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Cablegate: Russia Report for Financial Crimes Portion of 2007-2008

VZCZCXYZ0000
RR RUEHWEB

DE RUEHMO #0074/01 0141253
ZNR UUUUU ZZH
R 141253Z JAN 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 6105
INFO RHMFIUU/DEPT OF JUSTICE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS MOSCOW 000074

SIPDIS

SENSITIVE
SIPDIS

STATE FOR INL, SCT, EEB, AND EUR/RUS
JUSTICE FOR AFMLS, OIA, OPDAT
TREASURY FOR FINCEN

E.O. 12958: N/A
TAGS: EFIN KCRM KTFN SNAR RS
SUBJECT: RUSSIA REPORT FOR FINANCIAL CRIMES PORTION OF 2007-2008
INSCR

REF: (07) STATE 138130

1. (U) This message is sensitive but unclassified. The tracked
changes version of this report will be sent to individuals specified
in reftel. Post's point of contact for this report is Economic
Officer Clayton Hays (hayscp@state.gov).

2. (SBU) Russia's financial system does not attract a significant
portion of legal or illegal depositors, and therefore Russia is not
considered an important regional financial center. Criminal
elements from Russia and neighboring countries continue to use
Russia's financial system to launder money because of familiarity
with the language, culture, and economic system. The majority of
laundered funds do not appear to be from activities related to
narcotics production or trafficking, although these activities
occur. Experts believe that most of the illicit funds flowing
through Russia derive from domestic criminal or quasi-criminal
activity, including evasion of tax and customs duties and smuggling
operations. Despite making progress in combating financial crime,
Russia remains vulnerable to such activity because of its vast
natural resource wealth, the pervasiveness of organized crime, and a
high level of corruption. Other factors include porous borders,
Russia's role as a geographic gateway to Europe and Asia, a weak
banking system with low public confidence in it, and under-funding
of regulatory and law enforcement agencies. However, due to rapid
economic growth in various sectors, the number of depositors has
steadily been increasing.

3. (U) Russia has recently changed its laws to allow direct foreign
ownership and investment in Russian financial institutions. Net
private capital inflows for 2007 reached $82.3 billion according to
the Russian Central Bank, an increase from $41.6 billion in 2006.
In contrast to the capital flight that occurred during the 1990s,
the majority of more recent outflows involved the legitimate
movement of money to more secure and profitable investments abroad,
which reflects the maturing of the Russian business sector.
However, a portion of this money undoubtedly involved the proceeds
of criminal activity. According to official statistics, the trend
toward net capital inflows involves the transfer of assets from tax
havens, such as Cyprus and the Virgin Islands, previously known to
be popular destinations for Russian capital outflows in the 1990s.

4. (U) Russia has the legislative and regulatory framework in place
to pursue and prosecute financial crimes, including money laundering
and terrorism finance. The Russian Federation's Federal Law No.
115-FZ "On Combating Legalization (Laundering) of Criminally Gained
Income and Financing of Terrorism" became effective on February 1,
2002, with subsequent amendments to the laws on banking, the
securities markets, and the criminal code taking effect in October
2002, January 2003, December 2003, and July 2004, respectively. Law
RF 115-FZ obligates banking and nonbanking financial institutions to
monitor and report certain types of transactions, keep records, and
identify their customers.

5. (U) According to the original language of RF 115-FZ,
institutions legally required to report include: banks, credit
organizations, securities market professionals, insurance and
leasing companies, the federal postal service, jewelry and precious
metals merchants, betting shops, and companies managing investment
and nonstate pension funds. Amendments to the law that came into
force on August 31, 2004 extend the reporting obligation to real
estate agents, lawyers and notaries, and to persons rendering legal
or accounting services that involve certain transactions (e.g.,
managing money, securities, or other property; managing bank
accounts or securities accounts; attracting or managing money for
organizations; or incorporating, managing, and buying or selling
organizations).

