Insights: Week of May 2, 2022

Too big to sanction? As the United States and allies work to punish Russia for its invasion and atrocities committed in Ukraine, some sectors appear too important for the world economy to designate. Hungary, Slovakia, and Czechia oppose an outright ban on Russian energy, fearing the sanctions would wreak havoc with their economies, and the Russian metals sector appears to be off limits as well, allowing transactions to continue. The West has so far largely avoided sanctioning companies that provide energy and other key commodities.

  • In March, after sanctioning one of Russia’s richest oligarchs, Alisher Usmanov, the United States issued a general license to allow transactions with Usmanov’s companies, probably out of concerns about the impact on the global metals market. Usmanov owns 49 percent of global steel and mining company, Metalloinvest and has this week filed an appeal, challenging his inclusion on the EU sanctions list.
  • Hungary’s Prime Minister Victor Orban—who has a close relationship with Russian President Putin—says the country will not support an EU oil embargo against Russia because of the deleterious effects on Hungary’s economy. Slovakia is also concerned that the ban would not allow it enough time to find alternative energy sources, even though the current proposal would give both Hungary and Slovakia until the end of 2023 to adapt.
  • Russia’s MMC Norilsk Nickel (Nornickel)—responsible for about 5 percent of the world’s annual production of nickel, a key component of electric-vehicle batteries, and roughly 40 percent of its palladium, which goes into catalytic converters and semiconductors—has so far not been designated.

Although a number of Russian companies vital to the global commodities market have not been designated, numerous firms and financial institutions are derisking away from these Russian entities out of reputational and environmental, social, and governance (ESG) risk concerns. Continuing “business as usual” in Russia—a country that has engaged in atrocities and aggression against its sovereign neighbor—can result in public resentment, as well as a financial loss from investors and stakeholders who refuse to be involved in a venture that continues to provide resources that support Russian aggression.

Compliance and Due Diligence

Western ship insurers are terminating coverage for Russia’s leading shipping company Sovcomflot (SCF), adding to the wind-down of multiple services for Russia’s maritime sector, including ship certification by leading foreign providers, which is vital for accessing ports and securing insurance. SCF is sanctioned by the UK and Canada, and the United States has restricted it from raising capital in its financial markets.

The EU and Switzerland this month have banned the registration or provision of management services to family trusts that have Russian nationals as trustors or beneficiaries. EU and Swiss citizens also will not be allowed to serve as trustees, nominee shareholders, or directors for existing Russian trusts. Family trusts in recent years became a popular tool for Russian tycoons to hide their wealth.

Tata Steel, one of the major importers of Russian coal, in recent months has decided to stop procurement from Russia citing “uncertainties” over supplies due to international sanctions. Although companies from India still purchase crude oil and coal at discounted prices from Russia, payments to Russian suppliers through existing banking channels also remain a concern due to financial restrictions.

The head of Russia’s Orthodox Church, Patriarch Kirill, is reportedly facing EU sanctions along with Putin’s girlfriend, former gymnast Alina Kabaeva. Kirill has described Vladimir Putin’s rule as a “miracle” and supported the Kremlin’s authoritarianism by denouncing opposition protests. In recent weeks, he has also backed Russia’s invasion of Ukraine.

The UK this week sanctioned 31 Russian individuals and 32 entities, including media organizations and military industrial companies. Many were already subject to US/EU sanctions. Many of the newly designated individuals work for those media organizations, including an Irish citizen who is the head of Russia Today’s English language service.

The United States this month will work to advance a UN Security Council (UNSC) resolution to introduce additional sanctions against North Korea. Resolution 2397, passed after North Korea’s ICBM test in 2017, included a provision requiring the Security Council to further restrict North Korean oil imports in response to future long-range missile tests.

OFAC today, for the first time, sanctioned virtual currency mixer (Blender), which is used by North Korea’s Lazarus Group to support its malicious cyber activities and launder stolen virtual currencies. After US-designated Lazarus stole more than $600 million linked to online game Axie Infinity, it used Blender to process $20.5 million of the illicit proceeds. OFAC also updated the SDN List to identify additional virtual currency addresses used by the Lazarus Group to launder illicit proceeds.

China has been discussing ways to protect its overseas assets, concerned that the West could impose similar sanctions on it that were levied against Russia after its invasion of Ukraine. Some Chinese companies are derisking to avoid pressure on their businesses in Russia and in anticipation of secondary sanctions. The United States has threatened severe economic repercussions if China helps Russia evade sanctions.

The United States may impose sanctions on Chinese video surveillance company Hikvision for human rights violations related to China’s surveillance activities against religious minorities in Xinjiang. The company is already on the Commerce Department’s Entity List of companies threatening US national security, along with several other Chinese tech firms.

The EU has proposed sanctions against Belaruskali OAO, Belarusian Potash Co., and the Belarusian oil refinery Naftan. All three of these entities have been designated by the United States and provide significant revenue to the regime of Belarussian president Lukashenko.

