Legal Alert

Russian Sanctions Redux: FinCEN Issues Guidance on Suspicious Transactions and Evasion

by Peter D. Hardy and Shauna Pierson
March 24, 2022

Summary

The Financial Crimes Enforcement Network (FinCEN) issued alerts this month calling for increased vigilance in the face of potential evasion of Russian sanctions. FinCEN also offered guidance to financial institutions in detecting suspicious transactions involving high-value assets.

The Upshot

  • The U.S. has taken action to freeze certain Russian assets held in the U.S., to impose blocking sanctions against Russian individuals and entities, and to prohibit or restrict certain transactions involving Russian goods, services, and financial instruments.
  • FinCEN divides high-value assets that pose a particular risk of sanctions evasion into three categories, each with their own red flags: Real Estate; Art; and Precious Metals, Stones, and Jewelry.
  • There is an open question regarding who exactly is subject to FinCEN’s broad terms, and would thereby trigger the reporting of suspicious transactions and the freezing of related accounts.

The Bottom Line

FinCEN is sending the message that it predicts an increased risk of money laundering as a result of the expansive reach of Russian sanctions coupled with a weakened Russian economy.

Sanctions involving Russia are a front-burner issue for all businesses, but particularly for financial institutions. As we recently blogged, the Financial Crimes Enforcement Network (FinCEN) issued an alert on March 7 calling for increased vigilance in the face of potential evasion of Russian sanctions. FinCEN provided red flags to assist in identifying potential sanctions-evasion activity, particularly with respect to convertible virtual currency (CVC) and/or cybercrime. For example, sanctioned individuals may seek to evade sanctions and protect their assets by utilizing a CVC exchanger in a high-risk jurisdiction with deficiencies in anti-money laundering regulations and due diligence measures (especially as those apply to CVC).

On March 16, FinCEN issued its second alert on the topic (the Alert), reiterating the need for increased vigilance and assisting financial institutions in detecting suspicious transactions involving high-value assets to evade sanctions.

The Alert provides guidance to financial institutions on how to identify suspicious transactions relating to the use of certain high-value assets by Russian elites, their family members and their “proxies.” The Alert reminds financial institutions of the importance of quickly identifying suspicious activity related to the disposition of sanctioned Russian assets. The Alert also highlights the international and domestic task forces that were formed to effectuate the sanctions laws we describe below, emphasizing the need for cross-agency collaboration and information sharing to achieve the common goal of sanctioning Russia’s power players. However, the Alert unfortunately offers no guidance on how “proxies” should be identified or defined.

Current U.S. Sanctions Placed in Response to Russia’s Invasion of Ukraine

Broadly speaking, the U.S. has taken action to freeze certain Russian assets held in the U.S., to impose blocking sanctions against Russian individuals and entities (as well as Belarusian individuals and entities due to Belarus’s support for the invasion), and to prohibit and/or restrict certain transactions involving Russian goods, services and financial instruments (see here and here).

Specifically, those actions include (among other things): (i) freezing the assets of the Bank of Russia held within the U.S.; (ii) sanctions on major Russian banks and their subsidiaries; (iii) sanctions on Vladimir Putin, the Ministry of Foreign Affairs, members of Russia’s Security Counsel, Putin’s close allies, certain Russian elites and their family members, persons involved in disinformation campaigns, and more; (iv) prohibitions on the import of Russian-origin crude oil, petroleum, petroleum fuels, oils, and products of their distillation; (v) prohibitions on new investment in the energy sector in the Russian Federation by U.S. persons; and (vi) prohibitions on major Russian imports to the U.S., such as seafood, alcoholic beverages, and non-industrial diamonds. Many of these actions have been mirrored by other countries opposing the invasion of Ukraine and targeting Russian power elites.

Through its recent guidance, FinCEN is sending the message that it predicts an increased risk of money laundering as a result of the expansive reach of Russian sanctions coupled with a weakened Russian economy—which brings us to the current Alert. The Alert divides the high-value assets that pose a particular risk of sanctions evasion into three categories, each with their own red flags for financial institutions to watch.

Real Estate

According to the Alert, both commercial and residential real estate presents an attractive option for sanctions evasions, given the ability to use shell companies and trusts, as well as funds from offshore accounts, to purchase and sell real estate while obscuring the true beneficial owner. Russian elites who already own high-end real estate also could attempt to evade sanctions by liquidating real estate, even in countries with sanctions against Russia. The red flags to watch out for in real estate are:

  • The purchase, sale, donation, or legal ownership transfer of high-value real estate in the name of a foreign legal entity, shell company, or trust, especially if the transaction: (i) is far above or below fair market value, (ii) involves all-cash transfers, or (iii) is funded by a third party with a known nexus to sanctioned Russian elites and their proxies.
  • The use of legal entities or arrangements that may have a nexus to sanctioned Russian elites and their proxies to hide the ultimate beneficiary or the origins or source of the funds.
  • Changes, without an apparent business reason, to the transaction patterns of a firm located in a country other than the United States, Russia, Belarus, and Ukraine, where the new transactions involve convertible virtual currency and Russian-related investments or firms.
  • A Russian individual or entity requests a wire transfer from a non-U.S. (particularly non-Russian) bank to pay for an all-cash purchase, especially if the wired funds come from an account held by an individual or entity other than the original requestor.
  • The dilution of equitable interest held in real property by sanctioned Russian elites and their proxies, by the addition of, or the transfer of real estate to, an individual not affiliated with the buyer or seller.
  • The maintenance, purchase, or termination of real estate insurance by persons with a known nexus to sanctioned Russian elites and their proxies.

