Insights: Week Of May 30, 2022

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The United States and European partners are working to close the pathways Russian oligarchs, elites, and other sanctioned individuals and entities use to evade sanctions and fund President Putin’s war in Ukraine. We anticipate an increased focus on gatekeepers who facilitate financial transactions for sanctioned Russian individuals and entities via several joint efforts established by the Biden administration during the past several months.

  • OFAC this week sanctioned Imperial Yachts—a yacht brokerage that offers services relating to superyachts to Russia’s elites, including those in President Putin’s inner circle. Imperial Yachts conducts business with US-designated oligarchs, including providing management services to at least one yacht linked to an OFAC-designated individual. The company’s founder, Evgeniy Kochman, also runs BLD Management, which performs a similar service for luxury real estate. Kochman has been sanctioned by OFAC, and the KleptoCapture task force is investigating the entities to which he is linked, including BLD.
  • The State Department is targeting additional Russian oligarchs and elites close to Putin, including God Nisanov, a close associate of Russian officials; spokesperson for the Russian Foreign Ministry, Maria Zakharova; and Alexey Mordashov—one of Russia’s wealthiest billionaires, who is also sanctioned by OFAC—in addition to his family members and companies, including Severstal, one of Russia’s leading domestic steel producers. 
  • The Commerce Department has added 70 Russian and Belarussian companies to its Entity List, including several aircraft factories and shipbuilding and research institutes, including several units of the Russian Academy of Sciences, the Kharkevich Institute for Information Transmission Problems, and the Trapeznikov Institute of Control Sciences, as well as the Voronezh Joint Stock Aircraft Company, one of the largest Russian factories for passenger and cargo aircraft, and the Irkutsk Aviation Plant. More than 300 entities have been added to the Entity List since Russia launched its invasion of Ukraine in late February.

Gatekeepers, such as attorneys, company formation agents, real estate professionals, and facilitators such as Kochman will almost certainly face increased scrutiny from regulators—not only because they facilitate illicit actors’ access to the global financial system, but also because many of the current regulatory requirements do not apply to gatekeeper professions, allowing them to evade scrutiny when enabling transactions for kleptocrats, PEPs, and other possibly malign actors.

Compliance and Due Diligence

The EU has approved a sixth package of sanctions, including a partial ban on Russian oil imports, meant to curb Moscow’s ability to continue funding its invasion of Ukraine. The sanctions also bar Russia’s largest bank, Sberbank, as well as Credit Bank of Moscow and the Russian Agricultural Bank, from the SWIFT international payments messaging system. The EU agreed to drop the head of the Russian Orthodox Church, Patriarch Kirill, who has been a vocal supporter of Vladimir Putin and his war in Ukraine, from the proposed list of sanctioned individuals to placate Hungary. In addition, the UK and EU have agreed on an insurance ban for ships carrying Russian oil, shutting Moscow out of the vital Lloyd’s of London insurance market and restricting Russia’s ability to divert its supplies to other countries

Canada has imposed sanctions on 22 individuals and four entities in response to Moscow’s invasion of Ukraine. The restrictions target senior officials at Russian financial institutions and their family members, as well as key financial institutions and banks.

Biden administration officials are divided over how many more sanctions can be imposed against Russia without sparking global economic instability and fracturing transatlantic unity. Advocates of secondary sanctions in response to Russian atrocities in Ukraine claim opposition from allies can be overcome. Others worry about further strains on a global economy already suffering from inflation, skyrocketing oil prices, and a potential food crisis.

The United States is ready to implement a ban on imports from China’s Xinjiang region when the Uyghur Forced Labor Prevention Act (UFLPA) comes into effect this month. The law includes a “rebuttable presumption” that all goods from Xinjiang are made with forced labor and bars their import unless US companies can provide evidence to the contrary.

Banco Popular de Puerto Rico (BPPR) has agreed to pay more than $255,000 as part of a settlement with OFAC to resolve its civil liability for 337 transactions processed in violation of US sanctions on Venezuela. The apparent violations occurred when BPPR processed transactions totaling $853,126 on behalf of two low-level employees of the Venezuelan government. All of the apparent violations resulted from the maintenance of four personal accounts operated by these two Venezuelan government employees.

The United States will again push for additional sanctions on North Korea if it conducts a new nuclear test—the first in nearly five years. We expect Russia and China once again to block all new UN Security Council sanctions. Last week, the two vetoed a resolution sponsored by the United States that would have imposed tough new sanctions on North Korea for a series of launches of intercontinental ballistic missiles that can be used to deliver nuclear warheads.

The Biden administration is actively investigating whether new Chinese companies should be added to the Entity List as it examines what it calls efforts by China to evade US sanctions. Commerce Secretary Gina Raimondo says China is creating new ways to evade sanctions, including setting up new companies to avoid the restrictions.

The EU this week added one group and two individuals to its sanctions list for supporting international terrorism. The bloc has sanctioned Syrian al-Qa‘ida-linked terrorist group Hurras al-Din—which has been sanctioned by OFAC for several years—its leader Faruq al-Suri, and its religious leader Sami al-Aridi. The group has established operational camps in Syria, offering training to aspiring terrorists, and several European foreign fighters have joined its ranks.

