Jordan Sieffert
Russian Roulette:
Money Laundering in the New
Look, in principle, I am for the rule of
law. But what does “the law” mean in
Boris Berezovsky[1]
Introduction
Prior
to 1991 Russian society was relatively free from crime. Crime took place on the underbelly of Russian
society but it rarely came into view for the average Russian or outside
observer. For the average person
It
is under these conditions that economic crime has flourished in the new
In this paper I hope to explain not only
the practice of money laundering in the new Russia, but also the factors that
allowed for its development, the international and domestic pressures that came
to bear on the Russian state as a result of it, and the institutional
restraints that will limit it in the future.
Gustafson argues that Russian crime has reached “epidemic”
proportions. He cites three factors that
separate an epidemic from an endemic infection: “It strikes when society is
weakened, it rapidly builds to a peak in which a large part of the population
in infected, and then it subsides.”[3] It is my thesis that Russian economic crime,
specifically money laundering, has reached its peak, and will begin to subside
as state institutions become stronger.
The post-Soviet honeymoon is over; the international community and
Russia’s domestic population is no longer content to praise Russia’s
development just as long as the country is staving off communism. International governments are beginning to
demand that Russian capitalism move out of its infancy and take its position in
the global financial market. The
I can hide money in the twinkling of an eye from all the bloodhounds
that could be put on the case, and I would be so far ahead of them that there
would never be a hope of unravelling the trail. I am not kidding you. Technology today means that
that sort of thing can be done through electronic means.
Money laundering has consistently been
defined as “transforming the proceeds of crime into usable form and disguising
their illegal origins.”[5] This short and widely used definition does
miss a point that has become abundantly clear since 9/11: money laundering is
as much about future crimes as it is about past crimes. Financiers of terrorism understandably shy away
from the public eye by hiding their support in a web of international wire
transfers until the real source of the cash is buried. Individuals partake in laundering cash for
one of three reasons, all of which are aimed at masking the source of the funds. The first reason is that one is attempting to
hide the fact that funds originated from an illegal activity like gambling,
prostitution, or the sale of drugs. A
second reason one might try to hide the source is that the money is going to be
used in future to fund illegal acts like terrorism; this type of laundering has
received great, and arguably wasted scrutiny since the events of September
11th, 2001. A final reason one might
launder money is that she wishes to avoid detection by government authorities
in the country of origin, either to avoid taxation or in some instances to
avoid unwarranted seizure by a corrupt state.
In
The process of money laundering makes the source of
funds virtually undetectable without a comprehensive intelligence regime. Suter breaks down
the money laundering process into three steps:
First, ‘placement’ is where large amounts
of cash are negotiated into some other less obviously suspicious form.... Second, in the ‘layering’ stage, money is
spread within the financial system to create a false picture of the provider of
the original cash.... Third, in the ‘re-integration’
stage, the cleaned up money is brought back, supposedly legitimately, into the
financial system operated by the end-user.[6]
It is imperative that one understands that
these steps do not regularly take place in one city, province, or country. Each of these steps, which often comprise of
numerous transactions in and of themselves, involve
transferring financial resources across borders and out of the view of domestic
law enforcement agencies. A general
outline is given in Figure 1.
Figure 1: The
Stages of Money Laundering[7]
Criminal Activity
-Gambling,
fraud, prostitution, drugs, weapons, ect.
$
$
Option
1: Cash paid into bank.
Option
2: Cash exported.
Option
3: Cash used to buy high value goods, property or business assets.
$$$
$ $
$
Option
1: Wire transfers.
Option 2: Cash deposited in overseas banking system.
Option 3: Resale of goods, property, or business assets.
$$$$
$ $ $ $
Option
1: False loan repayments or forged invoices used as cover for laundered money.
Option
2: Complex web of transfers (both domestic and international) makes tracing
original source virtually impossible.
Option
3: Income from sale of goods, property, or legitimate business assets appears “clean.”
$
Money laundering is global in nature and
facilitated through the conveniences of modern technology. Proceeds of crime are drawn to the
jurisdictions with the lowest levels of anti-money laundering legislation like
moths to a flame. Once proceeds of crime
are transferred to banks in countries like the
At least one card-based system currently
being developed by Mondex, a company owned by Mastercard, is designed to allow money to be transferred
directly between cards without leaving [an audit] trail. Digicash, which is
developing a computer based payment system, is using what it calls a “one-way
privacy” method, which allows payers to check who received money from them, but
does not allow recipients to find out where it came from.[10]
Technological innovations that facilitate
transactions of large sums of cash with the added feature of anonymity are a
nightmare for law enforcement agencies, a nightmare that the international
anti-money laundering community hopes to avoid.
S sil¢nym ne boris¢, s bogatym ne sudis¢.
(Don’t fight the powerful and don’t sue the rich.)
Russian saying[11]
World Class Sprinters: The Underpinnings of Money
Laundering in the New
Having established the breadth of the
money laundering problem in
First, in the wake of the fall of the
Soviet Union,
Once the Russian state had a law to fight
the rampant money laundering taking place within its borders, another more
difficult problem became apparent: The state had no law enforcement agency that
could effectively implement this law.
The ineffectiveness of
Perhaps the most important factor that has
led to extensive money laundering in
The FATF
has decided to recommend the application of additional countermeasures
(including the possibility of enhanced surveillance and reporting of financial
transactions and other relevant actions) as of 30 September 2001 with respect
to
Financial
Action Task Force on Money Laundering[13]
The Black List: Domestic and International Anti-Money Laundering
Pressure
In
June of 2001
This recognition of
Although many might not even
know of this black list and the FATF sanctions, those involved in the everyday
workings of the Russian financial sector certainly do. Prior to the removal of
We have the obvious one’s of
siphoning money off from the treasury and of slowing down needed restructuring
of industry, but also a more subtle effect of blocking the ambition to
establish enforceable rules of the game.
Since capital flight involves illegal transactions, it will reinforce
old patterns of personalized relations, based on trust that neither part will
turn to the authorities. And it will
feed traditional patterns of high-level corruption.[15]
Added to Hedlunds economic
argument is the fact that money laundering is an attempt to clean the profits
of often despicable crimes like prostitution and drug trafficking. In 2000 the Russian people went to the polls
and sent a message; in Putin, they elected a
president that was seen as willing to stand up and fight the epidemic of
Russian crime. Putin
and others in government have recognized that money laundering is a large
component of the crime epidemic, and have thus begun to fight it with all means
at their disposal.
President
Vladimir Putin[16]
Tough Medicine:
On
the 6 August 2001, the Russian state responded to international pressure and
passed the law “On Combating the Legalization (Laundering)
of Income Obtained by
Criminal Means.”[17] This law brings the Russian
financial sector in line with the regulatory standards present in FATF member
countries. It established identification
requirements for those involved in financial transactions, created a Russian
FIU as mentioned above, set a standard for the reporting of all transactions
over 600 000 rubles, and laid out a framework for the sharing of information
with other FIUs around the world.
The creation of a Russian FIU is one
of the most important moves the Russian state could make in eliminating
economic crime. It is a clear signal
that in
Given the global nature of sophisticated money laundering schemes, the
sharing of information between FIUs is very
important.
Sure it’s
all true. But my children will be
honest.
Otari Kvantrishvili, late Moscow Godfather[19]
Conclusion
The last decade has been one of
turmoil and instability for the Russian economy, government, and people. The
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[1] “Will Putin Put Me In Jail?”, New Perspectives Quarterly 17 (2000): 48.
[2] “Robbing
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[12] Gustafson, Capitalism Russian-Style, 156.
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[15]
[16] “Putin:
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