In recent years a number of large financial institutions (FIs) have faced penalties for customer due diligence offences, including inappropriate monitoring of transactions and gathering insufficient information about beneficial owners identified by customers and about transactions carried out. This article explores how the FIs facing these penalties tried to get around sanctions.
Several high profile sanctions enforcement actions saw banks omitting customer identifying information in their wire transfers. Other enforcement actions saw banks using internal accounts and shell companies to disguise the involvement of sanctioned customers. FIs have also faced penalties for concealing customer identities by routing payments in highly complex ways. Below we describe eight common ways around sanctions.
Obscuring information in payment messages
SWIFT payment messages are sent in a manner intended to conceal the identities of sanctioned parties. Information that would identify such parties is either removed or replaced at the originating institution or a downstream branch.
Misuse of cover payments
Several non-US FIs have faced penalties for disguising the identity of their customers when clearing USD denominated transactions through US correspondent banks. First, an international wire transfer is exchanged directly between two non-US FIs that service the customer account. To process the transaction in USD, a separate “cover” payment instruction is sent to the US correspondent bank.
However, the US correspondent bank that is receiving and processing the cover payment only receives information (e.g. address, SWIFT code) for the two non-US FIs; it receives no information about the customers, about any other FI involved in the transaction, or about parties mentioned in the remittance information.
Misuse of special purpose entities
Payments are routed through special purpose entities (SPEs) such as shell companies or investment funds that are owned or controlled by sanctioned customers. The payments appear to be coming from the SPE rather than the sanctioned party. If the SPE is eventually tied to a sanctioned party, a new SPE is formed with a new name and used for the same purpose.
Misuse of suspense accounts
Payments are routed from sanctioned parties through internal suspense accounts to prevent the payments from being rejected or blocked by financial institutions. The outgoing SWIFT messages for such payments falsely identify the originating FI, instead of the sanctioned party, as the payment originator.
Layered routing of payments
Payments are structured in highly complicated ways (with no apparent legitimate business purpose) to conceal the involvement of sanctioned parties.
Trade finance violations
FIs attempting to circumvent sanctions remove or alter references to sanctioned customers or countries in trade finance instruments. For example, such FIs could use their bank name rather than the name of sanctioned customers, or use more general information to disguise the involvement of sanctioned parties or countries.
Amending information on checks
FIs attempting to circumvent sanctions remove or alter references to sanctioned parties when issuing and processing checks.
Using third-party financial institutions
USD denominated payments are sent through unwitting US correspondents (as opposed to their own US branches) in an attempt to minimise sanctions violations risk for the US branch of the originating institution. This method is often used in combination with the method of removing or altering the identifying information of a sanctioned party.
To better identify and prevent sanctions circumvention, FIs should integrate appropriate red flags into their controls and training materials.
(source of information: A publication of PwC’s Financial Crimes Unit “Sanctions: Circumvention methods under scrutiny”)