Money Laundering Bulletin
Annexation of Crimea
comes at a high price: the sanctions against Russia hurt; they are,
though, to be distinguished from AML by, if not bright lines, at
least a continuing dialogue with international partners through the
Financial Action Task Force, says Paul Cochrane. Some, though,
question Moscow's real compliance agenda.
US and European
Union (EU) sanctions (1) against Russia continue to biting - domestic
banks are closing, Western banks are de-risking Russian assets and
clients - but have the same measures undermined Moscow's role in
global compliance initiatives? The fact that Russia has an asset
amnesty in place to repatriate capital, whether clean or dirty,
suggests that its grip, never rock solid, maybe slipping.
Still in the fold
US and EU moves
against Russia in March 2014 caused some consternation at the
Financial Action Task Force (FATF), since their target held the
presidency until July 2014, and a high-level meeting of anti-money
laundering (AML) officials was scheduled to be held in Moscow in
June. In the event, the meeting did proceed.
Unlike the Group of
Eight (G8), which expelled Russia to become the G7 once more at the
same time as imposing sanctions, international regulators, including
FATF, were keen to keep Russia on-side of AML and counter terrorist
financing (CTF).
“FATF recognises
[Russia's financial intelligence unit, FIU] Rosfinmonitoring as one
of the most powerful FIU's in existence,” said Andrew Bowen, a
researcher for geopolitical consultancy Wikistrat.
So far, FATF’s
good offices seem to be working. “I wouldn't say that the sanctions
[have] impacted the issue of AML in a material way. Apart from
different political views, all governments are interested in
tightening scrutiny on those issues,” said Mikhail Kazantsev, a
partner at Moscow law firm Egorov Puginsky Afanasiev & Partners.
Sanctions – impact
assessment
Sanctions have,
though, shaken up capital flows. In 2014, US$151.5 billion exited the
Russian economy; the figure was US$32.6 billion in the first quarter
of 2015, according to Central Bank of Russia data. “The sanctions
are starting to bite. It is delaying certain energy projects in
Russia, and sanctions relief is at the top of their policy agenda, so
I can't imagine them doing something to undermine that,” said Shane
Martin, regulatory compliance director at Walkers, the law firm. “The
other point is that Russia is a member of FATF, and I've seen no
evidence of them stopping efforts in terms of supervising AML. You
often hear sanctions being described as smart or targeted, so I
expect Russia to be smart, and not give a knee jerk reaction.”
Russia’s plunging
economy and associated compliance risks due to the sanctions have
prompted some foreign financial institutions to withdraw. “My sense
is that banks are certainly de-risking, although they won't say so,”
said Dennis M Lormel, head of DML Associates, LLC, in the US.
The most high
profile example so far came in September 2015, when Deutsche Bank
closed its onshore corporate banking and securities business, the
biggest foreign securities firm in Russia. The bank is also being
probed by financial regulators, including the UK’s Financial
Conduct Authority (FCA), over an alleged money-laundering scheme by
Russian clients involving US$6 billion in trades in Moscow and
London.
Local enforcement
Russian banks are
also closing operations, attributed to the economic recession and
central bank action to rein in risky lenders. “Historically there
were a huge number of banks, over 900, and 90 per cent were small
regional banks associated with regional business. For wealthy
businessmen it was nice to have their own bank within the group. Now
the central bank is tightening screws and every other week we see a
bank licence revoked as not compliant, so banks are either merging,
being liquidated or going bankrupt,” said Kazantsev.
In September, the
central bank closed 37 banks, out of a total of 55 closed this year,
reducing the number of banks from 783, at the beginning of 2015, to
728, according to central bank data. Over 140 banks have closed since
2013. Moreover the central bank has barred more than 4,100 Russian
citizens from commercial bank management for alleged involvement in
risky activity that resulted in past bank failures.
Underlying motive,
perhaps
While the central
bank and its FIU are enforcing compliance, the motivation may not
simply be a cleaner and positive FATF evaluation, in 2018, according
to Bowen: “Rosfinmonitoring has become a repository of information
on shady deals, assets of the elite, and a massive surveillance
monitoring system, like a financial NSA [the US' National Security
Agency]. Rosfinmonitoring is directed at ensuring the regime can
monitor the elites, and two, reinforces the agreement that elites
only have their money as the state allows them to,” he argued. “At
any moment assets could be revoked; it is a Damocles sword hanging
over the heads of the elite. These are methods of control and allows
the regime to justify it as regulatory control.”
