NEWBRAND ACAMS - CGSS VC - 2 - Evasion - Slides For Student Use v1.1

ACAMS CGSS Exam Prep Module 2: Sanctions
Evasion Techniques
CGSS Exam Prep

Module 2: Sanctions Evasion Techniques
Course 1. Governance and Enforcement
Modules
2. Sanctions Evasion Techniques
a. Identify common methods to evade
sanctions
3. Sanctions Due Diligence
4. Sanctions Screening
5. Conducting Sanctions Investigations
6. Identifying and Blocking Assets
@ 2020 ACAMS. All Rights Reserved. 2
© ACAMS. All rights reserved. Provided to

ACAMS course participants. Do not distribute
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Evasion Techniques
Module 2
Learning 1. Parties that try to evade sanctions
Objectives
a. Identify attempts by external parties
to evade sanctions
2. Internal Staff
3. Trade-Related Methods
4. Concealing Beneficial Ownership
Sanctions Evasion Techniques
Sanctions evasion
o Intentional act to engage in prohibited activity
o Remove or conceal the involvement of sanctioned
o Place, entities, individuals
o In a transaction or series of transactions(s)
o Perpetrators
o External or internal
o Direct participants try to bypass CDD, filters, screening
o Financial institutions can be complicit
o Understanding evasion typologies can help identify loopholes

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Evasion Techniques
To identify evasion attempts
o Need to understand
o Nature of customer
o Businesses with which it is engaged
o Structure and individuals
o Where and with whom it does business
o Detect activity that does not
o Have a valid purpose
o Make sense for the given customer
Let’s discuss
o Bank customer
o Commodity wholesaler
o Receives financing to send grain to Southeast Asia
o New behavior
o Begins shipping to Dandong, China, near N. Korea
o Delayed the underlying trade documents
o What should the bank do?

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Evasion Techniques
Evasion Methods: Stripping
o Intentional removal of information by customer or staff
o Often to hide the identity of the
o Sender
o Recipient
o Jurisdiction
o SWIFT messages are frequently “stripped” to
o Remove vital information
o Make it difficult to make a decision
o Almost always involves an insider
Please answer the poll

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Evasion Techniques
Separating messages
o Sending two types of messages for the same payment
o With incomplete or different information
o Occurs when more than two financial institutions are involved
o SWIFT messages for general processing of transactions
o MT103: single payment between 2 banks
o MT202, MT202COV: tells the intermediary to cover payment of the beneficiary’s bank
Separating messages, continued
o Usually MT103 and MT202 sent together
o Provides complete information about
o Remitter and beneficiary
o To all banks involved
o To speed up process, MT103 sent to beneficiary bank directly
o Intermediary banks would then only see MT202
o As a result, no information about UBO
o SWIFT introduced MT202COV in 2007
o Payment message contains a sequence B field
o Must be identical to same fields of 50a and 59b of M103

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Evasion Techniques

Originator SWIFT Messaging Mechanics Beneficiary
(Frankfurt) (Hong Kong)
Payment order
Credit
A MT103 Payment Order B
MT202COV
MT910 Credit Advice

C D

(Frankfurt)
(Hong Kong)
Payment order
Credit
MT202COV
MT910 Credit Advice

C D

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Evasion Techniques

(Frankfurt) (Hong Kong)
Payment order
Credit
MT202COV
MT910 Credit Advice

C D
MT202COV
o Reduces probability of the intermediary having incomplete information
o If someone at the sending bank wants to conceal UBO, they could
o Alter the name information on the MT202COV, or
o Send an MT202 to mislead the intermediary bank
o SWIFT places responsibility on originating bank
o It is still possible to evade sanctions

