Kleptocracy and sanctions: Keeping the proper focus

Kleptocracy and sanctions: Keeping the proper focus

Kleptocracy is the misappropriation―or, to put it plainly, the stealing―of a country’s wealth and resources from its citizens by corrupt government officials. With the rise of kleptocracy, preventing and detecting sanctions evasion today has become a game of Whac-A-Mole for anti-financial crime (AFC) professionals. However, kleptocracy is not the only cause of sanctions evasion. Most people looking to steal or conceal ill-gotten gains will look to avoid actual or potential sanctions.

But let us not concentrate only on government officials and other politically exposed persons, their relatives and close associates. In today’s world, we must also focus on oligarchs―those usually ultra-wealthy individuals who have access to, maintain influence over or offer/provide services to government officials. Services can be in the form of advice, facilitation, significant industrial production or other significant economic influence. The enormous transfer of wealth to kleptocrats through corrupt means, or state capture, presents not only what at times can seem to be an insurmountable challenge, but also a threat to equality and the rule of law as we have understood it to be.

These kleptocrats are not sitting idly while sanctions are imposed and their wealth is frozen or otherwise confiscated. Rather, they are building intricate webs through which their wealth is transferred to mask their ultimate interest. They are attempting to “step away” from their wealth by transferring ownership to someone else. In reality, they still control their wealth.

Highly sophisticated, these efforts are often supported by networks of professional enablers, including lawyers, accountants, consultants and financial advisors who may or may not be aware of their role in the scheme. Wealth is laundered through layers of corporate structures, offshore shell companies, trusts and real estate investments. These channels can serve as blind spots for regulators and financial institutions (FIs) alike, making due diligence and beneficial ownership disclosure more challenging than ever.

The ever-growing population of kleptocrats (government officials, the oligarchs and their families and close associates), as well as the entities upon entities that are owned by these individuals, continue to emerge from the holes where they have been hiding only to crawl back down a different hole. Funds and other assets are flowing among all these parties in an effort to mask the source.

However, this is only looking at the flow of funds and assets that ostensibly are the property―acquired either legally or illegally―of the kleptocrat. It is not looking at the overarching issue of control. Generally, anti-money laundering regulations point to both the issue of ownership and control when identifying beneficial ownership. This notion of control needs to be incorporated into the risk management function and related controls for sanctions.

Wealth is laundered through layers of corporate structures, offshore shell companies, trusts and real estate investments

Control can manifest in various forms―not just through formal ownership but also through influence over decision-making, operational directives or even informal channels like personal relationships and backdoor agreements. The notion of “shadow ownership” complicates AFC compliance and risk assessment. That is why FIs must move beyond check-the-box to know your customer and truly understand who benefits from activities associated with the property.

In addition, sanctions evasion and the associated risk does not only focus on direct relationships, such as FIs’ customers. The customer’s customer, vendors and other related parties must also be examined along with those foreign FIs that may serve as correspondent banks. It is important to understand, in a holistic manner, the sanctions risk presented by all the parties.

In this game of Whac-A-Mole, there is also a need to focus on sanctions evasion through third countries. These countries, which may have less rigorous AFC legal regimes, may serve as intermediaries or staging grounds for rerouting goods, funds and services to or from sanctioned countries, entities or individuals.

In October 2024, the Office of Foreign Assets Control (OFAC) sanctioned 275 individuals and entities1 across 17 jurisdictions that were supplying Russia with material aid in support of the Russian military. While these individuals and entities were named and sanctioned by OFAC, the sheer number of these sanctioned individuals and entities makes it readily apparent that performing effective customer due diligence and enhanced due diligence to identify potential red flags for increased sanctions risks is essential.

Whac-A-Mole: It is not just about Russia

When we look at sanctions evasion as an issue unto itself, it becomes clear that it is not just about Russia. While Russian sanctions have been the most pervasive issue over the past three years, there is a new―or at least additional―focus in the U.S. on transnational criminal organizations (TCOs) and cartels. This presents risks like those found in Russian sanctions, whereby not only the TCOs and cartels themselves present sanctions risk, but also those companies and individuals that operate in or around TCO-controlled areas or that may provide support, even indirectly, to the TCOs.

