The U.S. government has significantly stepped up its efforts to locate and seize the assets of Russian oligarchs. Although the Russian oligarchs are plainly the targets of this initiative, the U.S. government has gone out of its way to identify "red flags" that could signal illegal transactions. Compliance is expected. Businesses ignore these red flags at their peril.
This Client Alert explains these recent efforts and provides guidance to businesses on how to meet the government's expectations and protect themselves in this new enforcement environment.
New USG Initiatives
TaskForce KleptoCapture
On March 2, Attorney General Garland announced the launch of TaskForce KleptoCapture, an interagency law enforcement task force dedicated to enforcing the sanctions, export restrictions and economic countermeasures that the United States has imposed on Russia since the invasion of Ukraine.1 According to DOJ, the mission of KleptoCapture will include:
- Combating unlawful efforts to undermine restrictions taken against Russian financial institutions, including the prosecution of those who try to evade know-your-customer and anti-money laundering measures;
- Targeting efforts to use cryptocurrency to evade U.S. sanctions, launder proceeds of foreign corruption, or evade U.S. responses to Russian military aggression; and
- Using civil and criminal asset forfeiture authorities to seize assets belonging to sanctioned individuals or assets identified as the proceeds of unlawful conduct.2
The task force will be supervised by the Deputy Attorney General, but will be led on a day to day basis by an experienced prosecutor from the Southern District of New York who will work with agents from various law enforcement agencies including the FBI, DHS and IRS.3
Russian Elites, Proxies and Oligarchs (REPO) Task Force
On March 16, 2022, DOJ and the Treasury Department, with counterparts from Australia, Canada, the European Commission, France, Germany, Italy, Japan, and the United Kingdom announced the creation of the multinational Russian Elites, Proxies, and Oligarchs (REPO) Task Force, which is designed to facilitate information sharing among law enforcement agencies from member states in order to ensure criminal prosecution, sanctions enforcement and asset forfeiture.4
Kleptocracy Asset Recovery Rewards Program
On March 16, the Treasury Department also announced the launch of the Kleptocracy Asset Recovery Rewards Program, which authorizes it to provide rewards of up to $5,000,000 for information leading to the (1) restraint or seizure, (2) forfeiture or (3) repatriation of stolen assets in an account at a U.S. financial institution (including a U.S. branch of a foreign financial institution), that come within the United States, or that come within the possession or control of any U.S. person.5 In announcing the program, the Treasury Department explained that initial rewards would target the recovery of assets stolen by Russian elites and their associates linked to the Russian Government.6
FINCEN Guidance/Red Flags
Simultaneously with the launch of the REPO Task Force and the Kleptocracy Asset Recovery Rewards Program, the Financial Crimes Enforcement Network (FinCEN) issued an "Alert on Real Estate, Luxury Goods, and other High Value Assets Involving Russian Elites, Oligarchs, and their Family Members."7
The alert explained that certain industries are at high risk of exploitation by sanctioned Russian elites and their proxies to evade sanctions and launder money. These industries include:
- real estate (because of its high value, potential for appreciation, and the potential use of layered opaque transactions to hide ultimate beneficial ownership);
- art (because of the frequent use of intermediaries by anonymous buyers and sellers);
- precious metals, stones and jewelry (PMSJs) (because they are portable, highly valuable, and can serve as practical replacements for currency); and
- luxury goods (such as yachts and high-end cars known to be favored by Russian elites).
To help businesses avoid being used for criminal ends, the alert identified the following key red flags of potential money laundering/sanctions evasion in each of these industries:
Real Estate – The Government Advises Businesses to Look for these Red Flags
- The purchase, sale, donation, or legal ownership transfer of high-value real estate in the name of a foreign legal entity, shell company, or trust, especially if the transaction: (i) is far above or below fair market value, (ii) involves all-cash transfers, or (iii) is funded by a third party with a known nexus to sanctioned Russian elites and their proxies.
- The use of legal entities or arrangements that may have a nexus to sanctioned Russian elites and their proxies to hide the ultimate beneficiary or the origins or source of the funds.
- Changes, without an apparent business reason, to the transaction patterns of a firm located in a country other than the United States, Russia, Belarus, and Ukraine, where the new transactions involve convertible virtual currency and Russian-related investments or firms.
- A Russian individual or entity requests a wire transfer from a non-U.S. (particularly non-Russian) bank to pay for an all-cash purchase, especially if the wired funds come from an account held by an individual or entity other than the original requestor.
- The dilution of equitable interest held in real property by sanctioned Russian elites and their proxies, by the addition of, or the transfer of, real estate to an individual not affiliated with the buyer or seller.
- The maintenance, purchase, or termination of real estate insurance by persons with a known nexus to sanctioned Russian elites and their proxies.
Art – The Government Advises Businesses to Look for these Red Flags
- The use of shell companies and trusts, and/or third-party intermediaries, including art dealers, brokers, advisers, or interior designers, with a nexus to sanctioned Russian elites and their proxies, to purchase, hold, or sell art on a client's behalf.
