Russia's membership in the FATF suspended. What does this mean and how ruinous is this for the aggressor's economy?
The decision is clearly at least a year overdue, though it may be presented as a great "victory"
The Financial Action Task Force on Money Laundering (FATF) has suspended russia's membership in the organisation. "The russian federation's ongoing and increasingly aggressive war against Ukraine unacceptably run counter to the FATF core principles aiming to promote security, safety, and the integrity of the global financial system, as well as its commitment to international cooperation and mutual respect," the FATF said in its statement on the matter. The organisation also emphasised the risks associated with attempts to circumvent anti-russian sanctions.
Earlier, Ukraine repeatedly appealed to the FATF, demanding that russia be blacklisted as a state sponsor of terrorism. But the organisation decided to gradually make life more difficult for russia. This "moderate" approach, unfortunately, gives the aggressor and its accomplices time to find workarounds.
Mind looked into what will change now and how decisive Western fighters against dirty money can be in general.
What actually happened? On February 24, 2023, the FATF suspended russia's membership in its plenary session.
According to the statement, "the actions unacceptably run counter to the FATF core principles aiming to promote security, safety, and the integrity of the global financial system. They also represent a gross violation of the commitment to international cooperation and mutual respect upon which FATF Members have agreed to implement and support the FATF Standards."
Given all this, the organisation decided to suspend russia's membership. "The russian federation remains responsible for fulfilling its obligations to implement the FATF Standards and... must continue to meet its financial obligations. The russian federation will remain a participant in the global network as an active member of the Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG) and will retain its rights as an EAG member. The FATF will monitor the situation," the release said.
This is not the first such message from the FATF regarding russia. Since February 24, 2022, the organisation has issued a number of statements, each of which condemned the actions of the russian federation. It did not, however, go further than expressing "deep concern."
What does the suspension of russia's membership in the FATF mean with the current wording? Technically, russia still has to comply with all FATF recommendations. The russian government itself said that this decision has no consequences. "This decision of the FATF does not lead to any obligations or restrictions for financial institutions in russia and abroad," rosfinmonitoring said.
Nevertheless, the gravity of this measure should not be undervalued. The FATF monitors the financial activity of high-risk countries by blacklisting particularly dangerous territories and grey-listing territories that are subject to close monitoring. "Although russia is neither blacklisted nor graylisted by the FATF, all international banks will scrutinise all russian payments and request explanations and documents for each transaction. In practice, this means that financial transactions will be more expensive, take longer, and there is no guarantee that the transaction will occur at all. This is yet another decision in the system of sanctions that is tightening around russia's neck," banking expert Stanislav Shlapak explains.
Yaroslav Lomakin from Honest & Bright Company Ltd says that the hardening of working conditions will affect not only russian bank clients. The entire financial sector will be forced to scrutinise its client base more closely for affiliation with russia. And such tightening is already affecting all financial markets, including the Ukrainian one.
"Don't forget that banks consider clients from Ukraine in terms of increasing the country's risks. That is, at any time the client or his business may disappear. The conditions for compliance and financial monitoring are complicated, as it is physically impossible to come and look at [assets in a country at war], nothing can be controlled," Lomakin says.
What does it mean to put a country on the FATF blacklist? First and foremost, it means that it is impossible or very difficult to make any payments with the outside world. Countries or jurisdictions with serious strategic shortcomings in the fight against money laundering and terrorist financing are blacklisted.
According to the FATF principles, for all high-risk countries, members of the organisation are strongly encouraged to "apply enhanced due diligence and, in the most serious cases, countermeasures to protect the international financial system from the risks of money laundering, terrorist financing, or arms trafficking emanating from that country."
To recap: Until 2004, Ukraine was also on the FATF's blacklist, in particular because of non-transparent cross-border currency transactions, including reinsurance. However, after the creation of the insurance market regulator, the State Commission for State Regulation of Financial Services, the problem was recognized as solved, and Ukraine was returned to the list of reputable countries.
"If a bank sees a payment from a blacklisted country, it will either block the transaction or freeze the money until the country's status changes," explains banking expert Olena Domuz.
Such a person is likely to be denied service, says Stanislav Shlapak. "It should also be remembered that all dollar payments go through the US, and all euro payments through the EU, which means they are monitored. Western financial monitoring systems can see which countries and which counterparties the money goes to," he notes.