As AFC compliance professionals, we cannot let our guard down when it comes to sanctions evasion

While this may predominantly be a Latin American issue when it comes to the TCOs as the focus is mainly on drug production and trafficking, particularly fentanyl, as well as on such issues as human trafficking, eyes cannot only focus on what transpires there. “Executive Order 14157―Designating Cartels and Other Organizations as Foreign Terrorist Organizations and Specially Designated Global Terrorists,”2 issued by President Trump on January 20, 2025, directed the designation of certain organizations as Foreign Terrorist Organizations (FTOs) or Specially Designated Global Terrorists (SDGTs), with the former bringing potential criminal liability for providing material support. The elevation of certain cartels to FTO or SDGT status significantly raises the stakes for compliance failures.

Further, material support can be provided to TCOs―perhaps indirectly―through supply chains and the trade finance activity associated with global trade. Since there are virtually no known legitimate uses for the chemicals used in the production of fentanyl (precursor chemicals), shipments of such chemicals may be masked as other goods. Those involved in the production of those precursor chemicals may also hide or attempt to hide their involvement―similar to the actions taken by kleptocrats.

As AFC compliance professionals, we cannot let our guard down when it comes to sanctions evasion. The principals associated with TCOs or cartels will utilize similar strategies as those used by the kleptocrats to mask the ownership and origin of funds. Similarly, the use of third parties may serve as a means to obfuscate the intended destination and use of materials and supplies to further the illicit production and distribution of deadly drugs or the trafficking of humans.

Moreover, criminal networks are increasingly complex, creating hybrid threats that blur the line between kleptocracy and organized crime. In some regions, corrupt regimes and cartels are so closely interconnected that a distinction between them is barely meaningful. The implication for sanctions enforcement is clear: static risk models that isolate these categories fail to capture the full picture. Instead, we must assess cross-sector risks and recognize convergence points.

Can we win the game of sanctions evasion?

It is said that winning a game of Whac-A-Mole is about scoring the most points. In the game of sanctions evasion Whac-A-Mole, it is not necessarily about killing the mole―an objective that may be unachievable. So, how does one run up the scoreboard?

To run up that scoreboard, organizations need to invest in three key areas: technology, training and threat intelligence. Technology should include not only screening tools, but also data enrichment to help identify sanctions evasion risk indicators. Training programs must evolve past annual checkboxes and focus on real-world scenarios, red flag indicators and typologies for emerging threats. In addition, threat intelligence sharing―whether through public-private partnerships or trusted peer-to-peer ecosystems―should be treated as a strategic priority, not an afterthought. The importance of such intelligence-sharing partnerships and collaboration cannot be overstated.

Finally, cultural mindset matters. Compliance should not be siloed within legal or risk teams but must be embedded into the core of operational decision-making. Senior leadership buy-in is essential for allocating the resources needed to stay ahead of the ever-evolving tactics used by kleptocrats, cartels and hostile governments.

Conclusion

The winning strategy comes down to an effective sanctions compliance program that understands and focuses on the evasions risk and utilizes high-quality data to help identify and react to risk indicators. It is important to understand that―like in all financial crimes, whether related to Russia or TCOs―sanctions evasion relies on concealment. So, creating as many holes in the concealment blanket as possible means those pesky moles will have fewer places to hide.

Stephen D. Marshall, director, advisory services, FinScan, Pittsburgh, PA, USA,
smarshall@innovatiesystems.com,

  1. “Treasury Takes Aim at Third-Country Sanctions Evaders and Russian Producers Supporting Russia’s Military Industrial Base,” U.S. Department of the Treasury, October 30, 2024, https://home.treasury.gov/news/press-releases/jy2700
  2. “Executive Order 14157―Designating Cartels and Other Organizations as Foreign Terrorist Organizations and Specially Designated Global Terrorists,” The White House, January 20, 2025, https://www.whitehouse.gov/presidential-actions/2025/01/designating-cartels-and-other-organizations-as-foreign-terrorist-organizations-and-specially-designated-global-terrorists/

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