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.
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.
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.”
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