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Evasion Techniques

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Evasion Techniques
Other evasion tactics during payment screening
A perpetrator might:
o Rearrange the data in a field not routinely screened
o Replace information with false data
o Bank identifier code for a neutral country, or
o Unusual combinations of letters
o Use red flag phrases, “No name,” or “On behalf of…”
o Alter the sender or beneficiary name
o Alter a message before sending it on
Payment messages
o Organizations should
o Check how their systems review a payment
o Review the entire contents of a message
o Are all fields scanned?
o Can the filters detect inconsistencies?
o Can it create an alert when a text field contains numbers?
o Verify that automated methods are adjusted effectively

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Evasion Techniques
Nested accounts
o Correspondent bank accounts are necessary for the global system
o Regulators require transparency
o Nested accounts: a foreign institution accesses US system through an account it holds

with another foreign institution
o US parties do not realize they are facing a customer’s customer
o Bank A in China has an account with Bank B in Italy
o Bank A is on government sanctions list
o Initiates payment on behalf of customer in China
o Through Bank B to make a payment in USD to US manufacturer
o US bank might only see Bank B as original sender
Iranian bank example
o In receipt of dollar payments from activity elsewhere
o Unable to clear those payments
o Iranian bank would
o Use a correspondent bank in an unsanctioned location
o Send dollars to the US for clearing
o Arrange for their name to be removed from payment information
o This scheme would require cooperation from the second

foreign institution

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Evasion Techniques
Q&A highlights
Module 2
Objectives
2. Internal Staff
a. Identify attempts by internal staff to

evade sanctions

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Evasion Techniques
Deliberate circumvention of sanctions
o Adding sanctioned individuals or entities to the “white list”
o To allow a payment or transaction to go through
o An organization should
o Have an internal escalation process for suspicious behavior
o Ensure employees understand and follow the process
o Regulators deal with deliberate acts harshly
o Criminal penalties
o Large fines
o Harsh punishment
Case Study: BNP Paribas, 2016
o 2014: Received a record fine from OFAC of US$9 billion
o Dollar clearing services
o Sudan, Iran, Cuba
o Staff had stripped references from SWIFT messages
o Payments circumvented controls
o Payments were processed on behalf of sanction targets
o Pleaded guilty to criminal conspiracy
o Long term, multijurisdictional, most senior levels
o Created a process and instructions

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Evasion Techniques
BNP Paribas, continued
o Compliance staff aware of widespread stripping
o Prioritized commercial gain over regulatory compliance
o Root causes
o BNPP lacked a compliance culture
o Internal cries of alarm met with resistance
o Insufficient due diligence from payment recipients
o Key takeaways
o The size of the fine outweighed any commercial gain
o Internal controls must ensure that altered or missing information is flagged and
captured before processing
o SCPs should be tested regularly and include common methods

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Evasion Techniques
Module 3
Objectives
2. Internal Staff
a. Describe trade-related methods of

sanctions evasion

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Evasion Techniques
Concealment
o Hide the identity of receiver of goods
o To conceal the identity of the ultimate purchaser, or
o To conceal the manner in which the products will be used
o Methods include
o Use a straw buyer; complete a separate purchase after export has occurred
o Falsify the name of the purchaser or end-user
o Falsely state the intended use in
o Purchase orders
o Transport documentation, or
o Other documents
Concealment, continued
o Certain sensitive merchandise requires an
o Attestation, or end-user certificate
o Indicating that the goods will not be further shipped or sold
o Subject to verification by regulators
o If purchaser intends to defraud, certificate would also be false
o For trade-based transactions, concealment could entail
o Obscuring the origin of the merchandise
o Obscuring the path of a vessel
o Transferring letters of credit, LOCs
o Removing the names of financial institutions

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Evasion Techniques
Concealing the final destination of goods
Those who wish to evade sanctions could
o Forge financial documentation on the final destination
o Bills of lading
o Sales orders
o Invoices
o Use an agent or straw buyer in an unsanctioned jurisdiction
o Exporter is unaware of the final buyer or destination
o Goods are shipped to named destination, then further on
Transshipment
o Delivery of goods to an intermediate destination; then to a final destination
o Can also mean a change of carrier or vessel
o Can be a necessary step to reach a legitimate destination
o Such as moving goods from an ocean vessel to a train
o Not always a sign of evasion
o Some jurisdictions have strict regulations
o OFAC example
o Goods cannot be imported to the US if transshipped through Iran
o Without prior authorization

