Russia's Oligarchs in the Crosshairs
Collaboration between sanctions and AML compliance is critical
Corruption and kleptocracy continue to take center stage in the US illicit finance theater. I’ve been stressing the importance of this issue for more than a year—ever since the Biden administration designated the two issues as core national security interests.
The issues of corruption and kleptocracy have only gotten more critical since Russia invaded Ukraine in February.
Because Russian oligarchs for decades have used the US financial system to hide their assets, sanctioning corrupt bureaucrats, oligarchs, their families, and others close to Russian president Putin and tracking their assets becomes a matter of national security, especially since many of them act as Putin’s “wallets,” helping the Russian president conceal his wealth and funding Russia’s aggression.
The efforts to punish Putin for the invasion and subsequent genocide of the Ukrainian people are directly linked to many of these oligarchs and their family members, and tracking their (and probably Putin’s) assets requires a tight collaboration between anti-money laundering and sanctions compliance.
Money laundering is efforts to conceal the origins of dirty money. Similar methodologies are also used to hide the origins of assets that belong to sanctioned individuals or parties and kleptocrats who have robbed their countries blind and use the global financial system to hide the misappropriated assets. They transfer the spoils of their corruption to family members, or into trusts, or into accounts of anonymous shell companies, and these are the same methodologies used to obscure the true owners of drug proceeds and profits from other crimes.
Just remember: Russian oligarchs, kleptocrats, and other corrupt public officials typically use the same methods to launder their illicit gains as those used by transnational organized crime groups, drug cartels, and other malign actors.
Recent government efforts like KleptoCapture and REPO task forces aim to stop sanctioned oligarchs from using the global financial system to hide and transfer assets. These efforts not only address Russian oligarchs’ efforts to evade sanctions but also clean possibly misappropriated assets or assets belonging to sanctioned individuals using the global financial system, linking the Biden administration’s and global partners’ priority focus on corruption and efforts to hold Russia accountable for its invasion of Ukraine.
Enter: the Financial Crimes Enforcement Network (FinCEN).
In an advisory published last week, FinCEN urges financial institutions to focus their efforts on detecting the proceeds of foreign public corruption, providing typologies and potential indicators of kleptocracy and other corrupt acts, such as bribery, embezzlement, extortion, and the misappropriation of public assets.
Russia is of particular concern as a kleptocracy because of the nexus between corruption, money laundering, malign influence and armed interventions abroad, and sanctions evasion. Corruption is widespread throughout the Russian government and manifests itself as bribery of officials, misuse of budgetary resources, theft of government property, kickbacks in the procurement process, extortion, and improper use of official positions to secure personal profits. Russia’s further invasion of Ukraine, for example, highlights foreign public corruption perpetrated by kleptocratic regimes like that of Russian President Vladimir Putin. Russia’s actions in Ukraine are supported and enabled by Russia’s elites and oligarchs who control a majority of Russia’s economic interests. These individuals have a mutually beneficial relationship with President Putin that allows them to misappropriate assets from the Russian people while helping President Putin maintain his tight control on power. Oligarchs are believed to be directly financing off-budget projects that include political malign influence operations and armed interventions abroad.
Stopping Russian sanctions evasion and concealment of misappropriated and corrupt assets is directly linked to efforts to stop Russia’s invasion and war crimes in Ukraine. Finding and freezing oligarch assets will reduce Russia’s ability to fund everything from weapons production to payments to its murderous troops.
US firms and financial institutions are on the front lines of the battle to tackle corruption. The red flags are generally known: opaque processes that award government contracts to the same bidders; location in a jurisdiction that is well known for public corruption, such as Russia, or secrecy havens that cater to Russian elites, such as the Seychelles or Cyprus; use of third parties to obfuscate real estate transactions; and assets that are held in the name of intermediate legal entities whose beneficial owner or owners are linked to kleptocrats and their families.
In the case of Russia, it’s not just a matter of preventing corrupt actors from accessing the US financial system and possibly avoiding criminal and regulatory consequences, but also helping de-fund the mass slaughter Russia is conducting in Ukraine.
Use internal block lists to capture information about Russian oligarchs, their family members, and other politically exposed persons with whom your financial institution may not want to transact.
Track the trajectory of sanctions, because an entity that is not fully blocked one day could be included on OFAC’s SDN list a few days later. Be proactive, and make time to research ownership and control of those entities, especially if there are indications of possible escalation of sanctions or divestment.
Hire the right people to protect your firm or financial institution and the US financial system—people who are dedicated to compliance, who understand sanctions, who follow policy developments both at home and abroad, and who understand financial crime, sanctions, and investigations to trace ownership and control, as well as the movement of assets.
The sanctions environment is only going to get more complicated, so pay attention. Delve deep into ownership and control structures, because involvement of kleptocrats, or corrupt government officials, or sanctioned individuals even at more than a couple of levels deep can impact the reputation of your firm or financial institution.
And finally, continuously reevaluate your risk appetite and assessments. Examine your compliance program regularly, especially in times of increased volatility, and ensure it matches your risk assessment and addresses your vulnerabilities.
Keep your eyes open, and remember your mission is to protect your firm and ultimately your country from access by malign actors.