On March 24, 2022, the Financial Transactions and Reports Analysis Centre of Canada ("FINTRAC") published a special bulletin on Russia-linked money laundering related to sanctions evasion (the "Bulletin"). The Bulletin serves as a resource for Canadian businesses to identify and understand the characteristics of financial transactions that may be connected to Russia-linked money laundering and/or used in order to evade the sanctions measures that have been imposed under the Special Economic Measures Act ("SEMA").
The Bulletin notes that sanctions evasion, in and of itself, does not constitute money laundering. In order for it to constitute money laundering, the sanctions evasion would either need to be attempted or committed using proceeds of crime (as defined in the Criminal Code), or give rise to or generate proceeds of crime that would then be laundered or attempted to be laundered.
Background
As discussed in our previous blog posts here, here, here and here, Canada has imposed wide ranging sanctions in response to Russia's invasion of Ukraine. These are set out in SEMA regulations issued in respect of Russia1, Belarus2 and Ukraine3 and include prohibitions against dealings, and direct and indirect facilitation of dealings, involving the property of over one thousand listed individuals and entities, making goods available to them, and providing financial or related services for their benefit. In addition to the listed persons sanctions, the SEMA regulations also impose a number of other measures including restrictions on certain sectors such as the financial, defence and energy sectors, and broad prohibitions supplying or transferring certain goods and technologies to Russia or to persons in Russia. Please refer to our previous blog posts for more detail regarding the key sanctions and export control measures.
Businesses are expected to screen all counterparties and those who own or control them against these and other sanctions lists. Notably, a number of Russian banks have been sanctioned by Canada that are not sanctioned, or are sanctioned to a lesser extent, by the United States, the European Union and the United Kingdom. Seven Russian banks have also been removed from the Society for Worldwide Interbank Financial Telecommunications ("SWIFT"). As a result, there is a heightened risk that Russian entities may utilize money laundering techniques to evade and circumvent these economic measures, as well as expand their use of the System for the Transfer of Financial Messages ("SPFS"), Russia's payment system which serves as an alternative to SWIFT.
Characteristics to Watch for
a. Corporate Structures, High-Risk Jurisdictions and Non-Resident Banking
The Bulletin notes that a key feature of Russia-linked money laundering is the use of intermediary jurisdictions to set up complex networks of shell and front companies and non-resident bank accounts. The shell companies are often registered in offshore financial centres or tax havens, and the non-resident bank accounts are often located in jurisdictions known to cater to Russian-speaking customers. In particular, potential characteristics of suspicious transactions include:
- Involvement of legal firms and company service providers based in offshore financial centers that have historically specialized in Russian clientele or in transactions associated with Russian elites and their associates.
- Jurisdictions previously associated with Russian financial flows that have a notable recent increase in new company formations.
- Complex opaque corporate structures such as limited partnerships ("LPs"), limited liability partnerships ("LLPs") and offshore companies (e.g. international business corporations ("IBCs")).
- Shell companies registered in tax havens which are conducting international wire transfers through financial institutions ("FIs") located in jurisdictions which are different from the company's registration and are associated with Russian financial flows. Particular attention should be paid to FIs that are connected to SPFS.
- Nested correspondent banking and correspondent banking: The Bulletin notes that Canadian FIs should review, monitor and report their correspondent banking relationships and transactions which exhibit characteristics of money laundering.
- Shell and front companies which may lack or have minimal online presence, such as lack of a website showing normal business information.
- Entities with corporate names that are overly generic, non-descriptive, easily mistaken with that of a better-known corporate entity or regularly misspelled in different ways.
- Jurisdictions with low barriers to set up shell companies and entities located in international trade hubs with noted anti-money laundering deficiencies (for more information, see the Financial Action Task Force Guidance and FINTRAC Advisory).
- Jurisdictions which have seen a recent decline in accountable governance and democratic development.
- Jurisdictions or FI accounts associated with Russian financial flows which are experiencing a sudden rise in value, without a clear economic or business rationale.
- Using real-estate transactions for money-laundering purposes (see FINTRAC's Operational Brief for more information).
b. Virtual Currencies and Other Alternative Financial Channels
The Bulletin notes that alternative financial channels such as cryptocurrencies and other emerging Fintech can also be used in Russia-linked illicit financial flows related to proceeds of crime. Characteristics associated with suspicious Russia-linked virtual currency ("VC") transactions may include:
- Customer transactions which are initiated from or sent to IP addresses in Russia, Belarus and other jurisdictions with weak AML/CTF systems.
- Customer transactions which are connected to VC addresses linked to sanctioned entities or individuals.
- Transactions which have direct or indirect exposure to VC exchanges or services located in Russia or other jurisdictions with weak AML regulations.
- Use of unlicensed brokers to off-ramp cryptocurrency (convert into fiat currency) sent from Russian exchanges/services to unknown third parties. This is often used to avoid KYC and reporting thresholds.
c. Cyber Crime
The Bulletin also notes that Russian entities and individuals represent a disproportionate share of crypto-enabled crime such as online fraud and ransomware. In addition to the VC indicators provided on FINTRAC's website, the Bulletin notes the following potential characteristics of transactions involving proceeds of ransomware and other cyber-enabled crime:
- Chain Hopping: Customers receiving VC from one or more private wallets, immediately initiating multiple rapid transfers for other VCs for no reason and then immediately converting VCs into fiat currency.
- Customer has direct or indirect transactional exposure to a VC mixing service or a tumbler, which are used to make it difficult to trace the origins of a VC.
- Customer has direct or indirect receiving transactional exposure, identified by using blockchain analysis tracing software related to ransomware.
Conclusion
FINTRAC reporting entities are encouraged to continue understanding their obligations with respect to Canada's sanctions regime and must submit a suspicious transaction report to FINTRAC if there are reasonable grounds to suspect that a financial transaction is related to the commission or attempted commission of an AML/CTF offence.
For regular updates on sanctions and export control measures issued in response to the Russian invasion of Ukraine, please refer to our Terms of Trade blog. Reporting entities can also visit the Canadian Sanctions website, the Sanctions - Russian invasion of Ukraine page and the FINTRAC guidance on Reporting suspicious transactions page for more information.
Footnotes
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