Blacklisting Russia
FATF to consider the evidence
The Financial Action Task Force (FATF) this week is reportedly going to consider evidence that could lead to the inclusion of Russia on its black list. Politico reports that it has seen documents that highlight the close financial and military cooperation between Russia and high-risk countries such as North Korea and Iran. Russia’s funding of private mercenaries such as the Wagner Group and their associated illegal activities is also part of the evidence presented by Ukraine to the members of the global financial watchdog proposing Russia’s blacklisting.
This is not going to be an easy sell.
Being blacklisted or even greylisted by FATF can severely damage a nation’s financial health and reputation. The designation could impact trade, investment, and other financial transactions, and blacklisted countries have trouble securing loans from global financial institutions, which will no doubt be increasi ng their due diligence when any transaction involving Russia is proposed. FATF proposes taking extreme caution with countries on its high-risk lists. Should Russia be included on the black list, correspondent relationships with Russian banks will no doubt be terminated, and business relationships with Russian institutions, entities, and even individuals will be more closely scrutinized than even now, after Russia’s full-scale invasion of Ukraine.
The jurisdictions on the grey list are high-risk, but at least they’re cooperating and working to improve their AML/CFT regimes. When FATF includes a jurisdiction on its grey list, the country has committed to resolving ASAP the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring. Not great for a country’s reputation, but slightly better than being blacklisted as a jurisdiction with serious strategic deficiencies to counter money laundering, terrorist financing, and financing of proliferation.
Right now, there are only three countries on FATF’s black list: Iran, North Korea, and Myanmar (aka Burma). If listed, Russia would be the fourth.
But its inclusion requires consensus from countries such as China and India, who are two of the 40 FATF members that would work to make that decision. And considering that two Chinese companies have just been designated for facilitating delivery of complete weapons systems to Russia, consensus will be tough to reach. OFAC last week sanctioned China-based Xiamen Limbach Aircraft Engine Co., Ltd., produces the L550E engine for implementation into the longrange Garpiya drone that regularly murders Ukrainians and destroys the country’s infrastructure. Redlepus Vector Industry Shenzhen Co Ltd (Redlepus), which also operates out of China, collaborates with US-designated Russian defense firm TSK Vektor OOO, which serves as an intermediary between AO IEMZ Kupol and the PRC-based suppliers for Russia’s Garpiya project, according to OFAC.
India continues to import loads of Russian oil, so getting Delhi on board with a blacklisting would also be a chore. And Kremlin has been pressuring India, threatening to invalidate defense and energy deals if Russia winds up an even bigger financial pariah over its invasion of Ukraine.
Ukraine has tried unsuccessfully to get Russia blacklisted since the full-scale invasion began, but as more evidence piles up, Russia’s participation in illicit financial transactions, collaboration with blacklisted countries, and funding and support of savage mercenaries, as well as tacit support of criminal cyber actors in hybrid operations is getting hard to ignore.
Although FATF needs to act on obvious threats, the organization doesn’t want to appear political either. Inclusion on the black list must not be politically motivated, but based on concrete evidence that the country represents an AML/CFT/CFP threat.
The evidence is piling up.
Let’s remember that FATF last year suspended Russia’s membership in the organization in response to Russia’s aggression.
The Russian Federation’s actions unacceptably run counter to the FATF core principles aiming to promote security, safety, and the integrity of the global financial system. They also represent a gross violation of the commitment to international cooperation and mutual respect upon which FATF Members have agreed to implement and support the FATF Standards. Considering the above, the FATF has decided to suspend the membership of the Russian Federation. The Russian Federation remains accountable for its obligation to implement the FATF Standards. The Russian Federation must continue to meet its financial obligations. The Russian Federation will remain a member of the Global Network as an active member of the Eurasian Group on Combating Money Laundering (EAG) and retain its rights as an EAG member. The FATF will monitor the situation and consider at each of its Plenary meetings whether the grounds exist for lifting or modifying these restrictions.
So Russia is already well on its way to becoming a financial pariah, especially with the suspension from FATF and Russian FIU, Rosfinmonitoring’s, suspension from the Egmont Group of financial intelligence units last year.
In addition, Russia has been cultivating close relations with other countries on FATF’s blacklist.
