EP:13 - Sanctions Evasion and Money Laundering: Techniques and Global Countermeasures

        Sanctions are powerful economic tools used by governments and international organizations such as the United Nations (UN), the European Union (EU), and the Financial Action Task Force (FATF) to deter criminal activities, terrorism financing, and human rights violations. However, sanctioned individuals, corporations, and even rogue states have developed sophisticated money laundering techniques to evade restrictions and continue illicit financial activities (FATF 102).

Sanctions evasion and money laundering are closely intertwined, with criminals using shell companies, offshore banking, cryptocurrency, and trade-based laundering to bypass financial restrictions. Countries like North Korea, Iran, and Russia have been implicated in large-scale sanctions evasion schemes, making this issue a critical priority for regulators, financial institutions, and law enforcement agencies.

Thailand, as a key regional financial hub, faces risks from sanctions evasion networks that attempt to exploit weak financial oversight, trade loopholes, and offshore banking systems. This paper explores how criminals evade sanctions, case studies of major violations, and Thailand’s response to global AML compliance.

How Sanctions Evasion Works

1. The Purpose and Impact of Economic Sanctions

Sanctions are imposed to:

• Deter illicit financial activities, including terrorism financing and arms trafficking.
• Prevent sanctioned countries and individuals from accessing global financial markets.
• Disrupt money laundering networks linked to drug cartels, corruption, and human rights abuses (World Bank 134).

However, sanctioned entities adapt quickly, using complex laundering techniques to disguise financial flows and maintain access to global banking systems (IMF 98).

2. Common Methods of Sanctions Evasion

a) Use of Shell Companies and Offshore Banking

• Criminals establish front companies in jurisdictions with weak AML enforcement.
• Funds are moved through offshore accounts in tax havens like the British Virgin Islands, Cyprus, and the Cayman Islands (OECD 121).
• Example: North Korea has used shell companies in Hong Kong and Malaysia to disguise arms deals and financial transactions (Interpol 88).

b) Trade-Based Sanctions Evasion (TBML)

• Sanctioned entities manipulate trade invoices to move money without detection.
• Phantom shipments and misinvoicing allow illicit financial transfers across borders (FATF 107).
• Example: Iran used fake petroleum exports to circumvent oil sanctions, laundering billions through European and Asian banks (Bank of Thailand 77).

c) Cryptocurrency Laundering and Digital Currencies

• Bitcoin, Monero, and privacy coins provide a way for sanctioned actors to move money anonymously.
• Decentralized exchanges (DEXs) and peer-to-peer (P2P) transactions bypass traditional banking restrictions (Interpol 94).
• Example: Russia has used cryptocurrency exchanges to bypass SWIFT banking sanctions since 2022 (OECD 128).

d) Third-Party Intermediaries and Money Mules

• Sanctioned entities use individuals or businesses in neutral countries to move funds on their behalf.
• These intermediaries help disguise financial transactions by routing money through non-sanctioned regions (IMF 87).

Case Studies: Sanctions Evasion and Financial Crime

1. North Korea’s Use of Shell Companies (2017)

• North Korean officials used front companies in China, Singapore, and the UAE to access the global banking system.
• Funds were laundered through trade in coal, seafood, and luxury goods despite UN sanctions.
• The UN blacklisted multiple banks and financial intermediaries involved in the scheme (FATF 115).

2. The Iranian Oil Laundering Network (2019)

• Iran evaded U.S. and EU oil sanctions by using front companies in Turkey and the UAE to sell oil.
• The scheme moved billions of dollars through European banks, disguised as legitimate trade transactions.
• Authorities seized assets linked to Iranian financial institutions involved in sanctions evasion (OECD 134).

3. Russia’s Cryptocurrency Sanctions Evasion (2022)

• After Western sanctions on Russian banks, Russia turned to cryptocurrency to move financial assets globally.
• Russian oligarchs used decentralized crypto exchanges and privacy wallets to bypass SWIFT bans.
• U.S. regulators blacklisted multiple crypto exchanges linked to Russian financial institutions (Interpol 89).
  

Thailand’s AML Response to Sanctions Evasion

1. Thailand’s Compliance with Global Sanctions Regulations

• Thailand follows FATF and UN guidelines on sanction enforcement, including:
  
• Monitoring financial institutions for sanction breaches.
• Blocking sanctioned individuals from accessing Thai banking services.
• Tracking high-risk cross-border transactions (AMLO 56).

2. Strengthening KYC and AML Controls in Financial Institutions

• Thai banks must screen customers against global sanctions lists before opening accounts.
• Financial institutions are required to report any suspicious transactions linked to sanctioned entities (Bank of Thailand 63).

3. Enhanced Cryptocurrency Regulations to Prevent Evasion

• Thailand’s Securities and Exchange Commission (SEC) has enforced:
• Stricter KYC rules for cryptocurrency exchanges.
• Suspicious transaction reporting (STR) requirements for large crypto transactions.
• Banning unlicensed crypto exchanges that fail to comply with FATF standards (OECD 119).

4. Trade-Based AML Regulations to Detect Sanctions Evasion

• Thai customs agencies monitor trade transactions involving sanctioned jurisdictions.
• AI-driven transaction monitoring systems detect anomalies in trade finance activities (Interpol 102).

Best Practices for Financial Institutions to Prevent Sanctions Evasion

1. Implementing AI-Powered Sanctions Screening

• AI-based financial monitoring tools automate screening for sanctioned individuals and entities.
• AI can detect complex layering techniques used to obscure the origin of funds (World Bank 122).

2. Enhancing Due Diligence on High-Risk Clients

• Financial institutions should conduct Enhanced Due Diligence (EDD) on politically exposed persons (PEPs).
• Increased scrutiny should be applied to customers from high-risk jurisdictions (FATF 113).

3. Strengthening Compliance in Cryptocurrency Transactions

• Mandate KYC for all crypto transactions exceeding a specified threshold.
• Require crypto exchanges to report suspicious activities to financial regulators (OECD 128).

4. Expanding Public-Private Partnerships on Sanctions Compliance

• Governments should collaborate with financial institutions, trade regulators, and fintech firms to combat sanctions evasion.
• Increased data sharing and inter-agency cooperation improves enforcement (IMF 98).

Conclusion

Sanctions evasion and money laundering remain major global challenges, with criminals using shell companies, offshore banking, cryptocurrency, and trade-based laundering to bypass financial restrictions. Countries like North Korea, Iran, and Russia have exploited loopholes in the financial system to evade sanctions and continue illicit financial activities.

Thailand has taken significant steps to strengthen AML regulations, enforce KYC standards, and monitor high-risk financial transactions. However, further efforts are needed to expand AI-driven transaction monitoring, regulate high-risk cryptocurrency transactions, and enhance international cooperation.

As financial crime networks become more sophisticated, governments, financial institutions, and regulatory bodies must work together to close loopholes and improve sanctions compliance measures.

Works Cited

AMLO. Thailand’s Financial Compliance Measures Against Sanctions Evasion. 2023.
Bank of Thailand. Risk-Based AML Controls in Financial Institutions. 2023.
FATF. Guidelines on Sanctions Evasion and Financial Crime Prevention. 2023.
IMF. The Economics of Sanctions and Money Laundering in Global Markets. 2023.
Interpol. Cryptocurrency and Dark Web Transactions in Sanctions Evasion. 2023.
OECD. International Sanctions and the Financial System. 2023.
World Bank. Advanced Technologies for Detecting Sanctions Evasion in Trade. 2023.