Countering Sanctions Evasion Will Grow Harder in Coming Years, Governments Say

The FATF, in a new report released last week, said sanctions evasion threats are already “enormous challenges for the public and private sectors” and will likely become more challenging. The group, composed of the U.S., the EU and dozens of other countries that make up most of the world’s major financial centers, said governments need to be regularly sharing information with industry about new sanctions evasion methods, and FATF members should review how they assess sanctions risks to address what the group said is an “uneven understanding of vulnerabilities” across countries.

The FATF warned that “well-resourced state and non-state actors will continue to probe for weaknesses in enforcement, preventive measures, and legal frameworks and take advantage of new technologies and ongoing shifts in the geopolitical landscape.”

One of the best ways to protect against sanctions evasion is for FATF countries to strengthen their counter-proliferation financing controls and “legal frameworks,” the report said, calling for a “collective leap forward in the effective implementation of CPF regimes.” This may include increasing investigations and prosecutions, creating new “detection and reporting tools,” and working closer with entities within a country and with other countries.

The FATF recommended that governments carry out more outreach with their private sectors and use any feedback to craft guidance about how the two can work together to strengthen their compliance controls, specifically mentioning financial institutions and virtual asset service providers.

It also noted that many countries are still at “varying stages of identifying, assessing, understanding, and mitigating” sanctions evasion risks, and some don’t understand their vulnerabilities well enough. The FATF called for a “horizontal review” of how members address evasions and proliferation.

The report points to a range of trends that malign actors, including countries like North Korea, Iran and Russia, are using to evade sanctions. It specifically mentions the creation of front companies, companies that obscure their ownership information, users of crypto and other virtual assets, and shippers that falsify shipping documents, especially in the maritime sector.

Sanctions evaders are using increasingly “complex schemes” involving multiple intermediaries to buy or move sanctioned goods, the FATF said, which “make[s] it difficult to detect and investigate [proliferation] and sanctions evasion cases.” Many sanctions evasion networks are partnering with local businesses in third countries to act as their intermediaries to buy the goods under “false pretenses,” FATF said, such as declaring that the goods will only be used for civilian purposes. This is most often happening in the electronics, chemicals, or industrial equipment sectors.

Sanctions evaders sometimes also source parts from multiple suppliers “to make the nature of the end-use less apparent” and not raise any red flags, the report said. They’re also transferring goods through free trade zones, which usually don't have as stringent oversight and allow companies to repackage goods under new labels. “For example, a prohibited shipment of missile components might be disguised as industrial machinery with altered documentations,” the FATF said.

The report also pointed to compliance challenges within the virtual asset industry. As of April 2024, it said about three-quarters of FATF Global Network countries, which include more than 200 governments, were “non-compliant or partially compliant” with international standards on virtual assets, which leaves the sector “vulnerable to abuse” by sanctions evaders.