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

Russia Banking SeminarRussia Banking Seminar

September 2010September 2010

Ethan S. Burger, Senior LecturerEthan S. Burger, Senior LecturerCentre for Transnational Crime PreventionCentre for Transnational Crime PreventionUniversity of Wollongong – Faculty of LawUniversity of Wollongong – Faculty of Law

ethansb@uow.edu.au ethansb@uow.edu.au

Soviet Legality . . . Russian LawSoviet Legality . . . Russian Law

Query:Query: If the Russian and senior governmental officials If the Russian and senior governmental officials are involved in large-scale economic crime (including are involved in large-scale economic crime (including money-laundering), why are relevant Russian money-laundering), why are relevant Russian legislations/regulations so detailed? If senior Russian legislations/regulations so detailed? If senior Russian officials are corrupt, how can one know whether to trust officials are corrupt, how can one know whether to trust the Russian government’s actions or information?the Russian government’s actions or information?

Hypothesis: Hypothesis: Russian laws/rules are enforced only against Russian laws/rules are enforced only against certain categories of person under particular certain categories of person under particular circumstances, not against “reliable” senior authorities, circumstances, not against “reliable” senior authorities, their favorites and persons capable of obtaining positive their favorites and persons capable of obtaining positive outcome through corruption. Russia also benefits from its outcome through corruption. Russia also benefits from its facade of compliance with international norms in this area.facade of compliance with international norms in this area.

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Today’s Road MapToday’s Road Map

I. IntroductionI. Introduction

IIII. Concepts relating to Money-Laundering . Concepts relating to Money-Laundering (“ML”) and Role of Changing Technology.(“ML”) and Role of Changing Technology.

III. Present Political Environment.III. Present Political Environment.

IV. Russian and Int’l Legal Framework.IV. Russian and Int’l Legal Framework.

V. Connecting the Dots.V. Connecting the Dots.

VI. Implications.VI. Implications.

VII. Useful Internet Links.VII. Useful Internet Links. 33

It Pays to be Sceptical (Especially about It Pays to be Sceptical (Especially about Predictions about Russia).Predictions about Russia).

How does one distinguish between How does one distinguish between anecdotesanecdotes and and datadata??

Our Our understandingunderstanding of illegal activity is of illegal activity is limited limited and imperfectand imperfect..

There are There are multiple variables multiple variables making making generalizations and the use of collective nouns generalizations and the use of collective nouns (e.g. “the U.S.”) suspect.(e.g. “the U.S.”) suspect.

EE

83.7% of all statistics in presentations are 83.7% of all statistics in presentations are either either false or misleadingfalse or misleading..

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Stages of Money LaunderingStages of Money Laundering

Stage 1 Stage 1 – – PlacementPlacement, moving the funds from , moving the funds from direct association with the crime (remember direct association with the crime (remember not all large sums of money are obtained not all large sums of money are obtained illicitly); illicitly);

Stage 2 Stage 2 – – LayeringLayering, disguising the trail to foil , disguising the trail to foil pursuit; and, pursuit; and,

Stage 3 Stage 3 - - IntegrationIntegration, making the money , making the money available to the criminal once again with its available to the criminal once again with its occupational and geographic origins hidden occupational and geographic origins hidden from view. from view.

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Money Laundering is Facilitated by: Money Laundering is Facilitated by:

- ““Cooperative” and “Non-inqCooperative” and “Non-inquisitive” correspondent uisitive” correspondent banks in banks in under-regulated jurisdicunder-regulated jurisdictions;tions;

- False Documentation (Trade-based ML);False Documentation (Trade-based ML);- Offshore Secrecy JurisdictionsOffshore Secrecy Jurisdictions and and Tax HavensTax Havens;;- Related-Party and Sham Transactions Related-Party and Sham Transactions (e.g. non-(e.g. non-

market pricing, over-billing and under-billing);market pricing, over-billing and under-billing);- Shell and Holding CorporationsShell and Holding Corporations;;- Taking advantage of legal loopholes andTaking advantage of legal loopholes and; ; - Technological change Technological change (e.g. on-line banking, cell (e.g. on-line banking, cell

phones, etc.) combined with phones, etc.) combined with increasing volume of increasing volume of money/value transfers.money/value transfers. 66

Is the Concept of ML an Anachronism?Is the Concept of ML an Anachronism?

