Feb 25, 2022 - Politics & Policy

Secrecy undercuts sanctions' impact

Illustration of Benjamin Franklin from a hundred dollar bill peaking out from behind an "open" American flag

Illustration: Sarah Grillo/Axios

The sanctions aimed at punishing Russia's invasion of Ukraine will likely face a self-inflicted obstacle, experts tell Axios: opaque financial vehicles allowing illicit foreign assets to flow through Western economies.

Why it matters: Financial transparency advocates have warned for years that lax disclosure of such transfers allows malicious foreign actors to hide their immense wealth. Now, it could imperil U.S. efforts to inflict pain on individual Kremlin officials behind the country's attack on its western neighbor.

  • Lawmakers and regulators are still grappling with the explosion of cryptocurrencies and other digital assets, many of which are difficult or impossible to trace.
  • U.S. law enforcement also believes hundreds of millions in Russian assets are tied up in private U.S. investment funds.
  • And officials on both sides of the Atlantic are eyeing ways to address the massive amounts of Russian money tied up in Western real estate.

The big picture: Lawmakers have been ratcheting up sanctions to exact a larger financial toll on Russian President Vladimir Putin and his inner circle.

  • On Tuesday, President Biden announced an initial "tranche" of sanctions against two Russian banks and three individuals, including the sons of two senior Kremlin officials.
  • On Thursday, less than 24 hours after the Russians began their invasion of Ukraine, the president announced a second and more far-reaching wave.
  • The sanctions will "impose severe cost on the Russian economy, both immediately and over time," Biden said.
  • A senior administration official told Axios: "We are extending the reach of U.S. sanctions to prevent the elites close to Putin from using their kids to hide assets, evade costs and squander the resources of the Russian people. This is a new approach. Other Russian elites and their family members are on notice."
  • Biden did not answer questions on Thursday about any plans to personally sanction Putin, whose wealth is estimated to be in the billions.

That's a route being pushed by Sen. Lindsey Graham (R-S.C.), who's calling for an interagency task force targeting the Russian president.

  • “I want this task force to go after Putin’s assets personally,” he said on Tuesday.

Across the Atlantic, British authorities plan to restrict Russian access to financial markets and crack down on the oligarch's extensive high-end real estate purchases, in addition to sanctions on individuals and financial institutions.

  • London is a Mecca for wealthy Russians, both for its palatial homes and its high-end restaurants and shopping.
  • “We are making sure that we open up the Russian doll of property ownership, of company ownership, in London and see who’s behind everything," Prime Minister Boris Johnson told the BBC on Sunday.
  • Transparency advocates nonetheless say the country does not yet have adequate measures to go after what has been dubbed "Moscow-on-Thames."

Identifying and isolating Russian assets may prove difficult due to gaps in financial transparency measures.

  • The FBI warned last year that opacity in the private equity and hedge fund markets was enabling money laundering at a huge scale.
  • One New York-based private equity firm received more than $100 million from a company tied to Russian organized crime, the bureau said.
  • U.S. states with minimal corporate disclosure requirements also provide easy means of concealing corporate ownership.
  • Cryptocurrencies and digital assets such as NFTs have added new, easily accessible and difficult-to-trace financial vehicles.
  • Moscow is suspected to house numerous crypto money laundering ventures.

What they're saying: "I’m confident we can hit Putin and his oligarchs hard," Sen. Sheldon Whitehouse (D-R.I.) told Axios. "But shining the light of transparency on the dark channels through which kleptocrats move their money will make applying that pressure much easier."

  • On Tuesday, Whitehouse urged the Biden administration to step up scrutiny of cash-only purchases of U.S. real estate, citing the potential for money laundering and sanctions evasion.
  • Anti-money laundering measures targeting real estate sales were among the components of a broader anti-corruption package the White House released late last year.
  • "We also need to address the American professionals who, wittingly or not, aid and abet our enemies by hiding their ill-gotten gains," Whitehouse said, specifically citing fund managers who "manage trillions of dollars without any anti-money-laundering safeguards."

But, but, but: Any U.S. effort to go after individual Russians' assets will need to be broad and comprehensive to be effective, according to Casey Michel, a Hudson Institute fellow and the author of "American Kleptocracy."

  • "It's wonderful that American legislators talking about coming after these kinds of oligarchy assets, seizing them outright," Michel told Axios in an interview. But "it is not any kind of panacea."
  • "It's great that the U.S. is taking leadership on this, but it has to be done in tandem with partners elsewhere ... whether that's the U.K., whether that's France, whether that's non-NATO members like Switzerland or Cyprus. It can't happen in the U.S. alone."
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