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Can Russia’s Oligarchs Be Brought to Justice?

Only if we fight the corruption coming from the Kremlin and its coterie of oligarchs in earnest do the Russian people have a fair chance for a decent future.

Takeaways


  • The sanctions will do grave damage to the Russian economy. But will sanctions on scores of individual Russians curb corruption? One needs to be skeptical.
  • It is good news that the U.S. Justice Department has now established a special task force to hunt for the klepto-cash.
  • Even if Western prosecutors can locate parts of the Russian oligarchs’ wealth, then they have an even larger challenge: Can they prove the cash is the product of crime?
  • It is Western banks that allocate the incoming Russian oligarch cash to numerous hedge funds and private equity firms, mostly in the world's largest capital market - the United States.
  • It is high time that the EU, the UK and the U.S. devote serious cash to the investigation and prosecution of corrupt Russian and other oligarchs who launder their billions into Western markets.

Speaking in Warsaw, President Biden declared: “We have to fight the corruption coming from the Kremlin to give the Russian people a fair chance.”

The great battle for freedom

No U.S. President has more clearly related pervasive corruption to what Biden has rightly called: “The great battle for freedom: a battle between democracy and autocracy, between liberty and repression, between a rules-based order and one governed by brute force.”

The sanctions on major Russian industries and the banking system will do grave damage to the Russian economy. But will sanctions on scores of individual Russians curb corruption?  One needs to be skeptical.

Who is targeted?

The scale of U.S. and European sanctions that are now being enforced is unprecedented.

When it comes to directly attacking corrupt Russians, then the prime targets are the business billionaires who are closest to Vladimir Putin and senior Kremlin officials, plus more than 350 members of the Russian Duma.

No opportunity will be missed for Western authorities to seize whatever assets – from mansions and yachts to fine art – that they can prove belong to sanctioned oligarchs and others.

Their Western bank accounts are being frozen – at least the ones that can be easily traced.

Finding the dirty cash

But the real wealth – the laundered dirty cash – of these sanctioned Russians is invested in Western stocks and bonds.

This may amount to hundreds of billions of dollars – compared to which the value of the yachts and mansions are peanuts.

Secrecy is paramount

Russian oligarchs have employed the highest priced lawyers, auditors, bankers and financial consultants in London, Zurich, New York and other financial centers.

These enablers have worked assiduously over many years to build complex systems to ensure that the Russian cash is safely invested – and secretly invested.

Vast sums of cash have been moved from Russia, via Cyprus, Luxembourg, London, Zurich, Geneva, Vienna and other European locations to multitudes of banks.

This is done via offshore holding companies registered in jurisdictions that ask no questions about who the true beneficial owners are.

Aiding and abetting Russian oligarchs

Then, portions of the funds from these shell companies go via law firms and consulting firms into the international wealth management departments of major international banks.

The banks do not press for beneficial ownership information. These banks then allocate the incoming cash to numerous hedge funds and private equity firms, mostly in the world’s largest capital market – the United States.

Proving crimes

It is good news that the U.S. Justice Department has now established a special task force to hunt for the klepto-cash.

But, even if they can locate a small fraction of the oligarchs’ wealth, then they have an even larger challenge: Can they prove the cash is the product of crime?

Are we defenseless?

In time, the oligarchs will go into court and challenge the seizures of their homes and yachts in Europe, and the freezing of their bank accounts. They will claim that all these assets were bought legitimately.

For example, two prominent oligarchs, Petr Aven and Mikhail Fridman, co-owners of Russia’s Alfa Bank, have long been the lead shareholders in a Luxembourg investment company called Letter One and its British affiliate of the same name.

Sanctioned Aven and Fridman have been forced to give up control of Letter One, but they will no doubt claim that its business has always been legitimate and that their personal European properties and art collections have been financed from profits from this corporation, and perhaps others in Europe.

It may be exceedingly difficult to prove that this is not the case, especially when the oligarchs engage the highest paid lawyers to tie government prosecutors in knots.

Inadequate enforcement

Despite President Biden’s bold anti-corruption assertions and all the current high-profile press coverage of some of the oligarchs, the bitter fact is that the budgets of Western anti-corruption agencies are woefully inadequate.

Right now, there are no positive indications that a dramatic increase in funding for anti-corruption enforcement is being contemplated.

The key U.S. Treasury Department’s enforcement branch had just 300 employees.  This total may rise modestly as a result of a modest budget increase.

Even so, its resources are totally inadequate when  hundreds of billions of dollars of dirty cash from oligarchs, kleptocrats and organized crime flow into the U.S. each year.

Tax evasion anyone?

So, you might say, if it is hard to prove corruption against some of the oligarchs, then why not take a leaf out of the old Al Capone book, and bring tax evasion charges against them?

Perhaps there is some merit here. But note – and here the oligarchs are no doubt laughing – a very recent White House budget request to give the Internal Revenue Service (IRS) $30 million to go after sanctioned individuals was blocked in the U.S. Congress.

The IRS has long claimed it lacks adequate funds to do its routine work, let alone pursue special oligarch-related investigations.

Until the European Union, the UK and the U.S. government devote serious cash to investigation and prosecution of corrupt Russian and other oligarchs who launder their billions into Western markets, Biden’s important words will have a slightly hollow ring.

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About Frank Vogl

Frank Vogl is co-founder of Transparency International and author of and author of “The Enablers - How the West Supports Kleptocrats and Corruption-Endangering Our Democracy" (Roman and Littlefield)

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