Russia on the EU's Money Laundering Grey List
What would that mean?
The Financial Times today reported that the EU is considering adding Russia to its “grey” list of countries that present a money-laundering, tax evasion, and other financial crimes risk. The majority of EU members support this move—meant to further increase pressure on Russia to stop its aggression against Ukraine.
Inclusion on the list means reputational damage for Russia, as well as a requirement for firms and financial institutions to conduct enhanced due diligence when transacting with Russian entities.
I have advocated the inclusion of Russia on the Financial Action Task Force’s (FATF) grey list at the very least for several years. Blacklisting Russia would be ideal, as I wrote last year. After all, Russia’s cozy relationships with other financial pariahs on FATF’s black list (North Korea, Iran, and Myanmar/Burma), its vast corruption that hinders economic development and facilitates the misappropriation of billions of dollars and the laundering of these funds to benefit Russian elites, and its continued, and sometimes brazen violation of international sanctions should almost certainly make Russia a very risky jurisdiction.
And let’s not forget Russia’s cozy relationship with designated terrorist groups, such as Hizballah, HAMAS, and the Huthis, resulting from Moscow’s close ties to Iran - these groups’ patron state. Russia also loves the Taliban, having last year removed the group from its list of terrorist organizations and laughably claiming in July that Russia considers the Taliban “an ally” in the fight against terrorism.
But the most FATF did was suspend Russia’s membership. The Egmont Group of Financial Intelligence Units (FIUs) in 2023 also suspended Russia’s FIU—Rosfinmonitoring—from the organization.
And now, the EU could possibly jump into the ring, adding Russia to the last FATF update that also included Algeria, Angola, Kenya, Ivory Coast, Laos, Lebanon, Monaco, Namibia, Nepal, and Venezuela.
Why hasn’t FATF listed Russia yet?
First, FATF could be concerned about limiting Moscow’s cooperation on counterterrorism efforts. This so-called “cooperation” should be viewed with a massive pillar of salt, considering Russia’s close relationship with terrorist groups I mentioned above.
Second, FATF may be trying to paint itself as above politics. For this reason, the global anti-money laundering watchdog may be basing its decisions on Russia’s last mutual evaluation in 2019. The grey- or blacklisting of Russia can certainly be viewed as a political move, but a lot of evidence exists in support of listing the country.
A lot has happened since 2019. Russia’s full-scale invasion of Ukraine in 2022 alone should have changed FATF’s calculus regarding Russia’s risks. The country has become one of the most significantly sanctioned in the world, so Russian oligarchs and other elites have more reasons than ever to hide the ownership and control of their assets and continue accessing the global financial system, conduct restricted transactions, and hide misappropriated funds.
In addition, Russia engages in numerous activities that scream “MONEY LAUNDERING AND SANCTIONS EVASION,” including the use of opaque corporate and financial structures to hide Russia’s connections to sanctioned entities and Moscow’s use of US and other western commercial real estate to evade sanctions, as well as the use of shadow fleets and massive fraud to evade trade restrictions.
Third, there’s the need for consensus. Although FATF did consider blacklisting Russia yet again, China, India, Saudi Arabia, and South Africa rejected the listing of their Russian pals.
In other words, counting on FATF to do what logically should have been done years ago (especially given the Russia nexus in multiple “laundromat” scandals, such as the Russian Laundromat, Troika Laundromat, and the Global Laundromat) is likely not smart.
So what will the EU greylisting accomplish?
The EU was supposed to have adopted the new grey list this week, but according to the Financial Times, the commission pulled its adoption at the last minute for “administrative/procedural reasons.” The full list requires backing from a majority of MEPs, and I have to wonder why the action was delayed. It may have nothing to do with Russia itself, as there’s been some debate about the listing of the UAE and delisting of Gibraltar.
EU officials, however, say the action will take place, is fully supported by the majority of EU members, and will happen early next week.
We shall see.
The listing normally results in reputational damage and required enhanced due diligence by financial institutions when processing transactions with a Russian nexus, increasing compliance costs.
Foreign direct investment can also be impacted. What investor would want to park funds in a country known for financial integrity deficiencies? Harkening back to Bill Browder’s book “Red Notice,” if investors in the early post-fall of the USSR days were “naive” and were willing to look the other way, ignoring the systemic corruption in Russia, there’s no excuse now.
I can’t imagine that anyone who has turned on the news over the past three years has somehow missed the attacks on civilians, the destruction of infrastructure, the rape, torture and murder of Ukrainians, and the kidnapping of Ukrainian children by Russia that resulted in massive sanctions and other restrictions to limit Russia’s access to the global financial system and to goods, technologies, and services meant to hinder Russia’s ability to wage war.
So any firm or financial institutions already not doing enhanced due diligence to ensure that they are not transacting with sanctioned entities, with facilitators, and with designated sanctions evaders should be aware that regulatory penalties and reputational damage are almost certainly guaranteed.
I believe the grey listing would be mostly messaging. However, there are obligations for members that would accompany the action. A higher level of scrutiny is a must for any transaction that could be connected with Russia or nations that facilitate Russian evasion of sanctions and other restrictions.
Smart organizations already engage in enhanced due diligence for any transaction that could have a Russia nexus, such as:
Verification of the ultimate beneficial owners (UBOs) of all legal entities involved in the transaction or the supply chain
Research into the source of wealth and source of funds
Mandatory approval from senior management before transacting with the potentially risky counterparty
Enhanced transaction monitoring, especially if red flags that indicate money laundering or sanctions evasion are present
Organizations that have a greater risk appetite and haven’t begun applying greater scrutiny to transactions that could involve Russia, its neighbors, or countries known to be transshipment points for restricted goods and technologies to Russia, as well as those that involve higher-risk products that allow Russia to gain access to restricted goods and technologies, should take the grey listing of Russia by the EU as a shot across the bow.
Be smart. Protect your firm. Up your due diligence game. Contact experts for help.