In 2003, the United States successfully wooed Russia to join the Financial Action Task Force (FATF), the intergovernmental grouping that develops global standards against financial crime. Just short of twenty years later, at last week’s plenary that coincided with Russia’s brutal onslaught on Ukraine, the FATF failed to expel the former. This is an error of judgment, and the FATF has nothing to gain and much to lose from its inertia.
What is FATF?
The FATF was established in 1989 by G7 members to develop a shared international approach to tackling the wealth of drug cartels. At the time, this area was a clean slate. The first laws against money laundering had only been adopted in the United States and U. in 1986, and their reach was limited to the proceeds of drug trafficking. The FATF’s first meetings resulted in a set of recommendations have undergone many a permutation since, but retain the same basic set of principles, such as the need for banks and other regulated businesses to conduct customer due diligence and report suspicious activities.
Technically, the FATF Recommendations are not binding, and the FATF itself is not even an international organization. It has no legal personality and its employees are formally employed by the OECD, in whose building the FATF is headquartered. In practice, though, its recommendations are honoured more than those of many ‘real’ international organizations. This is due to the FATF’s mutual evaluation review process, which involves the preparation of publicly available expert assessments of each country’s anti-financial crime framework. Crucially, these assessments cover not only the formal transposition of the FATF Recommendation’s into domestic law, known as ‘technical compliance’, but also – since 2013 – effectiveness’ measured by reference to 11 immediate outcomes, such as ‘[p]roceeds and instrumentalities of crime are confiscated’.
Those countries that do poorly in the FATF’s reviews can be placed on a blacklist (or, more politely, a list of ‘High-Risk Jurisdictions subject to a Call for Action’) or gray-list (formally, ‘Jurisdictions Under Increased Monitoring’). If a country features on either of those lists, it is likely to be treated as high-risk by financial institutions and other regulated businesses worldwide. As a result, businesses and individuals from blacklisted or gray-listed countries will either face greater scrutiny or, if they are deemed not worth the hassle, simply not be able to access regulated services. In short, the FATF operates a ‘name and shame’ framework whose influence is underwritten by domestic regulatory regimes in global financial centers, including the United States.
FATF and Russia
Not all countries participate in the FATF proper. Only 37 countries and two international agencies are FATF members. Most of the other countries take part in FATF-style regional bodies, which carry out mutual review of its members but have no say – at least, not directly – in the making of the FATF Recommendations. To be a member of the FATF is to have the privilege to shape international standards against financial crime.
Russia has belonged to this elite club of nations since 2003. In the early 2000s, the US government viewed the inclusion of Russia and China as essential to the FATF’s viability. Although the FATF had blacklisted Russia only in 1999, the hope was that, once inside the proverbial tent, Russia would have a greater incentive to comply itself and encourage others to do so. As Juan Zarate, then-Assistant Secretary for Terrorist Financing and Financial Crimes, writes in his book Treasury’s War: ‘Russian President Vladimir Putin knew it was important for Russia to remove the money-laundering stain for the future of the Russian economy and for national prestige’.
Since then, the relationship between the FATF and Russia has been a masterclass in manipulation on a par with The Talented Mister Ripley, where the protagonist exudes charm and innocence while murdering his friends one by one. In December 2019, the FATF published its latest review of Russia. Russia was assessed to be highly effective – the FATF’s highest accolade – in investigating and prosecuting terrorist financing and using financial intelligence, substantially effective across four other areas, including the confiscation of criminal proceeds, and moderately effective in five other components.
To put this into perspective, these are better results than those of Australia, Canada, Singapore and the majority of EU member states that have been evaluated so far.
This assessment is as implausible now as it was three years ago. Question marks over Russia’s financial crime defences were plentiful and available for everyone to see. The US Magnitsky laws were adopted in 2012 and 2016 in response to the death in a Moscow prison of a Russian whistleblower who had reported a $230 million-worth fraud allegedly perpetrated by high-ranking state officials. The so-called Russian laundromat was publicised in 2014. The estimated $2 billion wealth of a Russian cellist close to a certain politician was reported on in 2016. On the terrorist financing front, Russia is the only state in the world currently facing claims of state-sponsored terrorist financing in the International Court of Justice following the tragedy of flight MH17 and Ukraine’s application in 2017.
