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Sanctions have become more tough and systematic. On July 27, the US Senate passed the bill fixing sanctions against Russia. In addition to expanding the sanctions, their regime becomes permanent. Previously, sanctions were set by executive orders of the US president, but now they have become a law, which can only be changed by the Congress.

Key aspects:

  • Cooperation in the oil & gas sector: sanctions were used to affect only five Russian companies and their subsidiaries, but now they apply to projects with Russian participation of 33%. New restrictions will also affect the supply of equipment which price exceeds $ 1 million per unit or an annual turnover exceeds $ 5 million.
  • Direct investments in the privatization of Russian companies: US companies and private investors are at risk if they are going to participate in any new Russian privatization campaigns of state-owned companies if the annual investment exceeds $ 10 million and Russian officials or their close relatives will benefit from the transaction. Risk evaluation for such investments is difficult, the new sanctions are pushing private investors to conceal such investments, especially using common tools like offshore jurisdictions and blind trusts.
  • Funding: US banks and their subsidiaries and will not be able to finance projects if subjects of the sanctions list are interested in them.

Expected reaction: ownership structure concealment

Russian experts note the low effectiveness of sanctions, but one cannot deny the indirect effect of such decisions: the companies have finalized the ownership concealment schemes, and potential investors began to evaluate the risks of fines for non-compliance with sanctions.

Tools created and optimized for corrupt transactions are also suitable for evading sanctions – especially for businesses controlled by Russian officials and their family members.

Schemes involving distant relatives are especially popular for the holding of foreign assets, as it was in Ukraine until 2014. Deterioration of relations between countries was reflected in similar schemes, the nominees began to ignore the previous agreements and compromised with the new authorities.

Practically, the most sustainable schemes unite nominal owners and control over operating activities through contracts or financing.

Beneficiaries identification

There are many schemes for concealing ownership. Identifying real beneficiaries is not an easy task & its cannot be solved formally. Such schemes are rarely designed in advance, they arise spontaneously and then develop. Finally, they reach a state where the boundary between indirect control and independent business is erased. For example:

A Russian railway company owns several enterprises providing rails repair services. In the late 90s these companies were leased to a private contractor, which has received contracts for the rail track repair. At this stage, the scheme was transparent, and the specifics of this relationship was evident. Later the contractor has accumulated funds and begun to build its own manufacturing plant.

When the new plant was launched, the Contractor has received a leverage to improve the contract conditions.

The identification of beneficiaries means not only the analysis of the ownership structure or the search for contractors in classic offshores. There is a common Russian practice of appointing “well-respected people” to the management and even the ownership structure. For example, a private company may offer a PEPs friend or relative a position at the Board of Directors. It will not be required to participate and make any decisions, but to appear on the website and in corporate papers. Depending on situation, fictitious lobbyists can reduce the risks of hostile takeover or blackmail, help solving problems with local and state authorities and even provide some B2B sales. Nevertheless, such well-respected people are rarely associated with real beneficiaries.

The search for beneficiaries is the research of a particular business with the goal to understand how it’s organized and how can someone from the outside exert any influence on it and, moreover, control it.