ML is a process whereby ML is a process whereby the proceeds of a the proceeds of a crime are moved it is crime are moved it is not an objectivenot an objective..

ML most often connected to the drug trade.ML most often connected to the drug trade. Post 9/11Post 9/11, ML gained as a law enforcement , ML gained as a law enforcement

concern, but value is transferred by concern, but value is transferred by numerous means numerous means other than through banksother than through banks..

While there is considerable attention paid to While there is considerable attention paid to hawala hawala and its equivalent; and its equivalent; remember that remember that value can be passed in goods, any money value can be passed in goods, any money “derivative,” and real estate interests.“derivative,” and real estate interests.

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Governments Always Operate at a Governments Always Operate at a DisadvantageDisadvantage

Whereas business and criminal groups Whereas business and criminal groups are transnational, enforcement is are transnational, enforcement is largely national and relevant legal largely national and relevant legal rules lag behind practices by yearsrules lag behind practices by years;;

CoordinationCoordination between governmental between governmental entities, both within and between entities, both within and between countries can be countries can be problematicproblematic; and; and

Private sector and public corruption is Private sector and public corruption is pervasive.pervasive.

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The Era of The Era of БезпределаБезпредела The Early 1990s The Early 1990s

Early-mid 1990s, characterized by rampant inflation; Early-mid 1990s, characterized by rampant inflation; currency “reform”, lack of regulatory framework, the currency “reform”, lack of regulatory framework, the transformation of Soviet-era banks, “captive” banks, transformation of Soviet-era banks, “captive” banks, exploiting wage arrears, & keeping foreign banks out.exploiting wage arrears, & keeping foreign banks out.

Criminals acquire most private banks and insurance Criminals acquire most private banks and insurance companies using them to raise funds to acquire assets companies using them to raise funds to acquire assets during privatization and to facilitate financial frauds. during privatization and to facilitate financial frauds.

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The Economic Potemkin The Economic Potemkin VillageVillage

During the mid-1990s, Russia was viewed During the mid-1990s, Russia was viewed as the best performing “emerging” market, as the best performing “emerging” market, attracting considerable foreign investor attracting considerable foreign investor interest despite the reality on the ground.interest despite the reality on the ground.

In 1997, Russia experienced a huge level of In 1997, Russia experienced a huge level of capital flight and an unexpected financial capital flight and an unexpected financial crisis caused in part by the fall in energy crisis caused in part by the fall in energy prices.prices.

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The Putin Era: The Putin Era: WhiteWhite, , GrayGray and and BlackBlack BankingBanking

Some Russian banks Some Russian banks become more sophisticated become more sophisticated building relations with established Western banks.building relations with established Western banks.

In 2008, bank specialists estimated that there were only In 2008, bank specialists estimated that there were only about 300 “real banks” out of a total of 1,200 licensed about 300 “real banks” out of a total of 1,200 licensed banks. Most “little more than treasuries for big banks. Most “little more than treasuries for big businessmen or entities engaged in criminal activity businessmen or entities engaged in criminal activity such as money laundering” (e.g. Bank of New York’s such as money laundering” (e.g. Bank of New York’s local partners). Some “banks” engage in loan-sharking. local partners). Some “banks” engage in loan-sharking.

Rapid changes in the Russian stock market and the Rapid changes in the Russian stock market and the absence of insider trading rules often necessitates the absence of insider trading rules often necessitates the involvement of organized crime to launder money or involvement of organized crime to launder money or raise money for crimes.raise money for crimes.

