Money Laundering In Russia

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Table of Contents

Introduction. Money Laundering
Money laundering in Russia
Prevention of Money Laundering in Russia
The Efficacy of Russian Rules and Regulations in Preventing Money Laundering
Effects of Money Laundering on Russian Banks
Conclusion
Works Cited

Introduction. Money Laundering

Money laundering is defined as the process of disguising or “cleaning” money that has been obtained illegally and incorporating it into a financial system of a country (Hopton 12). It is also defined as making money that has been obtained illegally to appear legitimate.

Money launderers use a variety of methods to carry out their illegal business. There are varied sources of dirty money and these include drug trafficking, corruption in government offices and other organizations as well as activities related to tax evasion.

Other sources of dirty money include money from illegal trade or the black market and this depends on legitimacy of the trade in different countries. For instance, commercial sex work is illegitimate in most countries. Thus, money generated from this trade is dirty.

Money laundering can be done using various techniques, which range from simple ways to complicated methods.

Money laundering is a three-step process that involves introduction of cash into the financial system of an economy or placement/layering, which is making efforts to ensure that the original source of the money is hidden and then making use of the funds to generate income or wealth.

Various methods used in money laundering include structuring, smuggling and other banking-related methods (Truman and Peter 32).

Many governments have been in the war against money laundering and this has seen development of various anti-money laundering bills. Despite these bills, money laundering remains a challenge to most economies due to the complexity of the techniques used in money laundering and the inability to stem out the illegitimate sources of money (Stessens 23).

International organizations such as the International Monetary Fund (IMF) and the World Bank have also been in the forefront to fight against money laundering. In 1989, member countries of the G7 formed a body named Financial Action Task Force on Money Laundering (FATF), which is an intergovernmental body.

The body was mandated to bring to force measure to combat money laundering. These two organizations have formulated policies to help economies fight money laundering and ensure a combined effort to stem out the vice.

Scholars have however admitted that it could be impossible to estimate the amount of money laundered hence the figure released by the International Monetary Fund could be higher or lower (Demetis 73).

Money laundering in Russia

Russia ranked third in the twenty country origins of laundered money with money laundering making 15 per cent of the Russian Gross Domestic Product in Walker’s estimate of money laundering in 1998.

This, together with the fact that Russia does not have proper anti-money laundering policies made the Financial Action Task Force Against Money Laundering (FATF) to black list the country as a tax haven in 2000 (Leach 5).

Money laundering in Russia has been a big problem in the recent years like in many other economies in the world. In 1990s, there was a money laundering scandal in Russia that almost crippled the Russian economy.

Since that time, the country has been struggling to get back on its economical grounds but this has been greatly undermined by several money laundering scandals. In the 1990s, the Russian economy collapsed due to capital flight (Lane 52-77). This scandal was perpetuated through transfer of funds out of the Russian economy through Bank of New York accounts to a shadow company.

There have been numerous accusations of money laundering in Russia. In 2011, Swiss prosecutors opened criminal investigation into a case where Russian tax officials were allegedly involved in fraudulent activities carried out by Swiss bank accounts.

In 2002, a suit was filed by depositors of Inkombank alleging that top bank officials of the bank collaborated with Russian mobsters and the Bank of New York to transfer money out of the Russian bank to another account, an action that made the Inkombank to fail (Leach 45).

These two cases are just but examples of how serious and rampant the money laundering scandal is to the Russian economy.

Techniques Used to Carry Out Money Laundering in Russia

There are various methods or techniques used to carry out money laundering in Russia as well as in other parts of the world. It is said that in Russia, there are more than 120 methods of perpetrating money laundering. Due to this fact, the fight against money laundering is difficult (Lane 23).

All these methods or techniques can be broadly categorized into smurfing bank related methods, currency exchange and double invoicing.

Smurfing or structuring is a term used for methods, which involve depositing of cash in form of small amounts in order to eliminate suspicion of the source of cash. Other methods involve smuggling cash into another economy and having the cash deposited in a bank with the help of bank officials to prevent detection.

