Targeted Sanctions toward Russian Oligarchs Underscore Urgency of U.S. Anti-Money Laundering Reforms

In a rare act of near-unanimity, countries around the world have resoundingly condemned Russia’s illegal invasion of Ukraine–a nation of free peoples and a democratically elected government. Yet tragically, many of the same governments that have condemned Russia – including the U.S. – have, for years, enriched and empowered that regime by failing to close financial secrecy loopholes at home, handing Vladimir Putin and his cronies a backdoor to evade the bite of earlier sanctions and to continue their corrupt and criminal behavior. To defend democracy in Ukraine (and elsewhere) and to bring the economic weight of new sanctions to bear, the U.S. must work expediently with its allies to permanently close financial gateways for Russia’s political elite to hide and grow their illicit wealth. 

Under Vladimir Putin’s authoritarian rule, Russia functions as a true kleptocracy. Oligarchs in Putin’s inner circle amass wealth from Russia’s captive economy–which is smaller than that of the state of Texas–and then siphon this wealth away to hide and grow it offshore. With near complete anonymity afforded by the U.S. legal and financial systems, the United States has become a premier destination for corrupt and criminal actors worldwide to hide ill-gotten gains from any public accountability. This includes Putin and Russia’s oligarchs. 

Already, financial sanctions announced over the weekend and being imposed this morning are, in fact, taking a devastating toll on the Russian economy and the Russian Ruble. Prohibiting U.S. dollar transactions with the Russian Central Bank and other sanctions have caused the Ruble to drop below a U.S. penny. Secrecy afforded under U.S. law might undermine effective implementation of key U.S. sanctions targeting Putin and his inner circle, though, including those being advanced by the White House and a “transatlantic task force”. 

While the White House considers and implements immediate actions to aid Ukraine, it must also pursue structural U.S. anti-money laundering reforms to increase the effectiveness of targeted U.S. sanctions and to end the weaponization of U.S. legal and financial systems against democratic and open societies.

End the Use of Anonymous Shell Entities in the U.S. and Fund FinCEN

Treasury’s Financial Crimes Enforcement Network (FinCEN) should move forward expeditiously with implementing the Corporate Transparency Act (CTA), the landmark 2021 law meant to identify the true beneficial owners of legal entities formed or operating in the U.S. There is ample evidence of how Russian oligarchs have exploited U.S. entities to advance their own economic and political ends. For instance, in 2016, Russian billionaire Igor Makarov created an anonymous, unregulated private trust company and trust in the state of Wyoming to park, control and grow his fortune–via a so-called “Cowboy Cocktail.” No U.S. law required the identification of Makarov in connection with his forming these entities. His assets and identity were thus protected and kept secret by the U.S. legal system. The U.S. financial system became his piggy bank. With robust implementation of the CTA, Makarov would be identified to FinCEN, for the first time, as the individual controlling the private trust company.

FinCEN has been working diligently to implement this law, and its initial set of proposed regulations to do so, augmented by FACT’s recommendations, are a strong start toward finally ending anonymous shell companies in the U.S. Nonetheless, every day that the law is not implemented to its fullest extent is another day that law enforcement and national security officials lack critical tools necessary to best enforce economic sanctions against Russian oligarchs.

It is also more important than ever that Congress adequately fund FinCEN so that it can effectively implement this rule, as well as the measures discussed below. Current levels of FinCEN funding are simply not adequate to deliver the technological and staffing capabilities necessary to best implement these policies.

Further, loopholes in the CTA must be closed immediately. While Makarov might be required to disclose his identity under the CTA based on his current use of a private LLC or corporate trust company, secretive trust vehicles in Wyoming and other U.S. states like South Dakota might not be covered by the CTA. Congress can act to close this loophole and certain other unmerited exemptions under the CTA that protect kleptocrats as they launder and grow their ill-gotten gains in the U.S. 

Improve U.S. Real Estate Transparency

As FACT Coalition member Global Financial Integrity recently reported, the opaque U.S. real estate market is an attractive destination to park wealth gained from illicitly advancing Putin’s agenda. For example, Paul Manafort laundered money that he made while advising a pro-Russian regime in Ukraine by buying and renovating properties in the U.S through shell entities. 

While the CTA is capable of identifying beneficial owners of foreign shell companies that are registered to do business in the United States, many states–like Texas–do not require foreign shell companies to register to do business in connection with owning real estate. Other exemptions under the CTA and money laundering typologies through real estate will continue to allow Putin’s thugs to invest directly or indirectly in U.S. residential and commercial real estate anonymously without further action. 

FinCEN is actively pursuing broader anti-money laundering reforms to the U.S. real estate market, addressing  inherent limitations under current geographic targeting orders that have been in place since 2016. Such measures would bring transparency to the $50 trillion U.S. real estate market–a market that should have been subject to full anti-money laundering and countering the financing of terrorism (AML/CFT) rules since Congress required as much in 2001. 

As it drafts the new rule, FinCEN should reform and expand its real estate framework by, among other changes, pursuing a permanent and nationwide reporting regime that would require real estate professionals to identify the individuals behind their entity clients. Reporting requirements should also apply to both commercial and residential real estate transactions, without monetary thresholds, and apply to both buyers and sellers of a real estate property. 

Finalize AML Rules on Private Investment Vehicles

As the FACT Coalition and our allies have recently reported, private investment vehicles are yet another gateway for kleptocrats to waltz undetected into the global financial system. For example, Russian and Chinese interests have sought access to sensitive U.S. technology and innovation through private investment vehicles investing in the U.S., and a lack of disclosure in private equity obscured the majority stake owned by a Russian oligarch in a U.S. voting management firm. 

Right now, the $11 trillion private investment industry in the U.S. is essentially subject to no AML/CFT reporting requirements relating to invested capital. Economic sanctions against Russian oligarchs cannot be fully effective without putting into place the legal tools necessary to turn off access to an entire industry and market that, for a variety of reasons, is positioned to deliver anonymous and outsized returns. FinCEN should act now to bring investment advisers and unregistered investment companies under U.S. AML obligations. As a jumping off point, FinCEN can start with its proposed 2015 rulemaking.

Regulate Gatekeepers

Russian oligarchs do not enter the U.S. economy–or that of our democratic allies–without professional help. They are enabled by gatekeepers: accountants, lawyers, formation agents, art dealers, real estate and title agents, and others. A 2020 bipartisan report by the Senate Permanent Subcommittee on Investigations, led by Sen. Portman (R-OH) and Sen. Carper (D-DE), named the U.S. art market as a key vehicle for Russian oligarchs to launder money and evade sanctions.

At present, many of these critical professionals have no formal customer due diligence or other AML/CFT reporting requirements. It is long past due to require these enablers to identify the true identity and source of funds of their customers, in line with international recommendations and best practices. Congress should pursue proposals–such as the Enablers Act or similar, well-tailored approaches–to bring gatekeepers under U.S. AML rules.

Next Steps

The White House and international allies cannot divorce their immediate economic response to Russia’s attack on Ukraine from the need for structural reforms to bring international anti-money laundering safeguards into the 21st century.  The U.S., working with its allies, must clean up its own house to secure the integrity of international financial systems and to deny enemies of transparent and democratic governance the tools to keep hidden the proceeds of corruption and other crimes.

Fortunately, many of these solutions match priorities recently identified by the White House in the United States Strategy on Countering Corruption. Identifying these solutions is not enough; in real time the deadly flames of Putin’s corruption, fueled in part by the U.S. legal and financial systems, are beginning to swallow Ukraine. All haste is due.