Track and Disrupt

Sanctions regimes have continued to expand in scope since the full-scale invasion of Ukraine, aiming to asphyxiate Russia’s financial and military capabilities to wage war. The EU alone has passed 11 packages to date, each building on the last. These packages are paired with efforts to restrict circumvention, along with a forthcoming EU directive criminalising sanctions evasion.

The unprecedented sanctions against Russia have highlighted the importance of third countries – those countries that are neither the target of sanctions nor adopters of sanctions against Russia/Belarus (and thus are not legally bound by sanctions). Such third countries make up a majority of the world and are therefore an important factor in determining whether sanctions are ultimately effective. Put simply, if third countries provide circumvention routes or substitutes for the goods and services that sanctions aim to curtail, then the sanctions will be weakened or fail.

The trade in dual-use goods is one of five categories of sanctions evasion and avoidance covered by recent analysis undertaken by RUSI as part of the Serious and Organised Crime Anti-Corruption Evidence (SOC ACE) programme, and provides a particularly salient example of the role of third countries. Numerous reports have publicised cases of manufacturers deliberately or inadvertently shipping important military and technological components from sanctions-imposing countries to intermediaries in third countries that then ship them onward to military end-users in Russia and Belarus.

Tracking Sanctions-Evasion Networks in Third Countries

Our recent SOC ACE report categorised five types of sanctions evasion critical to funding and supplying Russia’s military-industrial complex: financial services, company incorporation, dual-use and military goods, exports of sanctioned Russian commodities, and oil smuggling. All of these operate primarily in the private sector and rely on third countries’ lax enforcement of – or deliberate refusal to implement –sanctions.

In the case of countries not imposing sanctions, many commentators have bemoaned the whack-a-mole problem: company incorporation is so easy that sanctioning a person or a company will just cause another to appear in its place. Behind all of these seemingly random companies, however, is a Russian or affiliated individual(s) directing a network, often associated with Russia’s Federal Security Service. In many cases, investigators have identified links between the Russian military-industrial complex and newly incorporated companies with low public profiles – and these wider networks are often based in or linked to manufacturers, banks and other businesses in sanctions-imposing countries.

If third countries provide circumvention routes or substitutes for the goods and services that sanctions aim to curtail, then the sanctions will be weakened or fail

These thousands of companies are often not random or spontaneous creations, but directed by the Russian military-industrial base. They consist of networks of individuals and companies directing this support and supply business, along with intermediary companies and the shipping and logistics firms that facilitate the circumvention trade. Gathering the data necessary to map these networks is critical, as is understanding which government stakeholders are linked to these networks, in order to support diplomatic engagement to disrupt this trade in third countries.

Some third countries are already introducing their own control systems to monitor the re-export of goods to Russia, such as Kazakhstan’s online tool to track the entire supply chain “from border to border”. However, governments and private businesses in these countries would benefit from this specific data collection and mapping approach to mitigate their exposure to opaque sanctions evasion networks and thus avoid getting caught in the crosshairs of US or EU sanctions.

Building Capacity in Allied Countries

Notwithstanding the role of third countries, allied countries that have imposed sanctions also contribute to circumvention. Many of the microelectronic components still feeding Russia’s military systems are Western-made yet continue to reach Russia, mostly due to a combination of a lack of enforcement capacity and the deliberate obfuscation of end-users through third-party intermediaries by the global networks supplying Russia.

Over 30 countries representing more than half the global economy have announced sanctions and export controls targeting Russia, but the findings of the RUSI-led European Sanctions and Illicit Finance Monitoring and Analysis Network (SIFMANet) point to a series of challenges that sanctions-imposing countries consistently face.

Prior to February 2022, many members of the sanctions coalition had very limited exposure to sanctions, and they are now scrambling to overhaul their national frameworks. In the EU, several member states are trying to determine the competent authorities and their responsibilities towards what is repeatedly called the “unprecedented” scale of sanctions against Russia. Both private- and public-sector actors have struggled to implement and enforce the sanctions, meaning that even countries with strong political will struggle to detect and interrupt sanctions evasion that might involve – or even start in – their own jurisdiction.

Truly disrupting third-country sanctions circumvention requires a better understanding of the wider networks enabling this activity

With unclear responsibilities, scarce resources and a lack of expertise, private-sector operators face an uphill battle to tackle the already intricate task of detecting and countering circumvention, muddled by the involvement of complex multi-jurisdictional schemes often involving third countries.

The coalition of sanctions-imposing countries could also be strengthened by more consistent intelligence-sharing to disrupt cross-border global sanctions evasion networks, and by improved harmonisation in the interpretation of sanctions (including among EU member states). This leads to cases where authorities from different member states disagree on whether measures should be taken against an entity that one or the other understands to be in breach of sanctions. Moreover, the violation and circumvention of sanctions is not criminalised in all members of the sanctions coalition – notably in EU member states. This means that even if these practices are already taking place within their jurisdiction, authorities cannot initiate investigations and disrupt the networks involved. The upcoming EU directive to criminalise these practices will aim to remedy this, but this adjustment is long overdue.

Disrupting Global Sanctions-Evasion Networks

Truly disrupting third-country sanctions circumvention requires a better understanding of the wider networks enabling this activity, from banks and corporate service providers to shipping and logistics networks. Taking this wider view will likely generate new levers for pressure, including cutting the financial ties of the enablers supporting this trade. Further, applying a network focus should also reveal links between private-sector actors and the governments of third countries.

In sum, efforts to tackle evasion should combine diplomatic engagement with third countries, focused on a network-centric approach, with a tightening of domestic efforts to disrupt sanctions circumvention at source. It is thus key that sanctions-imposing countries harmonise and improve their national frameworks as well, including better coordination and information-sharing across the coalition. Sanctions-evasion networks operate as global enterprises, and sanctions-imposing countries must do the same to render them ineffective.

Olivia Allison is currently working as an independent consultant, following a role as a Senior Managing Director at the boutique investigations consultancy K2 Integrity. She has more than 15 years’ experience carrying out complex, international investigations and supporting the development of integrity and governance for state-owned companies, international companies, and international financial institutions (IFIs).

Gonzalo Saiz is a Research Analyst at the Centre for Financial Crime & Security Studies at RUSI, focusing on sanctions and counter threat finance. He is part of Project CRAAFT (Collaboration, Research and Analysis Against Financing of Terrorism) and Euro SIFMANet (European Sanctions and Illicit Finance Monitoring and Analysis Network).