People in Russia also use businesses, which deal with lots of cash in order to deposit both legitimate and illegitimate cash into their accounts. These businesses are used as a cover up and they do not have legitimate activities (Stessens 95).

The other method used by Russians in money laundering is over – valuing or under-valuing invoices in the course of business in order to disguise the amount and movement of money. Some people establish trusts and shell companies because these do not disclose the real owner of the business in order to disguise people and hide laundered money (Truman and Peter 33).

A common method also in use in Russia to conduct money laundering is to buy majority shares in a bank in order to acquire control over the bank and enhance movement of money through the bank without scrutiny. This method is known as the bank capture method (Lane 39).

Casinos are also used for purposes of money laundering because players can buy chips, play for some time and then cash the chips for a check, which is deposited in a bank account as winnings from gambling hence being in a position to cleanse their ill-gotten income. Most casinos in Russia are owned and run by organized criminals and they help to perpetrate the crime of money laundering.

Money launderers also make use of real estate business to carry out their activities. They buy assets using illegitimate money, resell the property, and deposit the money as proceeds from sale of the property.

This is of course accompanied by undervaluation of the property in question in order to justify the source of the money (Truman and Peter 134).

Terrorist financing is a method that is becoming of more interest to many countries. This method is also used in Russia and it conceals the source of money. Black salaries where banks pay out salaries to nonexistent employees using illegitimate money are also a method in use to facilitate money laundering.

In Russia, organized crime is very rampant and this is the most common method of perpetration of money laundering. There was a scandal in 2002 about money laundering implicating the Bank of New York and this manifested that the famous Russian mafia is not a local operation but an international racket.

This group of organized crime is famous for carrying out of cross-border money laundering. These groups involved in organized crime have increased day by day because of political impunity in Russia and lack of enough legal reforms. According to the interior ministry of Russia, the organized groups had increased from 785 to 8,000 in 1996 (Leach 102).

This Russia mafia controls most businesses in the country and abroad and they receive certain percentages of profits made by international organizations. The history of these rackets dates back to 1964 and they have now increased in numbers.

Examples of these rackets include names such as Vory Zakone who are also known as Thieves in Law, the Dolgopruadnanskaya and the Solntsevskaya (Leach 114). These groups are involved in illegal trade of luxurious goods drug trafficking, gun smuggling and extortion.

Due to bad political leadership and corruption in Russia, these groups enjoy a substantial amount of protection and support from the top officials in the government. Some of the groups are even known to have police officers as members to the groups.

Like other parts of the world, money laundering in Russia makes use of technology in the process of laundering money. The money laundering techniques involve the use of simple ways and complicated methods such as of electronic payment systems.

The Financial Action Task Force on money laundering has identified several ways, which are used by money launderers. One method commonly used is the electronic or the wire money transfer technology in money laundering.

In Russia, most payments of unities are transferred from the payer to the payee over telecommunication networks. To facilitate money laundering, the sender and the receiver are the same person and this method is used to hide the identity of the people hence the true origin of money (Schneider and Dominic 83).

Money launderers in Russia often use illegal money transfer systems, which are also known as parallel bank systems in order to transfer money. Most of these money transfers are also based on several systems that support trust connections to send money hence making audit trail difficult.

People also use other methods such as providing false information on their identities when opening accounts in Russia with the intention of using these accounts for money laundering.

Money launderers use the good reputation of religious leaders or other people with good reputation for purposes of money transfers across borders. These people give money launderers unlimited access to their bank accounts and this facilitates money laundering since the transactions of these banks elicit little attention to regulators and investigators (Hopton 55).

Use of shell companies for money laundering purposes is also very common in Russia. Money launderers establish and control various organizations across borders with the aim of using them for transfer of huge sums of money. These companies do not have a business activity and do not have assets and liabilities.

They are purely used for money transfer purposes and they usually have several bank accounts. Some of the organizations established are in the form of charitable organizations and financial regulators do not monitor money transfer transactions with these organizations.

In Russia, technological advancements especially use of electronic payment systems such as SWIFT, EFT and TARGET or the involvement of virtual cash are all in use to carry out money laundering under the unsuspicious investigators and prosecutors.