Major changes in commodities is often attributable to Major changes in commodities is often attributable to Russian gaming in the futures market – again another Russian gaming in the futures market – again another opportunity for criminal banks.opportunity for criminal banks.

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Important Laws & Other Normative ActsImportant Laws & Other Normative Acts

Federal Law “On Banks and Banking Activities,” December 2, 1990 (as Federal Law “On Banks and Banking Activities,” December 2, 1990 (as amended);amended);

Federal Law “On Counteraction of Legitimization (Laundering) of Federal Law “On Counteraction of Legitimization (Laundering) of Proceeds of Crime and Financing of Terrorism, August 7, 2001 Proceeds of Crime and Financing of Terrorism, August 7, 2001 (amended July 2010 to add “know your customer” rules);(amended July 2010 to add “know your customer” rules);

Presidential Edict No. 1263 "On the Authorized Agency for Combating Presidential Edict No. 1263 "On the Authorized Agency for Combating Legalization (Laundering) of Proceeds from Crime and Financing of Legalization (Laundering) of Proceeds from Crime and Financing of Terrorism," (establishing Federal Monitoring Service); Terrorism," (establishing Federal Monitoring Service);

Russian Government Decree 307 “On Approval of regulations on the Russian Government Decree 307 “On Approval of regulations on the Federal Financial Monitoring Service,” June 23, 2004 (as amended); Federal Financial Monitoring Service,” June 23, 2004 (as amended); andand

Federal Law “On Currency Regulation and Currency Control,” Federal Law “On Currency Regulation and Currency Control,” December 10, 2003 (major revision of original law).December 10, 2003 (major revision of original law).

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Int’l Legal FrameworkInt’l Legal Framework

Council of Europe (“COE”) Convention on Council of Europe (“COE”) Convention on Laundering, Search, Seizure and Confiscation of the Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (1990);Proceeds from Crime (1990);

U.N. Convention on Transnational Crime (2000); andU.N. Convention on Transnational Crime (2000); and U.N. Convention against Corruption (2003).U.N. Convention against Corruption (2003).

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Also,Also, Russia is a member of the COE Committee of Russia is a member of the COE Committee of

Experts on the Evaluation of Anti-Money Laundering Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism Measures and the Financing of Terrorism ""MONEYVAL,MONEYVAL," Eurasian Group on combating money " Eurasian Group on combating money laundering and financing of terrorism (laundering and financing of terrorism (EAGEAG), ), Egmont Egmont Group, and FATF.Group, and FATF.

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Some Key PlayersSome Key Players

Basel Committee;Basel Committee; Egmont Group Egmont Group (Financial Intel Units);(Financial Intel Units); Financial Activities Task Force Financial Activities Task Force (FATF);(FATF); International Institutions (EBRD, IFC, International Institutions (EBRD, IFC,

IMF, UN, World Bank, etc.);IMF, UN, World Bank, etc.); Interpol;Interpol; NGOs (e.g. Transparency Int’l); andNGOs (e.g. Transparency Int’l); and Regional Anti-Money Laundering Regional Anti-Money Laundering

Groups.Groups.

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Declaration by a Group of Russian Declaration by a Group of Russian BanksBanks

““The Russian Federation [has] joined the international The Russian Federation [has] joined the international systems of measures aimed at prevention of systems of measures aimed at prevention of legalization of criminal incomes and [terrorist] legalization of criminal incomes and [terrorist] financing and is an active participant of the [FATF] financing and is an active participant of the [FATF] and the Egmont Group. The Russian legislation on and the Egmont Group. The Russian legislation on money laundering and [terrorist] financing money laundering and [terrorist] financing incorporations major recommendations elaborated incorporations major recommendations elaborated by the world community.”by the world community.”

