Insights: Week of April 11, 2022

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As countries around the world tighten the screws on Russia in response to what President Biden this week called a “genocide” in Ukraine, Moscow appears to be internally acknowledging that its energy sector is feeling the pain, and that it cannot continue to insulate its economy from sanctions and prop up the ruble indefinitely. Russia is taking steps to mitigate the financial pain, Russian oligarchs are moving to hide their assets, and possible new opportunities to evade sanctions and avoid use of the US dollar will almost certainly present themselves. Russia is engaging in a bit of “payment theater,” trying to flex its muscles by threatening to sue western powers for imposing sanctions that prompted it to default on its debts. Moscow has already missed payments on two of its dollar bonds, after US authorities blocked US banks from processing cash as part of measures to punish the country over its invasion of Ukraine.

  • Russia this week has called on the BRICS group of emerging economies (Brazil, Russia, India, China, and South Africa) to use national currencies for export-import operations, integrate payment systems and cards, create a BRICS financial messaging system to compete with SWIFT, out of which several of Russia’s largest banks were ejected last month, and create an independent BRICS rating agency. Russian Finance Minister Siluanov told the BRICS  that sanctions have destroyed the foundation of the existing international monetary and financial system and recommended that the countries take steps to mitigate the effects of the “manmade crisis.”
  • During the past decade, executives at five of Russia’s biggest financial institutions—Sberbank, Alfa Bank, VTB, Gazprombank, and VEB—have been exploiting the secrecy of the offshore financial system to hide their assets. The bankers began engaging in offshore asset transfers as Russia’s relationship with the rest of the world began to deteriorate after the Crimea invasion as the United States began discussing sanctions against those close to Putin in a bid to change the Russian president’s calculus. These bankers likely saw the writing on the wall and moved to protect their wealth.
  • Journalists have uncovered previously unreported assets of Russian oligarchs Eugene Shvidler and Roman Abramovich. Investigative reporters have identified two purebred show horses owned by Abramovich’s daughter, Sofia, an Airbus helicopter owned by Abramovich through a British Virgin Islands shell company, and a $2.7-million New York City apartment that reporters found in the name of Shvidler’s son, Daniel. The helicopter was deregistered in the UK a month before Abramovich was sanctioned, and re-domiciled in Russia. These assets and more have been added to OCCRP’s Russian asset tracker.
  • The Global Initiative Against Transnational Organized Crime reports that Russia could exploit illicit gold markets in Africa to generate profits and move funds. Moscow could use foreign exchange reserves accessed through illicit gold markets for imports, to fund Russian military operations, or to compensate sanctioned Russian oligarchs for their losses. Russia has quite a bit of influence in Africa and has deployed the US-designated Wagner group to African countries to protect its influence in countries such as Mali and Central African Republic.

Money laundering is an effort to conceal the origins of dirty money, and similar methodologies are also used to hide the origins of assets that belong to sanctioned individuals. As Russia increases efforts to evade financial restrictions, US firms and financial institutions will be on the front lines of the battle to counter Russian attempts to circumvent sanctions and obscure ownership of ill-gotten gains. Russian oligarchs have for decades used the West—whether financial institutions or real estate and other sectors—to hide their assets, and US firms must be aware of the relationship between efforts to launder dirty money and efforts to evade sanctions. FinCEN this week issued an advisory on kleptocracy and foreign public corruption, providing typologies and potential indicators of kleptocracy and other forms of foreign public corruption banks and financial institutions can use as a roadmap to tackle Russian sanctions evasion and efforts to hide corrupt assets.

Compliance and Due Diligence

The EU is warning member states that Putin’s demand that “unfriendly countries” effectively pay for Russian gas in rubles would violate sanctions imposed on Moscow following its invasion of Ukraine. Italy this week affirmed it will not veto a Russian oil embargo and supports sanctions, and major global trading houses are planning to reduce crude and fuel purchases from Russia’s state-controlled oil companies as early as May 15. Hungary, however, plans to pay for Russian gas in euros through Gazprombank, which will convert the payment into rubles to meet Putin’s demand. The EU is  considering a Russian oil embargo. Although proposals are being drafted by Ireland, Lithuania, and the Netherlands, there is no actual agreement yet to ban Russian crude. The European Parliament last week voted for an embargo, although its decision is not binding. Hungary will not support an oil embargo, which will make consensus nearly impossible to reach.

The Commerce Department has added 10 aircraft owned by Russian and Belarussian entities to a list of airplanes that likely have violated US export controls and warned that anyone providing service to the aircraft on the list without US authorization risks enforcement actions, including substantial jail time and fines. Nearly all the aircraft on the list are made by Boeing and operated by Russian airlines such as Aeroflot and Azur Air, as well as newly added Belavia Belarusian Airlines.

French lawmakers are calling for additional sanctions on the Taliban after the group banned school for girls above the sixth grade in Afghanistan. More than 50 members of the French Parliament have sent a letter to President Macron and the Speaker of Parliament to impose travel sanctions on Taliban officials to pressure them to live up to their human rights commitments made after the takeover. Taliban officials claim that “cultural challenges,” the economic crisis, and a lack of female teachers are responsible for the delay in reopening girls’ schools and promise to reopen them in the “near future.”