The money launderers also make use of financial instruments like life insurance policies, share certificates, bonds and other derivatives to clean dirty money. Most of trading in the financial instruments is done online with offshore companies (Lane 133).

Prevention of Money Laundering in Russia

After being put in the black list of ‘tax havens’ by the Financial Action Task Force Against Money Laundering (FATF) in 2000, the Russian government made great efforts to combat money laundering in the country. This is because the country was most hit by the effect of discriminatory measures that the black listing had on the Russian financial institutions.

Russia has made various milestones regarding the fight against money laundering. One of the major milestones includes the ability of the country to ratify the Council of European Convention on Money Laundering.

The council is responsible for various duties such as finding out money laundering tracks, seizing the involved culprits and confiscating any income earned from the illegal act (1990 Convention). The Russian government ratified this convention in 2001 and this led to the development of anti-money laundering legislation (FATF XV Report 49).

Russia developed the Federal Law No. 115-FZ in 2002 on ‘Combating Money Laundering and the Financing of Terrorism’ also known as the Money Laundering Law. This law gives guidelines to banks on ways of preventing money laundering and gives the required disclosures that banks should make to the government (Leach 155).

One of the provisions is that banks should monitor closely and report to the government any transaction that is equivalent to or exceeds 600,000 Roubles (17,500 Euros) in relation to cash payments, legal entities in countries that do not participate in anti-money laundering efforts.

Deposits into banks, trade in precious stones and metals should be reported. The Money Laundering Law also requires that that all organizations in Russia should disclose transactions of individuals put in the list of extremists. Financial institutions and banks in Russia are prevented from creating and maintaining bank accounts without proper identification of the real owners.

Another law implemented to combat money laundering in Russia was the amendment of the Criminal Code, which sought to make a definition of money laundering and provide penalties.

According to the amendments of the Criminal Code, money laundering was defined as “financial operations and other transactions with money or other property on a large scale obtained by criminal means for the purpose of giving lawful character to ownership, usage and disposal of the indicated money and other property” (Minaeva and Aksenova 1).

This was a good measure to ensure criminal prosecution of those involved in the vice of money laundering. The Russian reforms also saw the legislation and enaction of Banking Law and the Securities Law, which provide a framework for operation of financial institutions in the country.

The Russian government also established the Financial Monitoring Committee (FMC), which was to act as a new supervisor of activities aimed at monitoring cash transactions (Lane 24). This body was later renamed as the Federal Service for Financial Monitoring (FSFM).

The roles of this body are to collect process and analyze financial information about financial information with the main aim of preventing money laundering and financing of terrorism activities. The FSFM works hand in hand with the law enforcement agencies to ensure that all suspected transactions are investigated and the culprits are apprehended.

The information that is analyzed by the FSFM comes from the Central Bank of Russia, which is the supervisor of all credit and financial institutions in the country.

Other information is obtained from the Federal Insurance Supervision Service (FISS) and the Federal Service for Financial Markets (FSFM). The FISS is charge with the role of supervising the insurance companies and the FSFM manages players in the securities market.

The Russian government has been in the forefront of the fight against money laundering over the recent years. Russia became a full member of FATF in 2003 and it took up a leading role in the fight against money laundering in Russia.

The country also started the Eurasian Group on Combating Legalization of Proceeds from Crime and Terrorist Financing (EAG). The membership of the group includes regional nations such as Russia, China and Belarus among others.

The group has many members including Russia, China and Belarus among others. The role of this group is to observe the status of performance of the FATF in the fight against money laundering. Russia is also a member of the Council of Europe’s Select Committee of Experts on the evaluation of Anti-Money laundering Measures (MONEYVAL).

In order to get a good insight into measures taken by the government of Russia to fight money laundering, it is important to review the recommendations of the Financial Action Task Force against Money Laundering (FATF).

FATF has 40 recommendations and 9 special recommendations. Some of these recommendations aim to prevent money laundering while others focus on prevention of funding of terrorism activities and drug dealings.

