In two articles, I introduce a complicated, but highly topical issue. While it is grand public relations for the FBI to be televised as it goes to seize a super-yacht belonging to an oligarch – this is, after all, just the easiest part of the getting-the-oligarchs game.

Part 1 (a version of this appeared first on theGlobalist on March 29, 2022)

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.

By Frank Vogl

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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Part 2 (a version of this appeared first on the Globalist on April 6, 2022)

A rare case of Russo-Western cooperation

Why we need to worry that the current zeal of Western authorities to go after the Russian oligarchs will decline over time.

By Frank Vogl

The hard, cunning tycoons at the helm of Russian business are being squeezed as never before. Unprecedented investigations into their fortunes are being launched by Western governments.

At the same time, if they retreat from their international lifestyles back to Russia, they face increased Kremlin supervision.

In a rare case of Russo-Western de facto cooperation, the oligarchs thus have it coming from both sides.

“Oligarchs be warned: We will use every tool to freeze and seize your criminal proceeds,” declares U.S. Department of Justice Deputy Attorney-General Lisa Monaco on announcing a special Klepto Capture task force.

Veteran public prosecutor Andrew Adams, who will run that task force, states: “There will not be an escape hatch around the sanctions through money launderers and opaque financial networks.”

Do not underestimate oligarchs

Sounds like the oligarchs are finally in for some well-deserved hard times?

That would be great, but do not forget that these men – all men – are equipped with enormous resources.

These resources extend well beyond cash and investments, and especially include winding their way through the dark corridors of political power. That is how they made their money, after all.

Western eagerness? Ignorance? Complicity?

Many of these oligarchs took control of the largest corporations in Russia in the early and mid-1990s at a time when it was essential to have connections to President Yeltsin’s entourage, mafia protection and opaque ties to Russian banks.

Western governments overlooked the possible criminal activities that those Russian oligarchs had engaged in to make and secure their wealth.

According to the UK’s Tax Justice Network:

Decades of courting finance from dictators, tax evaders and organized crime with financial secrecy services and eyes wide-shut regulations have made it nearly impossible for (Western) governments to track down the billions in assets and wealth held by their sanction targets. An estimated $10 trillion is held offshore anonymously by wealthy individuals.

The game has changed

The world can only hope that change is not just in the air but will hit those Russian billionaire crooks hard.

Australia, Canada, Germany, France, Italy, Japan, the UK, and the U.S. have established the “Russian Elites, Proxies, and Oligarchs (REPO)” task force to coordinate investigations of all sanctioned oligarchs and their corporations. And, the United States is offering rewards of up to $5 million for information that helps the investigations.

The U.S. Treasury has also issued an “Alert” warning “enablers” of “Russian Elites, Oligarchs and their Family Members” to be on guard when it comes to transactions in real estate, art, and other high-value luxury goods.

Their lawyers, accountants, bankers and other consultants to these Russians are being placed under long-overdue scrutiny. They will be prosecuted if they continue to service old clients now on the sanction lists.

Freezing the loot

Under a series of presidential executive orders dating back to the Russian invasion of Crimea in 2014, the U.S. government has extensive sanction powers.

But as Tom Firestone, a partner at the law firm Stroock & Stroock & Lavan, stresses, these powers can “result in blocking, but not seizing property (such as yachts and mansions). The property need not be connected to the reasons for sanctioning an individual, there is little to no judicial oversight involved in blocking assets, and there is no need for the authorities to have proof of a crime.”

Firestone, a former U.S. prosecutor, whose career involved being based for some time in Moscow for the U.S. Department of Justice, states that it is far more difficult for the authorities to pursue full asset forfeiture.

In this case, there has to be a judicial order, proof of a crime by the sanctioned individual, and evidence that connects the assets of sanctioned individuals to a crime.

Hiding the loot

Some oligarchs claim that they are virtually destitute as a result of sanctions.

A pathetic interview given by one of the most powerful oligarchs, Mikhail Fridman, seeks to win sympathy. Do not be surprised if he, and many others who have been sanctioned, hire expensive lawyers (they can get permission to do so from governmental sanctions’ authorities), paid for perhaps by their friends and relatives, to challenge the asset freezes.

According to Drew Sullivan, head of the Organized Crime and Reporting Project (OCCRP), investigations together with other media organizations to produce the Russian Asset Tracker are proving to be very difficult.

The shell game

As some of the reports on this tracker reveal, suspected assets are often held in the names of offshore holding companies, registered, for example, in the British Virgin Islands, which are owned in turn by multiple layers of other holding companies to conceal the identity of the true owners.

Some of the companies that are controlled by oligarchs show they have less than 50% ownership, with other key shareholders being relatives or friends. This may enable them to avoid some asset freezes.

Russian “trusts” in Switzerland and South Dakota

Then, in many cases, the oligarchs have established trusts in Switzerland or in South Dakota, or in many other locations, that control the assets.

Sullivan notes that in some cases the oligarchs claim they do not own the vast mansions that they call home, but just rent them from trusts, which could be controlled by family members or other proxies.

In addition, assets are hidden through nominal bank accounts, say in Cyprus, that have no obligations to reveal true beneficial ownership details.

And, adds Sullivan, there is evidence that oligarchs anticipating the latest sanctions, moved wealth in recent months into assorted vehicles to place them beyond the grasp of Western authorities.

Short-term challenges

The immediate challenge for Western investigators is to be able to identify assets belonging to sanctioned oligarchs. They can try and subpoena information from hedge funds and private equity firms and the wealth management departments of banks.

They can also try and locate informants. They can do painstaking research into all manner of financial records. Tom Firestone warns that this could all take a long time.

Karen Greenway, a former U.S. kleptocracy investigator at the FBI, worries about whether the current zeal of Western authorities to go after the oligarchs will decline over time.

She is right to worry. The UK may well revert to its old cozy relations with the oligarchs once the Russia-Ukraine situation allows the British government to lift sanctions.

Long-term challenges

The investigations now underway will clearly rob the oligarchs of some of their benefits and privileges, if only temporarily.

It will force some of them to demonstrate their loyalty once more to Putin – perhaps with transfers of still more cash into his pockets.

For Western governments, however, the difficulties they face in bringing the oligarchs to justice should finally convince them to urgently undertake a series of critical steps.

1. Boost budgets for their justice department

2. Very swiftly approve beneficial ownership rules and laws that block loopholes

3. End the “golden visa and passport” systems that numerous countries offer to the super-rich

4. Establish new laws that can fling the Russian oligarchs’ Western “enablers” into jail if they continue to aid and abet money launderers.

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