Putin’s raids on the Skolkovo financial center outside of Moscow, and his recent push outlawing state officials from owning foreign assets-including precious metals-are just two of the most recent examples of Putin using anti-money laundering and financial laws as a means of control.
The traditional view of anti-money laundering laws is that they are designed to combat the proceeds and means of crime, terrorism and corrupt entities. In recent years it has become an even more pressing issue due to the global nature of not only our financial systems but of crime, terror and corruption as well. In Russia, however, such laws have a more nefarious and primary objective: to enforce and maintain control over the elite, and to silence any potential opponents to the Kremlin. Rarely is the question asked of how Russia is able to use the anti-money laundering laws as a tool of repression when it adheres to internationally set standards of practice. The answer lies in the separation between the establishment of anti-money laundering mechanisms, which falls in line with internationally set standards, and the enforcement of those standards, which are capriciously and politically used to not only prosecute opposition members, but to also collect information on the Russian elite, so as to maintain their loyalty for fear of prosecution.
Russia adheres to international recognized standards of anti-money laundering statutes and has been a full-fledged member of Financial Action Task Force since 2003 (FATF is an international body that sets and monitors countries anti-money laundering laws and efforts). Originally, Russia was put on the FATF ‘black list’, the NCCT (Non-Cooperating Countries and Territories), but was taken off in June 2002 and made a full member of FATF in 2003. The NCCT was created to publically chastise those countries which were failing to implement and adhere to the international anti-money laundering statutes. Russia was taken off the NCCT because it enacted the FATF’s 40+9 anti-money laundering recommendations, which are meant to serve as the foundation of a countries anti-money laundering effort, and created the suggested institutions for combating money laundering. Russia’s anti-money laundering regime came into effect on February 1, 2002 with the enactment of Russian Federal Law No. 115-FZ. This law-and its subsequent amendments- have established the advised anti-money laundering regime inside of Russia. Not only does Russia have the necessary laws in place that criminalize money laundering, but it also has a dedicated financial intelligence unit, Rosfinmonitoring, to oversee and investigate financial crimes.
Despite the institutionalization of anti-money laundering efforts, Russia still suffers the effects of vast financial crimes. Global Financial Integrity, a Washington D.C. based non-profit focusing on illicit financial movements, recently released a report in which it is estimated that Russia has lost $782.5 billion dollars in illicit capital flight over the last 18 years. Additionally, the former central bank chief Sergei Ignatyev reckoned that Russia suffered a loss of $49 billion in illegal money transfers in 2012. Add to this the recent revelations that many members of the Duma, not to mention other state officials, have significant foreign financial holdings, the worth of which are almost always in excess of documented financial capabilities of those members and their spouses. More recognizable to a global audience has been the recent financial collapse of Cyprus, where it is estimated that Russians held over $30 billion in deposits in the islands bank accounts and where, for a week or so, there was the possibility of the Kremlin bailing out the small EU nation.
With the revelations that such huge sums of money are leaving, or at the very least being laundered abroad, Putin has launched his much vaulted ‘de-offshorization’ campaign. Superficially, this consists of Putin calling for a stable legal environment and for the repatriation of Russian business holdings abroad. Putin has also recently stated that all state officials have three months to declare and divest their foreign holdings. All of this ‘de-offshorization’ rhetoric is part of a larger anti-corruption drive and what noted Russian and organized crime expert Mark Galeotti says on Putin’s recent actions, or lack of, on Cyprus as an attempt to, “…assert his independence from the elite as he tries to restore his personal relationship with the Russian masses. Besides, considering that money is power, anything that weakens – however slightly – both the megarich and organized crime cannot hurt Putin.”
If Russia has set up the internationally recommended institutions to combat and supervise money laundering, why has Russia continued to suffer from illicit outflows and continued to be viewed as one of the largest sources of laundered money in the world? It is because having the anti-money laundering statutes and enforcing them are two entirely different notions. To first understand how anti-money laundering laws are used as tools of repression we need to understand the banking system and the enforcement agents themselves.
Russia’s banking system and financial sectors are the result of its chaotic post-Soviet financial history. Russia is still reeling from the anarchy of the 1990’s and the ruble crash of 1998. After the ruble crash most Russians lost faith in the banking system, leading to Russia having 25 percent of its money mass in cash, compared to the normal rate of 7-10 percent in OECD countries according to Finance Minister Anton Siluanov. This has led to the consolidation of many banks, with some of the largest ones having the Russian government as their majority shareholder-VTB, Sberbank, and Gazprombank. In addition, there is limited banking infrastructure outside the St. Petersburg and Moscow regions. As Alexandra Orlova notes in her article “Russia’s anti-money laundering regime” in the Journal of Money Laundering Control, many banks are ‘niche’ banks set up with one primary customer, or set up by an entity to act as their own private institution. As a result, many banks became wary of reporting their own clients, because such actions would effectively mean the end of their business. However, this also means that they are susceptible to prosecution and enforcement by the authorities.
