OLIGARCH SANCTION EVASION
SANCTIONS ON RUSSIA
Sanctions on Russia's Elite - How are they Being Avoided?
Introduction
Russia’s invasion of Ukraine has prompted the international community to impose wide ranging sanctions on trade with Russia as well as directly sanctioning Russia’s most influential people and entities – the oligarchy. Russia’s wealthiest figures, such as Vladimir Potanin, Roman Abramovich and Leonid Mikhelson all now face wide-ranging sanctions that target their wealth and assets. However, these individuals continue to move and manipulate their money abroad in spite of sanctions – maintaining leverage over their sphere of influence across the world.
But how do these individuals continue to manipulate and leverage their wealth in countries that have placed them under restrictive sanctions? This article aims to explain how Russia’s wealthy and influential utilise legal loopholes, permissive governments and third-party money laundering techniques to continue using their money abroad. So long as institutions and business entities are unaware of how sanctions on Russia are avoided, Russian oligarchs will continue to leverage their fiscal power in other countries for their benefit – and for the benefit of the Russian state, who uses this money to finance its illegal war effort in Ukraine and other nefarious operations in other countries. In a world where money means influence, knowing how oligarchs move their money is key to denying them leverage in the international world.
The Issue of Trusts
Legal trusts prompt an interesting avenue for sanctioned individuals to somewhat ‘shield’ their assets from a freeze, even if those assets are technically in a sanctioning state such as the United Kingdom or other EU state. This is achieved because assets held within a legal trust are effectively the legal property of the trust itself, rather than the originating entity. While both the United Kingdom and EU have updated their sanctions relating to trusts to ultimately prohibit Russian nationals from exerting control or being trustees, there does remain some loopholes and difficulties for full sanctions implementation.
In the United Kingdom, sanctions only apply to legal trusts when it can be demonstrated beyond reasonable doubt that the trust is being controlled either directly or indirectly by a sanctioned individual. Thus, to avoid the threat of sanctions, some oligarchs may choose to heavily obfuscate the board of directors for the trust, removing any obvious signs that indirect control is being exerted. Additionally, other loopholes in British regulations exist in the allowance of Russians who are domiciled outside of Russia to become a trustee or receive other trust services, unless otherwise a sanctioned person. The other issue is secrecy. While trusts in the EU require some transparency under AMLD 5 (Anti Money Laundering Directive 5 – 2018) – requiring disclosure of settlors and origin of assets, this only applies to assets gained after the directive was implemented. This means that many oligarch held assets are still undeclared if they were purchased and settled before AMLD 5’s implementation.
Oligarchs maintain huge amounts of wealth within legal trusts across the US, UK and EU. The ability for trusts to dampen or even outright shield wealth from asset freezes makes them an incredibly lucrative option for oligarchs wishing to maintain some wealth leverage in a sanctioning country. While these sanctioned individuals are not permitted to directly or indirectly benefit from or control the trust; obfuscating the board of directors or appointing otherwise ‘unknown’ proxies to control how the money is used may be an option for oligarchs wishing to evade sanctions. The complicated nature of trusts combined with plentiful loopholes and legacy protections makes them a popular option for oligarchs to obfuscate the origin of their money. Thus, scrutiny must be directed towards wealth emanating from trusts with even loose associations with sanctioned entities or individuals, even if that particular trust is not subject to an asset freeze.
Intermediates and ‘Third Countries’
Gaps and inconsistencies between countries in regards to their sanctions on Russian individuals and entities connected to the state are frequent for a wide variety of reasons. These inconsistencies are exploited as much as possible by those wishing to avoid sanctions in target countries, using gaps, loopholes and inconsistencies to maximum effect. A common example would be the utilisation of an intermediate state or ‘third country’ that is able to receive money from the Russian federation or via normally sanctioned individuals and then laundering this money for propagation in other states with stricter sanctions. This kind of sanction evasion poses the greatest risk to countries and corporate entities that may be dealing with the funds of sanctioned individuals, as the idea of receiving money from a ‘third country’ rather than Russia itself may give a false sense of security to those carrying out due diligence. In spite of this, that money is still tainted if the originating entity is sanctioned in the recipient state, so equal amounts of scrutiny are required for the receipt of money from these so-called ‘third countries’ or other intermediate states.
