How Russia tries to game the anti-financial crime system to pursue its own interests.


John Cusack joined the Caspian team recently for a fascinating briefing and discussion based on Russia, and in particular how Russia tries to game the anti-financial crime system to pursue its own interests. Whilst Russia has transitioned to become a strange blend of authoritarian state and criminal enterprise, it has until now been able to successfully avoid effective censure or action.

As one of the world’s most experienced Financial Crime and Compliance leaders, John spent time in
Russia during the Boris Yeltsin years and had to deal with situations including whether to onboard and maintain so called oligarch and other Russian related assets and approve or decline Russia related transactions. This experience gave him a first-hand understanding of both the country and the challenges that Russia presented in terms of financial assets and financial crime.

The recent disturbing events in Ukraine have shone a brighter light on the finances of Russia and its
elites and brought into question the various means by which vast wealth was earned by an exclusive
few and how that wealth has been invested; in particular how it leaves Russia for destinations in the West. The 500 richest Russians wealth stood at US$640 billion in 2021, but these 500 make up less than 0.001% of Russia’s population, and their combined wealth was still higher than that of the poorest
114.6 million, or 99.8% of the adult population.

The origin of this wealth has long been discussed, but it’s legitimacy has come under scrutiny like
never before with many of Russia’s elites finding themselves the subject of recent Western Sanctions
applied to their assets, to the extent these are in Western jurisdictions and can be identified. Since the early 1990’s, following the collapse of the Soviet Union, President Yeltsin’s Independent
Russia embarked on a flawed “voucher privatisation” programme and then a “loans for shares”
scheme which led to state assets being syphoned to a privileged few through ‘old school’ favouritism
that prioritised the already wealthy or opened up the opportunity for criminal funds to bank roll
mass acquisition of state assets.

Sibneft was sold back to state controlled Gazprom in 2005 at a profit of US$12.5 billion.

These schemes led to the amassing of huge wealth for private individuals, who became known as Oligarchs, including for example Roman Ambramovich who notably bought a number of Russian oil businesses privatised in 1995 called Sibneft. He paid around US$250 million for the business which was sold back to the Russian State, and Gasprom, a decade later in 2005 valued at US$13 billion. According to the BBC, evidence has been presented that bribes were involved in securing the purchase of Sibneft, and that as a result of the deal the Russian government was cheated out of US$2.7 billion, though Abramovich denies this.

As the late 90’s began to see the transition of power from Yeltsin to Vladimir Putin, a major
investigation of the Bank of New York in 1999, can be considered as being a turning point. It was found that large amounts of Russian monies had been laundered through the bank and up to that point, the US and the US dollar had been seen as a destination of choice for Russian money flows abroad. The high profile nature of the case, which was followed by senate investigations, saw less Russian money
heading to the US and more to Europe, in particular to London and to Switzerland.

When Putin came to power in 2000, he took publicly visible steps to ensure that Yeltsin Oligarchs were clear what was expected of them – stay out of politics and respect the Russian state in order to keep hold of their now significant assets. He pursued further privatisation of state-owned properties in which allies close to Putin were placed as senior executives in order to maintain Kremlin control, creating a new slate of Putin Oligarchs. He tightened his grip on the country and made high profile examples of anyone, particularly Oligarchs that didn’t fall in line with his expectations that they should also support the Russian State and stay clear of politics or criticising the State and its activities.

Putin Yeltsin Russia Anti-Financial Crime
Vladimir Putin succeeded Boris Yeltsin to become President in 2000.

Public support for Putin began to wane following the global economic crises in 2008 and by 2011 saw street some of the largest ever street demonstrations since the collapse of the Soviet Union, which Putin clamped down on. Whilst outwardly, Russia portrayed an image that it was open for business and changing for the better through the hosting of global events like the Sochi Olympics of 2014 and the successful bid to host the 2018 FIFA World Cup, things were about to change, but only after the Olympics finished.

Russia decided on its first invasion plans into Ukraine by seizing control of and annexing Crimea and occupying eastern regions in 2015. This followed political & military support for the Syrian Assad regime which included allegations of chemical weapons usage. Then came suspected interference in the US elections of 2016 and accusations of carrying out the chemical poisoning of both Sergei Skrypal on UK soil in 2017 and opposition leader Aleksander Novelny in 2020. Sanctions followed each event but as is now clear, those sanctions were too light and poorly targeted to really change the course and the future ambition of Putin’s Russian state.

