ML/TF Risk Assessments should be reviewed in light of ‘OFSI & NCA Red Alert – Evasion Typologies’

The Gambling Commission has published on its AML Hub the following ‘red alert’ (that you can download below):

OFSI and NCA Red Alert – Evasion Typologies

18 July 2022

The Gambling Commission would like to draw licensees’ attention to the ‘Red Alert’ on financial sanctions evasion typologies by Russian elites and enablers (opens in a new tab) (PDF) issued by the Office of Financial Sanctions Implementation (OFSI), Joint Money Laundering Intelligence Taskforce (JMLIT)+ Sanctions Facilitators Cell, law enforcement, private industry and regulators, and the National Crime Agency (NCA).

The purpose of the alert is to provide information from law enforcement and the legal and financial services sectors on some of the common techniques designated persons, and their United Kingdom (UK) enablers, are suspected to be using to evade financial sanctions.

The Commission urges licensees to review the alert and consider any changes to their money laundering and terrorist financing risk assessment, as well as associated policies, procedures and controls.

Further information

For further information regarding sanction compliance, please see OFSI’s website (opens in a new tab) and the Commission’s AML notices and updates page, including our update related to the important Russian sanctions update from the Gambling Commission issued previously.

The Executive Summary to the red alert reads as follows:

Executive Summary

Russian aggression in Ukraine is enabled by the elites who control Russia’s economic interests. The UK, US, EU and other allies are targeting those elites with unprecedented sanctions, seeking to drive a change in behaviour from both them and from the Russian government over its invasion of Ukraine.

A priority for designation has been those corrupt elites who have obtained a benefit from the Government of Russia. These close relationships have allowed these individuals to secure and retain control over misappropriated assets.

From case studies identified through financial intelligence and other sources, some Designated Persons (DPs) are using a range of techniques in order to evade sanctions impacting on their personal and commercial holdings. While this behaviour has generally occurred prior to sanctions being imposed on the DP, it is also happening shortly afterwards. While there has been coordination between sanctions designation and implementation authorities such as the EU, the US Office of Foreign Asset Control (OFAC) and UK HM Treasury’s Office of Financial Sanctions Implementation (HMT OFSI) and Foreign, Commonwealth & Development Office (FCDO), differing timescales in designating individuals between jurisdictions created opportunities for DPs to facilitate the movement of funds/assets.

DPs are using associates, including family members and close contacts, via enablers to:

  1. Transfer assets such as shareholdings in holding companies to trusted proxies such as relatives or employees;
  2. Sell or transfer assets at a loss in order to realise their value before sanctions take effect;
  3. Divest investments to ensure ownership stakes are below the 50% threshold, or relinquishing previous controlling stakes.

Although a DP may claim to have relinquished the asset, it is highly likely that they will retain their influence through trusted proxies and enablers. Enablers are individuals or businesses facilitating sanctions evasion and associated money laundering. Facilitation requires:

i)  the criminal activity not happening, or being more difficult, without the enabler;

ii)  assisting a suspect to evade scrutiny by distancing the suspect in some way from the offence; and/or

iii) allowing a suspect to benefit by laundering proceeds or assisting with doing so.

Key professions include (but are not limited to) legal (barristers and solicitors), financial (relationship managers, accountants, investment advisors, wealth managers, payment processors, private equity, trust and company service providers), estate agents, auction houses, company directors, intermediaries/agents and private family offices.

The NCA and SFO have previously jointly assessed that, in relation to international bribery and corruption, London-based enablers are almost certain to be in senior positions (director, owner, CEO, senior partner) within their company or business. Enablers’ level of complicity is assessed at three common levels: criminally complicit, wilfully blind (for example in relation to source of funds checks) and unwittingly involved.

UK licensed gambling operators should particularly note the following ‘industry recommendations’ set out within the red alert:

Industry Recommendations

  1. Arms-length transactions need to be documented and should not be taken at face value by firms. Firms are advised to seek guidance from OFSI if they have any doubt. This is important not only for financial institutions, but also for professional services firms, when you are assessing indirect control a DP may exert over the entity.
  2. A failure to undertake appropriate due diligence, for example wilful blindness in relation to source of funds or wealth checks, should be considered a red flag for complicity and both breach and/or circumvention offences.
  3. Firms should assess complex corporate structures carefully as a component of their enhanced due diligence for high-risk clients, querying the commercial justification for such structures. As a tool of foreign policy, UK sanctions have jurisdiction both over England, Wales, Scotland and Northern Ireland, as well as the Crown Dependencies and Overseas Territories (which includes the British Virgin Islands). All UK persons worldwide are required to comply owing to the extra-territorial application of the Sanctions & Money Laundering Act 2018.
  4. It should be noted that issues of aggregation of ownership can be further complicated where differing approaches to aggregation of ownership are applied across EU, UK and US and more than one owner seeks to divest their shareholding. Again, firms are advised to seek guidance from OFSI if in doubt.
  5. Where firms are presented with documentation that purports to present a change in ownership by a company linked to a DP, it is important not only to conduct enhanced due diligence, but to follow up with the relevant competent authority (OFSI in the UK) to understand if firms have reason to believe that ownership has not been transferred appropriately.
  6. In instances where companies have provided their own legal assessments regarding the transfer of ownership, firms should also carry out their own legal assessment in order to come to their own determination.

Reference above to ‘a DP’ means reference to a ‘Designated Person’.