Of importance to this term paper are those recommendations that deal with prevention of money laundering. These involve recommendation 5, 6, 7 and 8 and they all provide guidelines on wider issues such on money laundering. It is the basis of these recommendations that Russia has developed several anti-money laundering laws.

Russia has joined efforts with other nations in order to put itself in a better position to fight money laundering and financing of terrorism activities. The main reason for these agreements is that money laundering is usually carried across countries thus the efforts of a single country are not effective to combat the crime.

It is for this reason that the FSFM has signed international agreements with various countries and organizations such as the United States, Czech Republic, Ukraine and many other countries. These agreements have gone a long way to exchange information between the parties and thus be able to prevent cross-border money laundering.

The repercussions for breach of any of the established laws and regulations to combat money laundering in the Russian economy are severe.

Examples of consequences of failure to adhere to the Money laundering Law and other anti-money laundering laws are revocation of the license of the bank or the concerned financial institution, imprisonment of officers found guilty and fining of the bank. In Russia, persons found guilty of the crime of money laundering or financing of terrorism activities face a sentence of 7 to 15 years imprisonment.

The Efficacy of Russian Rules and Regulations in Preventing Money Laundering

The anti-money laundering efforts by the Russian government are not efficient. Despite the enactment of strict anti-money laundering measures, the government has not registered a substantial reduction in the crime.

One of the impediments of the efficacy of the efforts to combat money laundering is the exemption of financial institutions from the legal requirements to disclose information to the government.

Though the Money Laundering Law allows the financial institutions to disclose information to the government on suspicious activities, most of the institutions hide in the legal responsibility they have for breach of contract on confidential information of customers (Minaeva and Aksenova 1).

The President of FATF, Professor Kader Asmal recognized and praised the efforts made by the Russian government to fight money laundering in 2005 (FATF XV Report 25). The president of Russia unveiled a national strategy to combat Money Laundering and Terrorism financing in 2005.

The FSFM also came up with a five-year plan of improving the anti-money laundering legislation, which was based on four principle strategies. These strategies were improvement of anti-money laundering law, training and retraining investigators and prosecutors in money laundering cases and strengthening of bilateral and international cooperation.

Using bilateral and international agreements with other countries and other international organizations such as the United Kingdom, Russia has been able to prevent money laundering across borders. The country is able to exchange information with these countries and organizations and combine efforts with the countries to fight money laundering.

This has gone a long way to increase the efficiency of the fight against money laundering across borders. Despite these developments, the efficiency of the Russian government to fight money laundering and financing of terrorism activities is greatly hampered by the failure of the country to sign the new Council of Europe Convention on Laundering, Tracing, Seizure and Confiscation of Proceeds from Crime.

In addition, the country also failed to signs a pact on the Council on the Financing of Terrorism, which is an update of the 1990 convention. Without signing of these updates, Russia cannot be effective enough in the fight against money laundering and financing of terrorism activities (Schneider and Dominic 83).

Various obstacles that are basic in nature also hamper the efficacy of the fight against money laundering and financing of terrorism activities in Russia. One of the obstacles is lack of a good framework to counter the basic issues of corruption and organized crime. Another obstacle is the shortcomings of the Money Laundering Law itself.

The regulation provides for a low threshold for interested parties to report on the FSFM operations hence the overworking of financial institutions with excess workload (Leach 147). This is because this requires them to make a report on many operations on a daily basis. Another shortcoming is the ambiguity in the definition of a ‘suspicious transaction’.

The definition of this term is left to financial institutions and other players. It is therefore imperative that most transactions will be improperly qualified as suspicious transactions or non- suspicious transactions and this is a big impediment to the efficacy of the Money Laundering Law.

Most of employees in the financial institutions and other governmental offices lack the training and experience to analyze information in order to detect money laundering. Most of these employees are also ignorant of the provisions of the Money Laundering Law and other legal provisions, which aim at preventing money laundering.

This has created the rise of improper qualification and application of the Money laundering Law making most money laundering transactions to go unrecorded. This reduces the efficiency of the Money Laundering Law in combating the crime (Truman and Peter 68).

