The Enigmatic Nature of Russian Money Laundering: Implications for the West

Transcription

1 The Enigmatic Nature of Russian Money Laundering: Implications for the West Russian Banking Seminar September 2010 Ethan S. Burger, Senior Lecturer Centre for Transnational Crime Prevention University of Wollongong Faculty of Law

2 Soviet Legality... Russian Law Query: If the Russian and senior governmental officials are involved in large-scale economic crime (including money-laundering), why are relevant Russian legislations/regulations so detailed? If senior Russian officials are corrupt, how can one know whether to trust the Russian government s actions or information? Hypothesis: Russian laws/rules are enforced only against certain categories of person under particular circumstances, not against reliable senior authorities, their favorites and persons capable of obtaining positive outcome through corruption. Russia also benefits from its facade of compliance with international norms in this area. 2

3 I. Introduction II. Today s Road Map Concepts relating to Money-Laundering ( ML ) and Role of Changing Technology. III. Present Political Environment. IV. Russian and Int l Legal Framework. V. Connecting the Dots. VI. Implications. VII. Useful Internet Links. 3

4 It Pays to be Sceptical (Especially about Predictions about Russia). How does one distinguish between anecdotes and data? Our understanding of illegal activity is limited and imperfect. There are multiple variables making generalizations and the use of collective nouns (e.g. the U.S. ) suspect. E 83.7% of all statistics in presentations are either false or misleading. 4

5 Stages of Money Laundering Stage 1 Placement, moving the funds from direct association with the crime (remember not all large sums of money are obtained illicitly); Stage 2 Layering, disguising the trail to foil pursuit; and, Stage 3 - Integration, making the money available to the criminal once again with its occupational and geographic origins hidden from view. 5

6 Money Laundering is Facilitated by: - Cooperative and Non-inquisitive correspondent banks in under-regulated jurisdictions; - False Documentation (Trade-based ML); - Offshore Secrecy Jurisdictions and Tax Havens; - Related-Party and Sham Transactions (e.g. nonmarket pricing, over-billing and under-billing); - Shell and Holding Corporations; - Taking advantage of legal loopholes and; - Technological change (e.g. on-line banking, cell phones, etc.) combined with increasing volume of money/value transfers. 6

7 Is the Concept of ML an Anachronism? ML is a process whereby the proceeds of a crime are moved it is not an objective. ML most often connected to the drug trade. Post 9/11, ML gained as a law enforcement concern, but value is transferred by numerous means other than through banks. While there is considerable attention paid to hawala and its equivalent; remember that value can be passed in goods, any money derivative, and real estate interests. 7

8 Governments Always Operate at a Disadvantage Whereas business and criminal groups are transnational, enforcement is largely national and relevant legal rules lag behind practices by years; Coordination between governmental entities, both within and between countries can be problematic; and Private sector and public corruption is pervasive. 8

9 The Era of Безпредела The Early 1990s Early-mid 1990s, characterized by rampant inflation; currency reform, lack of regulatory framework, the transformation of Soviet-era banks, captive banks, exploiting wage arrears, & keeping foreign banks out. Criminals acquire most private banks and insurance companies using them to raise funds to acquire assets during privatization and to facilitate financial frauds. 9

10 The Economic Potemkin Village During the mid-1990s, Russia was viewed as the best performing emerging market, attracting considerable foreign investor interest despite the reality on the ground. In 1997, Russia experienced a huge level of capital flight and an unexpected financial crisis caused in part by the fall in energy prices. 10

11 The Putin Era: White, Gray and Black Banking Some Russian banks become more sophisticated building relations with established Western banks. In 2008, bank specialists estimated that there were only about 300 real banks out of a total of 1,200 licensed banks. Most little more than treasuries for big businessmen or entities engaged in criminal activity such as money laundering (e.g. Bank of New York s local partners). Some banks engage in loan-sharking. Rapid changes in the Russian stock market and the absence of insider trading rules often necessitates the involvement of organized crime to launder money or raise money for crimes. Major changes in commodities is often attributable to Russian gaming in the futures market again another opportunity for criminal banks. 11

12 Important Laws & Other Normative Acts Federal Law On Banks and Banking Activities, December 2, 1990 (as amended); Federal Law On Counteraction of Legitimization (Laundering) of Proceeds of Crime and Financing of Terrorism, August 7, 2001 (amended July 2010 to add know your customer rules); Presidential Edict No "On the Authorized Agency for Combating Legalization (Laundering) of Proceeds from Crime and Financing of Terrorism," (establishing Federal Monitoring Service); Russian Government Decree 307 On Approval of regulations on the Federal Financial Monitoring Service, June 23, 2004 (as amended); and Federal Law On Currency Regulation and Currency Control, December 10, 2003 (major revision of original law). 12

13 Int l Legal Framework Council of Europe ( COE ) Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (1990); U.N. Convention on Transnational Crime (2000); and U.N. Convention against Corruption (2003) Also, Russia is a member of the COE Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism "MONEYVAL," Eurasian Group on combating money laundering and financing of terrorism (EAG), Egmont Group, and FATF. 13

