NOW YOU SEE ME, NOW YOU DON’T - UBO and Control Techniques for being invisible

Sanctions evaders, along with other nefarious actors, often employ sophisticated methods to obscure the actual owners or controllers of companies, assets, or transactions, making it difficult for regulators, financial institutions, and enforcement agencies to detect violations.

Below is a compiled list of standard techniques drawn from various authoritative sources on sanctions evasion.

These are primarily used in contexts like money laundering, proliferation financing, and avoiding restrictions on sanctioned entities (e.g., from Russia, DPRK, or Iran).

While some techniques overlap, they are categorised for clarity.

THE FIRST TWO ARE

Complex Corporate Structures and Layering

1. 1. Creating multi-layered networks of companies, subsidiaries, or legal entities across multiple jurisdictions to obscure ownership trails. This includes convoluted financial routes, layered letters of credit, or transaction layering through brokers and intermediaries to hide the ultimate beneficiary or end-user.

Ownership Transfers Below Detection Thresholds

1. 1. Reducing ownership stakes to just below regulatory thresholds (e.g., under 25, 15, 10%) shortly before or after sanctions are imposed, or transferring assets to previously unknown individuals (e.g., family members) while retaining undue influence through associates or governance mechanisms.

I'll go ahead and expand on the two specified techniques.

Complex Corporate Structures and Layering

1. 1. Creating multi-layered networks of companies, subsidiaries, or legal entities across multiple jurisdictions to obscure ownership trails to hide the ultimate beneficiary or end-user. This includes:
      • Convoluted financial routes,
      • Layered letters of credit, or
      • Transaction layering through brokers and intermediaries
   2. Circular Ownership (Open-Loop and Closed-Loop Structures):
      • Establishing interconnected ownership loops where companies hold stakes in each other, amplifying indirect control while masking the UBO.
        1. In open-loop variants, an external shareholder benefits from the loop to exert complete control indirectly;
        2. In a closed-loop, all owners are within the loop, making ownership indeterminable without deep investigation.
        3. Example:
           1. A sanctioned Russian shipbuilding firm appeared to own only 35% of a subsidiary, but circular loops revealed effective 80% control, triggering U.S. blocking sanctions.
           2. Russian shipbuilding firm United Shipbuilding Corporation (USC), a state-owned conglomerate that is the primary supplier of military warships to the Russian Navy and has been under U.S. sanctions since 2014 for operating in Russia's defense sector.
           3. USC, fully owned by the Russian government, was designated under U.S. sanctions by the Office of Foreign Assets Control (OFAC) under Executive Order 13661, which targets entities supporting Russia's actions in Ukraine. Under OFAC's "50 Percent Rule," any entity owned 50% or more (directly or indirectly) by a sanctioned party is also automatically blocked, even if not explicitly listed.
      • Control Through Informal or De Facto Means:
        1. Exerting influence without formal ownership, such as installing relatives or partners to run operations while the true UBO remains anonymous.
      • Indirect and Multi-Level Ownership:
        1. Using chains of entities (e.g., companies owning companies across borders) to bury the UBO under layers, often involving trusts, partnerships, or offshore jurisdictions with varying languages and regulations.
      • Opaque Chains and Interconnected Networks:
        1. Building barriers with numerous intermediary entities to conceal sanctioned individuals or high-risk shareholders, exploiting regulatory gaps.

Ownership Transfers Below Detection Thresholds

1. Reducing ownership stakes to just below regulatory thresholds (e.g., under 50%) shortly before or after sanctions are imposed, or transferring assets to previously unknown individuals (e.g., family members) while retaining undue influence through associates or governance mechanisms.
2. Differential Voting Rights and Management Appointment Powers: Granting disproportionate voting influence or the ability to appoint/remove senior executives, allowing control despite low nominal ownership percentages.
3. Control Via Debt Instruments: Using significant debt holdings to influence decisions, especially in distress scenarios, without triggering ownership disclosure thresholds.
4. Exploiting Loopholes in Thresholds Through Structures: Combining transfers with circular or layered setups to keep stakes below 25% or 50% while maintaining effective control via indirect loops or proxies. Example: A shareholder appears to hold only 4-10% directly but controls 90-100% through circular amplification.

