Last week, Ukraine solemnly marked one year since Russia’s invasion. In a speech in Poland commemorating the anniversary of the conflict, President Biden lauded the Ukrainian people and international community for their defense of democracy, stating that “Autocrats only understand one word: No, no, no. No you will not take my freedom. You will not take my future.” There’s an additional area in which the U.S. must tell autocrats like President Putin “no”: No, you will not use our financial system to hide your dirty money.
While the United States has, in many ways, stepped up to the plate during this crisis – providing serious political support, security assistance, economic sanctions, and humanitarian aid – there is an additional move it must take to more fully defend Ukraine’s freedom and uphold global democracy. The Biden administration must enact measures at home to plug long-standing gaps in U.S. anti-money laundering measures that leave our financial system vulnerable to exploitation by corrupt regimes and that allow kleptocrats to hide their illicit funds in U.S. markets.
U.S. Anti-Money Laundering Loopholes Obstruct Our Economic Sanctions
Let’s be clear: the Treasury Department, Department of Justice, and other corners of the U.S. government have been dogged in their pursuit to put the financial squeeze on Putin’s inner circle – identifying, freezing, and seizing Russian assets at breakneck speeds, and working with the international REPO Task Force and a coalition of more than 50 nations to ensure that these oligarchs have few places globally to park their funds (or their yachts). Few historic moments have set the precedent for the same sustained, collective response that we are seeing today against Russia.
Yet every time a sanctioned Russian oligarch has new U.S. assets frozen, a more sinister truth reveals itself: the United States obstructs its own economic sanction regimes by failing to simultaneously tackle the same secrecy systems that draw and allow these oligarchs to invest in the rule-of-law jurisdictions like the U.S. in the first place.
Take the following examples:
- Suleiman Kerimov for years successfully held at least $1 billion dollars anonymously in a Delaware trust and in turn used those funds to invest in U.S. markets – even after he was sanctioned by the Treasury Department in 2018. Treasury has since blocked the funds. This is just one example of how Russian oligarchs abuse the secrecy of U.S. trusts. The 2021 Pandora Papers exposé, which pulled back the veil on the secretive U.S. trust industry, Russian individuals – including 46 Russian oligarchs – made up 14 percent of owners of the 27,000 anonymous entities examined in the leak.
- Through his company Rusal, Russian oligarch Oleg Deripaska invested $200 million in a commercial aluminum rolling mill in Kentucky. He also owned a $15 million home in the Washington, DC area, which he held anonymously through a Delaware LLC.
- More recently, sanctioned oligarch Victor Vekselberg went through a U.S. resident to pay $4 million to maintain U.S. properties through their lawyer’s IOLTA account – a financial account that lawyers usually retain to help cover their client’s legal needs, e.g. a court defense.
Already, the sum of illicit oligarch wealth found in these three examples alone equals approximately one third of the total humanitarian aid that the United States has given Ukraine to-date. How much more effective could the United States be in its Ukraine policy if it weren’t simultaneously harboring Russia’s dirty cash?
These cases are staggering but not surprising. It’s no secret that the U.S. has a dirty money problem. In 2021, Treasury Secretary Janet Yellen admitted that right now, “the best place to hide and launder ill-gotten gains is actually the United States.” Further, the U.S. was named the most secretive jurisdiction in the world by the 2022 Financial Secrecy Index. That’s why the Administration’s inaugural 2021 Strategy on Countering Corruption – announced during the first Summit for Democracy – came at such a critical time as the U.S. reckons with its role as a global enabler of corrupt and criminal funds.
What the U.S. Can Do to Shut Out Klepto-Cash
As the United States marks one year of Ukraine’s war and looks ahead to the second Summit for Democracy this month, the Biden Administration must center domestic anti-money laundering reforms as a means to contribute to the defense of democracy worldwide.
Faithfully Implement the Corporate Transparency Act
Core to this objective is the faithful implementation of the bipartisan 2020 Corporate Transparency Act, which requires certain entities formed or registered in the U.S. to name their true, beneficial owner to a secure directory housed at the Financial Crimes Enforcement Network (FinCEN). While FinCEN has moved forward with a rulemaking process that has largely remained true to the statute, two recent proposals threaten to greatly undermine the usefulness of the directory for national security officials, law enforcement, and financial institutions charged with the protection of the American people and the U.S. financial system.
