Reliance on private companies jeopardize sanctions
Billionaire Eugene Shvidler has earned a place in the record books as the first person ever (!) to challenge U.K. sanctions in court. This isn’t admittedly as big a deal as it sounds, since Britain only gained the ability to sanction people unilaterally when it left the European Union, but still, I’m sure it’s a comfort to him to know that — win or lose — he’ll always have his small place in history.
Shvidler is represented by Peters & Peters, a London law firm, and I should be careful what I say here because the last time I had formal dealings with them (they threatened legal action against a film I made, which mentioned one of their clients), it was so stressful that I lost four kilos in a week. Still, like them or loathe them, I can’t deny that they’re good at their jobs: We never did get to screen the film, which is a shame because it was really interesting.
Shvidler was added to the sanctions list in March last year, with the official reason being that he had close relations with Roman Abramovich, who in turn was — according to the U.K. — “involved in obtaining a benefit from or supporting the Government of Russia.” Shvidler’s lawyers say the British government made “significant errors” in assessing their client’s relationship with Abramovich, and this is what will be examined by a judge.
Although sanctions sound like a law enforcement tool, they are in reality a political instrument imposed when a government minister decides they should be, if he or she “has reasonable grounds to suspect the person is involved in, or connected to, an activity set out in the regulations for a particular sanctions regime.” The regime in turn is laid out by a particular piece of legislation. In this case, the sanctions are intended to support Ukraine’s sovereignty and to urge Russia to de-escalate.
When the U.K.’s sanctions law was passed in early 2022, it still looked possible that Russia would refrain from invading Ukraine or that threatening to cost oligarchs money would persuade them to put pressure on Vladimir Putin to show restraint. The justification for maintaining the sanctions is now more about degrading Russia’s war machine, and it looks like Shvidler’s lawyer may be picking up on this shift in emphasis in his appeal hearing.
- “He has spoken out against the war and he cannot conceivably influence Russian government actions in Ukraine, which is meant to be the purpose of these sanctions,” Michael O’Kane of Peters & Peters told the Guardian.
According to comments made by a spokesman to OCCRP’s Russian Asset Tracker, Shvidler has not been to Russia since 2007 and has no ties to the Kremlin. (He does have a very nice-looking yacht.)
It will be interesting to see if Shvidler is the first of many to challenge his designation or an outlier, but either way it will be an important test case for the post-Brexit legislation, which obliges the government to revoke any designation if the conditions for it are not met. Judges have not had their say on this yet, but they do have a history of being markedly less enthusiastic about agencies making expansive use of new powers than those agencies are about using them (for example, Unexplained Wealth Orders).
In the EU, however, presumably in a sign of the relatively greater significance of EU sanctions on oligarchs’ ability to function, there are dozens of challenges against the designation process and the resulting legal pile-up has reached epic proportions. In fact, challenges to previous designations from previous rounds of sanctions are now bumping into more recent ones (Yanukovych, for example, is now rubbing shoulders with Mordashov and Melnichenko) in a manner that suggests that the courts are going to be busy for decades. Verily, being a sanctions lawyer is the 21st century’s gift that keeps on giving, not least because sanctions offices are having to expand in response, which involves them hiring ever more lawyers.
Staffing at the U.K.’s Office for Financial Sanctions Implementation has tripled over the last year, to around a hundred. The EU’s regulations are vast in scope, involving staff in every member state. I suspect that officials in Europe are slightly envious of their colleagues in the United States, however, since U.S. sanctions are not challengeable in court. Sanctioned individuals can write a petition to ask to be removed from the Office of Foreign Asset Control’s list, but the decision will be made by OFAC officers themselves.
Anyway, be that as it may, if EU history is any guide to the U.K. present, even if Shvidler wins, he may not be free of restrictions on his actions: European officials have consistently re-designated former Ukrainian officials even as those officials have won their court challenges against designation, sometimes many times over, and perhaps British officials will do the same.
ARE YOU COMPLIANT?
One of the reasons that politicians like sanctions so much is that they’re cheap. All a government has to do is to publish a list of all the people it thinks shouldn’t be welcome in its economy anymore, and it can leave the implementation to someone else. Private sector companies are obliged to comply with the government’s decision and — at their own expense — to conduct the necessary “due diligence” to make sure no one is sneaking in through a back door. You can see why politicians like it: There’s no cost to them, and the blame if it goes wrong falls on the bankers.
The downside, of course, is that financial firms’ compliance departments have ended up being an absolutely crucial element of the plan to squeeze Kremlin insiders out of the deep, rich and profitable markets of the West. So, how’s that going? Here are a couple of articles from the Financial Times which have caught my attention of late and which suggest that it’s not going well.
- “The bank’s official due diligence file on Roldugin contained only a printout of the website for the Mariinsky theater in St. Petersburg — where Roldugin was a conductor — and a single negative search result on Worldcheck, a compliance database.”