Of this non-exhaustive but illustrative list of relevant developments, only ‘laundromats’ merited a mention in the FATF’s report. From it, we learn that these large-scale money-laundering schemes had been proactively identified ‘by Rosfinmonitoring [Russia’s financial intelligence unit] strategic analysis’. Worldwide publicity has, however, been helpful in prodding Russia’s recalcitrant foreign partners to assist in investigations: ‘Rosfinmonitoring and other authorities consider that media attention on laundromats has been helpful because it can increase pressure to engage in international co-operation, which they concede has been challenging’.
The FATF’s review of Russia is an incredible document to put one’s name to, and yet one must be crystal-clear that it reflects not on the professional assessors or FATF Secretariat staff, but the organization as a whole. It is a product of the assessment methodology that allows well-resourced states to game the system; a focus on bilateral engagement with government agencies to the exclusion – until recently – of civil society; and the ultimately political decision-making of the FATF’s plenary, which adopts review reports.
It is the FATF’s plenary that has been in the spotlight of late, with its most recent meeting taking place between March 2-4. The event coincided with, and was overshadowed by, Russia’s unfolding invasion of Ukraine.
One of the outcomes of the plenary is an uncharacteristically blunt statement that condemns Russia’s ‘gross violation of the commitment upon which FATF Ministers agree to implement and support the FATF Standards’. It also notes that the FATF ‘is reviewing Russia’s role at the FATF and will consider what future steps are necessary’.
Some have suggested this means the FATF is ‘set to expel Russia’, but the opposite is likely true. It almost certainly reflects a lack of consensus to take stronger action. With the next plenary meeting slated for June, the most charitable interpretation is that FATF members are playing for time.
In doing so, it is difficult to think of any additional information the FATF needs to make its decision, or any hitherto unavailable options that member states hope will emerge. Nor will the organization gain anything from dithering. Some members may hope that the outrage over Russia’s invasion will fade. But, for as long as the Kremlin continues its scorched earth campaign in Ukraine, the implications for the FATF can hardly be overstated.
Russia is subject to unprecedented, although arguably insufficient, sanctions. Part of its Central Bank’s assets is frozen, as well as the property of some of the oligarchs. Calls are being made for the confiscation of these assets. Visa and MasterCard have ceased operating in Russia. As Russia approaches North Korean levels of economic isolation, its participation in setting global standards on financial crime prevention is increasingly untenable.
Of equal importance is the escalation of domestic repression. Russia’s financial intelligence unit, Rosfinmonitoring, has long operated a list of domestic ‘extremists’. Those designated include the poisoned and imprisoned opposition leader Alexei Navalny, his chief of staff Ivan Zhdanov, and other pro-democracy activists. Not only had the existence of this ‘extremist’ list not attracted any critical comment from the FATF but, as mentioned above, Rosfinmonitoring received full marks for its use of financial intelligence and investigation of terrorism.
Now that the Russian government has announced that financial support to Ukraine will be treated as high treason, Rosfinmonitoring’s continued access to international information-sharing partnerships, such as the Egmont group of financial intelligence units, must be out of the question. In fact, as recently as last year the FATF itself launched a workstream on the abuse of anti-financial crime standards for the ‘curtailment of human rights’, whose valuable insights it must now be delighted to put into practice.
Faced with this sad state of affairs, convening an emergency plenary meeting to expel Russia is the only credible course of action that the FATF can take. To circle back to Juan Zarate’s quote, Putin’s Russia of 2003 joined for the future of its economy and national prestige. Until Putin’s Russia of 2022 threw this all away, for two decades it had been reaping the benefits of membership, while the FATF suffered the embarrassment of its indefensible Russia report. It is time for it to ask, now: What have the Russians ever done for us?