Improvement of System of Money Laundering Counteraction in RusImprovement of System of Money Laundering Counteraction in Russia

Improvement of System of Money Laundering Counteraction in Russia

By Vasily Davydov

Legalized proceeds from crime are the financial basis of transnational organized crime, international terrorism and corruption, and counteracting legalization (money laundering) by imposition of criminal and other types of legal liability is the only effective method of combating these dangerous manifestations of criminal activity. This strategy of counteracting particularly dangerous criminality is already recognized both internationally and in Russia. Another internationally recognized approach is consolidation of authoritative international organizations and coordination of efforts and actions of countries in the sphere of counteracting money laundering. Since the eighties of the last century, the result of counteracting criminality by imposition of liability for legalization has been experience accumulated by the world community and those countries which were among the first started practicing this mechanism to suppression of criminal organizations’ activity (first of all, the USA and the UK). Some of the results obtained in the course of study on peculiarities of activity of the key organizations involved in the international collaboration in anti-money laundering can be used for preparing recommendations concerning development and enhancement of efficiency of state authorities on counteracting legalization of proceeds from crime in Russia.

The internationally known and authoritative specialized organization steadily and effectively combating money laundering at the international level is the international organization Financial Action Task Force on Money Laundering (FATF) – a special financial committee for money laundering issues[1]. The acronym GAFI is also applied for designating this organization.

The FATF was established in July 1989 at the Paris conference of the «Grand Seven» for the purpose of evaluation of effectiveness of anti-money laundering efforts[2]. By now, 31 members have joined the FATF, together with numerous observers including representatives of the United Nations Organizations, the International Monetary Fund and the World Bank.

The objectives of this international organization are analysis of results of operative actions on prevention of using the banking system and financial institutions for money laundering, working out model type acts of law and preventive instruments related to anti-money laundering, as well as enhancing collaboration of joint efforts of the countries participating in counteracting money laundering. Based on own analytical results, the FATF provides recommendations on internal legislation improvement to many countries where the laws related to counteracting legalization are underdeveloped yet.

The FATF’s efforts have resulted in development of the international standards, 40 Recommendations concerning the money laundering issues, by 1990, and 8 Special Recommendations concerning combating the financing of terrorism, by October 2001.

The FATF and its missions involve broad specialists, including experts from the Ministry of Finance, the Department of Justice, the Ministry of International Affairs and the Ministry of Internal Affairs, public financial authorities and defense and law enforcement agencies. The head office of the FATF actively cooperates not only with its own regional representations but also with the UNO, Interpol, the Organization of American States, the Egmont Group, and the financial organizations: World Bank, International Monetary Fund.

In 2000, for the purpose to affect the countries and territories not involved in the international combating money laundering, the FATF initiated creation of a special mechanism of involving countries in anti-money laundering activity, which is the major instrument to date. It is a «blacklist», issued annually by FATF, of countries not effecting purposeful legislative measures on preventing money laundering. The FATF’s efforts in this direction have led many of the countries remaining in the blacklist to actively reform the legal system by working out a special law of imposition of liability for money laundering. When in 2000 Russia was ranked as a country not collaborating with the world community against legalization of proceeds from crime, the FATF suggested that the world business community should show special discretion while dealing with the Russian companies and financial institutions. Moreover, the FATF notified the business community of a possibility to apply financial sanctions to Russia. The FATF’s actions in relation to Russia and the political situation in the country at that time apparently exerted critical influence upon the Russian authorities, and got things moving in Russia, i.e. the work on establishing an institution of counteracting legalization of proceeds from crime[3]. The result of active efforts of Russia on working out a legislative system of combating money laundering became evident after the visit of the FATF delegation to Russia (St. Petersburg, Moscow, Toola) which was held from September 23 to September 29, 2002. Then, based on the results of analysis of the Russian legislation, a decision on rehabilitation of Russia and removing of it from the blacklist was made. The FATF’s decision on admission of the Russian Federation to this authoritative international organization as a full member which was made in June 2003 became a crucial moment in the modern history of Russia.

