Guest Post: The Ukraine Crisis Demonstrates (Again) that the U.S. Must Crack Down on Illicit Finance

GAB is pleased to welcome back Shruti Shah, the President of the Coalition for Integrity, to contribute today’s guest post:

Like so many of us, I am shocked and horrified by Russia’s invasion of Ukraine and unforgivable attacks on civilian targets. At the same time, I have been encouraged by the resistance to Russia’s unprovoked aggression—most obviously and importantly by the brave Ukrainians defending their homeland, but also by the response of the international community. The United States, the European Union, Canada, the United Kingdom, and other nations have announced coordinated sanctions against Russia, including cutting off major Russian banks from the SWIFT system and preventing Russia’s central bank from drawing on foreign currency reserves held abroad. In addition to sanctions targeted at Russia’s financial system, Western nations have also sought to use targeted sanctions aimed at oligarchs close to President Putin. The Biden Administration also announced a transatlantic task force to ensure the effective implementation of financial sanctions by identifying and freezing the assets of sanctioned individuals and companies and an interagency law enforcement group called KleptoCapture.

This renewed focus on the corruption of the Russian political and economic elite is welcome. Russia’s deep-rooted corruption is one of the reasons that Putin has been free to engage in such outrageous acts. He relies on the security services and corrupt oligarchs to protect him. Oligarchs also serve as his personal wallet. Yet for far too long, these corrupt oligarchs have lived lives of luxury off of ill-gotten wealth, which they have used to purchase luxury property in places like New York and London. Yet while some oligarchs and Russian political figures were already the subject of targeted sanctions prior to the recent attack on Ukraine. Overall the West had been far too complacent. The Ukraine tragedy seems to have prompted Western governments to pay more attention to this problem. Indeed, the new sanctions are significant in both scope and size, and they welcomed by the Coalition for Integrity and most other anticorruption activists around the world.

But there’s more work to be done. It’s time for Western governments to ask some hard questions about how these corrupt elites were able to use their ill-gotten gains to buy luxury property and assets and enjoy their wealth in places like New York and in London for so long, and about the role of Western “enablers” in hiding the sources of their wealth and shielding questionable transactions from scrutiny. And, to turn to more specific priorities for policy reform in the United States, there are three specific things that the U.S. government should do to crack down further on illicit finance and thereby advance the agenda laid out in the White House’s Strategy On Countering Corruption:

  • First, the U.S. must ensure the swift and effective implementation of the Corporate Transparency Act (CTA), which seeks to prohibit the formation of anonymous companies. As is well known, anonymous companies are used to evade sanctions, launder money, and facilitate other forms of criminal activity. The CTA was an important step forward. That law will require most private companies to report their true beneficial owners to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). But FinCEN still needs to finalize its Proposed Rule on CTA implementation. And it is vital that the effective date of for the CTA’s requirements not be unduly delayed—the effective date should not be more than a year following the enactment of the FinCEN’s final rule. It is also critical that Congress and the Administration ensure that FinCEN has the resources to both build the database into which the beneficial ownership information will be submitted and to enforce the disclosure rules.
  • Additionally, the U.S. government needs to do more to promote transparency and integrity in the real estate sector. FinCEN is in the process of developing a new anti-money laundering (AML) regulations for real estate transactions. FinCEN is apparently considering two alternate approaches. One option would involve implementing specific and relatively limited reporting requirements to disclose beneficial owners, similar to those already required of title insurance companies under the current Geographic Targeting Orders. Alternatively, FinCEN is considering imposing more fulsome AML monitoring and reporting requirements on real estate transactions, including the requirement that real estate brokers file Suspicious Activity Reports (SARs) and establishing AML programs (which would entail things like designating an AML compliance officer, establishing AML training programs, implementing independent compliance testing, and performing customer due diligence). FinCEN should embrace the second, more comprehensive option.
  • In addition to requiring more ownership transparency in the corporate and real estate sectors, it is also essential that all intermediaries who set up offshore companies and trusts should also be required to conduct due diligence and screening of their clients and report suspicious activities to authorities. When these actors fail to meet their obligations, authorities should hold them accountable and impose appropriate sanctions.

For far too long, Western governments have been far too lax about addressing the vulnerabilities that enable corrupt politicians and their wealthy supporters to hide their money in the West. The failure to stem this tide of dirty money has contributed to creating a culture of corruption and impunity in Russia and elsewhere, a culture that has bred instability and contributed to the current crisis. It is therefore vital that the U.S. and other Western governments respond not only by imposing targeted sanctions on individual corrupt actors, but that they redouble their efforts to reform the systems that have facilitated the flow of dirty money.

4 thoughts on “Guest Post: The Ukraine Crisis Demonstrates (Again) that the U.S. Must Crack Down on Illicit Finance

  1. Thank you for this informative and timely post! It’s certainly encouraging to see the international community renew its focus on Russia’s deep-rooted corruption. I agree with your intuition that, alongside concerted international efforts, Western countries should carry out more specific measures to prevent further illicit finance. Your piece wonderfully lays out US-focused measures, but I’m curious if other Western nations involved in the concerted efforts you mentioned at the start of the piece are also considering some of these particular policies. I imagine that for these measures to be as effective as possible, other nations would need to be rolling out similar polices (especially the UK, which sees a lot of Russia’s illicit finances in the country as I’ve recently learned).

  2. Thank you for the important post. I agree that the US should do more to crack down on illicit finance and that fulsome implementation of the CTA, greater transparency in the real estate sector, and heightened due diligence obligations for company formation agents would help address the US’s role in facilitating overseas corruption, an issue that has taken increased urgency with the Ukraine crisis. I wonder if another thing we could do to strengthen these suggestions is to improve information sharing processes with other countries that have become a haven for dirty money. If the U.S. had access to beneficial ownership information collected by other countries’ financial institutions and law enforcement agencies, FinCEN could validate the information in its beneficial ownership registry and financial service firms (and hopefully soon, real estate and company formation agents) could use that information when conducting due diligence.

    • Interesting point, Justin! I completely agree that international collaboration would be vital, especially since it appears that nations seem to be fighting a common “enemy” in this war against corruption. It does make me wonder why existing international alliances (such as the EU, the UN, etc) have not played such a prominent role in this fight, and why anti-corruption efforts appear to often be framed as an individual-country issue. Could it be that, in an ever-increasingly interconnected world, anti-corruption efforts in general need to catch up with the times and become more globally integrated, and this current Ukraine crisis is showing us this conclusion?

      • Existing international alliances, such as EU and UN, have a difficult time coming to agreement given the divergent position of many Member States. You can look at UN efforts in things like the FACTI Panel (http///www.factipanel.org) but also see that Member States have difficulty officially adopting any of the recommendations.

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