Barry Eden
The terrorist attacks of September 11. 2001, shocked the world and started a new round of anti-money laundering (AML) regulation initiatives, as national governments sought to adjust their controls of financial systems to enable them to filter out money transfers by terrorist groups, While Russian companies and banks are hardly sponsoring terrorists, Russia’s financial system is used, many believe, to launder large amounts of money generated by bribery, drug cartels, and illegal international arms trading. Accordingly, Russia is on the Financial Task Force on Money Laundering’s (FATF) blacklist of countries that have not taken adequate measures to prevent money laundering.
As American, British, and Western European financial institutions see their compliance cost soaring, they are sure to shift some of the burden onto their correspondent Russian banks. For this reason, it is now becoming essential for Russian banks and corporate treasuries to understand how international anti-money laundering regulations work and how they are going to impact business as early as spring 2002.
Money-laundering is defined as processing the proceeds of criminal activities to disguise their origins. It is used to legalize cash from illegal arms sales, smuggling, and organized crime activities such as drug trafficking and prostitution rings, as well as embezzlement, insider trading, bribery, and computer fraud schemes. The volume of money laundering transactions performed worldwide each year is estimated by the IMF to be anywhere between $600 billion and $1.5 trillion.
This is between two and five times Russia’s GDP.
Long before the September 11 attacks, banks were already facing the intensified regulatory scrutiny of their anti-money laundering activities. Now they have been conscripted into the war against terrorism in a major way, as regulators and law enforcement officials seek their assistance in identifying and freezing the assets of terrorists. Let’s review some of the new legislation initiatives that will significantly impact Russia’s banks doing business abroad.
The FATF and others
FATF, an AML country group sponsored by the OECD, has also issued a set of eight recommendations in response to the September 11 attacks. These are in addition to its forty recommendations issued previously, which suggest how a «cooperative» jurisdiction should behave.
Some of the FATF recommendations are general, saying that the financing of terrorism should be criminalized everywhere in the world, suggesting that all countries should join a 1999 UN Convention for the Suppression of Financing of Terrorism, and calling for international cooperation.
Other recommendations are quite specific, including the freezing and confisca-tion of terrorist assets, the requirement to report suspicious transactions, and the requirement to ensure that non-profit organizations are not misused by terrorist organizations. Another potentially costly requirement would compel information about a person or entity originating a wire transfer to remain with the transfer through the payment chain.
Recent global anti-terrorist activity has prompted the adoption of new anti-ter-rorist and AML legislation in many countries around the world. More than a dozen countries have announced the drafting or adoption of AML laws over the past five months. Some of the countries that adopted laws (Dominica, the Philippines, and Hungary, for example), or drafted them (such as Indonesia and Egypt) are on the FATF blacklist of non-cooperating countries and needed to adopt and implement these laws to be removed from the list. Other countries that are not blacklisted by the FATF (including the United Arab Emirates, Hong Kong, Ukraine, and Oman) have also said they plan changes in their legislation relating to AML procedures.
Russia adopted AML legislation last year: the Russian AML law was enacted on February 1, 2002. The new law broadly corresponds to the FATF recommendations, even if some provisions appear ambiguous. Russia, however, was not removed from the blacklist during the February meeting of the FATF. Russian officials say that this is primarily because the committee would like to see how the law works in practice before making any decisions. Furthermore, the Russian AML law was adopted before the new Anti-Terrorist Money recommendations were issued. Nevertheless, Russian authorities hope that the country will be removed from the list in the summer of 2002.
What does it Mean for Business?
It is already clear that Western banks will incur significant incremental costs in accumulating information on people who use their services and in taking action against a growing list of unwanted organizations and individuals. Substantial effort is involved in screening true hits from false ones because the lists involve numerous aliases and possible stolen identities. Moreover, account activity must be reviewed for any hits going back five years, and law enforcement officials are not yet able to advise banks on what they should do when they have a hit.
Non-banking financial institutions such as insurers, asset managers, and investment banks, which have never before been required to monitor accounts for suspicious activity, may now be required to do so. The new US anti-terrorism legislation defines «financial institution» very broadly, meaning that insurers, securities brokers/dealers and asset managers will be required at least to enhance their anti-money laundering programs and related internal audit activities.
It is inevitable that Western banks and non-banking organizations will share their new compliance burden with their foreign correspondent banks. In fact, the U.S. anti-terrorism law requires that any foreign bank with an account (but without a facility) in the U.S. will have to designate an agent for the service. That opens the foreign bank up to substantial new liabilities and increased costs. Moreover, the U.S. can at some stage freeze an account of a foreign bank simply because it has not yet frozen certain «terrorist» accounts in a home country.
All Russian banks may be affected by the various special measures the U.S. Treasury may impose on relationships with problem foreign jurisdictions and/or institutions. And apparently Russia may be considered as a problem jurisdiction at least as long as it stays on the FATF blacklist. Taken together, this means that Russian entities that have correspondent accounts or that do business with American, British and other Western financial institutions should be prepared to comply with the laws of the jurisdictions in question.
Russian companies outside the financial services sector will be less directly impacted. Nevertheless, given that many of them have quite a complicated «group» structure spanning to several international jurisdictions, corporate CFOs may also have to initiate an extensive review of the structure to minimize the risk of having their payments disrupted or overseas assets frozen because of suspicious transactions.
Barry Eden is Partner in charge of financial services, Ernst and Young Moscow office. This article has been condensed and reprinted from the Business Perspective (March–April 2002).