- Transactions involving sanctioned Russian elites and their proxies, and large amounts of cash, especially in currencies not typically used in the art market.
- Artwork-related transactions involving persons with suspected ties to sanctioned Russian elites and their proxies who (i) are not concerned with recouping their initial investment or paying a substantially higher price than the notational value of the work, and/or (ii) conduct transactions that exceed the expected sales value of the work.
- The purchase, maintenance, or termination of insurance policies to protect the market value or provide cash payments for the loss, theft, or destruction of privately held or donated high-value artwork linked to sanctioned Russian elites and their proxies.
PMSJs – The Government Advises Businesses to Look for these Red Flags
- Transactions involving PMSJ trading companies, particularly in Asia, and firms with a nexus to sanctioned Russian elites and their proxies.
- High-value or frequent transactions involving mining operations with opaque and complex corporate structures, that are or have been owned or controlled by sanctioned Russian elites or their proxies.
Other High-Value Assets (i.e., Yachts and Vehicles) – The Government Advises Businesses to Look for these Red Flags
- The sudden transfer, including through sales, by sanctioned Russian elites and their proxies of ownership in high-value assets and goods.
- The involvement of legal entities, such as shell companies, with a nexus to sanctioned Russian elites and their proxies, that are falsely posing as well-known entities and operating in jurisdictions other than the well-known entity's jurisdiction and geographic sphere of business.
- The involvement of a common set of (i) financial institutions, (ii) individuals or (iii) addresses to facilitate luxury goods-related transactions, that may have a nexus to sanctioned Russian elites and their proxies.
- The involvement of law firms based in global and offshore financial centers that have historically specialized in Russian clientele or in transactions associated with sanctioned Russian elites and their proxies.
- The involvement of transportation service companies that have been owned by, or have a nexus to, sanctioned Russian elites and their proxies, and that may be used to transport luxury goods and obfuscate their movement.8
What Does This All Mean?
U.S. law enforcement has always investigated and, where appropriate, prosecuted money laundering and sanctions violations. But the newly announced (i) domestic and international cross-agency coordination, (ii) specific focus on Russian elites and (iii) financial incentives to induce cooperation are novel and important.
The concealment of beneficial ownership behind layers of offshore shell companies and the difficulty of obtaining evidence from multiple law enforcement agencies, both domestic and foreign, has long hampered efforts to prosecute Russian money laundering. Improved information sharing and financial rewards should make it easier to get at beneficial ownership and tie oligarchs' assets to crimes. Perhaps most importantly, the creation of a dedicated task force means that prosecutors and agents will have the time and resources that these complicated cases require.
One indication of the significance of these developments is the fact that the Russian government has already noticed them.9 In an official statement on March 19, Russian Ministry of Foreign Affairs spokesperson Maria Zakharova criticized what she called the U.S.'s "snitching" program and said that rather than trying to find Russian assets, the U.S. should try to determine what happened to the billions it spent on Afghan reconstruction and the millions it has spent on USAID.10 She also implied that she had information about money stolen by Russia's former Foreign Minister Andrei Kozyrev (now living in the U.S.) and said that she might apply for a "reward" for this information on the condition that the reward money be sent to the Clinton Foundation.11
In short, due diligence is key, and "know your customer" protocols have never been more important. Effective compliance programs are essential.
Trade sanctions are political sanctions. Willful violations can carry substantial penalties, including criminal sanctions. But because the sanctions require full compliance to be effective, negligent violations also carry significant risk. Rigorous compliance programs can block problem transactions. They are also a valuable defense when transactions prove to be tainted.
The fact that the U.S. Government has identified red flags is plainly helpful – but it also serves notice that businesses (including not-for-profit organizations) ignore red flags at great risk. Indeed, the government can and does cite the failure to recognize and act on "red flags" as "reckless behavior." The bigger and more sophisticated a company is, the higher the expectations of compliance.
As a consequence, even companies that stumble into illegal transactions can find themselves faced with substantial civil penalties, the risk of ancillary penalties (such as debarment from government contracts), negative publicity, asset seizures, and the costs and reputational damage of unwinding deals.
Given the government's new focus on using all available means to locate and seize oligarch assets, businesses (especially those in the high-risk sectors identified in the FinCEN alert) should work with qualified counsel to make sure that they have robust compliance programs adequate to detect potential sanctions evasion and money laundering. They should also be prepared to investigate potential violations, remediate them and, in appropriate circumstances, report them to OFAC and DOJ.
Footnotes
4. https://home.treasury.gov/news/press-releases/jy0659
9. https://www.gazeta.ru/politics/news/2022/03/19/17449123.shtml
10. https://www.gazeta.ru/politics/news/2022/03/19/17449123.shtml
11. https://www.gazeta.ru/politics/news/2022/03/19/17449123.shtml
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