A UN Security Council committee has granted a sanctions waiver for a South Korean civic group to send coal briquette machines to North Korea to help prevent waterborne and other infections. The waiver includes the shipment of 173 items, including conveyor frames, in an apparent effort to help North Koreans in the eastern border county of Kosong boil water and heat food to ward off infections.

The United States this week designated seven individuals in four Balkan countries—Albania, Bosnia, North Macedonia, and Montenegro—for destabilizing the region through corruption and criminal activity. The designations include former Prime Minister of Macedonia, Nikola Gruevski, who is a wanted fugitive and who fled to Budapest, Hungary, in 2018 to avoid serving his prison sentence for corruption. The sole entity that was sanctioned is linked to Gruevski and is registered in Hungary. Svetozar Marovic, former deputy president of the Montenegro Democratic Party of Socialists and former president of the Serbia and Montenegro common state, is also among those included on the SDN list. Marovic was arrested in 2015 in Montenegro for suspected involvement in corruption relating to construction projects.

OFAC this week designated an Irish organized crime group under the transnational organized crime executive order (EO0 13581. The Kinahans are well known in organized crime circles and are involved in everything from drugs and weapons smuggling to sports booking and money laundering. Of the four Kinahan entities that were designated, two are based in Dubai, and one—Nero Drinks—is an alcoholic beverage company based in the UK. The fourth entity is what OFAC has called the entire Kinahan organization – the Kinahan Organized Crime Group.

Germany’s banking regulator this week stripped Russia’s VTB bank of control over its European subsidiary, blocking the bank’s access to the subsidiary’s assets. The European entity’s activities can continue and customers can access funds, but its board cannot abide by directions from VTB, which was blocked by EU sanctions last week. German press reports that four of VTB Europe’s five board members have resigned, and the company has taken on no new customers since early March.

As political pressure grows to crack down on Russian oligarchs, policymakers are focusing on real estate as a way to help prevent them from accessing the US dollar. House Financial Services Chair Maxine Waters plans to introduce legislation in the coming weeks to shore up anticorruption laws related to the industry, and FinCEN, is working on additional regulations to cut down on money laundering through real estate.

Fraud and Abuse

US-designated oligarch Alisher Usmanov this week lost his yacht. Germany has seized the US-sanctioned Dilbar, which has been impounded and is being held in the Port of Hamburg. The yacht is “technically” owned by Usmanov’s sister, Gulbakhor Ismailova, named after Usmanov’s mother, Dilbar, and registered in the Cayman Islands. 

Ukrainian officials this week stopped a Russian cyberattack on Ukraine’s power grid that could have resulted in a massive outage, raising fears that Moscow will increase its use of cyber weapons against the war-battered country. Russia has long used online attacks alongside traditional warfare; but experts said the latest hacking attempt was among the most sophisticated cyberattacks they have seen in the war so far. The details of the attack suggested that Russia had planned the attack over several weeks and intended to maximize the damage by sabotaging computer systems that would be needed to restore the electrical grid.

Virgil Griffith, who conspired to help North Korea evade sanctions, has been sentenced to more than five years in prison and fined $100,000. The cryptocurrency expert planned to provide services to individuals in the DPRK by developing and funding cryptocurrency infrastructure there, including crypto mining, knowing that North Korea could use these services to evade US sanctions, and to fund its nuclear weapons program and other illicit activities. In 2019, Griffith traveled to Pyongyang to attend a blockchain and cryptocurrency conference, where he provided instructions on how the DPRK could use blockchain and cryptocurrency technology to launder money and evade sanctions

Russia is spreading disinformation on social media claiming that Ukraine is the money laundering and child sex trafficking capital of the world. Politifact rates this claim as “not even close.” Ukraine is not included on any AML grey or black lists, including the EU’s or FATFs, which removed the country from its grey list in 2014 after Russian puppet Yanukovych was ejected. In addition, the State Department’s Trafficking in Persons Report says Russia has a more serious problem with child sex trafficking than Ukraine. FiveBy a few weeks ago published an advisory on increased human trafficking risks in the wake of Russia’s invasion. 

Google this week filed a lawsuit against an alleged fraudster that the company claims is behind a number of online puppy selling scams. The tech giant claims the person responsible has been “perpetrating a puppy fraud scheme to exploit the COVID-19 pandemic for personal gain.” The defendant is said to live in Africa, and the company claims the suspect used several Google services in online puppy scams in which victims sent hundreds of dollars in exchange for puppies that never arrived. The suspected intent was to exploit the COVID-19 pandemic and the demand for puppies that came along with it.

A money laundering network in Pakistan transferred a “colossal amount” of allegedly illicit funds to Iran using informal transfer systems, and a representative of Iran’s Supreme Leader, Abolfazl Bahauddini, was apparently among the recipients. Investigation reports and WhatsApp chat logs show that members of the network operated between Pakistan, Iran, and Iraq during the past seven years. Hawala and hundi are informal ways of transferring cash across borders and are both illegal in Pakistan. The network also used pilgrims traveling to the cities of Najaf in Iraq and Qom in Iran to smuggle cash. 


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