The People’s Republic of China (PRC) and Russia are using offshore shell companies to circumvent international sanctions. These opaque legal entities, set up in jurisdictions with loose regulations and lax enforcement, allow sanctioned individuals, companies and nations to continue accessing critical goods, technologies and financial systems, evading stringent sanctions imposed by the United States and its Allies and Partners.
In response, the international community is adapting its approach to enforcing economic sanctions. By leveraging enhanced cooperation, stronger regulations and advanced technologies, nations are closing loopholes and making it harder for rogue enablers to avoid accountability.
For decades, shell companies have enabled the ultra-wealthy, celebrities, politicians, organized crime and nation-states to avoid taxes, hide assets and obfuscate ownership. The so-called Panama and Pandora papers provided peeks into this shadowy world. The documents, leaked from law firms in offshore havens and published in 2016 and 2021, respectively, revealed billions of dollars in hidden assets tied to the inner circles of Chinese Communist Party General Secretary Xi Jinping and Russian President Vladimir Putin.
From the PRC’s pursuit of advanced microchip technologies to Russia’s illegal war against Ukraine, the use of shell companies enables both regimes to skirt sanctions designed to deter illicit behavior. While Western governments impose and seek to enforce sanctions, shell companies remain a tool for Beijing and Moscow, raising questions about current enforcement strategies.
For the PRC and Russia, shell companies provide access to sanctioned goods and technologies that are crucial for military, industrial and technological development. They also clear the way to trade military-grade components or dual-use technologies without detection by Western intelligence agencies.
The PRC faces U.S. export controls on technologies that could bolster its military capabilities, including high-performance semiconductors, lithography technology and artificial intelligence (AI). While the PRC remains a global manufacturing hub, these controls have pushed PRC firms to find ways to avoid restrictions and increase domestic capabilities. PRC companies, particularly telecommunications and AI firms, have increasingly relied on front companies and third-party nations to acquire goods and technologies from the U.S. and Europe.
PRC companies have used entities in Hong Kong, Macau and Southeast Asia as intermediaries. Hong Kong remains a financial hub for PRC firms seeking to access foreign technology. In many cases, goods are shipped from Western countries to shell companies in those regions, only to be re-exported to the PRC or other destinations with fewer regulatory checks.
Meanwhile, after annexing Crimea in 2014 and invading Ukraine in 2022, Russia faced Western sanctions targeting key sectors such as defense, energy and technology. The measures sought to cut off Russia’s access to semiconductors and other advanced equipment critical for its defense industry and broader economy. Instead of halting trade, the sanctions pushed Russia to establish a network of intermediary countries, using shell companies to mask the end destination of sensitive goods. An example is Russia’s vast “shadow fleet” of aging, foreign-flagged tankers that ship Russian oil to market while avoiding international price controls, sanctions and maritime insurance prohibitions.
Third-party countries are critical to this strategy. Nations with less stringent oversight and regulatory enforcement have become key hubs for Russian trade.
The effectiveness of shell companies underscores the difficulty of monitoring and controlling global supply chains. While the U.S. has increased sanctions and export controls on specific industries, enforcement is a persistent challenge due to the opacity of these networks. The U.S. has used secondary sanctions, which impose penalties on foreign companies that engage with sanctioned entities, to target intermediaries, but these measures can be difficult to discern and enforce.
Tracking the web of corporate ownership and cross-border transactions that define shell companies is challenging. As more consumer goods and financial transactions are conducted digitally, with an increasing reliance on cryptocurrencies and blockchain technology, it becomes harder for regulators to monitor and control the transactions.
While the offshore ecosystem presents challenges in terms of transparency and enforcement, there are options for nations that impose sanctions. They can:
- Push for stronger global regulations requiring the disclosure of beneficial owners of shell companies.
- Increase international pressure on offshore jurisdictions to make it more difficult for entities to hide behind shell companies.
- Expand the use of secondary sanctions against firms that help PRC and Russian entities evade sanctions, which will disrupt the flow of goods and services to restricted markets.
- Use emerging blockchain technology and AI-powered analytics to track financial transactions and identify links between shell companies and sanctioned entities.
Greater international coordination, especially among the U.S., the European Union, and Asian and Middle Eastern partners, also is crucial to closing gaps in global sanctions enforcement.
As global trade becomes more interconnected and digital, the U.S. and its Allies and Partners must continue to adapt their strategies, using both technological innovation and diplomatic pressure, to ensure that sanctions are a powerful tool in addressing global security challenges.
