Blacklisting Russia

FATF Must Decide

Shady dealings. Image by Ulrich B. from Pixabay

The Financial Action Task Force (FATF) week began today, with delegates representing 206 members of the Global Network and observer organizations, including the International Monetary Fund, the UN, the World Bank, INTERPOL and the Egmont Group of Financial Intelligence Units participating. The international anti-money laundering/counterfinancing of terrorism (AML/CFT) watchdog has a full agenda this week, and one of the issues facing the members is whether or not to include Russia on its blacklist—a call for action identifying a country or jurisdiction with serious strategic deficiencies to counter money laundering, terrorist financing, and financing of proliferation.

The blacklist can result in further economic sanctions against Russia, resulting in further damage to the country’s already faltering economy. Payment delays, increasing borrowing costs, a decline in investments, which is already an issue for Russia since Moscow launched an all-out war on Ukraine last year.

The FATF this year suspended Russia’s membership in the world body, citing Russia’s invasion as running “counter to the FATF core principles aiming to promote security, safety, and the integrity of the global financial system.” The organization further warned “all jurisdictions to remain vigilant of threats to the integrity, safety and security of the international financial system arising from the Russian Federation’s war against Ukraine.”

FATF almost certainly knows that the sanctions and other restrictions and de-risking resulting from Russia’s invasion and illegal annexation of Ukrainian territories are forcing Moscow to engage in conduct such as sanctions evasion, money laundering, and terrorist financing (PMC Wagner almost certainly qualifies, with several allies prepared to designate the group as a terrorist organization).

So why not include it now?

The Royal United Services Institute (RUSI)—a UK security think tank—recently published two opposing viewpoints: one calling for Russia to be immediately blacklisted, and the other calling for FATF to “update its standards and country assessments to confront corruption,” calling the blacklist suggestions “political pressure.”

First, let’s agree that placing Russia on the FATF blacklist is definitely a political move. It’s also an emotionally satisfying one, but those two reasons should not preclude Russia’s blacklisting. The country is the most heavily sanctioned nation in the world and has more reasons than ever to engage in illicit financial transactions to protect oligarch wealth and the heavily hit economy.

In her article for RUSI last month, Fatima Alsancak argues that Russia’s latest Mutual Evaluation Report (MER) found the country to have a somewhat robust framework and its authorities to have a sound understanding of ML/TF risks. An updated evaluation, and thus an opportunity for the FATF to reconsider its assessment, is currently some way off.

The framework may, in fact, be robust, and the authorities may, in fact, have a good understanding of the financial risks, but those issues do not translate to a respect for the law and comprehensive efforts to address illicit finance, especially given the corruption and kleptocracy present in the Russian system. Knowing the problems and having the structures in place to address them, does not mean that Russia is doing just that. And yes, corruption and kleptocracy, as I previously wrote, are national security concerns and can impact the global financial system.

The MER was published in 2019, and a lot of things have happened since then.

Russia’s invasion of Ukraine.

The murder and torture of Ukrainian citizens and the kidnapping of Ukrainian children, which resulted in more comprehensive sanctions.

The use of opaque corporate and financial structures to hide Russia’s connections to sanctioned oligarchs.

Russia’s use of US commercial real estate to evade sanctions.

Cyber attacks.

Increased secrecy.

And given the significant sanctions imposed on Russia after its attack on Ukraine, Russia now more than ever has cause to hide ownership and control of vital companies, use complex networks of front and shell companies to continue accessing the global financial system, and using third countries and complicit gatekeepers and firms to conduct restricted transactions, evade sanctions, and hide misappropriated government assets.

Basing the decision about blacklisting Russia on previous MERs without accounting for current changes is a bad idea.

Likewise, basing the decision about including Russia on the blacklist on a fear of being perceived as a politicized move is shortsighted, especially if Russia meets the criteria.

The FATF reviews jurisdictions based on threats, vulnerabilities, or particular risks arising from the jurisdiction. Specifically, a jurisdiction will be reviewed when:

1. It does not participate in a FATF-style regional body (FSRB) or does not allow mutual evaluation results to be published in a timely manner; or

2. It is nominated by a FATF member or an FSRB. The nomination is based on specific money laundering, terrorist financing, or proliferation financing risks or threats coming to the attention of delegations; or

3. It has achieved poor results on its mutual evaluation, specifically:

•  it has 20 or more non-Compliant (NC) or Partially Compliance (PC) ratings for technical compliance; or

  • it is rated NC/PC on 3 or more of the following Recommendations: 3, 5, 6, 10, 11, and 20; or

  • it has a low or moderate level of effectiveness for 9 or more of the 11 Immediate Outcomes, with a minimum of two lows; or

  • it has a low level of effectiveness for 6 or more of the 11 Immediate Outcomes.

Yes, Russia’s last MER was positive, but again, it was published in 2019—several years before Russia launched an unprovoked war against its neighbor, before it became the most sanctioned country in the world, and before its reasons to commit financial crimes multiplied.

Russia will almost certainly be nominated at the plenary this week, based on the financial threats emanating from the country, and its membership in FATF was suspended, even though it remains a member of the regional body (ESG). For now.

Yes, Alsancak’s recommendation to reform FATF’s review process and addressing deficiencies in the global financial system that allow illicit Russian actors to continue transacting with impunity must be part of a comprehensive solution to the illicit finance problem writ large. But why should the solution preclude listing a country that is a hub for corruption, kleptocracy, money laundering, sanctions evasion, and other financial crimes?

In reply to Alsancak’s piece, Olha Vasylevska-Smahliuk recently wrote that blacklisting Russia should be a priority for FATF.

Terrorist financing is a particular concern, as is proliferation financing—another area of concern under the FATF mandate—since Russia continues to purchase unmanned aerial systems (UAS) from Iran and using them in its war on Ukraine. Iran claims it provided UAS to Russia before the war began. The admission underscores the violation of a UN resolution restricting Iran’s exports of missiles and related technologies that last until October 2023, including the export and purchase of advanced military systems such as drones.

Alongside its regular armed forces, Russia uses the private military company Wagner to conduct hostilities in Ukraine. The latter organisation operates in coordination with the armed forces, has a hierarchical structure and acts in the interests and with the consent of the highest military and political leadership of the country. Wagner is openly provided by the Russian authorities with military equipment including tanks, howitzers, multiple rocket launcher systems, armoured vehicles and fighter jets. However, the group’s activities go far beyond the Russian-led war in Ukraine and endanger international security on a global scale. Wagner's engagement in a number of other armed conflicts around the globe, combined with the threats posed by its leadership, falls under the criteria for ‘terrorist activity’.

Yes, Russia may be technically compliant with FATF standards, but a grey- or blacklisting involves more than that. A fear of being labeled “politicized” should not prevent FATF from objectively assessing Russia’s illicit finance threat.

A plethora of evidence exists that Russia is a threat to the global financial system. Maybe it’s time to consider a blacklisting, while at the same time working to improve the existing processes.