The Kremlin Playbook II

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1 The Kremlin Playbook II By Heather A. Conley, Donatienne Ruy, Ruslan Stefanov and Martin Vladimirov March 11, 2019 event Center for Strategic and International Studies

2 Definitions Enabler - One that enables another to achieve an end - especially: one who enables another to persist in self-destructive behavior... by providing excuses or by making it possible to avoid the consequences of such behavior Illicit financial flows - The World Bank defines illicit financial flows as cross-border movement of capital associated with illegal activity or more explicitly, money that is illegally earned, transferred, or used that crosses borders. This involves three main dynamics: 1. Acts themselves are illegal (corruption, tax evasion) 2. Funds are the results of illegal acts (smuggling and trafficking...) 3. Funds are used for illegal purposes (financing of organized crime) Money Laundering- Interpol defines money laundering as any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources

3 The first report (The Kremlin Playbook) answered the need to understand what was happening, how it works Detected patterns was this an amplification of Russian influence? This second report looked at six countries a case study approach First group enablers Austria, Italy, and the Netherlands Second group adaptation of Russian tactics - Czech Republic, Romania, and Montenegro For those who think tough rhetoric and the sanctioning of a few oligarchs is adequate, this report will refute that opinion

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6 This is a complex story that goes back decades A story of sanctions loopholes, shell ownership, letter box companies, tax avoidance schemes, the commingling of business and political interests, and corporate service providers Concentrates in energy, banking, and real estate It is about the use and direction of one trillion dollars of Russian private holdings that are held abroad The EU estimates that 2%-5% of global GDP is caught up in money laundering and illicit financing

7 Rethink Russian economic influence with inbound and outbound financial flows, foreign direct investment stocks, and the amount of exposure that European business has in the Russian market The energy sector is the most effective source of leverage for Russian economic influence Also, great growth in financial institutions, banks, telecommunications, and real estate Creating an eco-system of enabling a new battlespace shaped in the financial system, a financial gray zone Russian economic behavior is designed just below the threshold of illegality designed to stay hidden Enabling countries help to grow this economic system

8 A profile - your country is an enabler when: Your country s laws enshrine flexible double taxation or very generous tax withholding laws Your country has deep networks in many other countries, particularly central Europe and the Western Balkans where Russia uses many subsidiaries and an indirect corporate footprint Your country has very close relations with large national champions like energy companies or banks (corporatism) Your country has a growing corporate service provider of tax attorneys, accountants, and lawyers that provide incorporation and offshore financial services and your country protects the growing industry despite the fact that your economy doesn t benefit Statistic - the Netherlands has a corporate service provider industry that is the same size as in Japan, yet Japan s economy is 6x the size of the Netherlands (up to 4.5 trillion dollars)

9 A profile - your country is an enabler when: Your country excels at using trusts, preferential tax treaties, letterbox companies, special-purpose vehicles, shell companies, transfer pricing or mispricing, or profit round tripping Your country has very large banks which are heavily invested in Russia but smaller boutique banks that are usually more conduits for Russia s funds Your country s export credit agencies are really exposed to your investments in Russia

10 Austria is Russia s second largest investor (FDI) investments have increased since the annexation of Crimea Italy is Russia s third largest commercial partner exports to Russia have grown as has Italian outward FDI stocks UniCredit is the largest foreign bank in Russia by volume of activity The Netherlands is Russia s second largest trading partner and its second largest investment market for Russia the Netherlands is the largest tax treaty jurisdiction in the world Enabling forces allow Russian malign influence to work very quickly and very well

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13 Czech Republic, Romania, and Montenegro have experienced adaptation a concentration of Russian economic activity in local areas Russian real estate purchases in northern Italy and very high number of purchases in Montenegro Tourism, real estate purchases, and hotels provide enormous pressure on the tax base and the country itself Energy continues to be a big source of that pressure but downstream, see a lot of aluminum purchases - Mr. Darrow Poshov s name appeared frequently

14 Recommendations Combat with transparency and accountability We must fight in the light because Russian malign tactics work in darkness and shadows Suzanne Spaulding Create a transatlantic Intelligence, Surveillance, and Reconnaissance (ISR) system for financial flows that would provide an integrated database and a common operating picture for national security, financial intelligence, and law enforcement actors The U.S. Treasury Department s Office of Terrorism and Financial Intelligence would manage this system in cooperation with the Treasury s Financial Crimes Enforcement Network (FinCEN), and the Department of Justice s National Security and Asset Recovery Divisions Elevate money laundering as a priority threat to national security within the Treasury and Justice Departments and encourage European allies to do so in their national jurisdictions

15 Recommendations Reform and considerably strengthen the European Union s AML/Counter- Terrorism Financing system by ensuring much stronger coordination between the European Union and national banking and financial supervisors and the European Union and national security agencies The EU should strengthen its reporting and regulatory requirements for ultimate beneficial ownership (UBO) by closing disclosure loopholes in a number of tax-treaty jurisdiction The United States should work with European partners to create international standards for UBO disclosure, limiting the use of nominee directors and standardizing disclosure requirements for foundations and trusts Improve the tracking of tax evasion and enhance asset recovery efforts across borders. Tracing and seizing stolen assets and proceeds of crime remains a crucial part of tackling transnational organized crime, money laundering, and corruption

16 Recommendations Elevate the risk level of corporate service providers in illicit finance and money laundering activities for both the United States and the European Union Address the key risks and loopholes allowing the evasion of sanctions - remove bilateral exemptions and loopholes that have exempted grandfathered deals from the sanctions regime, particularly in the European Union - jint projects between European and Russian companies have also created potential gaps in the sanctions regime Harness the potential of the Global Magnitsky Act, particularly Section 3(a)(3) and (4), in targeting human rights violators and kleptocrats, as well as nominees for and people who assist these perpetrators Encourage European allies to speed up the development and adoption of an EU-wide Magnitsky Act The European Union must end the use of the so-called golden visas, and the United States must increase the transparency of investment visas