Russia and the Politics of Perception
Russia is seeking to influence the Financial Action Task Force. Its attempts reveal much about how risk perceptions are constructed in the global financial system.
Imagine, for a moment, that you are a bank compliance officer. You open your inbox to find that you have been tasked with assessing the risk of a new client. Specifically, you need to assess the risk that they will use their accounts to sidestep sanctions or engage in money laundering. Where would you start? One factor you might consider is whether they are involved in a high-risk industry. A food blogger is probably less risky than a cryptocurrency exchange.1 If it’s a business client, you might also think about their corporate structure. Why, you might ask, do they have multiple layers of shell companies in the British Virgin Islands? But before you get to these factors, you are likely to start with something simpler: their nationality.
Banks and other financial institutions regularly consider nationality when assessing the financial crime risk of prospective clients. This is generally plugged into a model which determines, based on multiple factors, whether a client should be rated low, medium, or high-risk. These risk ratings have important implications. Low-risk clients can expect their accounts to be approved quickly with few if any questions. Higher-risk clients, in contrast, receive a financial colonoscopy. What percentage of your wealth came from your second divorce? We understand that you inherited $200,000 from your father: where did he obtain his wealth? The higher the risk, the more likely clients will face these types of questions. There is also a stronger probability that banks will request extensive documentation from high-risk clients, investigate their transactions, or close their accounts with little explanation.
Nationality plays a huge role here. The average European bank will assign zero weight to the fact that some prospective client is from Denmark. But if you are from Yemen, Afghanistan, Haiti, or Iran, expect questions. Many banks will automatically assess such customers as high-risk purely based on their nationality. It is, in industry lingo, an automatic high-risk trigger. Similar triggers may exist for corporate clients if they are incorporated in, or do business with, certain countries.
This is a crude approach. It assumes, for example, that anyone from Burkina Faso is inherently more likely to be involved in crime. Not great. Concerns have been raised about the discriminatory nature of these and similar rules.2 And just last month Medy van der Laan, the Chairwoman of the Dutch Banking Association, acknowledged that ethnically diverse Dutch citizens (which predominantly involves those of Arab descent) were subject to more queries on the purpose of their transactions.3
van der Laan contends that banks have no choice. They are, she noted to Trouw, legally obligated to more closely monitor clients associated with certain high-risk countries.4 This is a little misleading, as banks do have substantial discretion in the way they carry out such obligations. But she is basically correct. European banks are required to perform enhanced monitoring of clients connected to what the EU refers to as “high-risk third countries.”5 There are 25 countries on the list, including Mali, South Africa, Jamaica, and Gibraltar.6 Most compliance professionals do not think twice about this. But its quite remarkable. One could argue that, for the purpose of combatting financial crime, the EU has not just condoned discrimination — it has obligated financial institutions to engage in it.7
The EU does not, however, create this list out of thin air. It is primarily derived from another organization: the Financial Action Task Force (FATF).8 The FATF sits atop the global financial crime pyramid. It maintains “grey” and “black” lists of countries considered to have deficiencies in their efforts to combat money laundering, terrorist financing, and related crimes. These lists seep into the EU’s definition of 'high-risk third countries’ and are used by banks around the world to determine how to weigh jurisdictional risk. This is tremendously powerful.9 The FATF’s lists cascade throughout the internal plumbing of the global financial system, determining which types of clients are closely monitored and which are not. And if there is one country that truly understands this power, it is Russia.