Russia’s relations with Myanmar have become even closer since Russia recognized the Tatmadaw’s seizure of power in 2021, and the junta endorsed the Kremlin’s full-scale invasion of Ukraine. According to the Singaporean research institution ISEAS – Yusof Ishak Institute, the junta’s leader Min Aung Hlaing views Russia as the country’s preferred major power partner, and Russia is now Myanmar’s largest source of military assistance.
South Korean intelligence this week has confirmed reports that North Korean troops are being sent to Ukraine to supplement Russia’s war there.
Further, before Russia vetoed the extension of the North Korean Panel of Experts (POE) that monitored compliance with UN sanctions. Why? Well, according to the more than 600 page final report issued by the panel, weapons transfers from North Korea to Russia have been taking place via merchant vessels Angara and Maria.
According to information supplied by member states to the panel, the MV Angara is a known ammunition transport ship. It moved hundreds of 20-foot cargo containers from the port of Rajin in North Korea to the port of Dunay in Russia. The vessel was shown delivering 300 containers that originated in Rajin to a Russian naval facility at Konyushkovo Bay on September 12, 2023. The POE also released supporting information that would indicate the vessel carried explosive cargo as well as information that suggests the cargo was subsequently shipped by rail to a Russian military supply site not far from the front in the Ukrainian conflict. There is no irrefutable direct evidence that the shipments were weapons (we will avoid a smoking gun reference here), but the report leaves one just millimeters away from the conclusion that Russia and North Korea were engaged in a historically large violation of UN Security Council sanctions in the summer and autumn of 2023.
So Russia is violating UN sanctions. But Russia is also violating the $60 per-barrel price cap on Russian oil shipments by using an environmentally hazardous, obscurely owned fleet of “ghost ships,” many of which were listed as blocked property by the UK last week.
Russia also violates western sanctions by using any number of known evasion methodologies, such as shell and front companies, close associates, family members, and other proxies, and complex ownership webs to continue accessing the global financial system that has made it perfectly clear that Russia is not wanted. Treasury in August targeted numerous transnational networks that procure ammunition and military materiel for Russia, facilitate sanctions evasion for Russian oligarchs through offshore trust and corporate formation services, evade cyber-related sanctions against Russian cyber actors, launder gold for a sanctioned Russian gold company, and support the Russian military-industrial sector by procuring sensitive and restricted goods and technologies.
Treasury is aware of Russian efforts to facilitate sanctions evasion by opening new overseas branches and subsidiaries of Russian financial institutions. Foreign regulators and financial institutions should be cautious about any dealings with overseas branches or subsidiaries of Russian financial institutions, including efforts to open new branches or subsidiaries of Russian financial institutions that are not themselves sanctioned. Treasury has a range of tools available to respond to the establishment of new evasion channels.
Despite previous denials, Russian dictator Putin last year admitted that “[t]he maintenance of the entire Wagner Group was fully provided for by the state.”
This is the same Wagner Group sanctioned by the United States as a transnational criminal organization.
This is the same Wagner Group that commits atrocities in Africa and exploits African natural resources.
This is the same Wagner Group that reportedly has razed entire villages and murdered civilians in the Central African Republic (CAR) to advance its economic interests in the mining sector, participated in the unlawful execution of people in Mali, raided artisanal gold mines in Sudan, and undermined democratic institutions in every country it has ever infested.
What about money laundering? The Russians are big time involved in laundering misappropriated funds. Remember the Russian Laundromat that intrepid journalists and investigators exposed as a criminal method to move vast sums of money—more than $20 billion—out of Russia?
Just this year, an international money launderer, Maxim Marchenko, pleaded guilty to charges of money laundering and smuggling goods from the United States using several Hong Kong-based shell companies, including Alice Components Co. Ltd., Neway Technologies Limited, and RG Solutions Limited.
“Marchenko concealed his scheme to funnel these microelectronics – which had application for use in rifle scopes, night-vision goggles, thermal optics and other weapons systems – by using shell companies and other elaborate money laundering techniques.”
And let’s not forget Iran’s growing military relationship with Russia, which includes the transfer of unmanned aerial systems (UAS) that are used to murder Ukrainians and destroy critical infrastructure in the country. The Pentagon in September confirmed that Iran transferred shipments of Fath 360 close-range ballistic missiles to Russia, although officials weren’t sure how many missiles Russia received.