Diamond dealers claim that EU rules against money laundering are being used to discriminate against them. Roughly two-thirds of diamond dealers have had their US dollar accounts frozen by their banks. Diamonds and other precious metals and stones are considered a high-risk business because of their huge cost, easy transportability, and lack of transparency around prices and trading deals. Belgium’s financial sector association says the sector does not discriminate against diamond traders but noted that “every bank has its own legal and compliance department,” which will analyze customers based on their risk appetite and will examine complaints.

Russian oil producers are taking a page out of Iran’s and North Korea’s playbooks when working to circumvent sanctions. Traders are working to obscure the origins of Russian oil, having anticipated the new EU ban and are using ship-do-ship transfers to avoid restrictions. Russia’s oil producers also are still profiting from India and China consuming cheap Russian oil.

Fraud and Abuse

Sanctioned Russian oligarch Roman Abramovich is suing the EU over being included on the sanctions list, as are numerous other sanctioned Russians. Abramovich filed the suit against the EU Council after being forced to sell off the Chelsea football team and having his assets frozen. Russian oligarchs appear to be “spamming” EU courts with sanctions challenges, having filed at least 18 cases in the EU general court in Luxembourg since the start of Russia’s invasion of Ukraine. Putin has apparently instructed sanctioned oligarchs to overwhelm the EU legal system with legal challenges, and because plaintiffs are allowed to use their frozen assets to pay for legal costs, the risks of illicit financial transactions and money laundering will almost certainly increase. Putin’s chef and head of the mercenary Wagner group, Yevgeniy Prigozhin, just lost his appeal, which does not bode well for the others. 

The former head of the Louvre has been charged with complicity in fraud and money laundering in an investigation into the trafficking of Egyptian antiquities. Jean-Luc Martinez is currently France’s official ambassador for international cooperation on heritage issues and spearheaded efforts to safeguard artifacts at risk of looting and destruction in conflict zones during his time at the Louvre.

Canada’s major financial institutions should have detected money laundering red flags associated with hundreds of wire transfers that moved tens of millions of dollars for Chinese property developer Chen Runkai into Canadian bank accounts. However, banks, including the Royal Bank of Canada, CIBC, TD, and the Bank of Montreal, all accepted the money without flagging it to the country’s financial regulator. Only one bank—the Vancouver arm of Switzerland’s UBS bank—filed a suspicious activity report in 2012 after noticing massive flows of unexplained funds into a Chen family account, which the bank closed after questioning Chen’s mother, who nominally owned the account, about the source of the funds. She claimed the funds were the proceeds of a land deal in China but could provide no further details.

A father and son who ran a multimillion-dollar illegal marijuana business in Monroe, Washington, this week were each sentenced to five-year prison terms on drug and money laundering charges. Kenneth W. Rhule first came to the attention of law enforcement in 2018 after authorities saw that someone with the screen name “Gimacut93” was operating an unlicensed bitcoin exchange business. Rhule met repeatedly with an undercover agent posing as a criminal who needed to launder funds related to human trafficking and agreed to exchange bitcoin for cash, knowing that the money was the proceeds of criminal activity. Even as he was engaged in the operation of the unlicensed financial exchange business, Rhule and his father, Kenneth J. Rhule, were operating an unlicensed marijuana products business that paid no state taxes.

Colombian and Panamanian authorities have dismantled a drug trafficking ring that used semi-submersible vessels to move cocaine from the Pacific Coast to Central and North America. A cell of former members of the Revolutionary Armed Forces of Colombia (FARC), known as the 30th Front and reportedly led by an individual known as “Mahecha,” is believed to be behind this drug trafficking network. The alleged leader of the group in Colombia, Fausto Reina Bravo (aka El Profe), and his counterpart in Panama, Humberto Reina Yepes (aka Beto), were among the individuals arrested this week.

Costa Rica’s national health service was hacked this week by a Russian ransomware group known as Hive, just weeks after Costa Rican President Rodrigo Chaves declared a state of emergency in response to an attack by the Conti ransomware gang. Experts believe the same actors are behind both attacks, and that Hive has been helping Conti evade international sanctions targeting extortion payouts to cybercriminals operating in Russia. Given Moscow’s efforts to gain a foothold in Latin America, it would not be unreasonable to believe that the Kremlin has actively directed these activities against Costa Rica to foment a revolt against the current government and open the door to a more Russia-friendly one.

Binance CEO, Changpeng Zhao, claims that there are no Russian oligarchs on the platform, and the notion that cryptocurrency is widely used to facilitate illicit activities, such as terrorism and money laundering, is a “misconception.” Although he is right that crypto is not widely used for criminal activity, its use by illicit actors is on the rise. HAMAS has started collecting crypto and plans to continue using the currencies for its operations, and money laundering of cryptocurrencies in 2021 was up by 30 percent from the previous year.

The EU is planning an offensive to counter Russian disinformation about Western sanctions being responsible for the disruption to global supply of grains and fertilizers. EU leaders had appealed to African countries not to fall for a Russia-led propaganda campaign that portrayed the current global food insecurity as the result of Western sanctions against Moscow. The EU and the African Union agreed on a united message on food security which places the blame for disruptions to food supply squarely on Russian President Vladimir Putin’s shoulders.

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