US FinCEN alert identifies red flags for recognizing transactions designed to evade Russia sanctions

The Financial Crime Enforcement Network ("FinCEN") issued the Russian Elites High Value Assets alert ("Alert") on March 16, 2022, that underscores the comprehensive approach the US government is taking to ensure the effectiveness of Russia-targeted sanctions. The FinCEN issuance comes on the heels of recently announced initiatives by the US Departments of Treasury and Justice to establish task forces dedicated to identifying blocked assets and to enforce sanctions, export restrictions and other economic measures imposed by the United States and international partner nations.¹ In particular, President Biden's recent Executive Order 14066 places export controls on certain luxury goods to persons located in the Russian Federation and explicitly prohibits transactions designed to evade sanctions. The Alert shares a series of "red-flags" to guide financial institutions in identifying transactions in real estate, luxury goods and other types of high value assets that may be leveraged by Russian elites, their family members or intermediaries to circumvent US sanctions.

The Alert summarizes the sanctions that have been imposed by the US government targeting Russian and Kremlin elites through March 11, 2022. Norton Rose Fulbright is actively tracking the developments in this heightened sanctions space.² FinCEN also instructs financial institutions that when they file a Suspicious Activity Report ("SAR") relating to suspected transactions involving Russia-sanctioned parties they should include the term "Fin-2022-RUSSIALUXURY" in Field 2 of the SAR.

FinCEN also points out that Russian elites and their proxies may seek to evade sanctions through the purchase of commercial or high-end residential properties. Such real estate transactions often involve the use of shell companies or trusts, potentially with funds held in offshore jurisdictions, including countries that have imposed sanctions against Russia and its elites. Accordingly, the Alert instructs financial institutions to be attentive to a wide range of transactions involving high-value real estate, including those conducted in the name of a foreign legal entity, shell company or trust, or transactions where the amount of the transaction is far above or below the fair market value of the property. In addition, the Alert identifies the following red flags in real estate transactions:

• Wire requests from non-US institutions for all-cash transfers;


• Transactions that have no apparent business purpose involving a firm not located in the United States, Russia, Belarus or the Ukraine;


• Transactions involving convertible virtual currency and Russian-related investments or firms; and,


• Transactions of a dilutive nature where the interest in real property on the part of a Russian elite is reduced by the addition of, or the transfer to an individual not affiliated with the buyer or seller.

Art dealing is another area that FinCEN notes is attractive to sanctioned Russian elites because of the opacity provided by shell companies and intermediaries that are frequently used to purchase, hold or sell high value artworks. The mobility, concealability and subjective value of artwork may further add to its appeal as a means of evading sanctions. Red flags related to art transactions similarly involve shell companies, trusts and third party intermediaries with a nexus to sanctioned Russian elites and their proxies, as well as transactions involving large amounts of cash, particularly currencies not typically used in the art market. Art dealers should be wary of persons with suspected ties to sanctioned Russian elites and their delegates who (i) are not concerned with recouping their initial investment or (ii) are willing to pay a substantially higher price than the notational or sales value of the art work.

Similarly, the Alert advises that dealing in precious metals, stones and jewelry ("PMSJs"), such as gold and diamonds, is another high-risk field for transacting with sanctioned Russian elites. Because Russia is a major exporter of PMSJs, sanctioned entities, Russian elites and their proxies may attempt to use PMSJ transactions to evade trade restrictions in an effort to obtain needed currency or funds. For this reason, the red flags related to PMSJ transactions include transactions involving PMSJ trading companies, particularly in Asia, and firms with a nexus to sanctioned Russian elites and their proxies. In particular, one should be wary of high-value or frequent transactions involving mining operations with opaque and complex corporate structures that are or have been controlled by sanctioned Russian elites or their proxies.

Finally, the Alert identifies transactions involving other types of high-value assets that could be used to avoid sanctions. This category includes transactions involving items such as luxury yachts, private airplanes and vehicles. Under US sanctions regulations, such property of Russian-sanctioned elites in the US are subject to blocking and must be reported to OFAC. The FinCEN identifies the following red flags on transactions involving high-value assets:

• The involvement of legal entities such as shell companies, with a nexus to sanctioned Russian elites and their proxies that falsely pose as well-known entities operating in jurisdictions other than the well-known entity's jurisdiction and geographic sphere of business;


• The involvement of a common set of financial institutions, individuals or addresses to facilitate luxury goods-related transactions that may have a nexus to sanctioned Russian elites and their proxies;


• The involvement of law firms based in global and offshore financial centers that have historically specialized in Russian clientele or transactions associated with sanctioned Russian elites and their proxies; and,


• The involvement of transportation service companies that have been owned by or have a nexus to sanctioned Russian elites and their proxies, which may be used to transport luxury goods and obfuscate their movement.

Takeaways

• The US government is placing enforcement of Russian sanctions, and deterring sanctions evasion, in high priority.


• Financial institutions and other entities subject to FinCEN regulation should anticipate that they will be examined with respect to the steps they are taking to monitor and report on transactions that may be characteristic of sanctions evasion.


• Red flags listed in the Alert not only serve as a guide to what may constitute potentially suspicious transactions in this area, but are also an indication of the procedural areas that may be subject to future examiner review and evaluation.


• If institutions decide to file a SAR on transactions involving suspected sanctioned Russian elites, the entry, "Fin-2022-RUSSIALUXURY" should be included in Field 2 of the SAR. 

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