VZCZCXYZ0000
RR RUEHWEB

DE RUEHMO #0074/01 0141253
ZNR UUUUU ZZH
R 141253Z JAN 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 6105
INFO RHMFIUU/DEPT OF JUSTICE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS MOSCOW 000074 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR INL, SCT, EEB, AND EUR/RUS 
JUSTICE FOR AFMLS, OIA, OPDAT 
TREASURY FOR FINCEN 
 
E.O. 12958: N/A 
TAGS: EFIN KCRM KTFN SNAR RS
SUBJECT: RUSSIA REPORT FOR FINANCIAL CRIMES PORTION OF 2007-2008 
INSCR 
 
REF: (07) STATE 138130 
 
¶1.  (U) This message is sensitive but unclassified.  The tracked 
changes version of this report will be sent to individuals specified 
in reftel.  Post's point of contact for this report is Economic 
Officer Clayton Hays (hayscp@state.gov). 
 
¶2.  (SBU) Russia's financial system does not attract a significant 
portion of legal or illegal depositors, and therefore Russia is not 
considered an important regional financial center.  Criminal 
elements from Russia and neighboring countries continue to use 
Russia's financial system to launder money because of familiarity 
with the language, culture, and economic system. The majority of 
laundered funds do not appear to be from activities related to 
narcotics production or trafficking, although these activities 
occur.  Experts believe that most of the illicit funds flowing 
through Russia derive from domestic criminal or quasi-criminal 
activity, including evasion of tax and customs duties and smuggling 
operations.  Despite making progress in combating financial crime, 
Russia remains vulnerable to such activity because of its vast 
natural resource wealth, the pervasiveness of organized crime, and a 
high level of corruption. Other factors include porous borders, 
Russia's role as a geographic gateway to Europe and Asia, a weak 
banking system with low public confidence in it, and under-funding 
of regulatory and law enforcement agencies. However, due to rapid 
economic growth in various sectors, the number of depositors has 
steadily been increasing. 
 
¶3.  (U) Russia has recently changed its laws to allow direct foreign 
ownership and investment in Russian financial institutions.  Net 
private capital inflows for 2007 reached $82.3 billion according to 
the Russian Central Bank, an increase from $41.6 billion in 2006. 
In contrast to the capital flight that occurred during the 1990s, 
the majority of more recent outflows involved the legitimate 
movement of money to more secure and profitable investments abroad, 
which reflects the maturing of the Russian business sector. 
However, a portion of this money undoubtedly involved the proceeds 
of criminal activity.  According to official statistics, the trend 
toward net capital inflows involves the transfer of assets from tax 
havens, such as Cyprus and the Virgin Islands, previously known to 
be popular destinations for Russian capital outflows in the 1990s. 
 
¶4.  (U) Russia has the legislative and regulatory framework in place 
to pursue and prosecute financial crimes, including money laundering 
and terrorism finance.  The Russian Federation's Federal Law No. 
115-FZ "On Combating Legalization (Laundering) of Criminally Gained 
Income and Financing of Terrorism" became effective on February 1, 
2002, with subsequent amendments to the laws on banking, the 
securities markets, and the criminal code taking effect in October 
2002, January 2003, December 2003, and July 2004, respectively.  Law 
RF 115-FZ obligates banking and nonbanking financial institutions to 
monitor and report certain types of transactions, keep records, and 
identify their customers. 
 
¶5.  (U) According to the original language of RF 115-FZ, 
institutions legally required to report include: banks, credit 
organizations, securities market professionals, insurance and 
leasing companies, the federal postal service, jewelry and precious 
metals merchants, betting shops, and companies managing investment 
and nonstate pension funds.  Amendments to the law that came into 
force on August 31, 2004 extend the reporting obligation to real 
estate agents, lawyers and notaries, and to persons rendering legal 
or accounting services that involve certain transactions (e.g., 
managing money, securities, or other property; managing bank 
accounts or securities accounts; attracting or managing money for 
organizations; or incorporating, managing, and buying or selling 
organizations). 
 