SberbankSberbank, , VTB BankVTB Bank, , VNESHECONOBANKVNESHECONOBANK, ALFA , ALFA Bank, Bank of Moscow, Bank Zenit, International Bank, Bank of Moscow, Bank Zenit, International Moscow Bank, and Moscow Bank, and Reiffeisenbank Austria Reiffeisenbank Austria (Moscow).(Moscow).

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An Assessment from the IMFAn Assessment from the IMF

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

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World Bank AnalysisWorld Bank Analysis

““After a surge in the first quarter, capital flows remained steady After a surge in the first quarter, capital flows remained steady in April 2010, but faltered in May [due to] the European debt in April 2010, but faltered in May [due to] the European debt crisis. . . . Bond financing increased to USD 26 billion in April, crisis. . . . Bond financing increased to USD 26 billion in April, which in part reflects Russia‘s return to the international bond which in part reflects Russia‘s return to the international bond market (its first in more than a decade). The Russian [gov’t] 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 issued USD 5.5 billion in 5-year and 10-year bonds, the largest sovereign deal in emerging markets [] history. Bank flows are sovereign deal in emerging markets [] history. Bank flows are well below the level in pre-crisis years.”well below the level in pre-crisis years.”

““Capital flows remain volatile both in the banking and Capital flows remain volatile both in the banking and nonbanking sector, mostly reflecting the movement in oil prices nonbanking sector, mostly reflecting the movement in oil prices and remaining uncertainty regarding the recovery of global and remaining uncertainty regarding the recovery of global demand. . . . In the first quarter, net capital flows to the banking demand. . . . In the first quarter, net capital flows to the banking sectors eased to only USD 0.8 billion, down from almost USD 9 sectors eased to only USD 0.8 billion, down from almost USD 9 billion in the fourth quarter of 2009. ” billion in the fourth quarter of 2009. ”

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Is the Focus on Banks Valid?Is the Focus on Banks Valid?

The first stage of ML need not involve transferring The first stage of ML need not involve transferring money directly to banks.money directly to banks.

Money can be laundered through any mechanism Money can be laundered through any mechanism willing to accept cash.willing to accept cash.

In 2001, the Int’l Finance Corporation found that over In 2001, the Int’l Finance Corporation found that over 75% of Russian enterprising holding leasing licenses 75% of Russian enterprising holding leasing licenses (e.g. for automobiles and expensive equipment) were (e.g. for automobiles and expensive equipment) were not leasing out property.not leasing out property.

Hotels are an excellent vehicle for laundering money Hotels are an excellent vehicle for laundering money – after all, how does one confirm occupancy rates?– after all, how does one confirm occupancy rates?

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Largest Sources of Laundered FundsLargest Sources of Laundered Funds

1. 1. Economic crime Economic crime (commodity and stock market (commodity and stock market manipulation; insider trading, “legitimate business manipulation; insider trading, “legitimate business activity” by state officials through shills, and major activity” by state officials through shills, and major “corporate takeovers, and frauds);“corporate takeovers, and frauds);

2. 2. Corruption by officials & persons in private sector Corruption by officials & persons in private sector (benefiting from expropriations, receipt of bribes (benefiting from expropriations, receipt of bribes and kickbacks in connection with granting of and kickbacks in connection with granting of lucrative state contracts or traditional contracts, lucrative state contracts or traditional contracts, non-enforcement of relevant laws, illegal non-enforcement of relevant laws, illegal privatizations or unlawful sale of state property); privatizations or unlawful sale of state property); andand

3. 3. Other Sources Other Sources (illegal export of weapons and (illegal export of weapons and narcotics).narcotics).

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The Strange Case of GunvorThe Strange Case of Gunvor

GunvorGunvor, , a Swiss-based company, a Swiss-based company, has a near-monopoly on the has a near-monopoly on the transportation of oil and oil products transportation of oil and oil products from Russia.from Russia.

Prime Minister Putin Prime Minister Putin is believed to is believed to own a significant share of own a significant share of GunvorGunvor..

