Blacklist Russia

This commentary was prompted by the recent publication of a RUSI article entitled “The Financial Action Task Force’s Challenge with Russia”. Rather than representing a genuine attempt at a balanced analysis, the piece appeared to be timed for the upcoming FATF plenary session scheduled for 19–23 June 2023, where another attempt to blacklist Russia is expected. I therefore think it is important to present some counterarguments to the position outlined in the RUSI contribution.

The Financial Action Task Force (FATF) is the international organisation that establishes and polices the implementation of global standards for combatting money laundering, terrorist financing and proliferation financing. Since its establishment in 1989, the mandate of the FATF has expanded from exclusively tackling the former to also include the latter two. Together with the expansion of its mandate, the organisation’s authority and reputation have also grown, turning the FATF into a global standard-setter and watchdog. Despite increasing its role enormously, the organisation still presents itself as a technical rather than a political body.

In her piece, the author states that:

“… for those that view the FATF as a politically motivated organisation, such a decision will further erode the FATF’s integrity and negatively impact its reliability, as well as facilitating the further politicisation of the organisation. Rather than conceding to political pressure and blacklisting Russia, the FATF should aim to devise more thorough and better crafted standards to ensure that illicit finance threats do not remain outside the scope of its recommendations and country assessments”.

Sadly, this position is extremely similar to that of one of the FATF’s permanent members – Russia. Namely, Russia blames the FATF for neglecting its recent mutual evaluation results and for politicising the process as a whole. While some might suggest improving FATF procedures instead of blacklisting the country, we should keep in mind that Russia’s violent aggression has already taken the lives of tens if not hundreds of thousands of Ukrainians, and will take hundreds of thousands more if not stopped using all available means.

According to the FATF’s mandate, one of the organisation’s tasks is “Identifying and engaging with high-risk, non-co-operative jurisdictions and those with strategic deficiencies in their national regimes, and co-ordinating action to protect the integrity of the financial system against the threat posed by them”. The FATF maintains a list of High-Risk Jurisdictions subject to a Call for Action (also known as the “blacklist”). These countries exhibit “significant strategic deficiencies in their regimes to counter money laundering, terrorist financing, and financing of proliferation”.

In March 2022, the FATF admitted that Russia’s actions ran contrary to the organisation’s core principles, representing a gross violation of the commitment of FATF ministers to implement and support the FATF Standards. Later, in April 2022, FATF ministers recognised that Russia’s actions posed a threat to the integrity, safety and security of the international financial system. Furthermore, in June 2022, the FATF decided to limit Russia’s role and influence within the FATF. The limitations were tightened even more in October 2022, until eventually in February 2023 Russia’s membership of the organisation was suspended.

Russia’s violent aggression has already taken the lives of tens if not hundreds of thousands of Ukrainians, and will take hundreds of thousands more if not stopped using all available means

Meanwhile, Russia is engaged in terrorist financing. Alongside its regular armed forces, Russia uses the private military company Wagner to conduct hostilities in Ukraine. The latter organisation operates in coordination with the armed forces, has a hierarchical structure and acts in the interests and with the consent of the highest military and political leadership of the country. Wagner is openly provided by the Russian authorities with military equipment including tanks, howitzers, multiple rocket launcher systems, armoured vehicles and fighter jets. However, the group’s activities go far beyond the Russian-led war in Ukraine and endanger international security on a global scale. Wagner’s engagement in a number of other armed conflicts around the globe, combined with the threats posed by its leadership, falls under the criteria for “terrorist activity”.

In 2017, the US designated Wagner as being responsible for or complicit in – or having engaged in, directly or indirectly – actions or policies that threaten the peace, security, stability, sovereignty or territorial integrity of Ukraine. Furthermore, in November 2022, the Department of State designated Wagner for operating in the defence and related materiel sector of the Russian economy. Moreover, Wagner has been sanctioned by Australia, Canada, Japan, the UK and the EU. Most recently, in February 2023, the Ukrainian Parliament also designated Wagner as an international criminal organisation.

Another area of concern falling directly under the FATF mandate is proliferation financing. Beginning in 2022, Russia has deployed Iranian-made drones to attack Ukrainian territory, including civilian targets. This has been confirmed by multiple public sources. Furthermore, the transfer of unmanned aerial vehicles (UAVs) to Russia has been acknowledged by Iranian officials. This is an obvious infringement of the 2015 UN Security Council Resolution 2231, which explicitly prohibits any country from receiving these types of drones from Iran without prior approval by the Security Council. Given that no such approval was sought from or granted by the Security Council, these transfers represent violations of resolution 2231.