6. (U) Various regulatory bodies ensure compliance with Russia's
anti-money laundering and counterterrorism finance laws. The
Central Bank of Russia (CBR) supervises credit institutions; the
Federal Insurance Supervision Service oversees insurance companies;
the Federal Service for Financial Markets regulates entities
managing nongovernmental pension and investment funds, as well as
professional participants in the securities sector; and the Assay
Chamber (under the Ministry of Finance) supervises entities buying
and selling precious metals or stones.

7. (U) The CBR has issued guidelines regarding anti-money
laundering (AML) practices within credit institutions, including
"know your customer" (KYC) and bank due diligence programs. Banks
are required to obtain and retain for five years information
regarding individuals and legal entities and beneficial owners of
corporate entities. Banks must also adopt internal compliance rules
and procedures and appoint compliance officers. The amendment to
Law 115-FZ has required banks to identify the original source of

funds and to report to the financial intelligence unit (FIU) all
suspicious transactions since July 2004. Institutions that fail to
meet mandatory reporting requirements face revocation of their
licenses to carry out relevant activity, limits on certain banking
operations, and possible criminal or administrative penalties. An
administrative fine of up to $16,700 can be levied against an
institution, with a fine of up to $700 on an officer of an
institution. The maximum criminal penalty is 10 years in prison
with applicable fines.

8. (U) All obligated financial institutions must monitor and report
to the government: any transaction that equals or exceeds 600,000
rubles (approximately $22,700) and involves or relates to cash
payments, individuals or legal entities domiciled in states that do
not participate in the international fight against money laundering,
bank deposits, precious stones and metals, payments under life
insurance policies, or gambling; all transactions of "extremist
organizations" or individuals included on Russia's domestic list of
such entities and individuals; and suspicious transactions.

9. (U) Since the CBR issued Order 1317-U in August 2003, Russian
financial institutions must now report all transactions with their
counterparts in offshore zones. In some cases, offshore banks are
also subject to enhanced due diligence and maintenance of additional
mandatory reserves to offset potential risks undertaken when
conducting specific transactions. The CBR has also raised the
standards for offshore financial institutions, resulting in a
reduction in the number of such institutions. Overall wire transfers
from Russian banks to offshore financial centers have dropped
significantly as a result of such regulatory measures.

10. (U) Foreign financial entities, including those from known
offshore havens, are not permitted to operate directly in Russia;
they must do so solely through subsidiaries incorporated in Russia,
which are subject to domestic supervisory authorities. During the
process of incorporating and licensing these subsidiaries, Russian
authorities must identify and investigate each director of the
Russian unit, as nominee or anonymous directors are prohibited under
Russian law. In September 2005, the CBR completed its review of all
banks that sought admission to the recently established Deposit
Insurance System (DIS). To gain admission to the DIS, a bank had to
verifiably demonstrate to the CBR that it complies with Russian
identification and transparency requirements. Currently, 911 of
Russia's 1,145 banks participate in the DIS.

11. (U) By law, Russian businesses must obtain government
permission before opening operations abroad, including in offshore
zones. A department within the Ministry of Economic Development and
Trade (MEDT) reviews such requests from Russian firms, and once the
MEDT approves, the CBR must then approve the overseas currency
transfer. In either case, the regulatory body responsible for the
offshore activity is the same as for domestic activity, i.e., the
Federal Service for Financial Markets regulates brokerage and
securities firms, while the CBR regulates banking activity.

12. (U) Article 8 of Law 115-FZ provides for the establishment of
Russia's FIU, called the Federal Service for Financial Monitoring
(FSFM). FSFM is an independent executive agency administratively
subordinated to the Ministry of Finance. All financial institutions
with an obligation to report certain transactions must report the
required information to the FSFM. The FSFM is also the regulator for
the real estate and leasing, pawnshops, and gaming services sectors.
An administrative unit, it has no law enforcement investigative
powers. Depending on the nature of the activity, the FSFM provides
information to the appropriate law enforcement authorities for
further investigation, i.e., the Economic Crimes Unit of the
Ministry of Interior (MVD) for criminal matters, the Federal Drug
Control Service (FSKN) for narcotics-related activity, or the
Federal Security Service (FSB) for terrorism-related cases.