¶6.  (U) Various regulatory bodies ensure compliance with Russia's 
anti-money laundering and counterterrorism finance laws.  The 
Central Bank of Russia (CBR) supervises credit institutions; the 
Federal Insurance Supervision Service oversees insurance companies; 
the Federal Service for Financial Markets regulates entities 
managing nongovernmental pension and investment funds, as well as 
professional participants in the securities sector; and the Assay 
Chamber (under the Ministry of Finance) supervises entities buying 
and selling precious metals or stones. 
 
¶7.  (U) The CBR has issued guidelines regarding anti-money 
laundering (AML) practices within credit institutions, including 
"know your customer" (KYC) and bank due diligence programs. Banks 
are required to obtain and retain for five years information 
regarding individuals and legal entities and beneficial owners of 
corporate entities.  Banks must also adopt internal compliance rules 
and procedures and appoint compliance officers.  The amendment to 
Law 115-FZ has required banks to identify the original source of 
 
funds and to report to the financial intelligence unit (FIU) all 
suspicious transactions since July 2004.  Institutions that fail to 
meet mandatory reporting requirements face revocation of their 
licenses to carry out relevant activity, limits on certain banking 
operations, and possible criminal or administrative penalties. An 
administrative fine of up to $16,700 can be levied against an 
institution, with a fine of up to $700 on an officer of an 
institution.  The maximum criminal penalty is 10 years in prison 
with applicable fines. 
 
¶8.  (U) All obligated financial institutions must monitor and report 
to the government: any transaction that equals or exceeds 600,000 
rubles (approximately $22,700) and involves or relates to cash 
payments, individuals or legal entities domiciled in states that do 
not participate in the international fight against money laundering, 
bank deposits, precious stones and metals, payments under life 
insurance policies, or gambling; all transactions of "extremist 
organizations" or individuals included on Russia's domestic list of 
such entities and individuals; and suspicious transactions. 
 
¶9.  (U) Since the CBR issued Order 1317-U in August 2003, Russian 
financial institutions must now report all transactions with their 
counterparts in offshore zones.  In some cases, offshore banks are 
also subject to enhanced due diligence and maintenance of additional 
mandatory reserves to offset potential risks undertaken when 
conducting specific transactions. The CBR has also raised the 
standards for offshore financial institutions, resulting in a 
reduction in the number of such institutions. Overall wire transfers 
from Russian banks to offshore financial centers have dropped 
significantly as a result of such regulatory measures. 
 
¶10.  (U) Foreign financial entities, including those from known 
offshore havens, are not permitted to operate directly in Russia; 
they must do so solely through subsidiaries incorporated in Russia, 
which are subject to domestic supervisory authorities.  During the 
process of incorporating and licensing these subsidiaries, Russian 
authorities must identify and investigate each director of the 
Russian unit, as nominee or anonymous directors are prohibited under 
Russian law.  In September 2005, the CBR completed its review of all 
banks that sought admission to the recently established Deposit 
Insurance System (DIS).  To gain admission to the DIS, a bank had to 
verifiably demonstrate to the CBR that it complies with Russian 
identification and transparency requirements.  Currently, 911 of 
Russia's 1,145 banks participate in the DIS. 
 
¶11.  (U) By law, Russian businesses must obtain government 
permission before opening operations abroad, including in offshore 
zones. A department within the Ministry of Economic Development and 
Trade (MEDT) reviews such requests from Russian firms, and once the 
MEDT approves, the CBR must then approve the overseas currency 
transfer. In either case, the regulatory body responsible for the 
offshore activity is the same as for domestic activity, i.e., the 
Federal Service for Financial Markets regulates brokerage and 
securities firms, while the CBR regulates banking activity. 
 
¶12.  (U) Article 8 of Law 115-FZ provides for the establishment of 
Russia's FIU, called the Federal Service for Financial Monitoring 
(FSFM). FSFM is an independent executive agency administratively 
subordinated to the Ministry of Finance. All financial institutions 
with an obligation to report certain transactions must report the 
required information to the FSFM. The FSFM is also the regulator for 
the real estate and leasing, pawnshops, and gaming services sectors. 
An administrative unit, it has no law enforcement investigative 
powers. Depending on the nature of the activity, the FSFM provides 
information to the appropriate law enforcement authorities for 
further investigation, i.e., the Economic Crimes Unit of the 
Ministry of Interior (MVD) for criminal matters, the Federal Drug 
Control Service (FSKN) for narcotics-related activity, or the 
Federal Security Service (FSB) for terrorism-related cases. 
 