Клептократия (Kleptocracy)
The Russian Federation, you may be aware, does not have the best reputation when it comes to financial crime. As Vsevolod Sokolov summarizes:
One of the most persistent images of Russia since the collapse of the Soviet Union is of a state in the grip of criminal enterprises - of thugs in leather jackets shaking down and brutalizing helpless business owners and big-time kleptocrats making off with the country's wealth while strangling its nascent free market.10
The full story is, of course, more complicated. There is a long history of organized crime in Russia pre-dating the collapse of the Soviet Union, and the internal violence of the 1990s has largely given way to a consolidation of state power where corruption is not a bug but a feature of the system.11 Russian oligarchs, many of whom have ties to organized crime, have spread their assets across the globe — most infamously in London’s real estate market.12
Russia has also gone to great lengths to navigate the Western-dominated financial and monetary sphere. Take, for example, Jan Marsalek. For many years Marsalek was the Chief Operating Officer of Wirecard, a publicly-listed German payments processor that was once so big it considered buying Deutsche Bank.13 I just want to pause to stress this point: it almost bought Deutsche Bank. It’s a good thing it didn’t, as Wirecard was a massive fraud.14 But it turns out it wasn’t just any old fraud. Marsalek, the Financial Times recently reported, was a Russian asset. While COO of Wirecard, he allegedly helped facilitate spy operations, political assassinations, and the smuggling of a top-secret cryptography machine from NATO.15 And, really, what better company to run as a Russian spy than a payments processor:
The revelations add to the concerns that Wirecard itself, a payment processing company that was once the darling of Europe’s fintech scene before being exposed as a fraud by the FT, may for years have been used as a shadow financial network to pay and facilitate Russian undercover operations beyond the detection of [NATO] security services.16
Russia is not, in other words, the posterchild for financial crime prevention. You might expect this to result in Russia being placed on FATF’s grey or blacklist. If Croatia is on the grey list, surely Russia is too? But you would be wrong. The country received largely positive reviews in the most recent mutual evaluation of its measures against money laundering and terrorist financing.17 How is this possible? How can a country synonymous with dirty money, one utilizing illicit financial networks to assassinate political opponents abroad, not be on the list?
бюрократия (Bureaucracy)
The first step to understanding this puzzle is to appreciate the FATF process. The FATF does not perform national evaluations by itself. It enlists professionals from other member states to conduct what are, in essence, peer reviews (hence the term “mutual” evaluation). These professionals spend up to 18 months evaluating each country based on two criteria: technical compliance and effectiveness.18 The former refers to whether the country’s laws and regulations are consistent with the FATF’s policy recommendations. The latter captures whether the country is achieving certain “intermediate outcomes.”19 But there is no standardized way of measuring these outcomes — the assessors have a lot of discretion.20
And these outcomes are mostly about domestic-facing controls. The core of these controls in Russia is Rosfinmonitoring. This government agency collects financial intelligence and uses “sophisticated technology” to identify criminal activity and prevent terrorist attacks.21 Sure, Rosfinmonitoring might be an authoritarian tool used to designate political opponents as terrorists (most recently: the “international LGBT public movement”) but this isn’t what FATF is evaluating.22 It evaluates effectiveness, and Rosfinmonitoring is nothing if not effective. As financial integrity expert Richard Gordon summarized upon the report’s release:
They’ve got a pretty authoritarian operation and so the fact that Rosfinmonitoring is very good is not a surprise — when it’s looking at the people the government really wants to know about. It feels wrong, but, as you start to go through the methodology, it makes more sense.23
Enter your favorite Kafka quote. FATF is wedded to its standards — a common trap of bureaucratic assessment.24 And those standards also implicitly assume that there is a separation between the state and the criminals. It does not contemplate the possibility that the state itself is a criminal actor.25
влияние (Influence)
FATF’s bureaucratic approach is, however, only one part of the story. There are also politics at play. One key flashpoint is the selection of assessors. Who should be called upon to perform the assessment of each country? Per the FATF, it is the President and Secretariat who make such decisions.26 The 2019 mutual evaluation of Russia was composed of a highly international team that included one American.27
But when it was time for a follow-up report in 2023 — after Russia’s invasion of Ukraine — the FATF surprised many by handing this task to one of its regional bodies: the Eurasian Group on Combating Money Laundering (EAG).28 The current Chairman of the EAG is Yuri Chikhanchin, a Russian national who also happens to be the Director of Rosfinmonitoring. Suddenly the assessment team had a very different nationality composition: Uzbekistan, India, China, and a Russian representative of the EAG secretariat.29 The results were positive.
