Over on Radical Compliance, Matt Kelly flagged recent OFAC guidance on sham transactions and sanctions evasion. Sham transactions occur when the bad guys “effectuate transfers or establish arrangements that conceal—rather than genuinely extinguish—a continuing interest in property.” Among other things, OFAC’s guidance document identifies the following non-exclusive list of red flags for potential sham transactions:

– Commercially unreasonable transactions. Transfers of property in which a blocked person once held an interest on terms that are not commercially reasonable, lacking adequate consideration, or otherwise not suggestive of an arm’s length transaction may indicate that the blocked person still retains an interest in the property. Conversely, evidence that a transaction was between unrelated parties, at fair market value, in a competitive market, would tend to demonstrate that a bona fide transfer occurred.

– Transfer to family members or close associates. Transfers by a blocked person to a family member or close associate can be evidence of a sham transaction. Such family members or close associates may be acting as a proxy, facilitator, money manager, or agent for the blocked person. Similarly, the nature and scope of the relationship between the blocked person and a nominal owner of the transferred property may also be relevant. Formal or informal agreements, agent-principal or other close relationships, and other similar factors may indicate that the nominal owner is not independent from the blocked person and is instead holding property for, or acting on behalf of, the blocked person.

– Unclear purpose of transfer. Transfers lacking apparent business purpose may indicate an attempt to obfuscate a blocked person’s continued interest in property. Likewise, transfers to an individual with little or no relevant experience or expertise with respect to the transferred property may be evidence of a sham transaction.

– Unduly complex corporate structures involving higher-risk jurisdictions. The presence of unnecessarily complex legal structures without a discernible legitimate purpose—such as certain multi-layered limited liability companies, partnerships, or trusts—may indicate an effort to conceal an ownership interest. This risk is heightened when holding entities are domiciled in jurisdictions that have little connection to the property they hold, lack robust regulatory and supervisory controls, or offer laws and structures that enable obfuscation in property ownership.

– Continued involvement of a blocked person. Facts or circumstances suggesting a blocked person remains involved in the use, management, or disposition of property—including through proxies or intermediaries—may indicate that the blocked person continues to retain an interest in property. In these situations, where a blocked person previously held an ownership interest in the property, the blocked person may still be behind legal structures designed to conceal their interest.

– Transfer near the time of designation. Transfers completed close in time to a person’s designation may trigger suspicion warranting further analysis, such as when a purported transfer occurs immediately before or after a designation. For example, shortly before or after being designated by OFAC, blocked drug kingpins have transferred shares in non-U.S. companies to offshore shell companies; such transfers should raise U.S. sanctions compliance concerns.

– Evasive responses regarding a blocked person’s involvement. Evasive or vague responses, or failures to respond to questions from counterparties, key intermediaries, or gatekeepers regarding a blocked person’s involvement in property may be evidence of intent to conceal a continuing interest.

Keep in mind this isn’t just about Iran, North Korea and Cuba. The US currently imposes sanctions touching more than 30 countries, although only the three that I mentioned are subject to near-total trade and financial embargoes. Check out Matt Kelly’s blog for insights into some practical considerations to help your compliance program find and avoid potential sham transactions.

– John Jenkins