“For 30 years after the collapse of the Soviet Union, Russia subsidised the global financial system by US$1 trillion. And if we take the entire former Soviet Union, then the amount of exported capital is US$2 trillion”
Sergei Glazyev, economic adviser to Putin in 2019.

Throughout the existence of the new Russian State, over the last 30 years, capital flight (money that left Russia) is estimated to have been a staggering 1 US$trillion, as Russians moved wealth from Russia to foreign countries. This was led by the Russian elite, including Oligarchs, in search of trophy assets, properties, cars, yachts and investments, as well as those that considered Western assets a hedge against holding only Russian domestic assets. It is hard to discern the difference between these financial flows and other large funds that are mixed in from corruption, serious criminality and monies that leave but are not declared back in Russia and result in the evasion of tax collection. Russian designed “Laundromats” were used to funnel monies with the help of facilitators including so called professional gatekeepers, which ensnared Banks that had lax anti-financial crime controls including European based banks like Deutsche, Danske and Swedbank who were all fined significantly for offences linked to underlying significant Russian money flows.

It was recognised during the session that Russia is not the only place where crimes like drug trafficking, human trafficking and money laundering are prevalent (indeed these crimes are also prevalent in the West). However, the levels of corruption in Russia and the connections between serious organised crime and those in the Russian State, including those in law enforcement and in the intelligence services, make Russia stand out in terms of the G20 (worlds largest economies). Russia is together with Brazil as being one of the countries where the State significantly enables serious criminality rather than confronting it. Levels of corruption in Russia, according to TI’s corruption perception index, scored Russia at between 22 and 29 for the past 25 years (anything under 50 is deemed as poor) and serves to highlight Russia as the worst rated G20 country by far with corruption considered endemic.

Illegal Logging in Russia
Russian green crimes include illegal logging of the largest area of forests and plantations in the world.

Russia also plays a leading roll in cybercrime & green crimes. For example, it is considered by European intelligence officials as the world leader in cybercrime, with more Russian advanced criminal groups with hacking abilities than most other countries and the suspicion of ties to Russian intelligence services. Russia is also associated with other illicit trades including wildlife, logging, and mining. It is a little-known fact that with the world’s largest area of forests and plantations in the world, much of the country’s woodlands are currently under threat from illegal logging. Russia is one of the largest arms exporters with over US$15 billion in sales in 2020, and more than $50 billion on order. Russia exported arms to 45 countries, with the top 5 being Algeria, China, Egypt, India, and Vietnam and was responsible for 20% of global arms exports. The arms trade is one of the most corrupt businesses in the world, with estimates that 40% of all corruption cases in international trade are linked to arms deals – even though the arms trade only accounts for about half a percent of global trade.

As we fast forward to confront Russia’s now second invasion of Ukraine, with a raft of new more powerful sanctions designed to hurt Putin’s Russia, it is worth reflecting on the usage of sanctions so far and whether in addition to existing targets, the lack of targeting of Russian criminal assets and activities is a missed opportunity, as it has been over the last 30 years.

This missed opportunity extends to:

  • failing to effectively investigate the sources of all oligarch or Russian elite wealth
  • failing to investigate and follow the money from the underlying laundromats funds transfers once discovered
  • failing to target Russian organised crime leadership (for example Semion Mogilevich, the supposed leader of the largest Russian Organised Crime Group and considered Russia’s bosses of bosses) is not even sanctioned, and is living in Moscow
  • failing to take into proper consideration significant threat factors, such as corruption and state enabled organised crime into the FATF Review published in 2019, which allowed Russia to not only avoid any suggestion it should be listed on FATF’s so called Grey List, but as it is a FATF Member could object to changes proposed by others to strengthen the international response to fighting financial crime, which might for example make it harder to wash funds through the Russian laundromats using shell companies facilitated by professional gatekeepers

That not enough has been done to tackle financial crime was clearly highlighted in this fascinating session. That by not doing enough has enabled Putin and the Russian State to become emboldened was also obvious. A grave situation like Ukraine should not be what it takes to arouse those in the West that being serious and going after financial crime is essential. So far enhancing the fight against financial crime targeting Russia has not been part of the conversation. That it hasn’t yet, and wasn’t so far over the last 30 years, not least in terms of actions that come close to the rhetoric, is profoundly concerning. Let’s hope this changes and not just against Russian Financial Crime.