14 Some Key Players Basel Committee; Egmont Group (Financial Intel Units); Financial Activities Task Force (FATF); International Institutions (EBRD, IFC, IMF, UN, World Bank, etc.); Interpol; NGOs (e.g. Transparency Int l); and Regional Anti-Money Laundering Groups. 14

15 Declaration by a Group of Russian Banks The Russian Federation [has] joined the international systems of measures aimed at prevention of legalization of criminal incomes and [terrorist] financing and is an active participant of the [FATF] and the Egmont Group. The Russian legislation on money laundering and [terrorist] financing incorporations major recommendations elaborated by the world community. Sberbank, VTB Bank, VNESHECONOBANK, ALFA Bank, Bank of Moscow, Bank Zenit, International Moscow Bank, and Reiffeisenbank Austria (Moscow). 15

16 An Assessment from the IMF The banking system is still under strain and credit is likely to recover only gradually. Until recently, bank lending remained subdued, amid weak demand for credit and the continuing efforts by banks to restructure their balance sheets. There are signs, however, that the accumulation of overdue loans is now decelerating, and that banks are scaling back efforts to boost provisions and capital. In this context, credit growth picked up modestly in March and April, reflecting an improvement in credit demand and moderating credit supply constraints. The authorities have been exiting from extraordinary banking sector support extended during the crisis. 16

17 World Bank Analysis After a surge in the first quarter, capital flows remained steady in April 2010, but faltered in May [due to] the European debt crisis.... Bond financing increased to USD 26 billion in April, which in part reflects Russia s return to the international bond market (its first in more than a decade). The Russian [gov t] issued USD 5.5 billion in 5-year and 10-year bonds, the largest sovereign deal in emerging markets [] history. Bank flows are well below the level in pre-crisis years. Capital flows remain volatile both in the banking and nonbanking sector, mostly reflecting the movement in oil prices and remaining uncertainty regarding the recovery of global demand.... In the first quarter, net capital flows to the banking sectors eased to only USD 0.8 billion, down from almost USD 9 billion in the fourth quarter of

18 Is the Focus on Banks Valid? The first stage of ML need not involve transferring money directly to banks. Money can be laundered through any mechanism willing to accept cash. In 2001, the Int l Finance Corporation found that over 75% of Russian enterprising holding leasing licenses (e.g. for automobiles and expensive equipment) were not leasing out property. Hotels are an excellent vehicle for laundering money after all, how does one confirm occupancy rates? 18

19 Largest Sources of Laundered Funds 1. Economic crime (commodity and stock market manipulation; insider trading, legitimate business activity by state officials through shills, and major corporate takeovers, and frauds); 2. Corruption by officials & persons in private sector (benefiting from expropriations, receipt of bribes and kickbacks in connection with granting of lucrative state contracts or traditional contracts, non-enforcement of relevant laws, illegal privatizations or unlawful sale of state property); and 3. Other Sources (illegal export of weapons and narcotics). 19

20 The Strange Case of Gunvor Gunvor, a Swiss-based company, has a near-monopoly on the transportation of oil and oil products from Russia. Prime Minister Putin is believed to own a significant share of Gunvor. The Russian authorities have used similar tactics to those used against Yukos against Gunvor s competitors. 20

21 Gazprom: The Cash Cow of the Russian Powers that Be? Gazprom is Russia's largest company, statecontrolled and the world s largest gas producer. Its Chairmen of the Board have included: Viktor Chernomyrdin and Dmitrii Medvedev. The Russian government conducts its foreign policy in a manner to benefit Gazprom and in turn particular individuals. Many of its transactions are outright shams or structured to profit political figures and their favorites. See Roman Kupchinsky, Gazprom s European Web, Jamestown Foundation Monograph, February

22 Gazprom s International Web Use of non-transparent trading and financial leasing companies organized in Austria, Cyprus, Lichtenstein, Switzerland, Ukraine, the UK and many off-shore jurisdictions. Involvement of middlemen linked to organized crime (e.g., Massimo Ciancimio, Dmitro Firtash, Igor Fisherman [ties to Semion Mogilevich], shady business people (e.g. Dariga Nazerbayeva, Bruno Graneli, Howard Wilson) and politicians (e.g. Silvio Berlusconi, Leonid Kuchma, Romano Prodi, Vladimir Putin, Gerhard Schröder) from Russia, Ukraine, Kazakhstan Hungary, Israel, Italy and Germany. Dealings with RosUkrEnergo, ARosgas, Centrex, CEEGAG, Itera. ETG, MDM, Raiffeisen Investments, EniNeftegaz (buyer of Yukos assets then sold to Gazpromneft), Gazprombank, Gazpromexport, etc., involving billions of dollars. How closely is the law enforcement and intelligence communities monitoring this situation? Gazprom spreads its tentacles and the LNG market may be next. 22

