Sanctions have become one of the most powerful tools governments can use to deter terrorism financing, weapons proliferation, organized crime, and geopolitical aggression. When applied effectively, they isolate targeted individuals, companies, and even entire countries from the global financial system. This isolation disrupts funding channels for illicit activity and signals strong international resolve.
However, the reality is far more complex. Enforcement is not straightforward. The individuals and entities on sanctions lists are rarely passive targets—they fight back. They deploy creativity, financial resources, and sophisticated networks to bypass restrictions. These methods don’t just succeed in evading sanctions; they weaken the core principles of Anti-Money Laundering (AML) compliance.
In this article, we’ll break down how sanctions evasion works, why it poses such a critical threat to AML frameworks, and what financial institutions must do to stay compliant in a world where these two issues are deeply intertwined.
The Blurred Line Between Sanctions and AML
Traditionally, AML efforts focused on preventing money from flowing from criminal activities such as fraud, corruption, human trafficking, and drug trade. Sanctions, by contrast, targeted specific individuals, companies, and states involved in activities considered a threat to global peace or security.
For years, these were treated as separate functions inside financial institutions. That separation is no longer viable.
Today, sanctioned actors use the same playbook as professional money launderers. They create complex layers of transactions, operate through shell companies, exploit gaps in trade finance systems, and increasingly turn to digital assets to move value discreetly.
Take North Korea as an example. For decades, it has perfected the art of sanctions evasion through a vast network of front companies, false documentation, and illicit shipping practices. These tactics look remarkably similar to traditional laundering techniques—because they are. The same strategies designed to clean illicit funds now serve to conceal sanctioned transactions.
Regulators have taken notice. They no longer view sanctions and AML compliance as separate domains. For financial institutions, failing to integrate these areas creates blind spots—and those blind spots can lead to devastating penalties and reputational damage.
How Sanctions Evaders Exploit AML Weaknesses
Sanctions evasion is not random. It’s deliberate, highly organized, and often state-sponsored. These actors understand compliance frameworks intimately. They know where the gaps are, and they exploit them with precision.
Here are the main tactics they use:
1. Disguising Beneficial Ownership
Perhaps the most effective strategy is hiding the true owner behind layers of entities. Sanctioned individuals frequently establish complex corporate structures that span multiple jurisdictions, often involving shell companies and trusts registered in secrecy-friendly locations.
The Panama Papers revealed how sanctioned oligarchs and political elites used offshore vehicles to obscure ownership of yachts, real estate, and financial investments. Even enhanced due diligence can fall short if institutions rely solely on client-supplied documents. Without independent verification and advanced investigative tools, detecting the ultimate beneficial owner (UBO) becomes nearly impossible.
Consider how Russian elites have continued to access global markets despite sweeping sanctions. By creating multi-layered holding companies and leveraging jurisdictions with weak transparency requirements, they successfully obscure their control over assets—making it harder for banks to flag connections during onboarding or periodic reviews.
2. Deploying Proxies and Intermediaries
Instead of appearing on transactions themselves, sanctioned individuals often act through proxies—family members, business associates, or professional intermediaries such as lawyers and accountants. These individuals serve as the visible party in transactions, effectively shielding the sanctioned person.
This tactic is highly effective because proxies rarely appear on sanctions lists, meaning they often pass Know Your Customer (KYC) checks without raising suspicion. A notable example occurred after sanctions were imposed on Russian oligarchs following the annexation of Crimea in 2014. Many used relatives and associates to buy luxury real estate in London, New York, and other major cities—transactions that seemed legitimate on the surface.
3. Exploiting Jurisdictional Gaps
Sanctions enforcement is not globally uniform. Different countries adopt different measures, and some jurisdictions have limited enforcement capacity or political will. Sanctioned actors exploit this inconsistency by routing transactions through countries with weaker controls—a practice often referred to as regulatory arbitrage.
For example, goods and funds destined for sanctioned countries frequently pass through third-party states that are not bound by the same sanctions regimes. These transshipment points create opacity and make it harder for institutions to detect risks using traditional screening systems.
This tactic has been particularly evident in oil trade. Iranian entities have long used intermediaries in neighboring countries to mask the final destination of shipments, exploiting the complexity of global supply chains.
4. Leveraging Digital Assets and Alternative Channels
The rise of cryptocurrencies, blockchain technology, and decentralized finance (DeFi) has opened new avenues for sanctions evasion. Unlike traditional banking systems, digital asset transactions are pseudonymous and borderless, making them attractive to those seeking to avoid detection.
While blockchain is inherently transparent, tools like mixing services (or tumblers) and privacy-focused coins such as Monero and Zcash complicate transaction tracing. Furthermore, peer-to-peer platforms and decentralized exchanges often operate beyond traditional regulatory oversight.