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Evasion Techniques
Case Study: Ali Asghar Manzarpour
o 2007: Director of Preston Technical Services, Ltd.
o BIS charged him with three violations of EAR
o 2004: Coordinated the export of a single-engine aircraft to Iran without authorization
o Attempted to ship to US via a freight forwarder in the UK
o Shipment stopped before it left UK
o Lacked authorization from OFAC, per section 560.204
o Was ultimately denied export privileges for 20 years

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Evasion Techniques
Q&A highlights
Switching cargo on the open sea
o Cargo vessels must
o Maintain records of their route
o Specify at which ports they stopped, loaded, and offloaded cargo
o To evade sanctions, a ship from the selling country
o Arranges to meet a ship from sanctioned location
o International waters, beyond jurisdictions or naval forces
o Transfers the cargo in open water
o Documentation is falsified, transponders turned off
o Known as “loitering”
o Governments using international surveillance satellites
o Identify when ships leave ports, where headed, with whom they meet

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Evasion Techniques
Falsifying documents
o Common falsified documents include
o Commercial invoices
o Bills of lading
o Cargo manifests
o Goal is to conceal contents or destination
o Merchandise is seen only during packing/unpacking
o Spot checks can identify some fraud
o Thousands of containers travel through ports each day
o Authorities rely on all parties involved
Case study: Access USA Shipping LLC, 2017
o Fined US $27 million by BIS for EAR violations
o 150 violations: April 2011 - 2013
o Allowed overseas customers to buy goods from US for export
o Altered documents: value, description of goods
o Provided a “suite” in US warehouse for receipt of US goods
o Revised information before export
o To avoid US export control scrutiny
o CEO Eric Baird
o Indicted by US, December 2018
o Pleaded guilty, settled with US Dept. of Justice and BIS
o Largest penalty for an individual in BIS history

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Evasion Techniques
Case Study: Access USA - Root causes included
o Disregard for US laws, regulations governing exports
o Lack of understanding of consequences for violations
o Lack of any internal controls to ensure compliance
o No record keeping
o No employee training
Case study: Access USA - Key takeaways
o The importance of knowing your customer
o US companies failed to conduct proper due diligence
o Understanding nature of customer could have uncovered third-party arrangement
o Those determined to side-step regulations will do so
o For a limited time
o Any business engaged in trade must conduct thorough due diligence
o Especially with controlled merchandise

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Evasion Techniques
The use of front and shell companies
o To hide the identity of end users or final destination
o Can incorporate a front or shell company in a third country
o Appears that the end user is operating in the third country
o Bank account and address in same jurisdiction
o To give the impression of a clean business record

Shelf or aged companies
o Can be used to gain a clean business record
o Created ahead of time, often by law or accounting firm
o Inactive until needed
o Seem more reliable due to earlier date of incorporation
o To detect this type of evasion, need to understand
o Nature, purpose, structure of relationships
o Customers
o Counterparties
o Reasons for the business activities
o Geographies that are subject to sanctions
o Could set up entities in other jurisdictions
o To gain access to the financial system

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Evasion Techniques

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Evasion Techniques
Case study: ZTE Corporation, 2018
o Breached US sanctions on trade with N. Korea, Iran
o Pleaded guilty to conspiring to violate IEEPA
o Paid US $1 billion fine
o Had contracted with Iranian companies
o Created isolation company Beijing 8 Star, or 8S
o To hide illegal export of US goods to Iran
o Continued to look for ways to create isolation companies
o To supply US parts to embargoed countries
o Took deliberate steps to hide information from the US government
Case study: ZTE - Root causes for non-compliance
o Structuring the business to avoid export controls and sanctions
o Lack of a compliance culture
o Lack of a compliance program
o Failure to see the
o Seriousness of the acts
o Potential consequences