- “A sanctions-hit Russian warlord who has been accused of human rights abuses around the world was able to pass U.K. anti-money laundering checks by submitting a utility bill in the name of his 81-year-old mother.”
This reveals a problem at the core of what, for the lack of an alternative, I’ll refer to as our global anti-money laundering system. We are reliant on private companies to guard the gates of the financial system, and they in turn subcontract to other private companies for the information they use to make judgments on who they should admit. Those other private companies are trying to form a complete picture from incomplete fragments of information at a competitive price, and so we end up with printouts of theater websites or someone’s mum’s gas bill substituting for actual due diligence.
This is why proper transparency of ownership is so important. Instead of companies like Worldcheck attempting to assemble those fragments into a coherent whole, compliance officers should have reliable, easily accessible, government-verified information on who owns what available at the touch of a mouse button. Sadly, it looks like efforts to create a more transparent system in the United States are running aground.
- “State, local and tribal law enforcement — those on the front lines of the fight against fentanyl — will face a mountain of paperwork to access information that could be time-critical in saving American lives. U.S. banks legally required to identify and report suspicious transactions by cartels, terrorists and spies have also had their access severely restricted. As if that weren’t enough, trusted allies like the United Kingdom that readily share their registers with our law enforcement agents will also be blocked,” notes Nate Sibley in this analysis of the U.S. Department of Treasury’s rules for how the corporate registry will work.
This is another demonstration of a crucial principle in efforts to tackle financial crime, which is that politicians need to pay at least as much attention to how laws are interpreted and then implemented as they do to passing them in the first place. Otherwise, you end up with ever-more bureaucratic nonsense, ever-more expense and ever-more dirty cash.
And it’s not just people like Sibley who are concerned about the proposed system, which does indeed look remarkably non-transparent, considering it was created by a Corporate Transparency Act. As it stands, banks will have access to corporate registries for the purpose of establishing clients’ identities but then will not be allowed to use that same information for the purpose of complying with anti-money laundering rules. This creates the potentially bizarre outcome of bankers knowing that money is being laundered, but not being allowed to report it, not least since they’re not allowed to share information from the registry with people outside the United States.
- “The proposal creates a framework in which banks’ access to the Registry will be so limited that it will effectively be useless, resulting in a dual reporting regime for both banks and small businesses,” stated a letter to FinCEN signed by the American Bankers Association plus the bankers associations of every state in the union. “As conceived, the proposal is fatally flawed and should be withdrawn.”
And that’s just the start of the problem.
- “An even more dangerous threat to the anti-money laundering value of the statute comes from a seemingly innocuous place — the form that FinCEN has proposed to collect information from reporting entities. Within the 14 fields that reporting entities must report — for instance, their street address, or the name and license number of their true owner — they may mark in 11 of those that they are ‘unable to get the information.’ The draft form effectively renders the entire reporting regime under Corporate Transparency Act optional,” said FACT’s government affairs director Erica Hanichak.
I sincerely hope FinCEN is taking this on board, but I sincerely doubt that it is, because the story arc of officials-realizing-new-anti-money-laundering-measures-are-useless-then-crafting-new-ones has always taken at least a decade in the past, and why should anyone show any urgency now?
On the subject of FinCEN, I found this piece interesting about the way its officials attempt to balance the need to stop foreign banks from bringing dirty cash into the United States with the desire to avoid destabilizing the financial systems of fragile countries. FinCEN can, however, act against suspicious Russian institutions directly and without additional oversight, and in January acted against Bitzlato, a crypto exchange, so I hope it continues to do so in light of suggestions that U.S. officials are increasingly concerned about third countries facilitating sanctions-busting.
Last week, I asked rhetorically whether the elaborate names given to bills by American congresspeople help them to become law. And then, because this newsletter has the best readers of any newsletter anywhere, I got an answer in the form of this paper. Three forward-thinking academics surveyed a select group of Americans and concluded that a good acronym goes a long way.
- “In our degraded informational ecosystem, where a disturbing number of voters find themselves in a media echo-chamber, a constantly repeated acronym buffeted by evocative imagery might take on special power, swaying more voters across the political spectrum. It is disturbing to think that legislative success might turn on marketing rather than actual improvement. Yet, today’s deep partisan divide has brought an ever growing need to motivate core supporters. Tactical titles may be employed to help push a law over the top.”
So the conclusion is that this isn’t such a fun subject after all and appears to be as depressing as everything else. Sigh.
WHAT I’VE BEEN READING
I’m enjoying “Slouching Towards Utopia” by Brad DeLong, though I’m aware that everyone else has probably already read it. It’s engagingly written, which counts for a colossal amount for a book about economics, although it does feel like it’s currently taking an excessively long time to recount the story of hyperinflation in Germany, which I’ve definitely read enough times in the past.
By the way, in the unlikely event you feel you don’t get enough of me talking about why action against financial crime is important, here’s an interview I gave last week to the Silicon Curtain YouTube channel, which you can watch, if you are so minded.