dollars, banks could face crippling fines and legal action for operating a complacent anti-money laundering (AML) program that pays insufficient attention to sanctions evasion patterns and typologies.

Professionalised laundering and evasion Economic sanctions are the munitions of financial warfare. As they grow in magnitude, so do the responses by professional money launderers and dark financial institutions intent on profiting from their violation. History has shown that some financial institutions will adopt a radically different approach from their peers by offering financial services to sanctioned entities and/or their counterparties to generate exceptional profits.

Businesses operated by international banks that are classified as high-risk for money laundering – correspondent banking, trade finance, private banking, and capital markets – can be used to camouflage sanctions evasion activity within their gargantuan daily transactional volumes. Individuals and firms intent on offering sanctioned persons or entities access to global banking markets will exploit weaknesses within these four high-risk lines of business. Iran poses unique challenge The U.S. imposition of economic sanctions on highly isolated states, such as North Korea, is a fairly straightforward affair.

Policy is dictated by Washington, and rules flow through the compliance departments of international financial institutions. Financial intelligence then flows into FinCEN and law enforcement, followed by action from various intelligence agencies acting on that information. Those who maintain banking and trade relations with North Korea face exclusion from a global financial system that remains reliant on U.S. dollar payments to power international trade, remittances, and capital markets.

In the case of Iran, however, complex geopolitical factors create a far more challenging enforcement scenario. Since the United States relaxed economic sanctions in 2015, European countries have invested heavily in Iran’s oil industry. With the looming re-imposition of sanctions, European firms now face writing off their investments or risking prosecution by American authorities for engaging with the Iranian economy.

Immediately following the August 6th White House sanctions announcement, the European Union (EU), United Kingdom (UK), France, and Germany released a joint statement on updating the EU’s Blocking Statute, which “protects EU companies doing legitimate business with Iran from the impact of U.S. extra-territorial sanctions”. Although the Blocking Statute does not negate the risk of prosecution by American authorities for doing business with Iran, it certainly complicates those efforts. Additionally, U.S. rivals Russia and China both require Iranian oil to fuel their growing economies. Given their mutual disdain for current U.S. foreign policy, their appetite for adhering to economic sanctions against Iran is limited.

As such, those using money laundering techniques to evade sanctions may find that many financial centres are less enthusiastic about enforcing U.S. policies. Evasion tactics A common set of sanctions evasion techniques and themes emerged during the last round of sanctions, and they will feature even more prominently in the next round.

They are as follows.

• Beneficial ownership: Sanctioned entities will camouflage the beneficial ownership of the corporate vehicles they control to disguise their transactions. False identities, nominee directors or “straw men” (those who receive compensation for pretending to be the true owners) will be listed on the paperwork. Corporate ownership will daisy-chain throughout offshore financial havens renowned for their bank secrecy laws.

• Offshore financial havens: Jurisdictions where off-the-shelf incorporation is a booming business will see increased interest in their services. Other jurisdictions suffering from conflict or political upheaval may find their corporate registries polluted with shady companies intent on evading inspection by American authorities. Such havens have traditionally been found in tropical environments, but are becoming more prevalent in Africa, the Middle East, and Asia. The usual suspects of Switzerland and Grand Cayman are now passé, used primarily by amateurs. Laundering professionals have moved on to opaque locations that are normally off the radar. As China and Russia create numerous challenges for financial investigators, their use as offshore financial havens will only increase.

• Corporate nesting: Sanctioned entities will “nest” their transactions within a company that is not named in sanctions lists. Companies willing to earn extra income by ingesting these transactions will run certain risks, yet they will be generously rewarded.

• Institutional nesting: There are seemingly endless possibilities for dark correspondent banks willing to risk classification of “primary money laundering concern” by Section 311 of the USA PATRIOT Act. For financial institutions willing to run afoul of American sanctions policy set by the Office of Foreign Assets Control (OFAC), massive fees can be earned by dealing with sanctioned banks, individuals, and companies. For example: Internal procedures can be adjusted to bypass sanctions lists; SWIFT messages can be stripped of sanctioned entity names; OFAC filters can be turned off; training programs can instruct bank staff on how to circumvent sanctions; and transactions can be routed through numerous unrelated jurisdictions.

• National nesting: Not all countries agree with American sanctions policy. Those who adopt a more lenient approach to Iran will find themselves conduits for money launderers camouflaging Iranian banking activity. In the past, this list has included modern offshore financial havens. Now others are entering the fray, either by supporting their nationals who hold existing investments in Iran or who simply do not wish to abide by Washington’s current rules.

• Black market currency exchanges: The Black Market Peso Exchange (BMPE) was created in the 1970s to exchange Colombian pesos for USD, as a result of narcotics traffickers selling cocaine in Florida. The BMPE is an exchange of title for currency managed by brokers. The same scenario can exchange title of USD earned through oil sales for Iranian riyals or for USD to purchase imported goods into Iran.

• Alternative currencies: Chinese currency (RMB) is now available to corporations in major financial centres around the world. The Hong Kong Dollar (HKD) has been pegged to the USD for decades and maintained its strength through several significant financial crises. Both currencies count on massive USD reserves to support their power within foreign exchange markets. Lately, Euro payments have found a more eager audience for those unwilling to have their payment details routed through a U.S. correspondent bank. Lower volume currencies – such as those from Switzerland, Canada, Australia, and New Zealand – offer a degree of sanctuary, but their clearing banks will be closely following OFAC instructions, as they are heavily invested in the American banking industry and depend on USD access. Cryptocurrencies may offer unique camouflage options, but they are thinly traded and relatively unfamiliar to the traditional players offering sanctions evasion services. Given the breadth of cryptocurrency product offerings, however, there may be unique solutions that solve traditional problems of transactional camouflage.

Published 27-Aug-2018 by Kim R. Manchester
Produced by Thomson Reuters Accelus Regulatory Intelligence 28-Aug-2018

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