The software used by most financial institutions to report transactions is also another impediment of the efficiency of fight against money laundering in Russia. Money laundering methods involve the use of technology and for the government to be able to fight the vice, it needs to use more advanced technology than that used by money launderers.

In addition to lack of technology, there is lack of coordination of efforts between the organizations, which are involved in the fight against money laundering. There are communication barriers between the financial institutions, supervisory agencies and law enforcement agencies, which makes exchange of information on suspicious transactions difficult.

For Russia to be effective in the fight against money laundering, it should ensure that all the parties involved well coordinated and they are able to share information freely. All information regarding supervision and prevention of money laundering should be put in a database that is accessible to all players in the fight.

Corruption is also another factor that has led to lack of efficacy in the anti-money laundering efforts. A recent report by the Transparency International (TI) ranked Russia in the league of the most corrupt countries worldwide.

Corruption in the country has led to difficulties in creation of ways to apprehend the perpetrators of organized crime in the country. The political and the economic climate prevailing in Russia do not provide an ample environment for the fight against money laundering.

The significant reduction in money laundering that has been realized in the Russian economy is due to the enactment and enforcement of the Anti-Money Laundering Law. Since the enactment of the Money Laundering Law and other anti-money laundering and anti-terrorism financing activities, many people and institutions have been charged with the crime in Russia.

In 2003, fourteen people were found guilty of money laundering crime, in 2005, 419 people and in 2006, 532 people were found guilty of the same crime (Minaeva and Aksenova 1). Many cases related to money laundering were brought to the Russian courts in 2009 and this prevented money laundering of close to 289 Roubles.

In the same year, the Central Bank of Russia inspected 779 banks and revoked trading licenses of 51 banks. 343 of the inspected banks were found to have activities that could lead to money laundering and these cases were prevented.

FATF carried out a survey in 2008 that investigated the anti-money laundering efforts employed by the Russian government. The outcome of the survey that included efforts on the war against terrorism financing was weighed against the set recommendation of the task force that conducted the survey.

The FATF has 40 recommendations and 9 Special recommendations on anti-money laundering measures. According to the report, Russia had fully complied with 10 recommendations, partially complied with 21 and had failed to comply with 3 FATF recommendations. Two of the recommendations were not applicable in the country.

The survey also established that the Russian government had put in place a legal framework for identifying, investigating and prosecuting money laundering practices. The report however emphasized that the effectiveness of this legal framework could be enhanced by sealing the loopholes existing in the framework.

Some of the loopholes identified in the report were lack of proper and clear legal framework regarding beneficial ownership of property, failure of the Russian law to ban the maintenance of existing accounts in fictitious names and lack of proper guidelines on due diligence.

After this report, the country strengthened the Federal Law No. 115-FZ to prohibit financial institutions from opening accounts without proper identification of the account owner and maintaining anonymous accounts without proper identification of owner. Customer database is vital for any organization including the state.

Due to the efforts to fight money laundering, regulatory authorities have required financial institutions to make a three-year update of client details.

About recommendation 6 on politically exposed persons (PEP), the FATF report noted that Russia had not made any legislation regarding PEPs. Law No. 121-FZ was implemented in 2009 to ensure that recommendation 6 on PEPs had been adhered to.

The Russian Banking laws and regulations have not been able to provide specific guidelines to banks on information required to be able to understand the nature of the bank they wish to enter into correspondence with. The Federal Law No.

129-FZ requires that banks should keep comprehensive records on transactions and maintain them for a period. Despite the efforts of the government to enforce this law and comply with special recommendation VII, full compliance has not been realized. This is another indicator of the lack of efficacy in anti-money laundering efforts.

This is because most financial institutions visited by FATF in the evaluation in 2008 had little knowledge about money laundering and activities that constitute money laundering. Russia was also rated as partially compliant to requirements 15, 17, 22 and 27 on various issues on anti-money laundering.

The fact that the country had partially complied with most of the FATF recommendations and had totally failed to comply with others shows that the fight against money laundering is not efficient and more needs to be done.

