The number of European companies involved in business transactions with countries or entities under sanctions has significantly increased, particularly since the onset of Russia’s war in Ukraine in 2022. A recent report by Transcrime, “Kleptotrace,” which recently was presented to Europol. Usefully, it shines a light on a deeply disturbing reality: a number of unwitting firms, particularly small and medium-sized enterprises (SMEs), are increasingly becoming embroiled in complicated masterplans to avoid sanctions.
The truth found in this report is shocking. At the moment of Russia’s full-scale invasion of Ukraine, thousands of other companies in the EU, Ukraine, and other European countries were owned by at least 342 Russian nationals who were already sanctioned. These key findings raise critical questions. Do European companies have what it takes to survive and thrive in the cutthroat landscape of the new global regulatory regime?
Growing Involvement with Sanctioned Entities
Specifically, beginning in early 2022, European companies increased their activity with sanctioned countries and entities. This increase points to a frustrating development in the current geopolitical environment. The “Kleptotrace” report, co-authored by Giovanni Nicolazzo from Transcrime, underscores the challenges faced by businesses that lack the necessary tools and security infrastructure to identify potential risks effectively.
Furthermore, many of these companies, particularly SMEs, usually rely on self-declarations from their suppliers or clients. These declarations are not enough to ensure that companies comply with sanctions. Nicolazzo reminds funders about the need for real due diligence, saying that
“In addition to identifying the company’s owner, it is necessary to reconstruct the entire supply chain, right down to the end users.”
This strategy is intended to reduce the likelihood of unintentionally conducting business with sanctioned parties.
The complexity of these transactions is largely due to the key role intermediary banks play in these transactions, according to the report. These shadow financial institutions are usually organized in tax havens such as those in the Caribbean. Yet, they often continue to have relationships with those who are sanctioned individuals or entities. This complex web of international financial markets creates encrypted pathways to circumvent sanctions.
Internal Corruption and Risk Factors
Internal corruption appears to be a key risk factor across the landscape of sanction evasion. Stephen Piccinino, former regulation & enforcement official, policy advisor at Malta Financial Services Authority, warns against domestic politicians. As he cautions, their previous relationships with sanctioned people or organizations can be extremely hazardous. He advises companies to remain vigilant, stating,
“Be particularly careful if it possesses resources such as precious metals. And above all, check for internal corruption, particularly if there are any domestic politicians with past links to sanctioned individuals or entities.”
The existence of such players may make compliance more difficult and create a greater risk of dealing with sanctioned entities.
Additionally, evasions of sectoral sanctions are responsible for an overwhelming 80% of all evade cases. Yet as Nicolazzo notes, most of these firms lack the internal resources necessary to carry out deep audits on their partners. He notes,
“Those who do not have access to adequate tools or databases end up relying on simple self-declarations by the supplier or customer, which alone are not enough.”
This lack of resources can lead to significant compliance failures, particularly among smaller operators who might struggle more than larger companies when adapting to rapid regulatory changes.
Ongoing Research and Future Implications
At Transcrime, we are in the very midst of carrying out a statistical update on sanctions evasion. They hope to provide better understanding of the magnitude of this essential problem. Nicolazzo reminds that it’s important for firms to continue to be vigilant and forward thinking in evaluating their risks.
“Often these are entities that would have no economic justification for acquiring such assets. A thorough audit would reveal suspicious addresses, links with other similar companies and the absence of indicators of real operations.”
As the market keeps changing, businesses need to have their eyes wide open and be ready to adapt. Piccinino comments on the importance of strong enforcement measures within national borders.
“A state that is serious about enforcing sanctions should investigate the activities of large conglomerates in its national territory.”
He further illustrates how corrupt practices can undermine compliance efforts when politicians exploit loopholes in financial systems for personal gain:
“If, for example, I am a corrupt politician from a European country and I want to conclude a transaction to build energy infrastructure in a sanctioned country, I can conclude the contractual agreement, and I receive the payments via a risky but non-sanctioned country to the terminal bank account in my country because I know that my bank does not do the necessary checks.”
The advance changing and nuances of the challenging web of sanctions evasion is go fast established. European companies need to build their risk assessment frameworks robustly, and rigorously adhere to international laws and benchmarks.
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