Countries/Jurisdictions of Primary Concern - Russia

Bureau of International Narcotics and Law Enforcement Affairs
Report

While Russia continues to make significant progress in improving its AML/CFT legal and enforcement framework, the prevalence of money laundering in Russia remains a major obstacle to financial sector development. Money laundering continues to cost the Russian economy billions of dollars every year. The Central Bank of Russia (CBR) estimates that $8.6 billion in 2014, and $936 million in the first half of 2015 left Russia through what the CBR terms “fictitious transactions.” This definition, according to the CBR, includes payment for narcotics, bribes to government officials, and tax evasion. Domestic sources of laundered funds include organized crime, evasion of tax and customs duties, fraud, smuggling operations, and corruption. In particular, official corruption remains a significant problem at all levels of government, and is a major source of laundered funds, with proceeds frequently moved offshore. Cybercrime remains a significant problem. Russia’s highly skilled hackers and traditional organized crime structures have followed the global trend of increasingly combining forces, resulting in an increased threat to the financial sector.

Russia is considered a significant transit and destination country for international narcotics traffickers. Criminal elements from Russia and neighboring countries continue to use Russia’s financial system and foreign legal entities to launder money. Criminals invest and launder their proceeds in securities instruments, domestic and foreign real estate, and luxury consumer goods.

Gaming is only allowed in specified regions, with regulatory authority shared across multiple agencies, including the Ministries of Finance and Internal Affairs. The Federal Financial Monitoring Service (Rosfinmonitoring), Russia’s financial intelligence unit, has been designated as the competent AML/CFT authority for casinos. Only licensed casinos in special gambling zones can register with Rosfinmonitoring, which has inspected the two registered casinos. Online gaming is prohibited.

There is a large migrant worker population in Russia. While the majority of workers likely use formal banking mechanisms, a considerable amount of transfers are believed to occur through informal value transfer systems that may pose a vulnerability for money laundering.

Executive Order (E.O.) 13660, dated March 6, 2014, imposes a travel ban and freezes any assets held in the United States of persons or entities who acted to undermine the democratic processes and institutions in Ukraine and contributed to the misappropriation of its assets. E.O. 13661, dated March 16, 2014, expands the scope of E.O. 13660 to cover the Government of the Russian Federation and its officials, the Central Bank, any state-controlled entities, those who operate in the arms sector in Russia, and seven specified individuals who are senior Russian government officials. The EU took parallel action and imposed similar sanctions in March 17, 2014, followed by Council Regulation (EU) No 692/2014 of June 23, 2014, imposing restrictions on import/export activity and financial transactions.

For additional information focusing on terrorist financing, please refer to the Department of State’s Country Reports on Terrorism, which can be found at: http://www.state.gov/j/ct/rls/crt/

DO FINANCIAL INSTITUTIONS ENGAGE IN CURRENCY TRANSACTIONS RELATED

TO INTERNATIONAL NARCOTICS TRAFFICKING THAT INCLUDE SIGNIFICANT

AMOUNTS OF US CURRENCY; CURRENCY DERIVED FROM ILLEGAL SALES IN THE U.S.; OR ILLEGAL DRUG SALES THAT OTHERWISE SIGNIFICANTLY AFFECT THE U.S.: YES

CRIMINALIZATION OF MONEY LAUNDERING:

“All serious crimes” approach or “list” approach to predicate crimes: All crimes approach

Are legal persons covered: criminally: NO civilly: YES

KNOW-YOUR-CUSTOMER (KYC) RULES:

Enhanced due diligence procedures for PEPs: Foreign: YES Domestic: YES

KYC covered entities: Banks and credit institutions; Russian Post; payment acceptance and money transfer services; securities, insurance, and leasing companies; investment and non-state pension funds; casinos and gaming outlets; dealers in precious metals and stones; real estate agents; pawnshops, microfinance organizations, and consumer credit cooperatives; and legal or accounting service providers

REPORTING REQUIREMENTS:

Number of STRs received and time frame: Not available

Number of CTRs received and time frame: Not available

STR covered entities: Banks and credit institutions; securities markets, investment and pension funds; Russian Post; insurance sector; leasing companies; pawnshops and dealers in precious metals and stones; casinos; real estate agents; lawyers, notaries, and legal or accounting service providers; microfinance organizations; consumer credit cooperatives; and non-commercial organizations receiving funds from certain foreign entities

MONEY LAUNDERING CRIMINAL PROSECUTIONS/CONVICTIONS:

Prosecutions: Not available

Convictions: 164 in 2014

RECORDS EXCHANGE MECHANISM:

With U.S.: MLAT: YES Other mechanism: YES

With other governments/jurisdictions: YES

Russia is a member of the FATF and two FATF-style regional bodies: the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL); and the Eurasian Group on Combating Money Laundering and the Financing of Terrorism (EAG). Its most recent mutual evaluation can be found at: http://www.fatf-gafi.org/countries/n-r/russianfederation/

ENFORCEMENT AND IMPLEMENTATION ISSUES AND COMMENTS:

Russia continues to strengthen a number of regulatory and legal measures to combat financial crime and money laundering. During this period of economic difficulty, Russia has continued to make progress in reducing money laundering, partly as a way to lessen the amount of money that is being illegally siphoned out of the local economy. The improvement in financial legislation, while a major step forward for Russia, requires full and unbiased implementation to address Russia’s reputation as a center for money laundering.