The Russian authorities have used The Russian authorities have used similar tactics to those used against similar tactics to those used against YukosYukos against against Gunvor’sGunvor’s competitors. competitors.

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Gazprom: The Cash Cow of theGazprom: The Cash Cow of the Russian Powers that Be? Russian Powers that Be?

Gazprom is Russia's largest company, state-Gazprom is Russia's largest company, state-controlled and the world’s largest gas producer. Its controlled and the world’s largest gas producer. Its Chairmen of the Board have included: Chairmen of the Board have included: Viktor Viktor Chernomyrdin Chernomyrdin and and Dmitrii Medvedev.Dmitrii Medvedev.

The Russian government conducts its foreign policy The Russian government conducts its foreign policy in a manner to benefit Gazprom and in turn particular in a manner to benefit Gazprom and in turn particular individuals. individuals.

Many of Many of its transactions are its transactions are outright shams or outright shams or structured to profit political figures and their favoritesstructured to profit political figures and their favorites. .

See See Roman Kupchinsky, Gazprom’s European Web, Roman Kupchinsky, Gazprom’s European Web, Jamestown Foundation Monograph, February 2009.Jamestown Foundation Monograph, February 2009.

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Gazprom’s International WebGazprom’s International Web

Use Use of non-transparent “trading” and “financial leasing” of non-transparent “trading” and “financial leasing” companies organized in companies organized in AustriaAustria, Cyprus, Lichtenstein, , Cyprus, Lichtenstein, SwitzerlandSwitzerland, Ukraine, the UK and , Ukraine, the UK and many off-shore jurisdictionsmany off-shore jurisdictions..

Involvement of middlemen linked to organized crime (e.g., Involvement of middlemen linked to organized crime (e.g., Massimo Ciancimio, Dmitro Firtash, Igor Fisherman [ties to Massimo Ciancimio, Dmitro Firtash, Igor Fisherman [ties to Semion Mogilevich], shady business people (e.g. Dariga Semion Mogilevich], shady business people (e.g. Dariga Nazerbayeva, Bruno Graneli, Howard Wilson) and politicians Nazerbayeva, Bruno Graneli, Howard Wilson) and politicians (e.g. Silvio (e.g. Silvio Berlusconi, Leonid Kuchma, Romano Prodi, Berlusconi, Leonid Kuchma, Romano Prodi, Vladimir Putin, Gerhard SchröderVladimir Putin, Gerhard Schröder) from Russia, Ukraine, ) from Russia, Ukraine, Kazakhstan Hungary, Israel, Italy and Germany.Kazakhstan Hungary, Israel, Italy and Germany.

Dealings with Dealings with RosUkrEnergo, ARosgas, Centrex, CEEGAG, RosUkrEnergo, ARosgas, Centrex, CEEGAG, Itera. ETG, MDM, Raiffeisen Investments, EniNeftegaz (buyer Itera. ETG, MDM, Raiffeisen Investments, EniNeftegaz (buyer of Yukos’ assets then sold to Gazpromneft), Gazprombank, of Yukos’ assets then sold to Gazpromneft), Gazprombank, Gazpromexport, etc., involving Gazpromexport, etc., involving billions of dollars.billions of dollars.

How closely is the law enforcement and intelligence How closely is the law enforcement and intelligence communities monitoring this situation? Gazprom spreads its communities monitoring this situation? Gazprom spreads its tentacles and the LNG market may be next.tentacles and the LNG market may be next.

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Reiffeisen Bank & Diskont ScandalReiffeisen Bank & Diskont Scandal

In 2006, Diskont Bank had its license revoked by the In 2006, Diskont Bank had its license revoked by the Russian Central Bank. Shortly thereafter, the 1Russian Central Bank. Shortly thereafter, the 1stst RCB Deputy Chairman Andei Kozlov is murdered.RCB Deputy Chairman Andei Kozlov is murdered.