FinCEN must make significant changes to a recent proposed rule – defining how authorized users gain access to information stored in the database – to remove hurdles not contemplated by the statute to law enforcement and financial institution access. Access to the database should be complete, timely, and uncomplicated for groups allowed by the law to use the database.
An even more dangerous threat to the anti-money laundering value of the statute comes from a seemingly innocuous place – the form that FinCEN has proposed to collect information from reporting entities. Within the 14 fields that reporting entities must report – for instance, their street address, or the name and license number of their true owner – they may mark in 11 of those that they are “unable to get the information.” The draft form effectively renders the entire reporting regime under Corporate Transparency Act optional. If the Corporate Transparency Act is to be a meaningful anti-money laundering measure, FinCEN must rescind this form or otherwise remove the “option” to report an entity’s true, beneficial owner.
Improve AML Safeguards in the U.S. Real Estate Sector
When it comes to dirty money in the U.S. real estate market, Oleg Deripaska’s Washington estate and commercial property in Kentucky are but drops in the bucket. This January, FinCEN issued an alert recognizing the vulnerabilities of the U.S. commercial real estate sector as a playground for Russian oligarch funds. But this is part of a broader problem. As exemplified in a 2021 report, “Acres of Money Laundering,” the $50 trillion U.S. real estate sector is a magnet for illicit funds from around the globe – whether from corrupt state officials, drug trafficking organizations, or even rogue states. Yet the real estate sector has enjoyed more than a 20-year exemption from fulfilling anti-money laundering obligations.
The Administration has initiated a rulemaking to finally bring AML coverage to the real estate market, and is expected to release a proposed rule this April. This rule plays the biggest role in preventing, detecting, and flagging crimes in instances in which entities, rather than individuals, are the primary actors in a real estate transaction – e.g. when an otherwise opaque foreign corporation conducts an all-cash purchase of a U.S. real property. This rulemaking is long overdue and should, once proposed, be comprehensive: by including both residential and commercial real estate; by including all real estate sales or transfers regardless of cash value; and by ensuring that a real estate professional is always “on the hook” for conducting AML checks, regardless of how a deal is structured.
To send a clear signal that Russian oligarch funds aren’t welcome in U.S. markets, the U.S. should release a proposed rule to tackle real estate money laundering on the eve of the next Summit for Democracy, set to be held March 29-30.
Assign Customer Due Diligence Responsibilities for the Private Investment Sector
Treasury’s freeze of Suleiman Kerimov’s $1 billion nestegg made waves last summer, but few asked the question of how he was able to invest all this money in U.S. markets in the first place. As demonstrated in a joint report from FACT, Transparency International-US, and Global Financial Integrity, “Private Investments, Public Harm,” there are Mack-truck sized gaps in U.S. AML rules when it comes to the $11 trillion private investment sector. Whereas broad swaths of professionals operating in the U.S. investment market – broker-dealers, mutual funds, futures commission merchants, and others – have obligations to “know their customer” and conduct due diligence, those in the private investment sector have no such obligation.
While the Strategy on Countering Corruption tasked FinCEN with reviving a 2015 rule to cover private investment advisers, no such rule has been initiated under this Administration. If it wants to demonstrate its seriousness, the Administration should initiate a rulemaking by December, on the second anniversary of the Strategy’s introduction.
Tackle the Opacity of U.S. Enablers
Congress has an important role to play in holding Putin’s facilitators to account. As the allegations against Vekselberg show, U.S. professionals are often the first port of call for global kleptocrats and criminals to move their wealth into the United States. Vekselberg reportedly used a lawyer as a means to pay for, control, and profit from properties held within U.S. borders. But corrupt officials rely on professionals to form entities and trusts, manage money and assets, process payments, and serve as trustees.
Congress came close last year to passing the bipartisan ENABLERS Act – legislation that would authorize the Treasury to bring these various professionals under the U.S. anti-money laundering framework. Legislators must work to effectuate the reforms of the Act during the 118th Congress.
Ukrainian civilians shouldn’t pay the price while U.S. “enablers” reap the profit. In his speech in Poland, President Biden affirmed that U.S. support for Ukraine “will never tire.” There’s no better way to show our support than by doing the hard, long-term work here at home to make sure the strength of the U.S. economy doesn’t benefit Putin’s cronies or war crimes abroad.