¶13.  (U) In June 2005, President Putin approved a national strategy 
for combating money laundering and terrorism finance, part of which 
called for the creation of a new Interagency Commission on Money 
Laundering, comprised of twelve ministries and government 
departments. In addition to receiving, analyzing and disseminating 
information from the reporting entities, the FSFM has the 
responsibility of implementing the state policy to combat money 
laundering and terrorism financing.  The Interagency Commission is 
chaired by the head of the FSFM and is responsible for monitoring 
and coordinating the government's activity on money laundering and 
terrorism financing.  FSFM authorities credit cooperation among 
Commission members for the conviction of 257 individuals on money 
laundering charges between January and June 2006. 
 
¶14.  (U) Nearly all financial institutions submit reports to the 
FSFM via encrypted software provided by the FSFM.  According to 
 
press reports, Russia's national database contains over four million 
reports involving operations and deals worth approximately $900 
billion. The FSFM estimates that Russian citizens may have laundered 
as much as $11 billion in 2007. The FSFM receives approximately 
30,000 transaction reports daily.  Of these daily reports, 25 
percent result from mandatory (currency) transaction reports, and 75 
percent relate to suspicious transactions. 
 
¶15.  (U) Each of the FSFM's seven territorial offices corresponds 
with one of the federal districts that comprise the Russian 
Federation.  The Central Federal District office is headquartered in 
Moscow; the remaining six are located in the major financial and 
industrial centers throughout Russia (St. Petersburg, Ekaterinburg, 
Nizhny Novgorod, Khabarovsk, Novosibirsk and Rostov-on-Don).  The 
territorial offices coordinate with regional law enforcement and 
other authorities to enhance the information flow into the FSFM, and 
to supervise compliance with anti-money laundering and 
counterterrorism financing legislation by institutions under FSFM 
supervision. Additionally, the satellite offices must identify and 
register at the regional level all pawnshops, leasing and real 
estate firms, and gaming entities under their jurisdiction.  The 
regional offices also are charged with coordinating the efforts of 
the CBR and other supervisory agencies to implement anti-money 
laundering and counterterrorist financing regulations.  Russia's 
anti-money laundering law, as amended, provides the FSFM with the 
appropriate authority to gather information regarding the activities 
of investment foundations, nonstate pension funds, gambling 
businesses, real estate agents, lawyers and notaries, persons 
rendering legal/accountancy services, and sellers of precious metals 
and jewelry. 
 
¶16.  (U) During the first half of 2007, the FSFM registered 5,603 
crimes involving money laundering, compared to 7,957 reports for all 
of 2006.  Interior Ministry officials reported that 4,535 of the 
2007 cases went to trial.  Both the FSFM and MVD report that the 
number of suspicious transaction reports for the year roughly 
equaled those of 2006 and credit increased cooperation among law 
enforcement agencies for the number of cases brought to trial. 
 
¶17.  (U) As part of administrative reforms enacted in 2004, the FSKN 
now has a full division committed to money laundering, staffed by 
agents with experience in counter narcotics and economic crimes. 
This division cooperates closely with the FSFM in pursuing 
narcotics-related money laundering cases.  The FSKN reported that 
during 2007 it referred 14 cases of money laundering more than $60 
million for prosecution.  Consistent with Financial Action Task 
Force (FATF) recommendations, the criminal code was amended in 
December 2003 to remove a specific monetary threshold for crimes 
connected with money laundering, thus paving the way for prosecution 
of criminal offenses regardless of the sum involved. 
 
¶18.  (U) With its legislative and enforcement mechanisms in place, 
Russia has begun to prosecute high-level money laundering cases. 
During 2007, the CBR revoked the licenses of 44 banks for failing to 
observe banking regulations.  Of these, 30 banks lost their licenses 
for violating Russia's anti-money laundering laws.  Central Bank 
First Deputy Chairman Andrey Kozlov's effort to prohibit individuals 
convicted of money laundering from serving in leadership positions 
in the banking community remains a pending issue in the CBR. 
 