Several pieces of legislation tighten controls on the financial sector. Federal Law 110-FZ, enacted in May 2014, lowers the threshold of foreign currency transactions conducted by non-profit organizations, foreign states, and international and foreign organizations subject to mandatory controls to 100,000 rubles (approximately $1,400). Federal Law 213-FZ, passed in July 2014, regulates the opening of banking accounts and letters of credit for defense and strategic industries. In December 2014, several additional laws were passed. Federal Law 461-FZ was amended to expand the list of entities covered under the AML/CFT law to include communications providers. Federal Law 484-FZ requires individuals trading in commodity or financial markets to provide information, upon request, to Rosfinmonitoring. Federal Law 484-FZ mandates the notification to Rosfinmonitoring of the opening, closing, or changing of details of any accounts or letters of credit by companies of strategic importance to the Russian Federation.

The CBR again stepped up enforcement within the banking sector, revoking 92 banking licenses in 2014 and 93 by November of 2015. The CBR claims dubious transactions were one of the main reasons behind the revocation of licenses. The CBR tightened the criteria for suspicious transactions by reducing the quarterly transaction volume threshold from RUB 5 billion (approximately $68.3 million) to RUB 3 billion (approximately $41 million) and the proportion of suspicious cash transactions from 5 percent to 4 percent of the debit turnover on customer accounts. The CBR also has tightened restrictions on cash payment terminals by forcing 95 percent of cash transactions to go directly to special accounts. The CBR Department of Financial Monitoring and Currency Control had estimated the aggregate value of illicit cash payments through terminals in 2015 was RUB 390 billion (approximately $5.3 billion). Over 11 million suspicious transaction reports (STRs) were filed in 2014.

In November 2015, the President signed an executive order to establish an interagency commission on preventing the financing of terrorism. The Kremlin stated that this order will be used to block money and assets belonging to organizations or individuals believed to be involved in terrorist activity. The interagency commission will process requests received by Rosfinmonitoring from other countries’ relevant agencies on organizations’ or individuals’ possible involvement in terrorist activity (including financing terrorism). The Prosecutor’s Office, Central Bank, regional and local authorities, and other state agencies and organizations have been instructed to send materials in their possession on possible involvement in terrorist activity (including financing terrorism) of organizations and individuals to the Inter-Agency Commission for Preventing the Financing of Terrorism.

Rosfinmonitoring published a draft bill in October 2015 that would require administrative liability for laundering criminal proceeds for legal persons (e.g., companies). Current Russian legislation provides for criminal liability for laundering by natural persons and penalties of up to RUB 60 million (approximately $819,500) for legal persons but only in cases of financing terrorist attacks and similar crimes, not for ordinary criminal operations.

In March 2015, Federal Law 140-FZ, also called the Capital Amnesty Law, was passed. It allows Russian citizens and legal entities to declare their offshore assets without fear of being held accountable for criminal, administrative, or tax indiscretions that may have occurred in connection with their assets prior to January 1, 2015. The amnesty was scheduled to end on December 31, 2015, but was extended until June 2016 by Presidential decree on December 29, 2015. The Capital Amnesty Law is intended to be an incentive to return capital to Russia in conjunction with the de-offshorization law, which entered into effect, after a delay, in June 2015. This legislation requires offshore entities that are at least 50 percent Russian-owned to pay tax on unallocated profits; the ownership threshold will fall to 25 percent in 2017. Russian ownership in a controlled foreign company of more than 10 percent must be reported to the Russian authorities before April 1, 2015.

In 2014, the Russian Federation undertook additional measures centered on its tax system. The plan develops a number of items of important AML legislation. Most of these steps were completed in 2014. In 2015, there was a steady improvement in efforts to reduce illicit transactions. The Federal Tax Service and Rosfinmonitoring created new interagency working groups and exchanged information databases to increase cooperation in the prevention, detection, and suppression of illegal financial transactions. Russian authorities are also using computer models to analyze trade and financial flows, as well as to model taxpayer behavior in the home appliance/electronics and precious metal markets.

In June 2014, Federal Law 173-FZ was passed to allow Russian financial institutions to improve information exchange with foreign tax authorities generally. According to this law, Russian financial institutions may transfer information to a foreign tax authority only with the consent of the non-resident customer. If no consent is provided, the financial institution may unilaterally terminate the contract with the client. In addition, on Dec. 12, 2015, the Russian government established Decree No. 1365 requiring Russian individuals to report annually to the government on transactions on their foreign bank accounts. Russia is unable to effectively enforce foreign forfeiture orders.

There were a number of criminal prosecutions for money laundering in 2014. The most prominent was the arrest of Sergei Magin for the creation of a criminal association. The charges claimed Magin established 14 shell companies that specialized in illegal encashment transactions. It was estimated this group illegally transferred RUB 200 billion (approximately $2.7 billion) abroad. Other cases involved the misuse of state funds awarded under government contract in the amounts of RUB 5 billion (approximately $68.3 million) and RUB 9 billion (approximately $122.9 million). In 2014, there were over 1,200 criminal charges filed using Rosfinmonitoring materials, and 164 convictions on charges related to money laundering.

Qiwi, a large Russian digital payment system, has announced plans to issue a Russian crypto-currency, called the BitRuble in 2016. Qiwi is currently testing and finalizing the various platforms to ensure they comply with Russian law. While bitcoin is currently illegal in Russia, if BitRuble is able to launch, it would present challenges to law enforcement to prevent money laundering in Russia.

Although the U.S. and Russia are parties to a bilateral Mutual Legal Assistance Treaty (MLAT), cooperation under the MLAT is often not effective. Additionally, U.S. authorities have been unable to work with Russian counterparts to pursue criminal forfeiture under Russian law of millions of dollars in drug-trafficking proceeds that an international drug dealer, convicted in the U.S., admits went to purchase warehouses for the storage of drugs.