When looking at the current, unprecedented, and coordinated round of western sanctions on Russia, their effectiveness can immediately be questioned by the lack of transparency around ownership of financial and physical assets. In a recent article titled “Russian bankers shuffled personal wealth offshore long before latest sanctions, Pandora Papers show” written by Scilla Alecci for the International Consortium of Investigative Journalists (ICIJ), Alecci wrote that “before the invasion of Ukraine, Russia’s ambassador to Sweden, Viktor Tatarintsev, told the Swedish newspaper Aftonbladet that the economic penalties threatened by the U.S. and other powers were ‘nothing positive but not as bad as the West makes it sound. Excuse my language,’ Tatarintsev said, ‘but we don’t give a (blank) about their sanctions.’”
What this says in polite language is that tracking the flow of Russian funds and the movement of physical assets has long been, and continues to be, immensely hindered by a lack of transparency around beneficial ownership. This lack of transparency has a direct impact on the efficacy of financial sanctions, export controls, and asset seizures.
To raise awareness of this issue, organizations and regulatory authorities have released a flurry of advisory statements. For example, on March 4, 2022, the FAFT “adopted amendments to Recommendation 24 and its Interpretive Note which require countries to prevent the misuse of legal persons for money laundering or terrorist financing and to ensure there is adequate, accurate, and up-to-date information on the beneficial ownership and control of legal persons.” On March 7, 2022, FinCEN issued an alert, FIN-2022-Alert001, FinCEN Advises Increased Vigilance for Potential Russian Sanctions Evasion Attempts, and again on April 14, 2022, issued an Advisory on Kleptocracy and Foreign Public Corruption. On March 11, 2022, the UK financial regulators issued a joint statement on Russian sanctions, evasion, and crypto assets. The EU also issued a set of FAQs on March 16, 2022, noting that companies must exercise due diligence when exporting goods that may have Russia as the final destination.
The common theme through all these advisories is identification of beneficial owners. As AML and sanctions practitioners, identifying ultimate beneficial owners (UBO) is critical and has been a part of customer due diligence processes for some time. However, the complexity of the legal structures established to hide Russian wealth and, in some if not many cases, illicit gains creates significant challenges. For many, overcoming these challenges involves understanding not only who your customer may be, but also understanding all there is to know about their complex legal structure, including organizational hierarchy and ownership. One must include as part of their customer due diligence process the “offshore operatives”, a term used in the ICIJ article referring to the proxies being used by the wealthy. These proxies, as well as the flow of funds through the various entities and jurisdictions, should be considered to properly and completely assess the risks associated with a customer.
Now is the time to re-examine your exposure. That means not only monitoring that which you know, but really identifying your exposure brought about by potentially weak due diligence efforts.