13. (U) In June 2005, President Putin approved a national strategy
for combating money laundering and terrorism finance, part of which
called for the creation of a new Interagency Commission on Money
Laundering, comprised of twelve ministries and government
departments. In addition to receiving, analyzing and disseminating
information from the reporting entities, the FSFM has the
responsibility of implementing the state policy to combat money
laundering and terrorism financing. The Interagency Commission is
chaired by the head of the FSFM and is responsible for monitoring
and coordinating the government's activity on money laundering and
terrorism financing. FSFM authorities credit cooperation among
Commission members for the conviction of 257 individuals on money
laundering charges between January and June 2006.

14. (U) Nearly all financial institutions submit reports to the
FSFM via encrypted software provided by the FSFM. According to

press reports, Russia's national database contains over four million
reports involving operations and deals worth approximately $900
billion. The FSFM estimates that Russian citizens may have laundered
as much as $11 billion in 2007. The FSFM receives approximately
30,000 transaction reports daily. Of these daily reports, 25
percent result from mandatory (currency) transaction reports, and 75
percent relate to suspicious transactions.

15. (U) Each of the FSFM's seven territorial offices corresponds
with one of the federal districts that comprise the Russian
Federation. The Central Federal District office is headquartered in
Moscow; the remaining six are located in the major financial and
industrial centers throughout Russia (St. Petersburg, Ekaterinburg,
Nizhny Novgorod, Khabarovsk, Novosibirsk and Rostov-on-Don). The
territorial offices coordinate with regional law enforcement and
other authorities to enhance the information flow into the FSFM, and
to supervise compliance with anti-money laundering and
counterterrorism financing legislation by institutions under FSFM
supervision. Additionally, the satellite offices must identify and
register at the regional level all pawnshops, leasing and real
estate firms, and gaming entities under their jurisdiction. The
regional offices also are charged with coordinating the efforts of
the CBR and other supervisory agencies to implement anti-money
laundering and counterterrorist financing regulations. Russia's
anti-money laundering law, as amended, provides the FSFM with the
appropriate authority to gather information regarding the activities
of investment foundations, nonstate pension funds, gambling
businesses, real estate agents, lawyers and notaries, persons
rendering legal/accountancy services, and sellers of precious metals
and jewelry.

16. (U) During the first half of 2007, the FSFM registered 5,603
crimes involving money laundering, compared to 7,957 reports for all
of 2006. Interior Ministry officials reported that 4,535 of the
2007 cases went to trial. Both the FSFM and MVD report that the
number of suspicious transaction reports for the year roughly
equaled those of 2006 and credit increased cooperation among law
enforcement agencies for the number of cases brought to trial.

17. (U) As part of administrative reforms enacted in 2004, the FSKN
now has a full division committed to money laundering, staffed by
agents with experience in counter narcotics and economic crimes.
This division cooperates closely with the FSFM in pursuing
narcotics-related money laundering cases. The FSKN reported that
during 2007 it referred 14 cases of money laundering more than $60
million for prosecution. Consistent with Financial Action Task
Force (FATF) recommendations, the criminal code was amended in
December 2003 to remove a specific monetary threshold for crimes
connected with money laundering, thus paving the way for prosecution
of criminal offenses regardless of the sum involved.

18. (U) With its legislative and enforcement mechanisms in place,
Russia has begun to prosecute high-level money laundering cases.
During 2007, the CBR revoked the licenses of 44 banks for failing to
observe banking regulations. Of these, 30 banks lost their licenses
for violating Russia's anti-money laundering laws. Central Bank
First Deputy Chairman Andrey Kozlov's effort to prohibit individuals
convicted of money laundering from serving in leadership positions
in the banking community remains a pending issue in the CBR.