Thus, currently, Russia can be considered among the countries having the unified laws of counteracting legalization of criminal proceeds which complies with the international requirements and appropriate domestic agencies controlling and investigating crimes concerned with money laundering.

Direct collaboration of the national specialized agencies on combating money laundering – Financial Intelligence Units (further - FIU) is realized under supervision of the Egmont Group. At first, establishment of FIUs was considered as an isolated occurrence; however, in June 1995, representatives of the governmental agencies and international organizations assembled in the Egmont-Arenberg Palace in Brussels to discuss issues on combating money laundering at the international level. Consequently, the informal entity currently known as the Egmont Group (by name of the first meeting location) was established. The main purpose of this group was the establishment of the conference of FIUs from all over the world which would provide support to the national programs on counteracting legalization of criminal proceeds, as well as enhancement of financial information exchange, advanced training of personnel, promotion of new-technology-based communication channels.

As per the internal documents regulating work of the Egmont Group, a FIU is of great importance for creating a mechanism of counteracting legalization of criminal proceeds on the level of a solitary country or territory and constitutes a central domestic agency on controlling and counteracting legalization of criminal proceeds. Such public service is to ensure a possibility of fast exchange of information on both international and domestic levels, while protecting interests of respective participants of economic activity. The functional differences between FIUs depending on position in the governmental authorities system of a solitary state or region in no way restrain them from participating in the group work and exchanging information. The Egmont Group’s experts point to the two different approaches to FIU establishment. In the first case they recommend to establish such a unit within the existing defense and law enforcement agency of the state machine, while in the other they suggest to organize a separate unit solely dealing with collection and evaluation of financial information. Despite the unified official definition specifying the FIU’s functionality, it is assumed that a FIU under certain jurisdictions may not only perform an informational function but also operate as a defense and law enforcement agency, i.e. investigate a crime and perform a role of public prosecutor in court[4].

In 2004, in the course of the international study on evaluation and analysis of activity of FIUs from different countries, the World Bank’s experts analyzed various organizational types of such public services as FIUs[5]. The results included the following FIU types:

1. Administrative type of FIU. Such unit within the state authority is not subordinated to the Ministry of Internal Affairs and does not imply investigative services. Generally, it acts as mediator between financial institutions and defense and law enforcement agencies. The primary role of such unit is collecting and analyzing information, revealing shady operations with financial assets and informing investigating bodies about the occurrences. FIUs of such type operate in Andorra, Australia, Bolivia, Bulgaria, Canada, France, Israel, Korea, Poland, Russia, Spain, Ukraine, USA, and Venezuela;

2. A FIU as an organizational unit within the defense and law enforcement agencies of the state machine. The experience shows that a FIU within the enforcement agencies can easy collaborate with the other investigating and operating agencies on both domestic and international levels. Information prepared by such service is applicable for using as evidence in the course of both criminal investigation and trial; it is used in the other defense and law enforcement agencies. Such FIUs operate in Austria, Estonia, Germany, Hungary, Ireland, Sweden, and Great Britain;

3. FIU operating under jurisdiction of the Department of Justice or the Office of Public Prosecutor. Such units are represented in countries with the continental legal system where the Office of Public Prosecutor constitutes a part of the system of legal institution and has authority to control investigating agencies in respect of investigation supervision. Operation of a unit implies that the Office of Public Prosecutor is notified of shady financial operations and may immediately proceed to investigation if suspicion of a crime commitment is proved by the data received in the course of supervision of the commenced examination. Legal proceedings (for example, arrest of assets, freezing of bank accounts, conducting criminal interviews, caption and seizure) may be applied immediately in the course of investigation that is of great importance to cases concerned with legalization. FIUs of this type can function well in countries where, according to the Act of Bank Secrecy, strict statutory restrictions are applied and direct participation of the Office of Public Prosecutor is required to secure cooperation of banking institutions. Unlike the other state authorities, the Office of Public Prosecutor is the least prone to political impact. In the judgment of the experts, selection of Office of Public Prosecutor as a FIU location in the public authority system does not exclude existence of a special financial investigations service within the system of the Ministry of Internal Affairs. FIU of this type function in Cyprus and Luxemburg.