What did Tehran get in return? Probably intelligence they need and some financial transfers. In July, Reuters reported that Russian and Iranian central banks are working to connect their digital currency systems, which would allow the two sanctioned countries to carry out bilateral transactions. Since then, Russia has passed a law, signed by Putin in August, legalizing cryptocurrency mining in Russia and authorizing foreign digital financial assets to be traded on Russian blockchain platforms.
Iran is a designated state sponsor of terrorism and has been since 1984, funding attacks by Hizballah, HAMAS, and the Huthis in Yemen.
Russia is also developing its relationship with the terrorist groups. Hizballah and the Russians fought together in Syria, allied with the Assad regime, and after 2018, according to my buddy Aurora Ortega and Matt Levitt of the Washington Institute for Near East Policy, Moscow and Hizballah “began to engage in unprecedented joint sanctions evasion activities.”
In November 2018, the US Department of the Treasury exposed a convoluted trade-based oil smuggling sanctions evasion scheme directed by Hizbullah and the Qods Force of Iran’s Islamic Revolutionary Guard Corps (IRGC). This scheme allowed the Iranian regime to remit money to Russia’s state-owned Promsyrioimport on behalf of Syria, enabling Russia to evade US sanctions against the Assad regime. Simultaneously, the Syrian Central Bank remitted cash to Hizbullah, HAMAS and the IRGC-Qods Force on behalf of the Iranian regime. Central to this scheme were two key conduits: Hizbullah official Mohamed Qasir and Russia-based Syrian national Mohamed Alchwiki. In a letter to a senior official at the Central Bank of Iran, Qasir (aka Mr Fadi) and Alchwiki confirmed receipt of $63 million as part of a scheme to benefit Hizbullah.
The US Treasury during the past several years continued to target networks involved in oil smuggling and transferring funds on behalf of designated terrorist group, the Iranian Islamic Revolutionary Guard Corps Quds Force (IRGC-QF). And at least some of the vessels sanctioned during these years, such as the Zephyr I and Julia A, have also been used to smuggle Russian oil.
Hizballah is designated as a terrorist organization by both the United States and EU, but Russia has publicly stated that it does not consider Hizballah a terrorist group. Of course, Moscow this month also removed the Taliban from its list of terrorist organizations. Yes, that Taliban. Putin in July even went as far as to say that Russia considers the Taliban an ally in the fight against terrorism.
I can’t believe I typed that with a straight face!
Of course, there are economic reasons why Russia needs to legitimize the Taliban.
The Russian Business Center in Afghanistan estimates Russia’s trade with Afghanistan at about $1 billion (over five times more than in 2021). Russian Deputy Prime Minister Alexei Overchuk has given the far more modest figure of $560 million. It’s impossible to assess the reliability of these numbers: not only is Russia’s customs data classified, but much trade with Afghanistan involves multiple border crossings and is settled in cash.
So, yes, there are plenty of reasons to consider Russia as high-risk and uncooperative when it comes to stemming financial crimes. In addition, the evidence Ukraine submitted for FATF’s consideration also includes evidence about the messaging app Telegram and cryptocurrencies being used to facilitate Russian terrorist financing and to the laundering of money Russia obtained from stealing goods, such as grains and minerals, during its invasion of Ukraine.
A delicate balance.
I can understand why FATF could be hesitant to blacklist Russia. Aside from Russia’s allies facing pressure from Moscow, the FATF may also be concerned about terrorism financing and Russia’s cooperation in that sphere. In addition, FATF is concerned about appearing to be punishing members for political reasons.
But let’s be realistic here. After ISIS attacked the Crocus City Hall venue in March, Russia did everything in its power to divert attention from the terrorist group that actually claimed responsibility for the gruesome attack and spread disinformation to blame Ukraine.
And Russia’s cuddly relationship with other terrorist organizations indicates that its cooperation against Islamic terrorism is anything but robust.
In addition, I would submit that in its effort to appear nonpolitical, FATF would be ignoring very real threats posed by Russia’s financial crimes, including money laundering, corruption, sanctions evasion, and terrorism financing.
By ignoring the overwhelming evidence in favor of working to avoid the appearance of political partisanship, FATF would actually be ignoring its mission to protect the financial system.
In my opinion, long overdue.