This gives rise to an investigation which implicates This gives rise to an investigation which implicates Raiffeisen Zentralbank in a major money laundering Raiffeisen Zentralbank in a major money laundering scandal involving over 50 banks, including scandal involving over 50 banks, including Gazprombank, Sberbank, VEB, and Alfa BankGazprombank, Sberbank, VEB, and Alfa Bank..

Some prominent Russian banks are involved. Some prominent Russian banks are involved. Apparently, the there was a Apparently, the there was a kick-back scheme kick-back scheme involving the building of a gas pipeline, the cost of involving the building of a gas pipeline, the cost of which doubled in a very short time. which doubled in a very short time. Does this explain Does this explain the high cost of major projects by the Russian state the high cost of major projects by the Russian state or entities controlled by it?or entities controlled by it? 2323

The Financial Crisis and the Bailing The Financial Crisis and the Bailing out of Russian Banksout of Russian Banks

Recall that in 2008, the Russian economic slowdown preceded the “global Recall that in 2008, the Russian economic slowdown preceded the “global financial crisis.financial crisis.

Initially, the Russian Duma authorized the Central Bank of Russia Initially, the Russian Duma authorized the Central Bank of Russia to give the equivalent of $50 billion to the state-owned to give the equivalent of $50 billion to the state-owned Vnesheconombank (VEB) in Moscow, which in turn was Vnesheconombank (VEB) in Moscow, which in turn was authorized to lend to private companies and banks. authorized to lend to private companies and banks.

According to the New York Times, the Russian Central Bank estimated in According to the New York Times, the Russian Central Bank estimated in 2009, the countries debt exceeded $128 billion. 2009, the countries debt exceeded $128 billion. The Russian Government The Russian Government did not want Russian assets to fall into the hands of foreign entities, but 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 used this opportunity to re-establish state control over the economy and some of the so-called “Oligarchs,” many of whom controlled banks.some of the so-called “Oligarchs,” many of whom controlled banks.

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Condition of the Russian Economy & Condition of the Russian Economy & Russian Regulatory Enforcement VariesRussian Regulatory Enforcement Varies

- Rebounding Russian Consumer Confidence? - Rebounding Russian Consumer Confidence? -- According to RCB -- According to RCB data the number of Russians taking out ruble-denominated data the number of Russians taking out ruble-denominated mortgages in the first half of the year was up significantly over the mortgages in the first half of the year was up significantly over the prior year.prior year.

- Not all Russian Financial Institutions are Struggling - Not all Russian Financial Institutions are Struggling --Renaissance --Renaissance Capital (RC) making investments assets and providing consulting Capital (RC) making investments assets and providing consulting services in Nigeria, acquires brokerage in Nigeria, and expanding services in Nigeria, acquires brokerage in Nigeria, and expanding into its international activities into counties such as Mongolia, Serbia, into its international activities into counties such as Mongolia, Serbia, and South Korea recall ONEXIM Group holds a 50% stake in RC.and South Korea recall ONEXIM Group holds a 50% stake in RC.

- But - But -- July 2010, Mezhprombank defaults on a €200m Eurobond (first -- July 2010, Mezhprombank defaults on a €200m Eurobond (first bank default since 1999). Politically-connected Federation Council bank default since 1999). Politically-connected Federation Council Member Sergei Pugachiov (known as Putin’s Banker) owned it.Member Sergei Pugachiov (known as Putin’s Banker) owned it.