IN APPLYING THE ABOVE, THE FOLLOWING FACTORS WILL ALSO BE SEEN

1. Use of Shell or Front Companies
   1. Establishing or partnering with dormant or nominal companies (often in offshore jurisdictions or third countries) to act as intermediaries, masking the connection to sanctioned entities by operating under different names, ownership structures, or locations.
   2. These companies conduct seemingly legitimate transactions to access financial systems or facilitate trade.
2. Nominee Directors, Shareholders, or Proxies
   1. Appointing third parties (e.g., lawyers, accountants, family members, or trusted associates) as nominal owners or directors while retaining effective control.
   2. This includes using professional enablers like trustees or wealth managers to exert influence without direct ownership.
3. Trusts and Other Opaque Legal Entities
   1. Utilising trusts, foundations, or similar structures to hold assets or exercise control indirectly, often overseen by trust companies for no legitimate reason, thereby concealing the proper beneficiary.
4. Bearer Shares
   1. Issuing unregistered shares that can be transferred anonymously, allowing ownership to change hands without records and evading disclosure requirements.
5. Ownership Transfers Below Detection Thresholds
   1. Reducing ownership stakes to just below regulatory thresholds (e.g., under 50%) shortly before or after sanctions are imposed, or transferring assets to previously unknown individuals (e.g., family members) while retaining undue influence through associates or governance mechanisms.
6. Offshore Jurisdictions and Tax Havens
   1. Registering entities in secrecy-friendly locations (e.g., British Virgin Islands, Cayman Islands) with weak disclosure rules, using them to channel funds or hold assets while obscuring non-resident beneficiaries.
7. Correspondent Banking and Nested Accounts
   1. Holding accounts under corporate names in foreign banks to reduce scrutiny, or using nested correspondent accounts to conceal transactions on behalf of sanctioned entities, hiding the UBO through a lack of transparency in international transfers.
8. Falsification or Omission in Documentation
   1. Omitting references to sanctioned parties in transaction documents, falsifying shipping papers (e.g., bills of lading), or misclassifying goods to conceal end-users and ownership links.
9. Use of Third Countries or Transit Points
10. 1. Routing shipments, finances, or communications through intermediaries in non-sanctioned countries to disguise origins, destinations, or beneficiaries, often involving free trade zones.

These techniques are not exhaustive and often combine for greater effect. Detection typically relies on red flags like a lack of:

• • Online presence,
  • Generic company names, or
  • A reluctance to provide due diligence information.

Source Information Links

Here is a list of the sources used, with direct links you can copy and paste:

1. Moody's on Complex Corporate Structuring Involving Circular Ownership:
1. https://www.moodys.com/web/en/us/kyc/resources/insights/circular-ownership-and-complex-corporate-structuring.html
2. Tax Justice Network on Complex Ownership Structures:
1. https://taxjustice.net/wp-content/uploads/2022/02/Complex-ownership-chains-Reduced-Andres-Knobel-MB-AK.pdf
3. Federal Register on Beneficial Ownership Information Reporting Requirements:
1. https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements
4. SSRN on Complex Ownership Structures:
1. https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID4040794_code2664516.pdf?abstractid=4040794&mirid=1
5. FATF on Best Practices on Beneficial Ownership for Legal Persons:
1. https://www.fatf-gafi.org/content/dam/fatf/documents/Best-Practices-Beneficial-Ownership-Legal-Persons.pdf
6. AsiaVerify on Multi-Layered Corporate Structures:
1. https://asiaverify.com/from-shell-company-to-behemoth-multi-layered-corporate-structures-bury-the-ubo/
7. Moody's on Unveiling Hidden Risk Associated with Ultimate Beneficial Ownership:
1. https://www.moodys.com/web/en/us/site-assets/ma-kyc-unveiling-hidden-risk-associated-with-ubo.pdf
8. The Law Society on Money Laundering Risks and Threats:
1. https://www.lawsociety.org.uk/en/topics/anti-money-laundering/money-laundering-risks-and-threats
9. Aretia Advisors on How EDD Helps Uncover Ultimate Beneficial Ownership (UBO) Risks:
1. https://aretiaadvisors.com/how-edd-helps-uncover-ultimate-beneficial-ownership-ubo-risks/
10. LinkedIn Post on How to Spot Beneficial Ownership Structures Hiding Sanctions Exposure:
1. https://www.linkedin.com/posts/farid-pasha_beneficialownership-sanctions-corporatestructures-activity-7353348346079539201-PL3O
11. University of Malta on Complex Corporate Structures: A Risk Assessment:
1. https://www.um.edu.mt/library/oar/bitstream/123456789/130718/1/2419EMAEMA590505030928_1.PDF
12. Tax Justice Network on Privacy-Washing & Beneficial Ownership Transparency:
1. https://taxjustice.net/wp-content/uploads/2024/03/Privacy-Washing-and-Beneficial-Ownership-Transparency-Tax-Justice-Network-March-2024.pdf
13. FATF on Guidance on Proliferation Financing Risk Assessment and Mitigation:
1. https://www.fatf-gafi.org/content/dam/fatf-gafi/guidance/Guidance-Proliferation-Financing-Risk-Assessment-Mitigation.pdf