Senators Marco Rubio and Rick Scott have introduced the Transaction and Sourcing Knowledge (TASK) Act (S. 4095) that would direct the Securities and Exchange Commission (SEC) to require publicly traded companies to report any aspect of their supply chain that is directly linked to forced labor from China’s Xinjiang Uyghur Autonomous Region and any transactions with companies that pose national security risks. The bill would also mandate that transactions with the Chinese military-industrial complex or companies placed on Commerce Department’s Entity List be reported.

Rubio, along with Senators Todd Young, Tom Cotton, Josh Hawley, and John Cornyn, this week also sent a letter to Treasury Secretary Janet Yellen regarding Chinese-funded Alphawave IP Group’s intent to acquire US-based semiconductor IP developer OpenFive. Alphawave, which has extensive business in China, is backed by Wise Road Capital, a Beijing-based private equity firm with links to the Chinese Communist Party. The senators urged the Treasury Department to conduct a Committee on Foreign Investment in the US (CFIUS) review of the acquisition.

OCCRP has quoted FiveBy Director of Risk Intelligence, Irene Kenyon, in its report about Dubai-based company, Petrochem, that has apparently had used several proxy companies and falsified documents to obscure that the ship hauled cargo from Iran in possible violation of US and other sanctions.

Fraud and Abuse

Financial crime experts before Russia’s invasion of Ukraine noticed increased movements of money by Russian individuals via informal payment systems, similar to hawalas. Regulators generally do not look at proxy-to-proxy/hawala transactions, no documentation is required, and no money actually changes hands. Many of the transfers were likely conducted by entities linked to Russian oligarchs in anticipation of sanctions being levied against them

OCCRP reports on RCB Bank in Cyprus that was set up and owned by a Russian bank dubbed Putin’s “piggy bank.” Russian VTB bank divested its shares of RCB in February, but ties between RCB and the Kremlin still exist. A leaked Cypriot government report says RCB helped its CEO, Kirill Zimarin, and 31 other staff, their relatives, or bank clients to obtain Cypriot passports under a now-defunct citizenship-by-investment scheme that has been shut down because of corruption issues.

Indian authorities last weekend seized $725 million from Chinese smartphone company Xiaomi, accusing it of violating the country’s foreign exchange laws by making illegal remittances abroad. India’s Enforcement Directorate said the smartphone maker had transferred the funds to “three foreign based entities” under the guise of royalty payments.

Apparently, the expanded UK regime that was intended to fight global corruption and illicit money entering the country from overseas is proving ineffective. Since the UK’s anticorruption rules were implemented last year, only 27 people have been sanctioned. The United States took action against 68 individuals and companies during a single week in December to reflect the Biden administration’s priorities during the Summit for Democracy.

Individuals and entities who acquired Credit Suisse securities between March 19, 2021 and March 25, 2022 have filed a class action lawsuit, alleging that the Swiss bank misled investors over business dealings related to Russian oligarchs. The complaint alleges that Credit Suisse made materially false and misleading statements regarding the company’s business, operations, and compliance policies. 

The Dutch Gaming Authority (KSA) has issued a warning to all iGaming operators about the industry’s insufficient AML/CFT compliance. Specifically, the regulator highlighted inadequate operator knowledge regarding the origins of player finances and insufficient reporting of transactions to the Dutch Financial Intelligence Unit (FIU).

Former special agent with Homeland Security Investigations (HSI), Felix Cisneros, this week was found guilty by a federal jury of 30 felonies: one count of conspiracy to commit bribery of a public official, one count of bribery, 26 counts of money laundering and two counts of subscribing to a false tax return. Cisneros accepted cash, checks, private jet travel, luxury hotel stays, meals, and other items of value from an individual associated with a criminal organization. In exchange, Cisneros accessed work databases and removed “derogatory information” on a German national, as well as provided law enforcement information to the individual.

Lebanese citizens, Mohamad Yassine and Hassan Rahman, this week were arraigned on charges of operating an international money laundering organization that sent funds to a bank in Brooklyn. According to court filings, Yassine and Rahman participated in a sophisticated Lebanon-based money laundering  organization, which collected, laundered and repatriated illicit funds, including drug proceeds, throughout the United States, Europe, the Middle East, South America, and Australia in exchange for a percentage-based commission of the amount laundered. The organization used a network of workers to pick up and deliver bundles of cash, and it used the banking system to launder money through wire transfers.

A new leak of Dubai property data has exposed just how many foreigners have poured their money into apartments and villas there. They include more than 100 members of Russia’s political elite, public officials, or businesspeople close to the Kremlin, as well as dozens of Europeans implicated in money laundering and corruption or subject to international sanctions. Several European officials and lawmakers who have been accused of mishandling public funds are also among the listed owners — and some have failed to officially declare their Dubai properties.

Russian mercenaries may be linked to civilian massacres in Mali. According to data compiled by the NGO Armed Conflict Location and Event Data Project (ACLED), as many as 456 civilians died in nine incidents involving Malian forces and US-designated Wagner Group between January and mid-April of this year. Internal Malian army documents refer to members of Wagner as “Russian instructors.” Experts believe that after the 2020 coup in Mali, the country hired Wagner for an estimated rate of $10 million per month to be paid both in cash and through rights to extract minerals.

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