As the war in Ukraine rages on, recent advisories from financial crime agencies in the United States and the United Kingdom indicate heightened scrutiny on financial activity of Russian individuals and entities, including persons closely connected to the Kremlin. The relevant activities go beyond traditional banking and financing, and extend to dealings in securities, real estate, artwork, jewelry, crypto, and other high-value assets.
Government Investigations Likely: As described in a previous briefing, the U.S. government and the UK government appear poised to initiate enforcement actions against Russian oligarchs and other persons that violate U.S. and UK sanctions. In addition, parties also may be subject to congressional scrutiny.
The UK’s National Crime Agency. In July 2022, the UK’s National Crime Agency (NCA) issued a Red Alert on techniques being used by Russian oligarchs to evade sanctions imposed following the invasion of Ukraine, including:
- the “[t]ransfer of assets such as shareholdings in holding companies to trusted proxies such as relatives or employees”;
- the sale or transfer of “assets at a loss in order to realize their value before sanctions take effect”; and
- the divestment of assets to ensure that sanctioned persons’ “ownership stakes are below 50% threshold, or relinquishing previous controlling stakes.”1
The Red Alert also noted that nonsanctioned third parties potentially could enable and facilitate these activities, including lawyers, financial advisers, and auctioneers. The use of “alternative payment methods” to evade sanctions is also cited, and specifically, crypto assets. The Red Alert explains that “Russian money launders have increasingly been observed in UK intelligence and operational activity providing cash to crypto-asset services, with the ability to move significant volumes of funds.”2
The UK government is carrying out its commitment to target Russian oligarchs. Just last month, the NCA raided the home of a wealthy Russian businessman suspected of close ties to Russian President Vladimir Putin for suspicion of money laundering, conspiracy to defraud the UK Home Office, and conspiracy to commit perjury.3 The resulting arrests are the latest “disruption” by the NCA, meant to “demonstrably remove or reduce a criminal threat … [by] Putin-linked elites and their enablers.”4
The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). Similar to the NCA, FinCEN issued new guidance in December 2022 summarizing trends of Russian oligarchs’ financial activities based on data from Bank Secrecy Act reports filed from March to October 2022.5 In releasing the report, the agency highlighted that it had “identified 454 BSA reports detailing tens of billions of dollars in suspicious activity” by Russian oligarchs, high-ranking officials, and sanctioned individuals. FinCEN noted these suspicious activity reports showed that Russian oligarchs had:
- transferred funds and assets around the time of the February 2022 Russian invasion of Ukraine, including the transfer of beneficial ownership of companies, trusts, or accounts by Russian oligarchs to children; and
- purchased high-value goods or property prior to the invasion, including art.6
FinCEN previously issued an Alert on March 16, 2022, that requested financial institutions be on heightened alert and file Suspicious Activity Reports on transactions involving Russian elites, oligarchs, and their families involving high-value assets, specifically real estate, jewelry, and artwork.7 FinCEN referred to a report by the U.S. Senate Permanent Subcommittee on Investigations as a case study on how Russian oligarchs purchased high-value art despite sanctions imposed in response to Russia’s annexation of Crimea.8
The U.S. Senate’s Permanent Subcommittee on Investigations. Companies with operations in the United States should also take note of potential scrutiny on sanctions compliance from Congress. The U.S. Supreme Court has stated that Congress has broad investigatory powers, which are delegated through the House and Senate rules to committee chairs who can subpoena both documents and testimony. Congressional subpoenas should be taken seriously; the failure to respond can result in the recipient being held in either criminal or civil contempt. The catalyst for a congressional investigation can come from a number of places, including media reports, whistleblower allegations, or executive branch agency documents. For example, the investigation described below was initiated after congressional investigators requested and received Suspicious Activity Reports that financial institutions filed with FinCEN.
Congress has shown strong interest in sanctions-related topics in the past. Following the 2014 imposition of sanctions on Russia for its invasion of Crimea, financial activity of Russian oligarchs drew the attention of congressional investigators. A July 2020 U.S. Senate Permanent Subcommittee on Investigations (the Subcommittee or PSI) report revealed how Russian oligarchs evaded U.S. sanctions through the techniques and activities recently highlighted by the U.S. and UK financial crime agencies, including the transfer of assets to children and the purchase of millions of dollars in high-value art. The Subcommittee based its findings on information requested through its subpoena power from private companies, including over one million documents from seven financial institutions and the four major auction houses; it also conducted interviews of current and former employees of the auction houses.9 The sanctions failures of the financial institutions and the auction houses detailed in the report received broad media coverage in the United States and the United Kingdom.
The Subcommittee’s bipartisan report focused on the financial activity of Russian oligarchs Arkady and Boris Rotenberg following sanctions imposed on them by the United States following Russia’s 2014 annexation of Crimea. The report outlined actions taken by the Rotenberg family designed to evade sanctions, including:
- Shell companies linked to the Rotenbergs transferred over $120 million through the United States to Russia during a four-day window between the March 16, 2014, Executive Order announcing the United States would impose sanctions on Russia for the annexation of Crimea, and the Treasury Department specifically naming the Rotenbergs as sanctioned on March 20, 2014.