¶19.  (U) Russian legislation provides for the tracking, seizure and 
forfeiture of criminal proceeds.  None of this legislation is 
specifically tied to narcotics proceeds.  Legislation provides for 
investigative techniques such as search, seizure, and the 
identification, freezing, seizing, and confiscation of funds or 
other assets. Authorities can also compel targets to produce 
documents. Where sufficient grounds exist to suppose that property 
was obtained as the result of a crime, investigators and prosecutors 
can apply to the court to have the property frozen or seized. Law 
enforcement agencies have the power to identify and trace property 
that is, or may become, subject to confiscation or is suspected of 
being the proceeds of crime or terrorist financing. The law allows 
the FSFM, in concert with banks, to freeze possible 
terrorist-related financial transactions for one week: banks may 
freeze transactions for two days, and the FSFM may follow up with 
freezing for an additional five days. 
 
¶20.  (U) In accordance with its international agreements, Russia 
recognizes rulings of foreign courts relating to the confiscation of 
proceeds from crime within its territory and can transfer 
confiscated proceeds of crime to the foreign state whose court 
issued the confiscation order. However, Russian law still does not 
provide for the seizure of instruments of crime.  Businesses can be 
seized only if it can be shown that they were acquired with criminal 
proceeds.  Legitimate businesses cannot be seized solely on the 
basis that they were used to facilitate the commission of a crime. 
 
 
¶21.  (U) The Presidential Administration as well as Russian law 
enforcement agencies have expressed concern about ineffective 
implementation of Russia's confiscation laws.  The government has 
proposed amendments that are currently under review by the Duma 
(Parliament) which would make it easier to identify and seize 
criminal instrumentalities and proceeds.  While Russian law 
enforcement has adequate police powers to trace assets, and the law 
permits confiscation of assets, most Russian law enforcement 
personnel lack experience and expertise in these areas. 
 
¶22.  (U) The Russian Federation has enacted several pieces of 
legislation and issued executive orders to strengthen its ability to 
fight terrorism.  On January 11, 2002, President Putin signed a 
decree entitled "On Measures to Implement the UN Security Council 
Resolution (UNSCR) No. 1373 of September 28, 2001."  Noteworthy 
among this decree's provisions are the introduction of criminal 
liability for intentionally providing or collecting assets for 
terrorist use, and the instructions to relevant agencies to seize 
assets of terrorist groups.  When this latter clause conflicted with 
existing domestic legislation, the Duma within the year approved an 
amendment to the anti-money laundering law, resolving the conflict 
and allowing banks to freeze assets immediately pursuant to UNSCR 
¶1373. Article 205.1 of the criminal code, enacted in October 2002, 
criminalizes terrorist financing.  On October 31, 2002, the 
Federation Council, Russia's upper house, approved a supplemental 
article to the 2003 federal budget, allocating from surplus 
government revenues an additional 3 billion rubles ($1.1 million) in 
support of federal counterterrorism programs and improvement of 
national security. 
 
¶23.  (U) The FSFM reports that in regard to terrorism financing, it 
has compiled a list of 1,300 organizations and individuals suspected 
of financing terrorism, 400 of which were foreign.  There are five 
sources of information that may designate entities for inclusion on 
the FSFM's list of proscribed organizations. International 
organizations' designations, such as the UN 1267 Sanctions 
Committee, constitute the first source. Second, Russian court 
decisions provide a basis for inclusion.  Third, resolutions from 
the Prosecutor General can identify individuals and organizations 
for inclusion. Fourth, Ministry of Interior investigations serve as 
a basis for inclusion if subsequent court decisions do not dismiss 
the investigation's findings.  Finally, bilateral agreements, which 
include information sharing regarding entities on the counterpart's 
entities list, may provide a basis for inclusion on the FSFM list. 
 
¶24.  (U) At the request of the General Procuracy, the Russian 
Supreme Court has, to date, authorized an official list of 17 
terrorist organizations.  According to press reports, this 
designation allows Russian law enforcement agencies to seize the 
organizations' financial assets immediately, whereas the FSFM 
designation provides a basis for financial institutions to include 
information about the organizations in suspicious transaction 
reports.  Although Russia has actively assisted the U.S. in 
investigating cases involving terrorist financing, Russia and the 
U.S. continue to differ about the purpose of the UN 1267 Sanctions 
Committee's designation process.  These political differences have 
hampered bilateral cooperation in this forum. 
 