It is remarkable that Russia remains a member of FATF at all. Ukraine nominated Russia for the blacklist, supplying evidence that it disregards the organization’s recommendations on money laundering and terrorist financing.30 Koos Couvée has reported, however, that politics got in the way:
[FATF’s International Cooperation Review Group] “came very close” to recommending that FATF gray-list Russia during the group’s latest summit in Paris in February, the source said. “Nobody [in FATF] is raising any questions on technicalities [Russia’s violations of FATF’s standards] anymore. It’s political.”31
What FATF chose instead was to “suspend” Russia’s membership. Russia was allowed, however, to remain an active member of the EAG. This is a bit like suspending a kid from school but still allowing them to attend their classes. While an active member of the EAG, Russia has also sought to become an observer of another regional body: the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG).32 Further, Russia reportedly blocked certain European speakers from participating in a FATF summit in Mauritania.33 Thus, as Couvée observes, Russia — which is in a tight race with North Korea as the country with the worst reputation for financial crime — retains substantial influence in the FATF.
подразумеваемое (Implications)
What this means, in practice, is that financial institutions around the world have no obligation to assume Russia poses high jurisdictional risk.34 Remarkably, Russia is also missing from the EU’s list of high-risk third countries despite that the Union can (and has) supplemented FATF’s grey and blacklists. Banks are, of course, obligated to enforce Russian sanctions. And they may choose to voluntarily upgrade the risk weight given to clients with Russian connections. But there will always be segments of the industry looking for an excuse to ignore this factor.
For the Russian state and its elites, poking such holes in the American sphere of financial influence is well worth the effort. They understand the power of FATF’s standards — the way they proliferate across the world through legal and regulatory mechanisms. The global anti-money laundering regime is like a complex river with tributaries seeping into every country. Influencing the FATF is, for Russia, a way of polluting the riverhead and watching it spread downstream. Through such influence, Russia can alter the perception of its inherent risk. To paraphrase a famous Soviet poster of cosmonauts, they can make the fairytale becomes truth.
But there is a wider debate that deserves consideration. There are approximately 135 million Russians living today. Should we really presume that each and every one is inherently more likely to be a criminal? Such presumptions punish the innocent for the crimes of their leaders. I, for one, would not want to be considered higher risk simply because my former (and, god forbid, possibly future) president is currently on trial for paying hush money to a porn star. Perhaps the real concern here is not that Russia is seeking to influence its FATF outcomes. Rather, it is that we continue to rely on such primitive conceptions of risk.
Though there is always room for exceptions!
See, for example, the Australian Human Rights Commission’s comments on the country’s 2006 AML bill. Similar concerns have been expressed about banks closing accounts for Politically Exposed Persons, a term created to capture individuals who are involved in political affairs and thus, the theory goes, at higher risk of engaging in (or being subject to) bribery and corruption. Recent debate on this issue was sparked by Nigel Farage of all people. UK bank Coutts closed Farage’s accounts, leading him to allege that he was being discriminated against based on his political views.
NL Times, Ethnically diverse clients face more checks at Dutch banks (translating original reporting in Trouw). Three customers have sued ING on similar grounds, alleging that they were subject to racial profiling. One of the plaintiffs, Jalal Et-Talabi, claims that ING requested his cooperation with an investigation because he transferred 100 euros between his accounts to cover a short-term loan to his brother. He alleges that this investigation was triggered because he referenced his brother’s Arabic name in the transfer description: “100 euros cash Abdelhamid.”
NL Times, Ethnically diverse clients face more checks at Dutch banks (translating original reporting in Trouw).