Effects of Money Laundering on Russian Banks

Credit Risk: this risk is associated with the inability of a borrower to repay his/her loan or the inability to meet the contractual obligations of the loan. Under the risk, the borrower is unable to repay the principle sum or the interest or both.

The risk is common in cases in which a borrower depends on expected cash flows in future to repay the pending debt today. Investment and commercial banks usually charge higher interest rates for borrower whose perceived credit risk is high. Calculation of credit risk of an individual is calculated depending on the ability of the borrower to service the loan.

Liquidity risk: The risk results from the inability of a security being marketed in appropriate time to reduce the expected loss.

Exchange rate Risk: exchange rates are not usually constant especially in a flexible exchange rate regime. An exchange rate risk is effect of fluctuation in the exchange rates on the assets and securities.

The fluctuations in the exchange rates especially for foreign investors could either reduce or increase the value of money and the investment hence realization of either a loss or profit. Although the risk affects businesses, it could also affect individual international investors.

Inflation Risk: this is the danger that inflation poses on the security. The risk results for increased inflation in an economy. Long run effects of inflation risk could be erosion of the value of a given asset. Securities that bear interest could be devalued, purchasing power reduced and the activities in the financial market disrupted.

Conclusion

Russia is one of the most active participants in the fight against money laundering in the European region and in the world. There are still inefficiencies in the fight. The inefficiency is brought by obstacles such as corruption, poor financial framework, lack of transparency in the operations of the financial institutions and poor political and economic climate (Hopton 62).

The efficiency is also lowered by the fact that there are more than one hundred ways to perpetrate the crime of money laundering in Russia. However, it is clear that Russia is committed at preventing money laundering due to the measures the country has put in place. These measure need to be reviewed time from time in order to keep up with the current trends in money laundering.

In generally, the efforts of the Russian government to fight money laundering has proved to be ineffective in meeting the objective of preventing money laundering, detecting money laundering activities, prosecuting perpetrators of money laundering and generally eliminating organized crime in the country.

The limitation in the fight is due to lack of a culture that promotes and upholds regulatory compliance by financial institutions. There are also deep-rooted weaknesses in the banking system in Russia, which reduces effectiveness of the measures taken to combat money laundering.

Politicians and other powerful individuals in Russia also use the anti-money laundering measures to advance their own personal agenda thus reducing the efficiency of the efforts to provide money laundering.

It can therefore be concluded that Russia is not badly off in the fight against money laundering but much needs to be done. It is also difficult to evaluate the efficacy of the Russian government in combating the crime due to lack of data and evidence concerning money laundering in the country.

This is because such data on cases of money laundering are treated with confidentiality in order to protect the reputation of the involved financial institutions and government agencies (Leach 183).

Works Cited

Demetis, Dionysios. Technology and Anti-Money Laundering: A Systems Theory and Risk-Based Approach. Massachusetts: Edward Elgar Publishing, 2010. Print

FATF XV Report. Report on Money Laundering and Terrorist Financing Typologies 2004-2005, FATF-XV (Financial Action Task Force on Money Laundering (FATF), 10 June 2005, May 30 2011. Web.

Hopton, Doug. Money Laundering: A Concise Guide for All Business. Burlington: Gower Publishing, Ltd., 2009. Print.

Lane, Stuart. Russian banking: evolution, problems and prospects. Massachusetts: Edward Elgar Publishing, 2002. Print

Leach, James. Russian Money Laundering: Congressional Hearing. Moscow: DIANE Publishing, 2001. Print

Minaeva, Tatiana and Marina, Aksenova. Anti-Money Laundering in Russia. Moscow: White & Case LLC, 2010. Print.

Schneider, Friedrich and Dominic, Enste. The shadow economy: An international Survey. Cambridge: Cambridge University Press, 2007. Print

Stessens, Guy. Money laundering: a new international law enforcement model. Cambridge studies in international and comparative law, Vol 15. Cambridge: Cambridge University Press, 2000

Truman, Edwin and Peter, Reuteer. Chasing dirty money: Progress on Anti-Money laundering- The fight against money laundering. New York: Institute for international Economics, 2006. Print.

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