The Threat of Russian Criminal Money: Reassessing EU Anti-Money Laundering Policy

The Threat of Russian Criminal Money: Reassessing EU Anti-Money Laundering Policy Walter Kegö Alexander Georgieff STOCKHOLM PAPER June 2013 The Threat of Russian Criminal Money: Reassessing EU Anti-Money Laundering Pol- icy is a Stockholm Paper published by the Institute for Security and Development Policy. The Stockholm Papers Series is an Occasional Paper series addressing topical and timely is- sues in international affairs. The Institute is based in Stockholm, Sweden, and cooperates closely with research centers worldwide. The Institute is firmly established as a leading research and policy center, serving a large and diverse community of analysts, scholars, policy-watchers, business leaders, and journalists. It is at the forefront of research on is- sues of conflict, security, and development. Through its applied research, publications, research cooperation, public lectures, and seminars, it functions as a focal point for aca- The Threat of demic, policy, and public discussion. The opinions and conclusions expressed are those of the author/s and do not necessarily Russian Criminal Money: reflect the views of the Institute for Security and Development Policy or its sponsors. Reassessing EU © Institute for Security and Development Policy, 2013 ISBN: 978-91-86635-58-9 Anti-Money Laundering Policy Printed in Singapore Distributed in Europe by: Institute for Security and Development Policy Västra Finnbodavägen 2, 131 30 Stockholm-Nacka, Sweden Walter Kegö Tel. +46-841056953; Fax. +46-86403370 Email: [email protected] Alexander Georgieff Distributed in North America by: The Central Asia-Caucasus Institute Paul H. Nitze School of Advanced International Studies 1619 Massachusetts Ave. NW, Washington, D.C. 20036 Tel. +1-202-663-7723; Fax. +1-202-663-7785 E-mail: [email protected] Editorial correspondence should be addressed to Alec Forss at: [email protected] Institute for Security and Development Policy Västra Finnbodavägen 2, 131 30 Stockholm-Nacka, Sweden www.isdp.eu Contents List of Abbreviations List of Abbreviations ��4 AML- Anti-Money Laundering Executive Summary ��5 EAW- European Arrest Warrant Introduction ��7 EBA- European Banking Agency Emergence of Russian Organized Crime in the 1990s ��11 ESA- European Supervisory Authority Change and Continuity: Russian Organized Crime in the 2000s ��19 EU- European Union The Resilience of EU Money Laundering Networks ��32 FATF- Financial Action Task Force The Future: Policy Recommendations to Counter Money Laundering FI- Financial Institution in the EU ��53 FIU- Financial Intelligence Unit About the Authors ��65 FSA- Financial Service Authority (UK) FSB- Russian Federal Security Service JIT- Joint Investigation Team MVD- Russian Ministry of Internal Affairs NFI- Non-financial institution OLAF- European Anti-Fraud Office OOCRP- Organized Crime and Corruption Reporting Project PEP- Politically exposed person RBA- Risk Based Analysis ROC- Russian Organized Crime RZB- Raiffeisen Zentral Bank SAR- Suspicious Activity Report STR- Suspicious transaction report UNDP- United Nations Development Program USAID- United States Agency for International Development 6 Walter Kegö & Alexander Georgieff Executive Summary both of the former steps, the EU must take an active role in ensuring all EU countries not only comply, but also enforce money laundering laws. How these steps should be carried out will be covered in this paper. Russian organized crime continues to be a problem in Europe, and Since the early 1990s, Russian criminal networks have plagued the Euro- their power and reach will continue to grow if their financial chan- pean Union. The spread of organized crime groups from Russia, follow- nels are not dismantled. It is up to the EU to stop the rot and com- ing the break-up of the Soviet Union, has brought with it increased vio- pel banks and governments to acknowledge that the long-term lence and the rise of illicit networks. However, these organized crime risk of being involved with the Russian criminal world is too high. groups thrive precisely because the Eastern European member states of the EU continue to allow the illicit money from these groups to pass through their financial institutions. Whether this is because of corruption or an institutional inability to counteract the problem, money laundering persists, which acts to undermine the EU as a whole. In 2005, the EU adopted the Third EU Anti-Money Laundering (AML) Directive, which