The Fifth Anti-Money Laundering Directive’s Article 18a states, “With respect to business relationships or transactions involving high-risk third countries identified pursuant to Article 9(2), Member States shall require obliged entities to apply the following enhanced customer due diligence measures:
(a) obtaining additional information on the customer and on the beneficial owner(s);
(b) obtaining additional information on the intended nature of the business relationship;
(c) obtaining information on the source of funds and source of wealth of the customer and of the beneficial owner(s);
(d) obtaining information on the reasons for the intended or performed transactions;
(e) obtaining the approval of senior management for establishing or continuing the business relationship;
(f) conducting enhanced monitoring of the business relationship by increasing the number and timing of controls applied, and selecting patterns of transactions that need further examination…”
Consolidated list. There is an interesting (and opaque) footnote on Gibraltar: “Without prejudice to the legal position of the Kingdom of Spain with regard to sovereignty and jurisdiction in relation to the territory of Gibraltar.”
Michele Sciurba makes a similar point with respect to the Fourth Anti-Money Laundering Directive’s requirement to perform enhanced due diligence on Politically Exposed Persons: “For all practical purposes, the requirement to treat all those with pep status as high risk in the absence of evidence of financial crime is prima facie discriminatory and the requirement that family members and people associated with peps should be subject to scrutiny without any suspicion of wrongdoing would seem to be a violation of basic legal protections” (p. 229).
The European Commission’s methodology basically starts with FATF lists and then involves supplementary processes. Check out this fun chart.
Julia Morse’s book, The Bankers' Blacklist, is the go-to text to fully understand this power.
Sokolov, Vsevolod. “From Guns to Briefcases: The Evolution of Russian Organized Crime.” World Policy Journal 21, no. 1 (2004): 68–74. http://www.jstor.org/stable/40209904, p. 68.
See, e.g., Lanskoy, Miriam, and Dylan Myles-Primakoff. "The Rise of Kleptocracy: Power and Plunder in Putin's Russia." Journal of Democracy 29, no. 1 (2018): 76-85. https://doi.org/10.1353/jod.2018.0006.
See, e.g., Patrick Radden Keefe, “How Putin's Oligarchs Bought London.”
Olaf Storbeck, Wirecard: the frantic final months of a fraudulent operation.
Ibid.
Russia’s 2019 Mutual Evaluation Report concluded that the country was compliant or largely compliant with 35/40 technical recommendations. It was determined that five “effectiveness” indicators were only moderately successful, but, strikingly, Russia — Russia! — has no areas where fundamental improvements are needed.
Here’s the methodology for fellow masochists.
See, for example, this very loose guidance for assessors (point 63): “Assessors should set out clearly the extent to which they consider the outcome to be achieved overall, noting any variation, such as particular areas where effectiveness is higher or lower. They should also clearly explain the basis for their judgement, e.g., problems or weaknesses which they believe are responsible for a lack of effectiveness; the core issues and the information which they considered to be most significant; the way in which they understood data and other indicators; and the weight they gave to different aspects of the assessment. Assessors should also identify any areas of particular strength or examples of good practice.”
Russia’s 2019 Mutual Evaluation Report (p. 41).
The Moscow Times, “Russia Adds ‘LGBT Movement’ to ‘Terrorists and Extremists’ List.”
Here’s a related paper that is also highly relevant here: de Goede, M., & Sullivan, G. (2016). The politics of security lists. Environment and Planning. D, Society & Space, 34(1), 67–88. https://doi.org/10.1177/0263775815599309.
Nor would we want it to. This would put FATF in the impossible position of judging political regimes whose cooperation is needed to achieve international harmonization.
Russia’s 2019 Mutual Evaluation Report (p. 13).
Ibid.
Ibid.
There may be state-level legal differences here with which I am not familiar. Let me know!
A valuable report. Thank you.
It's concerning, but not at all surprising, that Russia has compromised FATF. From the Russian point of view, it would be irresponsible not to at least try. The question is, what is to be done about it?