In terms of enforcement, the Central Bank of Russia (CBR) is instrumental in setting up the recommendations and setting the regulations that banks must follow in regards to anti-money laundering protocols. However, banks must also report suspicious transaction reports (STR) to Rosfinmonitoring, not the CBR, and the Ministry of Internal Affairs (MVD) and the Federal Security Service (FSB) also have economic crime divisions that enforce the anti-money laundering and financial laws of the country. Heightening the jurisdictional confusion, the CBR is also the largest shareholder of Sberbank, one of the largest banks in Russia. The CBR has also left a large amount of ambiguity to what it regards as suspicious transactions and leaves it up to the banks themselves to decide. Banks consequently engage in what Alexandra Orlova calls ‘defensive reporting’ in which banks report ever increasing numbers of transactions-regardless of their validity as truly suspicious, owing to the fear of being accused of intentionally hiding suspicious activities. More and more STR’s get reported to Rosfinmonitoring, which relays the information directly to Vladimir Putin, who assumed direct control of the monitoring agency in 2012. As part of this attempt to centralize or singularize Russia’s financial controls, Investigative Committee head Alexander Bastrykin has lately called to create on financial police, putatively under the Committee’s control, but in fact answerable directly to the president.
Because of the fractious nature of the banking sector in Russia and the amount of information that is readily available to the presidential administration, charges of money laundering, embezzlement and fraud are today the chief legal means of coercion in the country. The late billionaire and oligarch responsible for Vladimir Putin’s rise Boris Berezovsky, opposition leader Alexander Navalny, Hedge Fund manager William Browder, and the late lawyer Sergei Magnitsky who uncovered a $230 million dollar fraud have all become victims to Russia’s capricious and politicized financial laws. Under the current systems, banks are easily transformed into state informants and mechanisms for enforcing not the law but one oligarch or official’s personal goals and vendetta’s. Rosfinmonitoring in effect has become a kind of kompromat clearinghouse, creating a large information database from which the authorities can use to prosecute opponents of the regime. Due to the runaway corruption inherent in Russia’s financial and business spheres-as the Kremlin itself has lately conceded-almost anyone is thus open for prosecution due to the likelihood of some flagged piece of malfeasance being in his or her background. As the French political scientist and Russianist Gilles Favarel-Garrigues noted:
“Control over business circles is exercised mainly by exploiting the state of generalized legal vulnerability that besets them in a context of social resentment towards them…the acquisition of wealth in the Russian setting relies almost automatically on recourse to illegal practices, notably in respect to taxation. Exploitation of the legal vulnerability of entrepreneurs takes the form of instituting targeted and high-profile legal proceedings, which simultaneously constitute signals addressed to the profession as a whole. Any business leader can identify with the fate of Mikhail Khodorkovsky, convicted of unlawful practices that are extremely widespread.”
It is in this context that one should view Putin’s ‘de-offshorization’ campaign not as a legitimate venture to end the rampant corruption, but rather an attempt to consolidate his absolute control over the Russian elite. Putin has not decided to re-negotiate the agreement whereby the owners of capital in the country are allowed wide discretion and free range to conduct their businesses in return for not challenging him. Rather, he is simply strengthening his own position to ensure he has enough leverage to ensure their compliance and to personally override any factionalism or fiefdoms that have emerged from the state patronage system he created over 13 years.
Part of “de-offshorization” has been a rewriting of Russia’s historic indulgence of state officials with foreign assets. The FATF requires that all countries have policies regarding Politically Exposed Persons (PEPs)-that is, persons, friends and family who hold government positions-and to ensure that they undergo increased scrutiny from their financial institutions. Russia currently has laws regarding foreign PEP’s, but does not require banks to conduct any further due diligence regarding domestic PEP’s. That is why until recently it has been quite easily for members of the government to spirit money out of the country. It is also why Putin has recently ordered that state officials have three months to divest any foreign holdings. The situation in Cyprus and the revelations about capital flight have given Putin the expedient cover to increase his leverage over the elites by demanding that their money return home, where it can be potentially exploited by the financial and anti-money laundering laws.
Due to the enforcement of anti-money laundering laws being subject to political considerations, Russia will remain far below its economic potential. The arbitrary nature and unpredictable enforcement of laws means that investment in Russia will not be what it should be. Additionally, we have seen how the anti-money laundering laws are not used to prosecute criminals, but to prosecute members of the opposition and act as an enforcement mechanism of the regime. These reasons are cited by the likes of Coca-Cola as the main factors for ranking Russia alongside Nigeria in terms of business risk. Until Russia can separate the political from the legal, investment and economic growth will suffer. It is an even worse sign for the state of Russian democracy and the rule of law.