23 Reiffeisen Bank & Diskont Scandal In 2006, Diskont Bank had its license revoked by the Russian Central Bank. Shortly thereafter, the 1 st RCB Deputy Chairman Andei Kozlov is murdered. This gives rise to an investigation which implicates Raiffeisen Zentralbank in a major money laundering scandal involving over 50 banks, including Gazprombank, Sberbank, VEB, and Alfa Bank. Some prominent Russian banks are involved. Apparently, the there was a kick-back scheme involving the building of a gas pipeline, the cost of which doubled in a very short time. Does this explain the high cost of major projects by the Russian state or entities controlled by it? 23

24 The Financial Crisis and the Bailing out of Russian Banks Recall that in 2008, the Russian economic slowdown preceded the global financial crisis. Initially, the Russian Duma authorized the Central Bank of Russia to give the equivalent of $50 billion to the state-owned Vnesheconombank (VEB) in Moscow, which in turn was authorized to lend to private companies and banks. According to the New York Times, the Russian Central Bank estimated in 2009, the countries debt exceeded $128 billion. The Russian Government did not want Russian assets to fall into the hands of foreign entities, but used this opportunity to re-establish state control over the economy and some of the so-called Oligarchs, many of whom controlled banks. 24

25 Condition of the Russian Economy & Russian Regulatory Enforcement Varies - Rebounding Russian Consumer Confidence? -- According to RCB data the number of Russians taking out ruble-denominated mortgages in the first half of the year was up significantly over the prior year. - Not all Russian Financial Institutions are Struggling --Renaissance Capital (RC) making investments assets and providing consulting services in Nigeria, acquires brokerage in Nigeria, and expanding into its international activities into counties such as Mongolia, Serbia, and South Korea recall ONEXIM Group holds a 50% stake in RC. - But -- July 2010, Mezhprombank defaults on a 200m Eurobond (first bank default since 1999). Politically-connected Federation Council Member Sergei Pugachiov (known as Putin s Banker) owned it. - Perhaps not Russian AML is not all corrupt and dysfunctional -- in August 2010, RIA-NOVOSTI reported that MVD uncovered a criminal group, which included several high-level bankers, suspected of laundering $65 million. 25

26 Russia s 5 Richest Men Name Rank Born Billions Initial Activity Vladimir Lisin $15.8 Steel Mikhail Prokhorov $13.4 Investments Mikhail Frydman $12.7 Oil Roman Abramovich $11.2 Steel Oleg Deripaska $10.7 Aluminum All of the above individuals are self-made and compared with billionaires from other countries rather young. How reliable can such data be? Companies controlled by them are active throughout the world and they personally own significant assets abroad. See Forbes

27 Largest Russian Companies (FT 500 List) (July 2010) Gazprom, Global Rank 33, energy. Rosneft,Global Rank 62, energy, Sberbank, Global Rank 86, banking. Lukoil, Global Rank 140, energy. Surgetneftegaz, Global Rank 174, energy. Norilsk Nickel, Global Rank 207, metals. VYB Bank, Global Rank 263, banking Novolipetsk, Global Rank 383, metals. Novotek, Global Rank 394, energy. Mobile Telesystems, Global Rank 470, telecom. Vimpelcom, Global Rank 493, telecom. ISSUES: Nationality of entity vs. beneficial owners; Shills and subsidiaries. Ties to banks? 27

28 Problem in Combating Russian Money Laundering Governments, despite their rhetoric, assign a low priority to combating foreign corruption and money laundering. Many Russian individuals and entities have considerable skill in the mechanics of money laundering process. Russian officials are often the beneficiaries of money laundering and thus Russian regulators and international organizations have their hands tied. They can rely on the cooperation or acquiesce of foreign financial institutions (and their personnel) as well as offshore banking/tax havens. 28

29 Debt for Thought Russian banks and enterprises still owe a considerable amount of money to Western banks and corporations. While going after assets of such companies in Russia is unlikely to be productive, Russian law makes parent companies liable for the debts of their subsidiaries. Conceivably, parent companies and the individuals that control them have assets abroad that may be attractive to gain control over for example, Russian individuals and corporations may hold stock in Western corporations as well as real estate and rights to natural resources. 29

30 Too Big to Fail? Too Big to Succeed? Instability (i.e. political change in Russia is often viewed with trepidation by the West). Russia continues the Soviet geopolitical strategy of making the EU dependent on Russian energy while its companies seek to gain financial control abroad to strengthen its share of market in metals, gold, etc. Russia buys some EU politicians such as Gerhardt Shröeder, Berlesconi, etc. Enter into transactions with France, Germany and Italy to gain political leverage and more. 30

31 Russian Gov t Sites Russian Central Bank -- and Russian Federal Service for Financial Monitoring -- and Russian General Procuracy -- and Russian Government -- and Russian Ministry of Finance -- and Russian Presidential Website -- and 31

32 Other Interesting ML Sites Eurasian Group -- Global Financial Integrity -- Financial Action Task Force html; IMF on ML -- World Bank on ML -- GRAMS/PSGLP/0,,contentMDK: ~menuPK:461615~ pagepk: ~pipk: ~thesitepk:461606,00.ht ml 32