19. (U) Russian legislation provides for the tracking, seizure and
forfeiture of criminal proceeds. None of this legislation is
specifically tied to narcotics proceeds. Legislation provides for
investigative techniques such as search, seizure, and the
identification, freezing, seizing, and confiscation of funds or
other assets. Authorities can also compel targets to produce
documents. Where sufficient grounds exist to suppose that property
was obtained as the result of a crime, investigators and prosecutors
can apply to the court to have the property frozen or seized. Law
enforcement agencies have the power to identify and trace property
that is, or may become, subject to confiscation or is suspected of
being the proceeds of crime or terrorist financing. The law allows
the FSFM, in concert with banks, to freeze possible
terrorist-related financial transactions for one week: banks may
freeze transactions for two days, and the FSFM may follow up with
freezing for an additional five days.

20. (U) In accordance with its international agreements, Russia
recognizes rulings of foreign courts relating to the confiscation of
proceeds from crime within its territory and can transfer
confiscated proceeds of crime to the foreign state whose court
issued the confiscation order. However, Russian law still does not
provide for the seizure of instruments of crime. Businesses can be
seized only if it can be shown that they were acquired with criminal
proceeds. Legitimate businesses cannot be seized solely on the
basis that they were used to facilitate the commission of a crime.


21. (U) The Presidential Administration as well as Russian law
enforcement agencies have expressed concern about ineffective
implementation of Russia's confiscation laws. The government has
proposed amendments that are currently under review by the Duma
(Parliament) which would make it easier to identify and seize
criminal instrumentalities and proceeds. While Russian law
enforcement has adequate police powers to trace assets, and the law
permits confiscation of assets, most Russian law enforcement
personnel lack experience and expertise in these areas.

22. (U) The Russian Federation has enacted several pieces of
legislation and issued executive orders to strengthen its ability to
fight terrorism. On January 11, 2002, President Putin signed a
decree entitled "On Measures to Implement the UN Security Council
Resolution (UNSCR) No. 1373 of September 28, 2001." Noteworthy
among this decree's provisions are the introduction of criminal
liability for intentionally providing or collecting assets for
terrorist use, and the instructions to relevant agencies to seize
assets of terrorist groups. When this latter clause conflicted with
existing domestic legislation, the Duma within the year approved an
amendment to the anti-money laundering law, resolving the conflict
and allowing banks to freeze assets immediately pursuant to UNSCR
1373. Article 205.1 of the criminal code, enacted in October 2002,
criminalizes terrorist financing. On October 31, 2002, the
Federation Council, Russia's upper house, approved a supplemental
article to the 2003 federal budget, allocating from surplus
government revenues an additional 3 billion rubles ($1.1 million) in
support of federal counterterrorism programs and improvement of
national security.

23. (U) The FSFM reports that in regard to terrorism financing, it
has compiled a list of 1,300 organizations and individuals suspected
of financing terrorism, 400 of which were foreign. There are five
sources of information that may designate entities for inclusion on
the FSFM's list of proscribed organizations. International
organizations' designations, such as the UN 1267 Sanctions
Committee, constitute the first source. Second, Russian court
decisions provide a basis for inclusion. Third, resolutions from
the Prosecutor General can identify individuals and organizations
for inclusion. Fourth, Ministry of Interior investigations serve as
a basis for inclusion if subsequent court decisions do not dismiss
the investigation's findings. Finally, bilateral agreements, which
include information sharing regarding entities on the counterpart's
entities list, may provide a basis for inclusion on the FSFM list.

24. (U) At the request of the General Procuracy, the Russian
Supreme Court has, to date, authorized an official list of 17
terrorist organizations. According to press reports, this
designation allows Russian law enforcement agencies to seize the
organizations' financial assets immediately, whereas the FSFM
designation provides a basis for financial institutions to include
information about the organizations in suspicious transaction
reports. Although Russia has actively assisted the U.S. in
investigating cases involving terrorist financing, Russia and the
U.S. continue to differ about the purpose of the UN 1267 Sanctions
Committee's designation process. These political differences have
hampered bilateral cooperation in this forum.