What threats does cooperation with clients from blacklisted countries pose to banks? A transaction involving any person from such a country means at least a lot of questions for the bank, up to and including fines. In the worst case scenario, the country of bank registration that allowed transactions with the blacklisted persons will itself be under the scrutiny of international regulatory authorities.
For example, in 2016-2017, the U.S. FBI conducted an investigation into Latvia's financial system. In the process, transactions between Latvian banks and sanctioned North Korea surfaced. At the time, it was not a question of direct transactions: the chain included many transactions involving offshore accounts. But Latvia was able to solve this problem only by cooperating with the FBI, whose detectives have the right to monitor all dollar transactions.
Why hasn't russia been blacklisted by the FATF yet? Ukraine has been asking to blacklist russia for a year now. One of the first to make such a request was NBU Governor Kyrylo Shevchenko, followed by about a dozen more requests from the Ministry of Finance, the National Bank, and the State Financial Monitoring Service.
However, as experts explain, the russian economy is too large, and many government and business contacts around the world are tied to it. Accordingly, the international russian lobby is doing everything it can to keep the country off the FATF blacklist.
It should be noted that russia was already on the list until 2002. In October 2002, it was blacklisted, and in June 2003, it was admitted to the FATF.
Why wasn't russia put on the FATF's "grey" list and what does it entail? The FATF has a list of jurisdictions that are subject to "heightened vigilance" recommendations. As of February 24, 2023, it included traditional offshore jurisdictions such as Gibraltar, Panama, or South Africa, as well as countries such as Turkey, Jordan, and the UAE, with which Ukraine, among others, actively trades. The reasons for being included in the grey list are individual for each country.
For example, the financial systems of Turkey or the UAE can be used to work with sanctioned jurisdictions, such as Iran, one banker told Mind on condition of anonymity. "But banks do not see this connection directly. They can only see a bank in a particular jurisdiction from the 'grey' list. For countries on this list, banks have to go through a number of additional procedures to confirm the purity of the transaction and request additional documents," the source said.
According to him, some Ukrainian banks do not make payments to companies registered in London or Brussels, but have accounts only in Turkey. "Usually, if the country of registration and the country of the company's account are different, this is a danger indicator for banks. So there is a high probability that such a company will be denied a transaction," the source says.
How do workarounds work? If a legal entity wants to send money to Iran, it cannot do so directly – Iran has been disconnected from the SWIFT payment system since 2018. However, such a company can send a payment to an intermediary in Turkey, the UAE, and even further to russia (Iran and russia have recently integrated their banking systems). And from there, the bank will transfer the money to Iran or North Korea, which has been disconnected from SWIFT since 2017. The whole question is the cost of the transaction and the bank's willingness to take the risk.
The bank itself can neither prove nor disprove that the money transferred to Turkey is actually going to russia or North Korea. To find out, operations involving law enforcement agencies, wiretapping, and other investigative and detective activities will be required. Such actions are usually coordinated and carried out at the supranational level.
Can the current FATF measures be considered sufficient to put pressure on russia? No, they cannot. Military analyst Maksym Kukhar notes with regret that the "punishment" is clearly overdue and formal: "85 years ago, the USSR was expelled from the League of Nations for military aggression. And today, a year after the outbreak of the war, russia has been kicked out of the accounting club of interests."
According to him, the FATF has compromised itself because "over the past nine years, thousands of russian transactions for the purchase of weapons and military hardware, the sale of resources to circumvent sanctions, and the hiding of oligarchs' funds in the western financial sector have passed it by."
At the same time, in mid-February 2023, the European Union added russia to the list of non-cooperative states in the disclosure of tax information. This list includes offshore "treasure islands" such as Panama, the Bahamas, the Virgin Islands, Trinidad and Tobago, etc. As a result, the russian federation has become the largest offshore territory in the world. In practice, this means increased control over all operations directly or indirectly related to russia by the European authorities.
"It would be understandable if the rf froze SWIFT transactions, even if it was delayed. But in any case, russia will find ways to bypass the restrictions – it is a very large territory with a lot of contacts with China, India and the Arab region. There are also other ways to circumvent the sanctions. Yes, it will be expensive, but it is possible," summarises Olena Domuz.
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