Artworks

Buying, selling or holding art—through auction houses or online marketplaces—is another attractive option for sanctioned Russian elites to evade sanctions (we previously wrote on the interplay of art and sanctions evasions). Similar to real estate, so-called “shell companies” are frequently used to deal in art, allowing beneficial owners to potentially conceal their identity. Compared to real estate, art presents a more flexible vehicle for money laundering due to its capacity to be mobile and to be valued subjectively (nonetheless, the U.S. Treasury recently issued a report concluding that “the art market should not be an immediate focus for the imposition of comprehensive AML/CFT requirements.”).

According to the Alert, some red flags to watch out for in the art world are:

  • The use of shell companies and trusts, and/or third-party intermediaries, including art dealers, brokers, advisers, or interior designers, with a nexus to sanctioned Russian elites and their proxies, to purchase, hold, or sell art on a client’s behalf.
  • Transactions involving sanctioned Russian elites and their proxies, and large amounts of cash, especially in currencies not typically used in the art market.
  • Artwork-related transactions involving persons with suspected ties to sanctioned Russian elites and their proxies who (i) are not concerned with recouping their initial investment or paying a substantially higher price than the notational value of the work, and/or (ii) conduct transactions that exceed the expected sales value of the work.
  • The purchase, maintenance, or termination of insurance policies to protect the market value or provide cash payments for the loss, theft, or destruction of privately held or donated high-value artwork linked to sanctioned Russian elites and their proxies.

Precious Metals, Stones, and Jewelry

Precious metals, stones, and jewelry (PMSJs) are particularly significant for potential Russian sanction evasions, because Russia is a major exporter of diamonds, gold and other precious metals. As part of the U.S. government’s initial response to the invasion of Ukraine, the Office of Foreign Assets Control (OFAC) expanded its restrictions to include the Russian-based Alrosa company, the world’s largest diamond mining company.

Like art, PMSJs are portable and highly valuable. Further, because the item itself is both legal and a substitute for currency, it can be especially difficult to discern whether PMSJs are used to conceal illicit wealth. FinCEN provided the following red flags to watch out for related to PMSJs:

  • Transactions involving PMSJ trading companies, particularly in Asia, and firms with a nexus to sanctioned Russian elites and their proxies.
  • High-value or frequent transactions involving mining operations with opaque and complex corporate structures, that are or have been owned or controlled by sanctioned Russian elites or their proxies.

The Use of “Proxies”

The red flags provided in the Alert highlight some of the real-world situations that may arise as the conflict continues and Russian elites may seek to access and dispose of their assets. However, there is an open question regarding who exactly is subject to the broad terms of the Alert, and would thereby trigger the reporting of suspicious transactions and the freezing of related accounts. In the Alert, FinCEN puts three categories of possible wrongdoers under the same umbrella: (i) sanctioned Russian elites, (ii) their family members, and (iii) persons or entities through which sanctioned Russian elites and their family may act (labelled as “proxies”). Further, the Alert repeatedly mentions anyone with a “nexus” to sanctioned Russian elites and their “proxies.”

The rationale for extending the Alert to cover transactions conducted by “proxies” and those with a nexus to sanctioned Russian elites make sense from the perspective of pure logic, because otherwise sanctioned Russians could evade sanctions by enlisting someone else to do their bidding. However, as a practical matter, the Alert provides no guidance regarding how financial institutions should identify whether someone is a “proxy,” a term which appears to mean “nominee.” This is another version of an evergreen problem in AML compliance:  how much due diligence must a financial institution do in order to trace potential connections and the source of funds?  If there is no publicly available and relatively accessible document which links a person with a sanctioned Russian, much less with the family member of a sanctioned Russian, the use of proxies often will be very hard to detect, if not impossible. Having said that, if a financial institution happens to be aware of facts suggesting that a proxy is being used, then it should proceed accordingly. Hopefully, regulators will be sensitive downstream to the practical challenges here.

Task Forces

Finally, the Alert lists the international and domestic task forces dedicated to identifying blocked assets and enforcing sanctions, export restrictions, and economic pressure measures imposed by the United States and other nations. Specifically, the Alert notes:

  • The Russian Elites, Proxies, and Oligarchs (REPO) Task Force, announced on the same day of the Alert and launched by the U.S. Department of the Treasury and the U.S. Department of Justice with counterparts from Australia, Canada, the European Commission, France, Germany, Italy, Japan, and the United Kingdom. According to the Alert, “[t]he REPO Task Force is intended to share information to take concrete actions, including sanctions, asset freezing, and civil and criminal asset seizure, and criminal prosecution.”
  • The Kleptocracy Asset Recovery Rewards Program, announced on the same day of the Alert and which “supports U.S. Government programs and investigations aimed at restraining, seizing, forfeiting, or repatriating stolen assets linked to foreign government corruption and the proceeds of such corruption.”
  • Task Force KleptoCapture, announced on March 2 and described as “an interagency U.S. law enforcement task force dedicated to enforcing the sweeping sanctions, export restrictions, and economic countermeasures that the United States has imposed, along with allies and partners, in response to Russia’s unprovoked military invasion of Ukraine.”

The scope of global Anti-Money Laundering (AML) scrutiny and enforcement for financial institutions is enormous and growing. Numerous federal agencies regulate AML—and penalties for non-compliance range from fines, forfeitures, and indictments to the loss of reputation and stock value.

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