19.12.23 Review

Sanctions Laundromat: Experts warn that the infrastructure created for money laundering is also being used to evade sanctions

Analysis of Russian court data conducted by the Russian branch of Transparency International shows that about 10% of cases related to illegal capital outflow from Russia are linked to the United Kingdom, accounting for approximately 10% of the total volume of funds withdrawn. Over the past 10 years, at least 20 billion rubles have been funnelled through such transactions, but this represents only the tip of the iceberg — the funds that have been the subject of proceedings by Russian law enforcement agencies. Most often, the money is withdrawn either through fake transactions for the purchase of goods, or through real transactions in which the value of the goods is significantly inflated. According to the authors of the report, the sanctions against Russia will lead to a redirection of money laundering flows to Asia, but also to an increase in their scale, as Russian authorities have relaxed financial control over foreign trade transactions to make it easier for Russian companies to circumvent sanctions. The authors warn that the structures and schemes used to evade sanctions are almost the same as those used for illegal capital outflow — shell companies in offshore jurisdictions and intermediary Western firms, including those in the UK, the report warns.

Experts from Transparency International — Russia in Exile have analysed cases of illegal capital outflow from Russia through the UK, which is a primary destination for Russian financial flows to the West. To do this, they examined Russian court decisions over the past 10 years related to violations under Articles 193 and 193.1 of the Russian Criminal Code concerning illegal currency transactions, including cases involving fake documents. During the period from 2013 to 2022, more than three hundred such decisions were identified. 30 of these, i.e. approximately 10%, include information on companies registered in the UK. The experts estimate that over the past 10 years, at least 20 billion roubles have been illegally funnelled out of Russia using such companies. This accounts for approximately 10% of the total amount of funds illegally withdrawn from Russia through trade.

The year 2013 was chosen as a starting point because it was the year in which Federal Law No. 134-FZ was adopted, clarifying and expanding the use of Article 193 of the Criminal Code of the Russian Federation ('Evasion of obligations to repatriate funds in foreign currency or the currency of the Russian Federation') and adding Article 193.1 to the Criminal Code ('Committing currency transactions involving the transfer of funds in foreign currency or the currency of the Russian Federation to accounts of non-residents using false documents'). According to the data from Russian courts, since the adoption of this law, an average of approximately 30 billion roubles have been illegally withdrawn from Russia annually. Moreover, 70% of cases of illegal capital outflow are related to the export of timber, mostly to Finland and China. However, as the Transparency experts note, this is likely only a small part of the total volume of illegal withdrawal of funds from Russia, because only those cases that have been detected by the authorities, investigated and brought to court have come to their attention. In addition, court judgements are usually handed down about five years after the offence has been committed, so a significant number of cases from this period are still under consideration.

The most common type of money laundering among the verdicts examined is trade-based money laundering (TBML). One method of this type of money laundering involves providing banks and customs authorities with documents for fictitious foreign trade deals. Another method entails the actual shipment of goods but with a significant overvaluation of their cost. Such transactions often include rounded values for the price and cargo weight and involve goods that have no counterparts on the Russian market, which allows the company to avoid duties and VAT. Typically, these include building materials, high-tech equipment, electronics, cars and car parts, boats, yachts, chemical products and consumer goods. This list is largely the same as the list of goods and economic sectors that the international Financial Action Task Force (FATF) has identified as vulnerable to money laundering.

However, the authors of the report note that due to the growing share of services in the global economy, service-based money laundering (SBML) is also becoming more prominent. According to Transparency, in 2022, TBML accounted for 17 billion rubles worth of Russian transactions and SBML for an additional 4 billion rubles, often with fictitious documents for the purchase of services accompanying fictitious documents for the purchase of goods. Such cases are more difficult to identify and the fact that the service was not provided is harder to prove, which is largely why this method of illegally withdrawing money is still poorly understood. FATF indicates that vulnerable areas for money laundering through services include gambling, especially online casinos, software supply, financial and consulting services, as well as trademarks and similar intangible assets, such as intellectual property rights.

Recently, there has been discussion in Russia about repealing Articles 193 and 193.1 and transferring the corresponding offences to Articles 174 and 174.1 of the Criminal Code of the Russian Federation, which define liability for money laundering. In 2019, then-Prime Minister Dmitry Medvedev and the Ministry of Finance advocated for this, and in 2023, the need for this repeal was supported by the Russian Union of Industrialists and Entrepreneurs. The initiative stems from the fact that, in some cases, Articles 193 and 193.1 are used to prosecute legitimate foreign trade activities and hinder importers, especially when they are forced to postpone deliveries and payments under contracts.

However, according to Transparency, the Central Bank and security authorities are opposed to repealing these articles because they believe they help to combat violations of currency legislation related to money laundering, financing of terrorism and fraud. Therefore, even despite the relaxation of control over international transactions due to the need to bypass sanctions, there is currently no indication that these articles of the Criminal Code will be repealed.

According to the authors of the report, as trade between Russia and the UK has decreased by 85% as a result of the war, illegal economic activity will be diverted to Asia, the CIS and countries that have not joined Western sanctions. Moreover, sanctions are likely to complicate international financial chains, which will make it difficult to monitor the legality of transactions. Within this context, the Transparency experts note that we should expect an increase in the number of illegal trade operations, including those conducted for money laundering.

However, there is another dimension to this problem. Transactions are usually conducted through firms registered under English common law, such as Scottish Limited Partnerships (SLPs). SLPs appear as intermediaries in a large number of international 'laundromat' chains, the report highlights. The founders of these firms are shell companies registered in the Seychelles, Marshall Islands, British Virgin Islands or Belize, where their legal framework allows them to successfully conceal information about their ultimate beneficiaries. Although Transparency's research describes cases of illicit Russian trade operations up to 2022, there are indications that, following Russia's full-scale invasion of Ukraine, similar British intermediary firms and shell companies are being used for the delivery of dual-use goods to Russia.