- Perhaps not Russian AML is not all corrupt and dysfunctional - Perhaps not Russian AML is not all corrupt and dysfunctional -- in -- in August 2010, RIA-NOVOSTI reported that MVD uncovered a August 2010, RIA-NOVOSTI reported that MVD uncovered a “criminal group”, which included several high-level bankers, “criminal group”, which included several high-level bankers, suspected of laundering $65 million.suspected of laundering $65 million. 2525

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Russia’s 5 Richest MenRussia’s 5 Richest Men

NameName RankRank Born Born Billions Initial ActivityBillions Initial Activity

Vladimir Lisin 32 ‘56 $15.8 SteelVladimir Lisin 32 ‘56 $15.8 SteelMikhail Prokhorov 39 ‘65 $13.4 InvestmentsMikhail Prokhorov 39 ‘65 $13.4 InvestmentsMikhail Frydman 42 ‘64 $12.7 OilMikhail Frydman 42 ‘64 $12.7 OilRoman Abramovich 50 ‘66 $11.2 SteelRoman Abramovich 50 ‘66 $11.2 SteelOleg Deripaska 57 ‘68 $10.7 Aluminum Oleg Deripaska 57 ‘68 $10.7 Aluminum

All of the above individuals are All of the above individuals are “self-made”“self-made” and and compared with billionaires from other countries rather compared with billionaires from other countries rather young. young. How reliable can such data be? Companies How reliable can such data be? Companies controlled by them are active throughout the world and controlled by them are active throughout the world and they personally own significant assets abroad.they personally own significant assets abroad.

See See Forbes 2010. Forbes 2010.

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Largest Russian Companies Largest Russian Companies (FT 500 List)(FT 500 List)

http://media.ft.com/cms/66ce3362-68b9-11df-96f1-00144feab49a.pdf (July 2010) (July 2010)

Gazprom, Global Rank 33, energy.Gazprom, Global Rank 33, energy. Rosneft,Global Rank 62, energy,Rosneft,Global Rank 62, energy, Sberbank, Global Rank 86, banking.Sberbank, Global Rank 86, banking. Lukoil, Global Rank 140, energy.Lukoil, Global Rank 140, energy. Surgetneftegaz, Global Rank 174, energy.Surgetneftegaz, Global Rank 174, energy. Norilsk Nickel, Global Rank 207, metals.Norilsk Nickel, Global Rank 207, metals. VYB Bank, Global Rank 263, bankingVYB Bank, Global Rank 263, banking Novolipetsk, Global Rank 383, metals.Novolipetsk, Global Rank 383, metals. Novotek, Global Rank 394, energy.Novotek, Global Rank 394, energy. Mobile Telesystems, Global Rank 470, telecom.Mobile Telesystems, Global Rank 470, telecom. Vimpelcom, Global Rank 493, telecom.Vimpelcom, Global Rank 493, telecom.

ISSUES:ISSUES: Nationality of entity vs. beneficial owners; Nationality of entity vs. beneficial owners; Shills and subsidiaries.Shills and subsidiaries. Ties to banks?Ties to banks?

Problem in Combating Russian Problem in Combating Russian Money LaunderingMoney Laundering

Governments, despite their rhetoric, assign a low priority Governments, despite their rhetoric, assign a low priority to combating foreign corruption and money laundering.to combating foreign corruption and money laundering.

Many Russian individuals and entities have considerable Many Russian individuals and entities have considerable skill in the mechanics of money laundering process.skill in the mechanics of money laundering process.

Russian officials are often the beneficiaries of money Russian officials are often the beneficiaries of money laundering and thus Russian regulators and international laundering and thus Russian regulators and international organizations have their hands tied.organizations have their hands tied.

They can rely on the cooperation or acquiesce of foreign They can rely on the cooperation or acquiesce of foreign financial institutions (and their personnel) as well as off-financial institutions (and their personnel) as well as off-shore banking/tax havens.shore banking/tax havens.

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Debt for ThoughtDebt for Thought

Russian banks and enterprises still owe a Russian banks and enterprises still owe a considerable amount of money to Western banks and considerable amount of money to Western banks and corporations.corporations.

While going after assets of such companies in Russia While going after assets of such companies in Russia is unlikely to be productive, Russian law makes parent is unlikely to be productive, Russian law makes parent companies liable for the debts of their subsidiaries.companies liable for the debts of their subsidiaries.

