Sanctioned Ownership Structures and Hidden Control Risks

Dilution of Sanctioned Ownership refers to the act of changing the ownership structure of a company to hide the involvement of a person or entity that is under sanctions. This is done to bypass international laws that prevent sanctioned individuals from owning or controlling businesses, especially when they are involved in illegal activities like money laundering or terrorism financing.

Sanctions are measures taken by governments or international bodies to prevent individuals or companies involved in illegal activities from doing business. Dilution happens when a person or entity reduces or hides their stake in a company to avoid detection and continue their operations.

Example:

Global Ltd. is a shipping company owned by Mr. Yahya, who is under international sanctions because of his connections to illegal activities. Due to these sanctions, Mr. Y is prohibited from owning or controlling a business that operates internationally.

To bypass these sanctions, Mr. Y decides to dilute his ownership in the company. He transfers a large portion of his shares to several shell companies and intermediaries, making it look like someone else owns the majority of the company. On paper, Ms. Zaid, a trusted associate of Mr. Yahya, appears as the majority shareholder, even though Mr. Yahya still controls the business behind the scenes.

This dilution allows Global Ltd. to continue operating and shipping goods to sanctioned countries without attracting attention. The company avoids scrutiny because it looks like Ms. Zaid owns the business, even though Mr. Yahya remains in control.

However, the compliance team at a financial institution financing one of the shipments becomes suspicious. They investigate and discover the true ownership structure, linking the company back to Mr. Yahya. The financial institution reports this to the authorities, leading to an investigation.

Key Takeaways:

• Dilution of Sanctioned Ownership is when a person under sanctions changes the ownership structure of a company to hide their involvement.
• This is done to bypass sanctions and continue illegal activities without detection.
• In this example, Mr. Yahya used shell companies and intermediaries to hide his control of Global Ltd. and continue business with sanctioned countries.
• AML compliance teams play a key role in spotting these attempts and reporting suspicious activities to authorities.