- Four months after those sanctions, a London-based intermediary executed paperwork that appeared to transfer Arkady Rotenberg’s interest in Milasi Engineering to his son, Igor Rotenberg, who was not sanctioned at the time leading a financial institution to determine the transfer was done for the sole purpose of evading sanctions and closing all 198 accounts associated with the intermediary.
- Purchases of more than $18 million in high-value art at New York auction houses and private dealers traced back to Rotenberg-linked shell companies in the months following the imposition of sanctions, as well as more than $91 million in other post-sanctions transactions to the same Rotenberg-linked shell companies.10
News outlets in the United States and the United Kingdom took notice. Media coverage was critical of the entities and individuals involved, including by The New York Times,11 The Wall Street Journal,12 BBC News,13 and a BBC Panorama documentary that featured the report, “Banking Secrets of the Rich and Powerful.”14
The PSI report led to action by both the executive branch and Congress. Following the report, the Treasury’s Office of Foreign Assets Control (OFAC) issued an advisory regarding the sanctions risks associated with dealing in high-value art with Specially Designated Nationals or Blocked Persons.15 Congress also passed the Anti-Money Laundering Act of 2020, which included the establishment of a database of beneficial owners of companies formed or registered to do business in any state. That Act also added the sale of antiquities to the list of industries that must comply with the Bank Secrecy Act. FinCEN finalized and issued regulations for reporting beneficial ownership on September 30, 2022, which will become effective on January 1, 2024.16
Sanctions and their associated enforcement actions resulting from Russian aggression in Ukraine present serious challenges to individuals and entities with financial connections to the Kremlin. For more information on responding to regulators and sanctions compliance, please contact Wilson Sonsini attorney Mike Casey or another member of the National Security team.
Responding to congressional inquiries requires different strategic considerations from typical white-collar litigation or lobbying, and knowledge of House and Senate rules and practices is important to avoiding critical missteps that could expose firms to undue legal or public relations crises. Please reach out to Wilson Sonsini attorneys Andy Dockham or Janet Kim with any questions about congressional inquiries or how Wilson Sonsini can assist you in any matter.
[1] National Crime Agency, Red Alert, Financial Sanctions Evasion: Russian Elites and Enablers, July 2022, https://www.nationalcrimeagency.gov.uk/who-we-are/publications/605-necc-financial-sanctions-evasion-russian-elites-and-enablers/file.
[2] Id., The U.S. Department of the Treasury has also issued guidance on the virtual currency industry compliance with sanctions. For more on that, see the following Wilson Sonsini Alert: https://www.wsgr.com/en/insights/new-ofac-guidance-raises-the-stakes-for-crypto-industry.html.
[3] National Crime Agency, Wealthy Russian businessman arrested on suspicion of multiple offences, https://www.nationalcrimeagency.gov.uk/news/wealthy-russian-businessman-arrested-on-suspicion-of-multiple-offences.
[5] Financial Crimes Enforcement Network, Financial Trend Analysis, Trends in Bank Secrecy Act Data: Financial Activity of Russian Oligarchs in 2022, December 22, 2022, https://www.fincen.gov/sites/default/files/2022-12/Financial%20Trend%20Analysis_Russian%20Oligarchs%20FTA%20_Final.pdf.
[6] Financial Crimes Enforcement Network, New FinCEN Analysis of BSA Data Reveals Trends on the Financial Activity of Russian Oligarchs, December 22, 2022, https://www.fincen.gov/news/news-releases/new-fincen-analysis-bsa-data-reveals-trends-financial-activity-russian-oligarchs.
[7] Financial Crimes Enforcement Network, FinCEN Alert on Real Estate, Luxury Goods, and Other High-Value Assets Involving Russian Elites, Oligarchs, and their Family Members, March 16, 2022, https://www.fincen.gov/sites/default/files/2022-03/FinCEN%20Alert%20Russian%20Elites%20High%20Value%20Assets_508%20FINAL.pdf. In April 2022, FinCEN also outlined concerns with kleptocracies—and particularly Russia—for laundering illicit funds through the use of intermediaries and shell companies and sanctions evasion. See Financial Crimes Enforcement Network, FinCEN Advisory, Advisory on Kleptocracy and Foreign Public Corruption, April 14, 2022, https://www.fincen.gov/sites/default/files/advisory/2022-04-14/FinCEN%20Advisory%20Corruption%20FINAL%20508.pdf.
[9] U.S. Senate, Permanent Subcommittee on Investigations, The Art Industry and U.S. Policies that Undermine Sanctions, https://www.hsgac.senate.gov/imo/media/doc/2020-07-29%20PSI%20Staff%20Report%20-%20The%20Art%20Industry%20and%20U.S.%20Policies%20that%20Undermine%20Sanctions.pdf.
[15] U.S. Department of the Treasury, Office of Foreign Asset Control, Art Advisory, October 10, 2020, https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions/20201030.
[16] Wilson Sonsini, Final Regulations on Beneficial Ownership will Require “Tens of Millions” of Legal Entities to File Reports, October 4, 2022, https://www.wsgr.com/en/insights/final-regulations-on-beneficial-ownership-will-require-tens-of-millions-of-legal-entities-to-file-reports.html.