Conceivably, parent companies and the individuals Conceivably, parent companies and the individuals that control them have assets abroad that may be that control them have assets abroad that may be attractive to gain control over – for example, Russian attractive to gain control over – for example, Russian individuals and corporations may hold stock in individuals and corporations may hold stock in Western corporations as well as real estate and rights Western corporations as well as real estate and rights to natural resources.to natural resources.

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Too Big to Fail? Too Big to Succeed?Too Big to Fail? Too Big to Succeed?

Instability (i.e. political change in Russia is often Instability (i.e. political change in Russia is often viewed with trepidation by the West).viewed with trepidation by the West).

Russia continues the Soviet geopolitical strategy of Russia continues the Soviet geopolitical strategy of making the EU dependent on Russian energy while making the EU dependent on Russian energy while its companies seek to gain financial control abroad its companies seek to gain financial control abroad to strengthen its share of market in metals, gold, to strengthen its share of market in metals, gold, etc.etc.

Russia buys some EU politicians such as Gerhardt Russia buys some EU politicians such as Gerhardt ShrShrööeder, Berlesconi, etc. Enter into transactions eder, Berlesconi, etc. Enter into transactions with France, Germany and Italy to gain political with France, Germany and Italy to gain political leverage and more.leverage and more.

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Russian Gov’t SitesRussian Gov’t Sites Russian Central Bank -- Russian Central Bank -- http://www.cbr.ru/daily.aspx and and

http://www.cbr.ru/eng/ ;;

Russian Federal Service for Financial Monitoring -- Russian Federal Service for Financial Monitoring -- http://www.fedsfm.ru/ and http://archive.fedsfm.ru/eng/;http://www.fedsfm.ru/ and http://archive.fedsfm.ru/eng/;

Russian General Procuracy -- http://www.genproc.gov.ru/ and Russian General Procuracy -- http://www.genproc.gov.ru/ and http://eng.genproc.gov.ru/;http://eng.genproc.gov.ru/;

Russian Government -- http://government.ru/# and Russian Government -- http://government.ru/# and http://government.ru/eng/#http://government.ru/eng/#

Russian Ministry of Finance -- http://www.minfin.ru/ru/ and Russian Ministry of Finance -- http://www.minfin.ru/ru/ and http://www.minfin.ru/en/;http://www.minfin.ru/en/;

Russian Presidential Website -- http://kremlin.ru/ and Russian Presidential Website -- http://kremlin.ru/ and http://eng.kremlin.ru/http://eng.kremlin.ru/

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Other Interesting ML SitesOther Interesting ML Sites

Eurasian Group -- http://www.eurasiangroup.org/Eurasian Group -- http://www.eurasiangroup.org/

Global Financial Integrity -- http://www.gfip.org/;Global Financial Integrity -- http://www.gfip.org/;

Financial Action Task Force -- Financial Action Task Force -- http://www.fatf-gafi.org/pages/0,2987,en_32250379_32235720http://www.fatf-gafi.org/pages/0,2987,en_32250379_32235720_1_1_1_1_1,00.html;_1_1_1_1_1,00.html;

IMF on ML -- http://www.imf.org/external/np/leg/amlcft/eng/; IMF on ML -- http://www.imf.org/external/np/leg/amlcft/eng/;

World Bank on ML -- World Bank on ML -- http://web.worldbank.org/WBSITE/EXTERNAL/WBI/WBIPROGhttp://web.worldbank.org/WBSITE/EXTERNAL/WBI/WBIPROGRAMS/PSGLP/0,,contentMDK:20292990~menuPK:461615~paRAMS/PSGLP/0,,contentMDK:20292990~menuPK:461615~pagePK:64156158~piPK:64152884~theSitePK:461606,00.htmlgePK:64156158~piPK:64152884~theSitePK:461606,00.html

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