RUSSIA AND THE FATF BLACKLIST

By Elena Chinyaeva

Russian officials made a presentation last month to the Financial Action Task Force, a twenty-nine-nation agency the G-7 countries established in 1989 to combat money laundering. They hoped to persuade the FATF that recent reforms merit crossing Russia off the list of “noncooperating countries” that could face international financial sanctions. They failed. The FATF de-listed Hungary, Israel, Lebanon and St. Kitts and Nevis, (and added Grenada and Ukraine), but left Russia’s position on the blacklist unchanged. Russia’s active role in the antiterror coalition apparently did not soften the evaluation of the country’s efforts to clean up its notoriously sloppy financial controls.

Russia’s place on the blacklist was a product of capital flight as much as of money laundering. Capital has been leaving Russia at least since 1992, when the distribution of state property to private parties really accelerated. The West cared little about the practice until 1999, when American and European authorities began to investigate the possible laundering of IMF credits through the Bank of New York. The Bank of New York investigation fizzled, but the pressure generated by the scandal had much to do with the FATF decision in June 2000 to put Russia, together with eighteen other states, on its list of “noncooperating” countries. Russia then met ten of twenty “deficiencies” the FATF identified as criteria for noncooperation.

Between June 2000 and June 2002, Russia took many steps to comply with Western requirements. Legislation “On Combating the Laundering of Income Obtained by Criminal Means” was enacted in August 2001 and took effect in February of this year. The law compels banks to report suspicious transactions involving US$20,000 or more, and established an interagency financial intelligence unit to act on such reports. Law enforcement agencies have initiated some forty cases under the moneylaundering law. Investigations of Lukoil and Gazprom caused sharp if temporary declines in their share prices on the stock exchange.

After September 11, when Western concerns about money laundering expanded to include the financing of terrorist networks, President Putin tightened the rules with a decree establishing criminal penalties for bank officials who fail to report suspicious transactions. Viktor Melnikov, the Central Bank’s deputy chairman for currency control, said in February that bank secrecy is not observed in Russia. (President Putin a month earlier had commented to the World Economic Forum that bank secrecy has never been observed in Russia–but he was not speaking of law enforcement.) On May 27, Sergei Stepashin, the director of the State Audit Chamber, became head of the international association of agencies of financial control (EUROSAI). On June 5, Russia’s financial intelligence unit was accepted as a member of the international Egmont group that serves as a clearinghouse for information. And, on June 17, the day before Russia’s presentation to the FATF, President Putin sent amendments to the Duma to tighten anti-moneylaundering controls on transactions that could be used to finance terrorism and to impose new criminal penalties for violations.

But all these measures have been to no avail, or at least not yet. Putin still has received no economic benefit from the West (except for confirmation of Russia’s market economy status) despite his good behavior.

But Vladimir Putin is a black belt in judo. He knows how to turn his opponent’s attack to his own advantage.

On June 19, the day after the presentation in Paris, the president held a two-hour meeting with one of his favorite bankers, Sergei Pugachev, apparently to discuss the return of Russian flight capital from its offshore havens. The Pugachev meeting also followed by a day Putin’s appearance at the Fourth Congress of the Trade and Industrial Chamber of Russia, where Putin offered a kind of amnesty to flight capital. Looking at National Security Council Chairman Vladimir Rushailo and the Minister of Economic Development and Trade German Gref, the president said: “The state should not demand to know where these funds are coming from, because the state itself for a long time failed to provide favorable conditions for investment.”

Plans for an amnesty to promote the return of flight capital have in fact been under discussion for some time. The government’s representative to the supreme court, Mikhail Barshchevsky, is working on the legal framework for an amnesty. Also under review is a tax break to cut the tax on returning flight capital from the usual 13 percent (the flat tax rate applied to income) to an “amnesty rate” of 5 percent.

Putin used the threat of FATF sanctions to underscore his point. Russian businessmen should hurry to bring their money home, he warned. The West will not relax its fight against money laundering, which has become part of the war against terrorism, he said. But the West also will not want to lose the Russian money deposited there. The assets could be frozen, he said, and effectively lost to their Russian owners.

The amounts involved are not small. Russia has in essence invested huge amounts of capital in the West. The Russian Ministry of the Interior estimates, that in 1992-1998, about US$45-$50 billion left the country illegally each year, though in 1999-2001 the figure dropped to US$25-$30 billion. John Odling-Smee, the head of the IMF’s Russian department, gives the more optimistic figure of US$15 billion for the period between May 1, 2001 and April 30, 2002. The former president of the Central Bank, Viktor Gerashchenko, reckons that only about US$$5-8 billion per year of capital flight could be reliably considered as coming from criminal activities; the rest, he says, was driven away by high taxation. Very recently, some flight capital may have returned. The Ministry of the Interior estimates that about 30 percent the of money illegally exported in 1999-2001 has come back for investment in Russia.

If the West ceases to be a comfortable refuge for Russian capital, perhaps more of that capital will come home. The West’s hard line may end up boosting Russian investment in Russia.

Elena Chinyaeva, who holds a doctorate in modern history from Oxford University, is a writer with the leading Russian political weekly Kommersant-Vlast.