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Evasion Techniques
Case study: ZTE - Key takeaways
o US companies should have
o Conducted more in-depth due diligence on other parties
o To see the connections to isolation companies
o Questioned the structure of the sales
o Regulators showed serious consequences for institutions that
o Conceal information
o Demonstrate evasion acts
o Staff must apply sanctions risk controls
o Escalate evasion attempts to management
Red flags: Trade-related evasion techniques
o Concealing identity
o Concealing restricted goods as non-restricted
o Misuse of a front or shell company
o Concealing end user, final destination, or both
o Concealing the final destination, or transshipment
o Concealing the end use, end user, or both

elsewhere. v1.1 24
Evasion Techniques
Module 4
Objectives
2. Internal Staff
a. Describe common methods for

concealing beneficial ownership
Concealment of ownership and control information
To conduct business in jurisdictions where they are sanctioned
o Need to establish customer ownership
o Verify
o Update periodically
o Methods
o Use of different names, change spelling, vary order
o Provide a false address
o Act through a representative

elsewhere. v1.1 25
Evasion Techniques
To prevent this technique, an institution should
o Look for counterparties that appear multiple times
o Establish a customer relationship
o Apply additional due diligence
o Conduct due diligence to
o Determine parties with whom they will transact
o Understand their target customer
o Determine whether you can screen customers in advance
o Determine whether their behavior indicates evasion attempts
Complex corporate ownership arrangements
 Make it difficult to establish beneficial owners
 50% ownership rule in US and Europe
 US: if entity is owned at 50% or higher by a sanctioned individual,

it must be considered sanctioned
 EU: the entity must be owned at level higher than 50%
 Challenge is to establish who the owners are
 Then determine whether they are a sanctions target

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Evasion Techniques

Complex corporate ownership schemes
1 2 3 5
100% 50% 100% 90%

50%
100%
2
D E F G H
10% 40% 50% 10% 40% 50%
B C
60% 40%
Other ways to conceal an owner’s identity
o Use legal entities in jurisdictions where it is hard to get beneficial ownership information
o Company register is not publicly accessible
o Register does not include UBO information
o Requests must be made to registrar and might not be granted
o Use bearer bonds or shares
o Identity of the actual owner is rarely provided
o As a result, the use of bearer bonds has been in decline
o Example: Swiss authorities require holders to establish owner identity

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Evasion Techniques
Divestment of ownership interests
o Sham divestments
o Selling equity or assets to
o Close associates
o Other affiliated persons
o Goal is to make it look like the target no longer owns the asset
o The target continues to influence or control operations

Divestment of Ownership Example
US sanctions targets
EU sanctions target
Arkady Rotenberg Boris Rotenberg

Company
(Brother 2) (Brother 1)
owned by
Roman Rotenberg
Russia (Son of Boris)
Finland
Sold 50% of shares
Arena Events Oy
(owned by Roman)

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Evasion Techniques
OFAC’s 50% rule
o Entities are blocked if one or more blocked persons owns a total of 50%
o Directly or indirectly
o Any divestment transactions
o Must take place outside of US jurisdiction
o Cannot involve US persons
o Entities with less than 50% ownership are NOT blocked
o Conduct due diligence to confirm the divestment occurred
If the property of a blocked entity comes within the US
o The property is blocked until OFAC
o Allows the unblocking, or
o Removes the blocked person from the SDN list
o If the ownership later falls below 50%
o The property remains blocked
o Since the blocked person still has interest
o Person may ask for permission to transfer or deal
o If the combined ownership of blocked persons falls below 50%
o Due to actions of the blocked person, property remains blocked
o Due to actions by OFAC, entity is no longer blocked

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Evasion Techniques
Modules

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Evasion Techniques

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Evasion Techniques
Q&A highlights
Modules