25. (U) The United States and Russia signed a Mutual Legal
Assistance Treaty in 1999, which entered into force on January 31,
2002. The FSFM has signed cooperation agreements with the Financial
Intelligence Units (FIUs) of 24 countries, including the United
States. The FSFM has been an active member of the Egmont Group
since June 2002, having sponsored candidate FIUs from the former
Soviet republics, including current FIU members in Ukraine and
Georgia. U.S. law enforcement agencies exchange operational
information with their Russian counterparts on a regular basis. In
2005, Russian law enforcement agencies cooperated with the U.S. in a
high-profile case that led to the conviction of a Russian national
in a U.S. District Court on charges that he laundered over $130
million through a Moscow bank. The individual was sentenced to 51
months imprisonment and ordered to pay $17.4 million in restitution
to the Russian government. This close cooperation between Russian
and U.S. agencies has continued and strengthened in 2006.

26. (U) Russia became a full member of the Financial Action Task
Force in June 2003 and participates as an active member in two
FATF-style regional bodies. It is a member of the Council of
Europe's Select Committee of Experts on the Evaluation of Anti-Money
Laundering Measures (MONEYVAL) and was instrumental in the creation
of the Eurasian Group on Combating Legalization of Proceeds from
Crime and Terrorist Financing (EAG). The EAG Secretariat is located
in Moscow. In December 2005, under the auspices of the EAG, the FSFM
established the International Training and Methodological Center of
Financial Monitoring (ITMCFM). The main function of the Center is to

provide technical assistance to EAG member-states, primarily in the
form of staff training for FIUs and other interested ministries and
agencies involved in AML/CFT efforts. The ITMCFM also conducts
research on AML/CFT issues. As Chairman of the EAG, Russia's FIU
continues to play a strong leadership role in bringing the region up
to international standards in its capacity to fight money laundering
and terrorism financing.

27. (U) Russia ratified the Council of Europe Convention on
Laundering, Search, Seizure, and Confiscation of the Proceeds from
Crime in January 2001. Russia is a party to the 1988 UN Drug
Convention and on May 26, 2004, became a party to the UN Convention
against Transnational Organized Crime. In November 2002, Russia
ratified the UN International Convention for the Suppression of the
Financing of Terrorism. Russia also became a signatory to, and
ratified on May 9, 2006, the UN Convention against Corruption.

28. (U) Through aggressive enactment and implementation of
comprehensive money laundering and counterterrorism financing
legislation, Russia now has well-established legal and enforcement
frameworks to deal with money laundering and terrorism financing.
Given its role in the creation and maintenance of the EAG, Russia
has also demonstrated the will and capability to improve the
region's capacity for countering money laundering and terrorism
financing.

29. (U) Nevertheless, serious vulnerabilities remain. Russia is
among the world's most sophisticated perpetrators of fraud and money
laundering through electronic and internet-related means. To meet
its goal of combating money laundering and corruption, Russia needs
to follow through on its commitment to improve CBR oversight of
shell companies and scrutinize more closely those banks that do not
carry out traditional banking activities, including making all
offshore operations subject to the identical due diligence and
reporting requirements as other sectors. To prevent endemic
corruption and deficiencies in the business environment from
undermining Russia's efforts to establish a well-functioning
anti-money laundering and counterterrorism finance regime, Russia
should strive to stamp out official corruption, particularly at high
levels, and to increase transparency in the financial sector and the
corporate environment. Russia should also commit adequate resources
to its regulatory and law enforcement entities in order to help them
fulfill their responsibilities. Additionally, Russia should work to
increase the effectiveness of its confiscation laws and their
implementation including enacting legislation providing for the
seizure of instruments, in addition to the proceeds, of criminal
activity. Finally, Russia should continue to play a leadership role
in the region with regard to anti-money laundering and
counterterrorist finance regime implementation.

BURNS

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