The U.S. Treasury’s decision to sanction Tornado Cash, a cryptocurrency mixer accused of facilitating billions in illicit transactions, highlights the growing role of virtual assets in sanctions evasion. For financial institutions, the challenge is compounded by the speed at which these technologies evolve.
5. Manipulating Trade Transactions
Trade-based money laundering (TBML) remains a cornerstone tactic for sanctions evaders. By falsifying invoices, under- or over-invoicing goods, or misrepresenting cargo, these actors disguise the movement of value as legitimate trade.
Given the sheer scale and complexity of global trade, manual detection is virtually impossible. Sanctioned Iranian entities, for instance, have been documented using front companies and complex shipping arrangements to conceal oil shipments in violation of U.S. sanctions. These schemes exploit weaknesses in trade finance processes and the limitations of traditional monitoring systems.
Why These Tactics Strike at the Heart of AML Compliance
What makes these strategies so dangerous is that they exploit the very foundations of AML frameworks. Customer due diligence assumes accurate disclosure of ownership, but layered structures and proxies break that assumption. Transaction monitoring depends on identifying unusual patterns, yet sanctioned actors mimic legitimate trade flows or break transactions into small pieces to avoid triggering alerts.
This convergence of sanctions and AML risk creates multiple challenges:
Screening limitations: Sanctions lists change frequently. Names are often transliterated, abbreviated, or intentionally misspelled. Without advanced matching techniques, institutions risk both false negatives and false positives.
Data quality issues: Many jurisdictions lack comprehensive, up-to-date corporate registries. Some still allow bearer shares, which obscure ownership completely.
Regulatory exposure: Most sanctions regimes operate under strict liability—meaning intent is irrelevant. Even unintentional facilitation of a prohibited transaction can result in heavy penalties and reputational damage.
The consequences of failure are severe. BNP Paribas paid $8.9 billion in 2014 for sanctions breaches, while Standard Chartered was fined $1.1 billion in 2019. These are not isolated cases. Regulators have made it clear: they expect financial institutions to identify and prevent sanctions breaches proactively—not reactively.
What Financial Institutions Can Do Now
Faced with this evolving threat, financial institutions must rethink their approach. Compliance is no longer about ticking boxes—it requires integration, technology, and global collaboration. Here are some possibilities:
1. Integrate AML and Sanctions Compliance
The era of treating these as separate domains is over. Institutions need a unified financial crime risk management framework that brings together sanctions screening, transaction monitoring, and customer due diligence. A holistic view ensures that alerts from one system are assessed in the broader context of overall risk.
For example, if a trade finance transaction is flagged for under-invoicing, it shouldn’t only trigger a money-laundering review—it could also prompt a sanctions risk assessment, especially if the goods involved are subject to export controls.
2. Invest in Advanced Analytics and AI
Legacy screening systems and rule-based monitoring tools can’t keep up. Financial institutions must deploy AI-driven platforms capable of detecting complex ownership structures, proxy relationships, and unusual trade patterns. Network analytics, for instance, can uncover connections between sanctioned individuals and entities, even several layers removed.
Similarly, blockchain analytics tools can trace cryptocurrency transactions linked to sanctioned actors, enabling proactive intervention.
3. Strengthen Beneficial Ownership Verification
Basic KYC checks are no longer enough. Institutions should conduct deep-dive investigations into UBOs, leveraging multiple data sources, both public and proprietary. Ongoing monitoring—not just periodic reviews—should become standard practice. Global standards like the FATF’s recommendations on transparency provide an excellent benchmark.
4. Upskill Compliance Teams
Technology is powerful, but it’s not a silver bullet. Compliance professionals need to understand the evolving nature of sanctions evasion, the role of digital assets, and the red flags associated with trade manipulation. Regular training sessions, scenario-based exercises, and cross-functional collaboration are essential to strengthening detection capabilities.
5. Foster Global Collaboration and Intelligence Sharing
Sanctions evasion is a global problem that demands global solutions. Financial institutions should actively participate in public-private partnerships, industry working groups, and intelligence-sharing initiatives. Collaboration accelerates the identification of emerging threats and helps dismantle illicit networks more effectively.
Final Thoughts
Sanctions evasion is not a side issue—it’s a direct attack on the integrity of the global financial system and the effectiveness of AML programs. As sanctions lists expand and geopolitical tensions rise, evaders will become more innovative, blending traditional laundering tactics with new technologies like DeFi and crypto mixers.
For financial institutions, the message from regulators is clear: strict liability applies. Intent does not matter. If you facilitate a prohibited transaction—even unintentionally—you will face severe penalties, reputational harm, and operational disruption.
The only way forward is integration, innovation, and vigilance. Institutions that embrace advanced analytics, beneficial ownership transparency, digital asset monitoring, and global intelligence sharing will not only stay compliant but also safeguard their credibility and resilience in an era of complex financial crime. Those that fail will pay the price—not just in fines, but in trust.