saw the ushering in of the new risk-based AML regula- tion strategy. The system has been lauded as a vast improvement to the bureaucratic and inflexible rule-based system utilized before. Nonethe- less, eight years later it is necessary to assess the success and failures of the current system, and identify the need for increased government over- sight in countries where money laundering continues to be a problem. Trends and evidence indicate that there are Eastern European banks actively involved in laundering illegal money from Russia into the rest of Europe. The Baltic States, for example, are often the first port of call for Russian and Ukrainian illicit and stolen capital. Numerous examples illustrate this continuing problem—the Vanagels Connection, for instance, a cross-border money laundering and offshore network that has concealed the origins of mil- lions of illicit euros, has involved numerous Baltic banks. Governments of the Eastern European member states of the EU have begun to counteract money laundering, but their efforts are lethargic and remain mostly unsuccessful. To combat the continuing spread of money laundering in the EU, three steps must be taken. First, EU banks must do their part to increase compliance with anti-money laundering protocols and not engage in relationships with banks suspected of laundering illicit assets. Second, nations must take responsibility for their financial institutions that are harboring illicit funds. Through their financial intelligence units and jus- tice system, they must ensure financial institutions are reporting money laundering cases, and confiscate illicit capital. Third, in order to ensure 8 Walter Kegö & Alexander Georgieff Introduction In 2007, Lt. Col Artem Kuznetsov of the Unit Field Officers of the Tax Crimes Division of the Russian Interior Ministry and Major Pavel Karpov reportedly broke into the offices of Hermitage Capital, a Guernsey-based investment group, in order to obtain the documents of two subsidiary com- For the past twenty years, the threat of Russian organized crime (ROC) has panies of Hermitage. Once stolen, the documents were forged and the com- loomed large on the EU’s doorstep. The proceeds from Russian crime and cor- panies put in the name of Viktor Markelov, a convicted criminal who had ruption have gravitated toward the shores of the EU financial world, threat- been involved with Kuznetsov and Karpov in a kidnapping a few years ening both financial stability and increasing levels of criminality. Safeguards earlier. Thereafter, the shell companies, under the control of the Kluyev have been put in place to stop this exodus of illicit capital from Russia, but crime ring, sued the subsidiaries for breach of forged contracts. The con- even so, vast amounts of money have infiltrated EU markets. The problem tracts between these shell companies and the subsidiaries did not actually is not so much that Russian organized crime has increased per se, but rather exist, and in court the subsidiary companies employed lawyers not con- that efforts have, by and large, not succeeded in curtailing the problem. nected with Hermitage for the defense. These lawyers raised no defense Notwithstanding, the EU has attempted to stem money laundering, and and accepted the full liability for the claims being brought against the sub- adopt policies that require financial institutions (FIs) to supply information sidiaries. This was all a calculated charade, and the losses from the claim- to national financial intelligence units (FIUs) regarding possible suspicious ants offset previous profits of the subsidiaries. By erasing the profits, the transactions. In this regard, the 2005 Anti-Money Laundering Directive, subsidiaries were then allowed to apply for tax refunds worth 5.4 billion adopted by all EU member states, stipulated increased banking regula- rubles, which the Russian Tax Offices granted immediately at the end of tion and due diligence from FIUs, but with FIs playing an increased role.1 December 2007. The tax officers involved were given a share of the profits Indeed, the ultimate goal was to use FIs as the “eyes and ears” of FIUs. for allocating the money. The profits were forwarded to Universal Savings The transnational money laundering schemes in question, however, are bank accounts that had been opened two weeks earlier. This money was highly complex, involving an intricate nexus between governments and orga- then dispersed to those involved in the scheme through various banks

Load more