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Evasion Techniques
Key Content Advisors

o Yevgeniya Balyasna, CAMS o Jon Harvey, CAMS
https://www.linkedin.com/in/yevgeniyabalyasna/ https://www.linkedin.com/in/jon-w-harvey-
emeafinancialcrimeaml/
o John Byrne, CAMS
https://www.linkedin.com/in/john-byrne-7640938 o Andrew McAdams, CAMS
https://www.linkedin.com/in/andrewmcadams
o Chloe Cina
https://www.linkedin.com/in/chloe-cina-4bb37729/ o Matthew McGuire, CAMS
https://ca.linkedin.com/in/amlmattmcguire
o Adrian Ford
https://www.linkedin.com/in/adrian-ford-4311012b/ o Samantha Sheen, CAMS
https://uk.linkedin.com/in/samantha-j-sheen-8081aa72
o Keth Furst
https://www.linkedin.com/in/keithfurst/ o Marian Todd, CAMS
https://www.linkedin.com/in/mariantodd/
o Chris Ghenne, CAMS
https://www.linkedin.com/in/christopher-ghenne-cams- o George Voloshin
b1a5931/ https://www.linkedin.com/in/george-voloshin/
o Jennifer Hanley-Giersch, CAMS-Audit

https://www.linkedin.com/in/Jennifer-Hanley-Giersch-
5909a99/
Thank you

elsewhere. v1.1 33

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ACAMS CGSS Exam Prep Module 2: Sanctions

CGSS Exam Prep

Course 1. Governance and Enforcement

@ 2020 ACAMS. All Rights Reserved. 2

© ACAMS. All rights reserved. Provided to

4. Concealing Beneficial Ownership

@ 2020 ACAMS. All Rights Reserved. 3

Sanctions Evasion Techniques

o Intentional act to engage in prohibited activity

o Remove or conceal the involvement of sanctioned

o Place, entities, individuals

o In a transaction or series of transactions(s)

o Direct participants try to bypass CDD, filters, screening

o Financial institutions can be complicit

o Understanding evasion typologies can help identify loopholes

@ 2020 ACAMS. All Rights Reserved. 4

© ACAMS. All rights reserved. Provided to

Sanctions Evasion Techniques

To identify evasion attempts

o Businesses with which it is engaged

o Structure and individuals

o Where and with whom it does business

o Detect activity that does not

o Have a valid purpose

o Make sense for the given customer

@ 2020 ACAMS. All Rights Reserved. 5

Sanctions Evasion Techniques

o Receives financing to send grain to Southeast Asia

o Begins shipping to Dandong, China, near N. Korea

o Delayed the underlying trade documents

o What should the bank do?

@ 2020 ACAMS. All Rights Reserved. 6

© ACAMS. All rights reserved. Provided to

Sanctions Evasion Techniques

Evasion Methods: Stripping

o Intentional removal of information by customer or staff

o Often to hide the identity of the

o SWIFT messages are frequently “stripped” to

o Remove vital information

o Make it difficult to make a decision

o Almost always involves an insider

@ 2020 ACAMS. All Rights Reserved. 7

Please answer the poll

© ACAMS. All rights reserved. Provided to

Sanctions Evasion Techniques

o Sending two types of messages for the same payment

o With incomplete or different information

o Occurs when more than two financial institutions are involved

o SWIFT messages for general processing of transactions

o MT103: single payment between 2 banks

@ 2020 ACAMS. All Rights Reserved. 9

Sanctions Evasion Techniques

Separating messages, continued

o Usually MT103 and MT202 sent together

o Provides complete information about

o Remitter and beneficiary

o To all banks involved

o To speed up process, MT103 sent to beneficiary bank directly

o Intermediary banks would then only see MT202

o As a result, no information about UBO

o SWIFT introduced MT202COV in 2007

o Payment message contains a sequence B field

o Must be identical to same fields of 50a and 59b of M103