Some common ‘third countries’ include Turkey, China, Kazakhstan, India, the UAE, and South Africa. These countries may maintain sanctions on certain individuals, entities or activities, however the strength of these sanctions and the political will to enforce them is often weaken in comparison to the European Union and United States. There are a wide plethora of reasons for why certain countries may take a weaker stance on Russia’s aggressive foreign policy, but most of it comes down to wishing to maintain a position of political ambiguity on the issue of Russia’s illegal invasion of Ukraine. This is primarily the case with India and China, who rely on Russia for certain key exports and imports. This is also the case with the United Arab Emirates (UAE) who have failed to impose adequate sanctions on entities connected to the Russian state for the purpose of maintaining political ambiguity. Many oligarchs have now moved their assets to the UAE to take advantage of these lacking sanctions, thus it may be increasingly likely that otherwise frozen oligarch money may be easily sourced from countries such as the UAE, Turkey, China and other ‘third country’ nations. Thus, due diligence should centre not only on ‘obvious’ sources of sanctioned money, but money also originating from the above countries.
Proxy Actors
The United Kingdom as well as other countries maintain that people “reasonably suspected” to be acting on behalf of a sanctioned individual or leveraging sanctioned assets are to be treated as sanctioned even if not named on any relevant lists. This allows for proactive implementation of the law. However, determining who may be indirectly connected to a sanctioned individual remains a difficult task.
Business associates, children, subsidiary company owners, associated lawyers and other related peoples are all subject to leverage by sanctioned entities in an attempt to utilise otherwise frozen assets abroad. A common scenario would be the proxy of a sanctioned individual taking ‘tainted’ money from either Russia or another state and utilising it in a country that is otherwise subjecting those assets to a ‘freeze’. In most jurisdictions this would still be an illegal act – since that ‘proxy’ is directly connected to a sanctioned entity. However, accepting this frozen money is an otherwise common mistake that corporate entities can make if due diligence is not completed properly or applied liberally.
The above graph showcases this type of ‘loophole’ clearly. A sanctioned individual maintains a reserve of assets and money in both Russia and other countries where they are not subject to sanctions. The sanctioned individual knows that they cannot get this money directly into the UK by themselves, as money sent by them will ultimately be rejected after basic due diligence made. Instead, the sanctioned individual utilises a proxy to move this ‘tainted’ money from either Russia or a third country into the target state. Given that most money from Russia is subject to enhanced scrutiny, the use of a ‘third’ country to host assets is a common practice to avoid suspicion.
The sanctioned individual hopes that no connection to themselves and the money will be made by the receiving organisation, relying on organisations to not conduct proper due diligence on the source of the ‘tainted’ money. If an organisation does not conduct the necessary due diligence, they may be inadvertently accepting ‘tainted’ money subject to an asset freeze in contravention of most state-led sanction efforts. This may place the organisation in a legally precarious position and has enabled the sanctioned individual and the Russian state to continue exerting its fiscal influence abroad. Thus, paying close attention to the activities of individuals not otherwise subject to sanctions but nonetheless connected to sanctioned individuals is an absolute baseline requirement for corporate entities accepting large sums of money or conducting business abroad.
The Effect of Cryptocurrency
Cryptocurrency remains a lucrative option for oligarchs wishing to move and manipulate their money in spite of sanctions. The nature of cryptocurrency as a digital-based commodity that can, in theory, be transferred without revealing the identity of the sender or recipient makes it a highly valuable tool to oligarchs and those who launder money for them.
