Bloomberg Law
April 4, 2022, 8:00 AM

Law Enforcement Zeroes in on Russian Sanction Evasion Schemes

Kevin Feldis
Kevin Feldis
Perkins Coie
T. Markus Funk
T. Markus Funk
Perkins Coie
Jamie Schafer
Jamie Schafer
Perkins Coie

The global response to Russian’s invasion of Ukraine has led to a cascade of multilateral sanctions targeting Russian governmental agencies, state-owned entities, banks, government officials, and private business leaders accused of support for Russian President Vladimir Putin’s warmongering. As the war continues, the U.S., in coordination with its international partners, will be increasingly focused on preventing inevitable attempts at evasion.

On Feb. 21, Putin signed a decree recognizing the independence of two controversial, Russian separatist-held regions of Ukraine. By the next day, the separatist regions were comprehensively excluded from U.S. markets.

By Feb. 24, Russia had launched Putin’s full-scale invasion, causing the U.S. and a global coalition of key allies (most notably, the EU and U.K.) to impose sweeping sanctions aimed at isolating the Putin regime. Those sanctions continue to evolve with regular additions to the entities, individuals, and sectors targeted. The sanctions are, by most accounts, devastating the Russian economy, and the impact on global business cannot be understated: Never before has a major world power been subject to such broad, organized sanctions.

Sanctions Naturally Trigger Evasion

In this climate, and in light of the global economy’s expansive and tangled web of business dealings involving Russia and its already-struggling economy (its gross domestic product puts it roughly on par with Brazil, Australia, Spain, and South Korea—and is roughly 1/14th that of the U.S.), law enforcement worldwide is bracing for what is anticipated to be a wave of sanctions evasion activities.

Whether intentional, misguided, or misinformed, there will inevitably be those who run afoul of the new prohibitions on doing business with targeted sanctioned regions, sectors entities, and individuals. Given the significance of these sanctions to national security and foreign policy priorities and the multilateral nature of emerging enforcement efforts, there is every reason to believe violations of sanctions against Russia will be robustly resourced and aggressively investigated and pursued.

It is, therefore, an important time for companies to conduct a clear-eyed evaluation of their internal controls, both to prepare for emerging risks and to meet regulators’ long-standing expectations—even where they have been less rigorously enforced at times in the past.

Stated simply, those companies that fail to get their compliance houses in order risk getting swept up in the coming wave of unprecedented international enforcement efforts.

Calling in Reinforcements

U.S. Attorney General Merrick B. Garland on March 2 announced the creation of a new interagency task force—KleptoCapture—dedicated to prosecuting Russia sanctions evasion. Garland pledged that the Department of Justice “will leave no stone unturned in our efforts to investigate, arrest, and prosecute those whose criminal acts enable the Russian government to continue this unjust war.”

Task Force KleptoCapture will be actively coordinating with a broad international coalition of national law enforcement agencies, now known as the Russian Elites, Proxies, and Oligarchs (REPO) Task Force.

And further bolstering law enforcement efforts, on March 16, the Department of Treasury launched a new whistleblower program called the Kleptocracy Asset Recovery Rewards Program. This new program offers rewards of up to $5 million for information leading to seizure, restraint, or forfeiture of assets linked to foreign corruption, specifically targeting corruption involving Russian government officials and oligarchs.

These efforts may soon produce a wave of enforcement actions targeting entities and individuals who afford sanctions targets continued access to U.S. and global markets. These actions will certainly target active co-conspirators, but they will extend much further to businesses that fail to exercise appropriate diligence to address potential sanctions evasion, particularly against those who fail to invest in compliance or ignore red flags.

U.S. law enforcement are also unlikely to shy away from pursuing foreign entities and individuals who assist sanctions targets in accessing U.S. goods, services, and currency.

Further, given the global public outcry regarding the invasion of Ukraine and the unprecedented affirmative response by private industry—including voluntarily and broadly divesting from Russia and severing the country’s ties to Western services and resources—the reputational implications of sanctions evasion allegations should not be underestimated.

Reading the Writing on the Wall

From an enforcement perspective, the writing is on the wall as to regulators’ expectations that companies and individuals actively take steps to (1) address and (2) steer clear from anything that could be considered sanctions evasion efforts. In fact, law enforcement agencies have begun issuing regular public alerts warning of likely sanctions evasion schemes and highlighting red flags suggestive of misconduct.

For example, regulators expect significant efforts to circumvent banking restrictions through use of foreign exchange houses, cryptocurrency, and pass-through transaction parties intended to hide the true parties in interest. Russia is also expected to focus its efforts on evasion of export controls by layering of third-party resellers between U.S. and Russian parties, particularly involving Chinese companies, given China’s ties to Russia and perceived history of sanctions evasion.

Regulators further emphasize likely attempts at obscuring ownership through opaque corporate structures or nominee holders, particularly with regard to transactions involving highly liquid assets such as real estate and luxury goods.

Best Practices 101

Companies should take these warnings seriously. Best practices include reviewing internal sanctions policies, procedures and controls, and consulting with trusted counsel about how well they are meeting long-standing government compliance expectations such as those set out in DOJ’s evaluation of corporate compliance programs and the Office of Foreign Assets Control’s (OFAC) framework for OFAC compliance commitments.

Robust controls around transactions involving shell companies or trusts, assets held in offshore jurisdictions, cryptocurrency, and opaque distributions chains are particularly critical to preventing and detecting sanctions violations, as is vetting of foreign counterparties. This is particularly true when it comes to jurisdictions with low levels of corporate transparency.

A wave of sanctions evasion is coming, with potentially unprecedented international enforcement resources bearing down on the entities and individuals who facilitate such evasion or fail to take precautions to avoid being involved. While the world is still digesting these complex and rapidly evolving sanctions, those targeted are working to develop schemes to evade them and continue business as usual.

Now is the time to take stock of sanctions compliance controls; tomorrow may be too late to avoid a nasty entanglement.

Author Information

Kevin Feldis is a partner at Perkins Coie with a global practice responding to government enforcement actions, conducting internal investigations, managing crisis response, litigating business disputes and white- collar cases, and counseling ESG and a range of corporate compliance issues. He served as a federal prosecutor for 18 years prior to joining the firm.

T. Markus Funk (Ph.D.), a former federal prosecutor in Chicago and State Department section chief in Kosovo, most recently served as the firmwide chair of Perkins Coie’s White Collar Investigations & Defense practice.

Jamie Schafer is a partner in the White Collar & Investigations practice with Perkins Coie. She represents corporations and individuals in complex criminal and regulatory matters, including matters involving the Foreign Corrupt Practices Act, anti-money laundering laws and regulations, and embargoes administered by the Department of Treasury, Office of Foreign Assets Control.