Capital crimes –
an amnesty
The FIU's moves tie
in with new policies by the Kremlin to stem the outflow of illicit
cash from Russia, estimated at US$1.3 trillion between 1994 and 2012,
according to US-based Global Financial Integrity figures released
this January. In November 2014, the Russian federal parliament passed
a law requiring citizens to pay tax on offshore assets – Federal
Law No. 376 ‘On amendments to parts one and two of the Russian tax
code (concerning taxation of income of controlled foreign
corporations and proceeds of foreign organisations)'. And in June
2015 a capital amnesty bill was passed, authorising a
no-questions-asked repatriation of illicit funds that is to last
until the end of the year (2015). Russia’s finance minister Anton
Siluanov has said the law "declares immunity from criminal,
administrative and tax punishment” for capital returned to Russia.
FATF acquiescence
Despite concerns
over the possible origins returning capital, FATF has gone along with
the law. “I recently helped the finance ministry on the amnesty of
capital law. One of the key principles is to fully comply with FATF.
There have been a lot of discussions with them, and at the end of the
day, said they were comfortable with the amnesty law,” claimed
Kazantsev. An FATF spokesperson said the organisation had reviewed
Russia’s capital repatriation initiative, adding, “The programme
met the requirements of the FATF’s basic principles. While the
programme is in effect, the FATF will continue to monitor whether any
suspicious transactions in relation to the [programme] are reported."
Return on leniency
Russia expects the
amnesty law to bring in US$4.3 billion in taxes over the next year
and 10% of the assets lost since 2014. However, no figures have been
released as to the law's current effectiveness. “We've no idea of
how much money has come in, but there's still a net outflow, as the
de-offshorisation law came at the same time as concerns about
sanctions and how the situation will develop,” said Bowen. Russia's
ministry of economic development forecasts capital flight to slow to
US$70 billion in 2016, and to US$55-60 billion in 2017.
Ever inventive –
the money will flow
Given
Rosfinmonitoring's actions and the country’s recession, it is no
surprise that sanctions are being circumvented. In the Crimea, rather
than VTB or banks owned by state gas giant Gazprom opening, “small
banks move in and suddenly expand as they are not as exposed to
sanctions or compliance issues,” said Bowen. “The way Russia is
paying pensions in Donetsk [in eastern Ukraine] is by sending
transactions via South Ossetia to eastern Ukraine, so a 'quasi
layering' effect. Money is also going from Russia to Moldova, then to
Latvia and onto London. Russia is exploiting the financial system as
much as financial players in the West allow them,” said Bowen.
The more traditional
offshore hubs used by Russians to launder money, such as Cyprus and
Dubai, have also rebounded, and now Russians are expanding their
horizons. “Russians are looking to exploit Singapore and Asia.
Before [the sanctions] launderers were purely looking at Europe; now
they're looking elsewhere,” Bowen added.
While there is
speculation that Russia will pivot eastwards to overcome Western
sanctions through major unilateral trade deals with China, private
businesses have not followed Moscow's lead. “Both Russia and China
are trying to extend the economic relationship, but private
businesses have not been enthusiastic,” said Kazantsev. “But if
the current situation continues, it will be one of the few options on
the table for Russian business. Will eastern partners substitute for
western ones? Probably not, but business with the east will
increase.”
Political restraint
Looking ahead,
further sanctions against Moscow are not likely, as Russia’s entry
into the Syrian conflict in September has created further
geopolitical concerns to address. “Because of the political
importance of the Russian role in Syria, I do not think that
currently anyone – the US Treasury or the EU – is willing to
sanction the Russian leadership and further ossify any meaningful
movement towards a political solution [in Syria],” explained Bowen.
“Rather than creating momentum for more sanctions it will actually
create momentum to reduce, or at least be less enthusiastic about
enforcing, the current sanctions.”
1)
http://www.state.gov/e/eb/tfs/spi/ukrainerussia/
and
http://europa.eu/newsroom/highlights/special-coverage/eu_sanctions/index_en.htm
Photograph by Anubis8, via Wikicommons
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