¶25.  (U) The United States and Russia signed a Mutual Legal 
Assistance Treaty in 1999, which entered into force on January 31, 
¶2002.  The FSFM has signed cooperation agreements with the Financial 
Intelligence Units (FIUs) of 24 countries, including the United 
States.  The FSFM has been an active member of the Egmont Group 
since June 2002, having sponsored candidate FIUs from the former 
Soviet republics, including current FIU members in Ukraine and 
Georgia.  U.S. law enforcement agencies exchange operational 
information with their Russian counterparts on a regular basis.  In 
2005, Russian law enforcement agencies cooperated with the U.S. in a 
high-profile case that led to the conviction of a Russian national 
in a U.S. District Court on charges that he laundered over $130 
million through a Moscow bank.  The individual was sentenced to 51 
months imprisonment and ordered to pay $17.4 million in restitution 
to the Russian government. This close cooperation between Russian 
and U.S. agencies has continued and strengthened in 2006. 
 
¶26.  (U) Russia became a full member of the Financial Action Task 
Force in June 2003 and participates as an active member in two 
FATF-style regional bodies.  It is a member of the Council of 
Europe's Select Committee of Experts on the Evaluation of Anti-Money 
Laundering Measures (MONEYVAL) and was instrumental in the creation 
of the Eurasian Group on Combating Legalization of Proceeds from 
Crime and Terrorist Financing (EAG).  The EAG Secretariat is located 
in Moscow. In December 2005, under the auspices of the EAG, the FSFM 
established the International Training and Methodological Center of 
Financial Monitoring (ITMCFM). The main function of the Center is to 
 
provide technical assistance to EAG member-states, primarily in the 
form of staff training for FIUs and other interested ministries and 
agencies involved in AML/CFT efforts.  The ITMCFM also conducts 
research on AML/CFT issues.  As Chairman of the EAG, Russia's FIU 
continues to play a strong leadership role in bringing the region up 
to international standards in its capacity to fight money laundering 
and terrorism financing. 
 
¶27.  (U) Russia ratified the Council of Europe Convention on 
Laundering, Search, Seizure, and Confiscation of the Proceeds from 
Crime in January 2001. Russia is a party to the 1988 UN Drug 
Convention and on May 26, 2004, became a party to the UN Convention 
against Transnational Organized Crime. In November 2002, Russia 
ratified the UN International Convention for the Suppression of the 
Financing of Terrorism. Russia also became a signatory to, and 
ratified on May 9, 2006, the UN Convention against Corruption. 
 
¶28.  (U) Through aggressive enactment and implementation of 
comprehensive money laundering and counterterrorism financing 
legislation, Russia now has well-established legal and enforcement 
frameworks to deal with money laundering and terrorism financing. 
Given its role in the creation and maintenance of the EAG, Russia 
has also demonstrated the will and capability to improve the 
region's capacity for countering money laundering and terrorism 
financing. 
 
¶29.  (U) Nevertheless, serious vulnerabilities remain. Russia is 
among the world's most sophisticated perpetrators of fraud and money 
laundering through electronic and internet-related means.  To meet 
its goal of combating money laundering and corruption, Russia needs 
to follow through on its commitment to improve CBR oversight of 
shell companies and scrutinize more closely those banks that do not 
carry out traditional banking activities, including making all 
offshore operations subject to the identical due diligence and 
reporting requirements as other sectors.  To prevent endemic 
corruption and deficiencies in the business environment from 
undermining Russia's efforts to establish a well-functioning 
anti-money laundering and counterterrorism finance regime, Russia 
should strive to stamp out official corruption, particularly at high 
levels, and to increase transparency in the financial sector and the 
corporate environment.  Russia should also commit adequate resources 
to its regulatory and law enforcement entities in order to help them 
fulfill their responsibilities.  Additionally, Russia should work to 
increase the effectiveness of its confiscation laws and their 
implementation including enacting legislation providing for the 
seizure of instruments, in addition to the proceeds, of criminal 
activity.  Finally, Russia should continue to play a leadership role 
in the region with regard to anti-money laundering and 
counterterrorist finance regime implementation. 
 
BURNS