Russian Risks: Valuable Watchlists to Monitor

It’s no secret that fighting financial crime depends on knowing your customers. Yet current AML/CFT regulations provide merely a starting point for this. The emphasis regulators place on taking a risk-based approach leaves much to an individual financial institution’s best judgment. It’s, therefore, critical that financial institutions continually explore new ways of identifying the true identities of their prospective and current customers — and by extension, of accurately assessing the risk of doing business with them.

Further, the list of industries involved in the fight against financial crime is growing. It’s less and less — as much as it ever was — a problem only banks confront. Securities, real estate, high-value commodities and other sectors are all exposed to money laundering risks. As a result, the regulators of these industries are publishing valuable data that shouldn’t be ignored. 

Using the example of Russia, a country where corruption permeates many levels of society, we explore below how that data can help identify risks to the financial system that might otherwise go undetected.

A Sneaky Securities Scheme in Russia

Securities have long been singled out as vulnerable to manipulation. Buy and sell orders can be executed quickly, in large volumes, and regardless of national borders. FATF, in a 2009 report, acknowledged this and said, “the securities sector is perhaps unique…in that it can be used both to launder illicit funds obtained elsewhere, and to generate illicit funds within the industry itself through fraudulent activities.”

Add corruption and lax adherence to AML/CFT controls, and securities become an extremely effective vehicle for the illicit movement of money.

The Russian “mirror trading” scheme, through which $10 billion was moved out of Russia between 2011 and 2015, provides an eloquent example. A company in Moscow would buy Russian blue-chip stocks using the local currency only to have a related company elsewhere sell the same stock at the same value for dollars. The trades were made possible by Deutsche Bank — specifically the broker-dealers and employees of the bank’s Moscow branch — and provided a way for Russian nationals to evade currency controls, taxes and possibly launder money made from illicit activities.

The beleaguered Deutsche Bank, which had already come under fire for its involvement in scandals such as the Russian Laundromat, was slapped with a $425 million fine and has suffered extreme reputational damage as a result of the scandal coming to light.

Casting a Wider Securities Net

While by some standards, Russian regulators gave merely symbolic punishments to those found to be involved with the mirror trades scandal, there’s a curious pattern concerning the number of licensed securities market participants after the scandal broke: in 2017, 614 license-holding participants in the securities market were to be found, almost 50% less than the 1149 license-holders in 2013. So, the corruption within this sector isn’t going unnoticed.

As the Russian Federation Central Bank is the main actor tackling issues related to the securities sector, lists such as the two below would serve to flag individuals operating with canceled or suspended licenses:

• Russian Federation Central Bank Stocks and Bonds Market Cancelled Licenses of Professional Securities Market Participants
• Russian Federation Central Bank Stocks and Bonds Market Suspended Licenses of Professional Securities Market Participants

Moreover, the below lists from the same entity serve to provide even more context and identify additional high-risk individuals that operate within the securities sector:

• Russian Federation Central Bank Stocks and Bonds Market Cancelled Certificates of financial market specialists
• Russian Federation Central Bank Administrative Proceedings
• Russian Federation Central Bank Revoked Insider Certificates

Designated Non-Financial Business and Professions (DNFBPs)

The securities sector may be unique in its ability to facilitate the generation of ill-gotten wealth. But the tendency for criminals to recruit industry professionals as conspirators is not. Nor is it confined to those professionals within the financial sector. Continuing with the example of Russia, it’s worth evaluating certain designated non-financial businesses and professions with an eye toward their susceptibility to money laundering. They include:

Tax evasion:

In Russia’s National Money Laundering Risk Assessment (NRA ML) for 2017–2018, tax crimes ranked high on the list of key areas of concern — specifically, VAT fraud and tax evasion. It’s worth noting that the country has taken significant steps to curb both in recent years. Yet when tax officials are complicit, bypassing those steps is still possible.

Lists such as the “Russian Federation Federal Tax Service Legal entities whose executive bodies include disqualified persons” can help to flag tax entities that may pose a higher than normal risk.

Precious stones and metals:

Russia’s export economy relies heavily on its mining industry, which includes oil and gas but also precious stones and metals. Unsurprisingly, high foreign demand makes smuggling and illegal extraction of these resources attractive to bad actors and is a major predicate offense for money laundering.

Further, as Russia’s NRA ML indicates, AML legislation has not been sufficiently implemented, and diligence in reporting suspicious transactions has been lacking: curiously, for instance, the number of STRs filed for precious stones and metals from 2014–2018 remained somehow constant, ranging between 3,500 and 4,700.

The Assay Chamber is responsible for overseeing this sector’s compliance with trade regulations. Therefore, lists such as the “Russian Federation State Assay Office Results of AML Supervision,” which covers entities found to be in breach of AML requirements, can help to flag high-risk entities.

Gambling

While gambling is mentioned in the NRA ML as low risk in comparison to other industries, this sector is still worth keeping an eye on. With casinos only officially permitted in four special zones and online gambling prohibited, illegal gambling and lotteries have sprung up to meet demand.

Indeed, one estimate calculates that Russians spent around $11.8 billion on sports betting in 2017 and that 65% of that went to unregulated providers. Further, the Federal Tax Service (FTS), which supervises this industry, discovered approximately 95,000 illegal online gambling providers in the space of two years (2016–2018).

Given its prevalence, monitoring those identified as offering illegal gambling or illegal lotteries would be beneficial for financial institutions when determining their risk exposure. Therefore, lists such as the Russian Federation Federal Tax Service’s “Entities Offering Illegal Gambling” and “Entities Offering Illegal Lotteries” can help to flag high-risk entities.

Flexibility and Variety Is Key

The global AML landscape remains complex and poses multiple challenges, which require a flexible approach in collecting and categorizing relevant lists to screen against. Russia is simply one example of how this flexible approach can be applied to provide further context. To ensure financial institutions benefit from the most up-to-date information for risk mitigation, they must look for providers that not only screen against the usual sanctions and watchlists but also against other relevant data from a variety of high-risk sectors.

This is something we at ComplyAdvantage strive to do. We continually monitor regulatory developments and expand our database offerings to provide information that tackles AML/CFT risks from a great variety of sectors, from the financial sector to DNFBPs and non-governmental organizations and charities.

Originally published October 22, 2020, updated May 5, 2022