Insights: Week of February 28, 2022

Treasury this week issued a new public guidance to block potential sanctions evasion by Russia’s Central Bank in response to Russia’s attempts to use exporters as its agents to access resources. The guidance clarifies that Russia’s Central Bank is blocked from the US financial system, and that US persons must reject transactions involving Russia’s Central Bank, the National Wealth Fund of the Russian Federation, or the Russian Finance Ministry entities, unless exempt or authorized by OFAC. These are not full blocking sanctions, and for now, energy payments to Russia continue. However, we warn that the situation remains volatile, and several lawmakers on Capitol Hill already have signaled possible support for an import ban targeting Russian oil, especially in the aftermath of Russia’s seizure of Europe’s biggest nuclear power plant in Ukraine.

In the meantime, the West continues to make Russia a pariah on the world stage, and numerous companies are cutting off ties. The London Stock Exchange today suspended trading in its last Russian securities, and some insurers withdrew cover from exporters over Moscow’s invasion. Numerous companies, from Apple to ExxonMobil, are suspending operations there. The United States yesterday added 92 oligarchs, their family members, aircraft, a yacht belonging to now-designated Russian oligarch Alisher Usmanov, and linked entities to the SDN list. The individuals—described as “Putin’s cronies and their family members”—will be cut off from the US financial system, their assets in the United States will be frozen, and their property will be blocked. OFAC is also targeting disinformation, including SDN Strategic Culture Foundation and associated outlets Odna Rodyna, Rhythm of Eurasia, and Journal Kamerton; SouthFront; SDN InfoRos; New Eastern Outlook; Oriental Review; United World International; and Geopolitical.

  • OFAC issued General License (GL) 15 concurrently with Usmanov’s designation, authorizing all transactions and unblocking all property of any entity owned 50 percent or more, directly or indirectly, by the oligarch, that does not appear the SDN List, probably to minimize the impact to the metals sector.
  • The White House this week extended current technology export restrictions on Russia to Belarus, as well as imposed new sanctions for allowing Putin to launch attacks on Ukraine from its territory. Worse yet, Belarus approved a referendum on Sunday that revoked its non-nuclear status, potentially opening the door for Russian nuclear weapons to be deployed there. This week’s measures target 22 entities that produce combat aircraft, armored vehicles, missiles, and other military equipment for Russia.
  • In response to Belarus enabling Russia’s invasion of Ukraine, the Commerce Department is preparing to impose export restrictions and tighten licensing requirements on certain foreign-produced items that are subject to the Export Administration Regulations, limiting the ability of military end users in Belarus to support Russia’s aggression.

As you will see below, the sanctions environment is becoming more and more complicated, as OFAC, UK, and EU issue designations against Russia in coordination with one another, and other countries use their own sanctions regimes to punish Russia for its aggression.


Compliance and Due Diligence

France this week seized a yacht owned by Rosneft head Igor Sechin. The yacht arrived in the south of France two months ago and was originally set to remain there until April 1 to undergo repairs. However, France’s Finance Ministry said that the yacht was preparing to cast off early, and the departure attempt constituted an infraction of France’s customs code, aiming to breach planned economic and financial restrictions.

Some key countries in East Asia are joining with the West to impose significant financial sanctions on Russia—a fairly unusual move for them, which seems to be brought on not only by outrage at Russia’s invasion of Ukraine, but also concern over China’s growing aggression in the region. “We want to demonstrate what happens when a country invades another country,” said one Japanese official.

Three US senators have proposed a bill to impose financial sanctions against China in the event of an attack or invasion of Taiwan. The legislation—Deterring Communist Chinese Aggression Against Taiwan Through Financial Sanctions Act—would sever all financial transactions between the United States and China in the event of an invasion and require the President to implement sanctions within 30 days, to include restrictions on transfers of credit or payments between financial institutions with China, a ban on investment in equity or debt of sanctioned persons, and a ban on financial engagement with Chinese military and software companies, financial messaging systems, and digital currencies.

Unsurprisingly, China will not impose financial sanctions against Russia. China’s Foreign Affairs Ministry has also refused to call Russia’s attack on Ukraine an “invasion,” but apparently Beijing is trying to position itself a bit further away from Russia of late, still refusing to condemn Putin’s actions, but tactfully registering its concern about the harm to civilians in Ukraine and acknowledging that the events in Ukraine constitute a war, rather than a “military operation,” as Putin claims. Mexico rejects sanctions on Russia, claiming it wants to have “good relations with all governments of the world,” and President Lopez Obrador is criticizing the “censorship” of Russian state-owned media companies by social media platforms.

The EU has approved new sanctions against individuals in Belarus who are playing a supporting role in the invasion of Ukraine. Sanctions will also target “some economic sectors, and in particular timber, steel and potash.”

The US-designated company that operated the controversial Nord Stream 2 pipeline that was to deliver liquified natural gas (LNG) to Germany, and that caused so much consternation and concerns about energy security in Europe, has declared bankruptcy and fired most of its employees. This, after Germany stopped its certification process for the pipeline and the United States laid full-block sanctions against Nord Stream 2 AG. The company denies filing for bankruptcy, but it does confirm that it terminated the contracts of its employees. As of this writing, the company’s website is unavailable.

The European Commission is studying whether crypto assets are being used to circumvent sanctions on Russian banks following the Ukraine invasion. Trading volumes between the Russian ruble and the Tether cryptocurrency spiked this week as the ruble tumbled to a record low. Crypto-exchange Binance, which we have criticized as being in need of compliance help, has blocked accounts of Russian clients targeted by sanctions.

