How companies identify circumvention schemes in the context of sanctions

Schemes to circumvent regulations are increasingly coming under the scrutiny of supervisory and law enforcement authorities. In future, companies must not only identify suspicious arrangements, but also analyse, document and address them in a risk-based manner. The EU has identified specific red flags that may indicate sanctions risks and potential circumvention schemes. We provide background information, answer four key questions and offer recommendations for action – precise, practical and relevant to decision-making.

Why traditional sanctions checks are often insufficient

Many companies check whether their business partners appear on sanctions lists in order to address the key risks. However, the real challenge often lies not in the obvious breach of sanctions, but in its concealment.

Business partners are sometimes used as intermediaries, payment routes are channelled via third countries, or beneficial owners are deliberately concealed. Outwardly, the transaction appears unremarkable; economically, however, its sole purpose may be to circumvent sanctions and export restrictions.

It is precisely such circumvention schemes that are increasingly coming under the scrutiny of supervisory, law enforcement and regulatory authorities. BaFin has been highlighting the associated risks for some time. At the same time, the European Union is continually clarifying its expectations of companies and is attaching unprecedented importance to this issue in the EU Anti-Money Laundering Regulation.

Why the pressure to act is mounting now

On the one hand, geopolitical tensions and extensive international sanctions regimes are leading sanctioned entities to increasingly seek alternative ways to circumvent trade and payment restrictions. Secondly, regulatory expectations of companies are rising noticeably.

Under the EU Anti-Money Laundering Regulation, financial sanctions will in future become an integral part of risk analysis. At the same time, the so-called ‘best-efforts’ rule already obliges companies, in certain cases, to take appropriate measures to prevent circumvention and the evasion of sanctions within their sphere of influence.

The key red flags for circumvention schemes

The EU has published specific warning signs in this regard. These can be summarised in four key questions:

Who is involved?

Particular attention is required when transactions are carried out via intermediaries without a clear economic rationale. Other warning signs include newly established business partners, complex corporate structures, short-term changes in beneficial ownership, or links to sanctioned individuals.
What is being traded?

Transactions involving sanctioned, dual-use or otherwise critical goods are cause for concern. Similarly, companies should be on their guard if product descriptions are unusually vague or if goods clearly do not fit the customer’s business model.
Where are goods or payments flowing to?

There are increased risks associated with deliveries or payment flows via countries that are frequently used as transit or bypass locations. Unusual supply chains or non-transparent payment routes that lack economic plausibility should also be investigated more closely.
Who is the actual end-user?

It is particularly critical when business partners do not disclose the final destination of goods, make only vague statements regarding end-usersor refuse to include contractual clauses to prevent re-exports (end-use declaration).

Sanctions risk analysis: From screening to risk assessment

Many companies have established sanctions screening processes. However, these are often insufficient: Regulatory expectations are increasingly moving towards a systematic and risk-based analysis of sanctions risks. This is particularly true in light of the new EU Anti-Money Laundering Regulation, which explicitly places financial sanctions at the centre of company-wide risk analysis.&

The key question here is where risks might arise within a company’s own business model. Of particular relevance are business relationships involving significant geographical risk, complex ownership structures, critical goods, and business models with significant links to third countries. The aim is to identify potential circumvention scenarios at an early stage and assess them in a transparent manner.

An effective sanctions risk analysis assesses business partners, ownership structures, transaction patterns, end-users, end-use and geographical risk factors within their overall context. This creates the transparency required for robust and risk-based decision-making.

What the regulator expects

Today, companies must be able to systematically identify, assess and document circumvention risks in a transparent manner.

This includes, in particular:

Risk analyses that explicitly take circumvention transactions into account.
Transparency regarding beneficial owners, end-users and final destination.
Risk-based due diligence processes for business partners and transactions.
Effective monitoring and control mechanisms for identifying anomalies.
Clear escalation, decision-making and documentation processes.

A single warning sign does not automatically constitute a breach of sanctions. However, it should prompt in-depth investigations and additional due diligence measures.

What your company should do now

Four areas of action require particular attention in order to identify risks at an early stage:

Systematically integrate red flags for circumvention schemes into the risk analysis.

Regularly analyse business partner networks for critical ownership structures, geographical risk factors and potential circumvention scenarios.

Scrutinise the final destination, end users and economic background of transactions more closely and document them in a traceable manner.

Assess conspicuous business relationships in a structured manner and establish clear decision-making and escalation processes.

Create transparency now

Circumvention schemes are among the fastest-growing risks in the area of financial sanctions. At the same time, regulatory expectations are becoming more specific and audits more rigorous.

In future, companies must be able to demonstrate that they not only identify potential circumvention risks, but also systematically assess and address them. By ensuring transparency regarding business partners, ownership structures, end-use and transaction patterns, companies can reduce regulatory risks and make more robust decisions when dealing with critical business relationships.

Our experts support companies in making sanctions and circumvention risks transparent, thoroughly assessing risk scenarios and establishing effective control and governance structures for an increasingly complex regulatory environment.

Ready to talk?

Contact us