Modern cryptocurrency, however, is not as private as some have been led to believe - with most countries now requiring KYC (Know Your Customer) protocols on broker sites and trading platforms. Thus, the ability for someone to censor the identity or origin of funds can be more difficult than first anticipated. However, in spite of these KYC rules and safeguards against money laundering, there remains ample opportunity for oligarchs wishing to launder their assets via cryptocurrency.
KYC protocols exist primarily to create a paper-trail of transactions linked to customers verified by identity authentication processes, however, these processes can be largely avoided through a mixture of money-laundering processes. Chain-hopping, money ‘tumbling’ services, ‘unhosted’ wallets and exploiting weaker KYC standards in other countries are all techniques available to oligarchs wishing to launder and move their money. These money laundering processes were identified by US Congress as to be the most likely used by state-actors and sanctioned individuals to launder and conceal the origin of illegal assets.
‘Chain-hopping’ refers to the act of converting funds to multiple cryptocurrencies repeatedly to obfuscate the true origins of the asset. The abilities of modern crypto brokers to buy and sell multiple currencies in rapid succession allows the effective obfuscation of an asset with minimal loss. This tactic has been seen in North Korea’s cryptocurrency laundering activities and has been used to great success when done under limited scrutiny. Money ‘tumbling’ services also aid oligarchs by taking illicit funds and combining them with funds from many other sources, some legitimate and others illicit. The final product of these money ‘tumbling’ services are funds with an ambiguous origins and comparative ease of liquidation back into regular currency. Thus, ‘chain hopping’ and money ‘tumbling’ remain lucrative options for oligarchs wishing to hide the origin of their funds in spite of strengthening KYC standards for cryptocurrency services.
In addition to the aforementioned cryptocurrency obfuscation methods, there remains one other method available to oligarchs and money launderers alike. ‘Unhosted’ wallets, that is, cryptocurrency wallets stored off-line rather than through a hosting provider, can be used to avoid KYC protocols. These wallets are stored on singular machines rather than via the internet and lack the usual regulatory oversight that online wallets are subject to. While ‘unhosted’ wallets still require some form of online service to convert cryptocurrency into traditional currency, oligarchs can utilise these locally stored ‘unhosted’ wallets by having them exported to countries with limited KYC or money laundering regulations – allowing the easy transfer of cryptocurrency into hard cash without much regulatory oversight. This may additionally grant the money launderer the ability to receive their cryptocurrency in an alternate traditional currency not typically subject to enhanced oversight – further obfuscating the origin of their illicit funds.
It can be seen that in spite of the strengthened implementation of KYC and anti-money laundering regulations across many countries and their respective cryptocurrency services, there remains ample ability for oligarchs to launder their money through illicit cryptocurrency services and via countries with lesser or even completely absent KYC protocols. These gaps in regulations means that cryptocurrencies are quickly becoming a new favourite tool available to oligarchs and the Russian state as a means to process its ill-gotten gains and frozen assets.
Conclusion
Western sanctions against the Russian Federation and its associated oligarchs have had success in kerbing the fiscal power that Russia wields over countries across the world. However, through asset trusts, legal loopholes, cryptocurrency and reliance on the complacency of states and businesses alike – the Russian Federation and its oligarchs continue to evade sanctions. Only through the astute application of enhanced due diligence techniques and greater scrutiny on all potential assets belonging to oligarchs and other sanctioned people can the Russian elite be fully prevented from exploiting their ill-gotten gains.
Querying the source of funds from countries such as the UAE, China, South Africa and India and ensuring full compliance with sanctions is an important step in a much broader due diligence process. Additionally, scrutinising funds sourcing primarily from cryptocurrency and other ambiguous methods to ensure full compliance with anti-money laundering legislation is quickly becoming a primary demand for businesses wishing to comply fully with sanctions and other financial regulations. To summarise, there is absolutely no shortage of means available to Russia’s sanctioned elite in leveraging their money in sanctioning countries – however, awareness of the above methodologies will greatly diminish the future ability for oligarchs to exploit their money worldwide.