The EU has sanctioned cellist Sergey Roldugin, whom for years we have called one of Putin’s “wallets.” Roldugin is one of Putin’s closest friends and is godfather to Putin’s daughter Maria. He joins a list of 680 individuals and 53 entities whose assets in the EU are frozen and who are barred from traveling to member countries. Roldugin is allegedly responsible for “shuffling” at least $2 billion through banks and offshore companies as part of Putin’s hidden financial network and allegedly participated in the “Troika Laundromat”—70 offshore shell companies whose owners used them to move billions of dollars in private wealth from Russia to the West and funneled the funds through the global financial system. Other Russian oligarchs are nervous, as many of them get sanctioned by OFAC, UK’s OFSI, and the EU. Billionaires and Alfa Group owners Mikhail Fridman and Petr Aven are contesting what they claim are “groundless” EU sanctions against them.

The Treasury Department this week published the 2022 National Risk Assessments (NRAs) on money laundering, terrorist financing, and proliferation financing. The NRAs are three separate documents addressing issues such as the misuse of legal entities and lack of transparency that enable corrupt actors and criminals to use the US financial system to launder illicit proceeds, small donors who funnel money to ISIS, al-Qa‘ida, Hizballah, and other terrorist groups, and the proliferation risks posed by North Korea and Iran. Treasury’s upcoming 2022 National Strategy for Combatting Terrorist and Other Illicit Finance was informed by the analysis contained in these three risk assessments and will  recommend methods to address these risks.

Fraud and Abuse

The US government has created a task force called “KleptoCapture”—a new interagency effort to enforce sanctions, export restrictions, and other measures taken against Russia “by targeting the crimes of Russian officials, government-aligned elites, and those who aid or conceal their unlawful conduct.” This task force also plugs into the Biden administration’s continued focus on corruption and kleptocracy as national security issues.

The Spanish Civil Guard has arrested five people suspected of stealing more than $6 million in cryptocurrency. The company, which stored crypto assets for its clients was robbed after one of its employees tried to download a movie from a pirate website and got a virus instead, which allowed the cyber criminal group to gain control over the employee’s computer and use it to steal the funds. The stolen funds were transferred to wallets controlled by the attackers and left there for half a year before being transferred to at least four people. $1.56 million of the stolen cryptocurrencies have been recovered.

Activists are requesting that Switzerland’s financial regulator (FINMA) investigate relationships between three Swiss banks and Lebanon’s central bank governor, who apparently had gone missing last week. Riad Salame has been investigated for money laundering by Lebanon and several European countries, including the UK, Belgium, and Germany. Seven activist groups from Switzerland and Lebanon have raised concerns that Bank Audi, BankMed, and Julius Baer have conspired to help Salame launder embezzled funds, so they have petitioned FINMA to investigate whether the banks have facilitated the misappropriation of millions of dollars from the Lebanese people.

A company in Beverly Hills that rented out safe deposit boxes has agreed to plead guilty to conspiring with customers to launder drug money. The company admitted that it recruited drug traffickers as customers and used the illicit proceeds to run the business. It also acknowledged that people at the company sold cocaine, arranged drug deals at the store, and instructed customers how to structure cash transactions to circumvent currency reporting requirements. Nonetheless, under the plea deal with US Private Vaults, Inc., the US Attorney’s office in LA has agreed not to file criminal charges against the company’s two owners, running contrary to a recent DOJ directive requiring prosecutors to be more aggressive about holding individuals accountable for wrongdoing at their companies. In another suspicious development, the government has not charged any customers of the store, despite claiming that the majority of them are “criminals.”

Credit Suisse has sent letters to hedge funds and other investors asking them to destroy documents relating to its richest clients’ yachts, private jets, and other financial assets in an attempt to stop information leaks about loans to oligarchs who were later sanctioned. The bank sent the letters as the United States, EU, and UK were implementing fresh sanctions against Russian oligarchs in response to Russia’s invasion of Ukraine.

The White House is naming a new chief prosecutor to fight pandemic-related financial crimes. Covid-related fraud has been on the rise since the pandemic was declared in 2020, with some individuals stealing millions of dollars from US taxpayers. Just last week, a federal jury convicted a 40-year-old Massachusetts man of submitting $13 million in fraudulent loan applications under the CARES Act’s forgivable Paycheck Protection Program (PPP) and submitting false documents to the IRS. He received $2 million in PPP funds despite having no US-based employees and no US-based payroll expenses. The Justice Department is not the only one getting a new pandemic fraud head. The Secret Service in December announced a new special agent in charge of pandemic fraud, citing more than 900 ongoing criminal investigations.

Israel has seized tens of thousands of shekels in cryptocurrencies headed for HAMAS, marking the third time within a year that it has seized cryptocurrency accounts funding terrorism. The 12 digital accounts and 30 digital wallets belonged to businesses associated with the Al’matchadun currency exchange—owned by the Shamlach family, which has been accused by the Defense Ministry of assisting HAMAS with the transfer of tens of millions of dollars per year.

Telecommunications company Ericsson put contractors’ lives at risk by insisting they work in ISIS-controlled territory in Iraq, according to a leaked report. Ericsson CEO Borje Ekholm admitted last week that the company paid ISIS for access to quicker transport routes in Iraq. When ISIS seized Mosul in June 2014, a senior Ericsson lawyer recommended shutting down the company’s operation there, but senior managers ignored the recommendation, fearing that it would “destroy” Ericsson’s business in the country. The Justice Department subsequently accused the company of breaking the terms of a 2019 deal with prosecutors by failing to properly disclose misconduct and compliance failures in Iraq.

 

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