4. A hybrid type of FIUs endued with both administrative and investigative authorities. The examples are Denmark, States of Jersey, and Norway.

Taking into consideration the specific Russian problems - complexity of pursuing investigative activities, corruption of the law machinery, inaccessibility of information in banking institutions of Russia, and other aspects of investigation of crimes concerned with legalization of criminal proceeds – it would be advisable to study a possibility of transfer of the Federal Financial Monitoring Service (further - FFMS) from the jurisdiction of the Ministry of Finance of the Russian Federation under the jurisdiction of either the Office of Public Prosecutor of Russia or the Federal Security Service of Russia, i.e. the least prone to corruption and political impact defense and law enforcement agencies. In the economic environment of the Russian Federation such subordination will be more effective for coordination of operating and investigating actions, advancement of investigative procedures and operational procedural enforcement, such as arrest or freezing of bank accounts. Moreover, it will enable the Service of Financial Monitoring of Russia to carry out operative retrieval and investigation. At present, this public service created by analogy with the similar service in the USA though functioning beyond the Anglo-American legal system is unable to run operational activity. Inherently, the FFMS of Russia is just an intermediate between the law machinery and banks, financial institutions, and other organizations being of interest of the criminal community. Generally, this service’s activity currently comes rather to reports prepared by its director in respect of revealed queer transactions than to reports on cleared cases, frozen assets of criminals or amount of funds transferred to other countries and seized by court decision[6]. «The system of counteracting legalization of criminal proceeds created 3.5 years ago does work actively and the information flow is steadily growing», stated Victor Zubkov, the Head of the Federal Financial Monitoring Service, to journalists. «In 2004, we received 1,257,000 information messages», - Zubkov said. «While during only 9 months of this year [2005 – the author’s comment], the number of such messages have reached almost 2 millions»[7].

According to the statistics by the Central Information Center of the Ministry of Internal Affairs of Russia, 1003 money laundering crimes were revealed in 1998 and 28 persons were convicted; in 1999 - 965 crimes, 21 persons convicted; in 2000 - 1784 crimes, 28 persons convicted; in 2001 - 1439 crimes; in 2002 - 1076 crimes; in 2003 - 620 crimes, 46 persons convicted; in 2004 - 1977 crimes, 85 persons convicted; and in 2005 - 6942 crimes, 203 persons convicted. Even rough comparison of the number of criminal cases for 2005 (6942), the number of messages on shady operations from Mr. Zubkov’s statement, and amounts of the funds white-washed by criminals which, in experts’ opinion, estimated to billions of dollars testifies inefficient performance by this Service and its improper position in the structure of public authorities.

Thus, despite of compliance of the Russian system of anti-money laundering to the international regulations, its functioning, in practice, is far from being perfect. First of all, it follows from the number of cases brought against criminals and solved notorious cases when legalization of criminal proceeds is concerned with the activity of corrupted officials and criminal groups. Before 2005, the statistics of solved cases practically did not maintain and data on arrested assets and funds of criminal groups did not exist. Since 2005, the situation, in whole, has not changed. The increase in number of cases can be justified by all-around application of Article 174¹ of the Criminal Code of the Russian Federation (legalization of own criminal proceeds) by case investigators.

Consequently, the existing practice testifies that the legal provision on legalization in Russia, by its principal function – combating the organized crime, is, unfortunately, still not applied. Existence of the system of counteracting legalization not in the least signifies its successful functioning.

In Russia, this fact is, in many respects, is determined by a few reasons: novelty and imperfection of the legal provisions, lack of qualified personnel in this area, and, mainly, corruption of public services. The peculiarity of such crimes is participation in illegal schemes and perpetration of crimes by so called «white-collar criminals», i.e. privileged criminals with a legal or economic education, an academic degree, coat-tail, and, consequently, the threat that such persons may use not only sophisticated methods of legalization but also the standard (for Russia) mechanism of tampering with officials involved in bringing and investigating criminal cases concerned with legalization, is pretty high. In other words, such social phenomenon as corruption is one of the key factors precluding the use of the system of counteracting legalization in Russia – the unique mechanism that enables to wreck the financial basis of the organized crime and terrorism.