Recent media reports confirm that cooperation between Russia and Iran on armed drones is of a continuous and sustained nature. Moreover, intricate schemes including the use of a state-owned airline are being deployed to illegally deliver UAVs from Iran to Russia. The expanding range of arms and technologies being supplied confirms the long-standing nature of cooperation between the two states. This obviously requires an immediate response by the FATF, as it entails immense proliferation financing threats.

At the very least, the examples mentioned above prove that Russia poses a danger to the international financial system, as it is engaged in terrorist financing and the financing of proliferation activities. Therefore, these activities have to be addressed using all available instruments.

According to its mandate, the FATF assesses the compliance of individual countries with international standards, and in cases where states fail to comply with the rules, it has powers to sanction them – namely by putting them on either a “blacklist” or a “greylist”. This should not be regarded as a “punishment”, but rather as an incentive for the sanctioned country to take the necessary steps in order to fix its deficiencies.

However, when it came to protecting the international financial system from an FATF member aggressively violating everything the organisation stands for, the FATF took a cautious stance, asserting its “non-political” status. But it should be pointed out that the FATF’s response in this case is dramatically different to what would be (and in fact has been) rapidly applied to Iran, for example – which suggests a political rather than a technical position on the organisation’s part.

If a respected organisation such as the FATF cannot deal with a criminal at its table, this casts a dark shadow on its viability in the long run

The designation of a particular country as high-risk is a comprehensive technical process with many safeguards built into it. The FATF has already applied a phased approach involving the gradual application of stringent measures, which makes it hard to accuse the organisation of overstepping its mandate or acting impulsively. Moreover, the organisation’s steps reflected the actions of Russia, meaning that the measures taken were in response to a blatant breach of the FATF’s mandate and principles. Prompt and meaningful steps from Moscow’s side would obviously have prevented further negative consequences for Russia, but there are no signs that such steps could be expected in the foreseeable future.

Furthermore, during the technical process of assessing whether or not Russia has the necessary protective measures in place to prevent threats to the integrity of the global financial system, the international community managed to incorporate unproductive discussions on the political nature of such an assessment in cases where the breaching jurisdiction is a member of the watchdog. This can only have been a cause of satisfaction for the Russians. In order to keep the discussion going, the aggressor country is even resorting to intimidation of FATF members. It is threatening to terminate contracts important to FATF member states if they dare to support its nomination to the greylist.

The idea of revising the FATF standards as well as considering the role of the organisation appears to be an attempt to move the discussion away from the main problem. The reality is that the FATF is constantly striving to improve. Most recently, it agreed upon a new updated Mutual Evaluation Methodology and updated its Mutual Evaluation Procedures. In particular, the FATF decided that the next round of assessments will have a greater focus on effectiveness and will take a more risk-based, targeted approach. Moreover, future assessments will be more frequent, with the time between assessments halved to six years. Given the above, it is important to avoid conflating separate issues. It is true that the mutual evaluation mechanism should be improved, but this has nothing to do with immediate response to an FATF member aggressively violating everything the organisation stands for. And the only possible response is blacklisting the violator.

Interestingly, the RUSI article claims that “if the aim is to target illicit finance originating from Russia, then while blacklisting will ‘name and shame’ the country, it will fail to systemically address the illicit finance problem emanating from Russia, which either has not been detected or has been underestimated for many years”. Since there is no explanation for this statement, I would put forward an opposing view: that blacklisting Russia will actually block most of the mechanisms currently used by the aggressor state and designed by Russia’s Central Bank, Ministry of Finance and intelligence services to evade sanctions and continue polluting the global financial system.

There have been regular reports of Russian agents establishing entities around the world with the involvement of offshore jurisdictions – as well as “neutral” countries and those where Russian spy networks are stronger – with the aim of purchasing components for weapons including cruise missiles, bombers and even intercontinental ballistic missiles. Classical GRU (Russian military intelligence) and SVR (Russian political/economic intelligence) covert operations are difficult to trace in the current circumstances. However, any money transfer originating in Russia could attract additional attention from correspondent banks and financial intelligence units around the world at the very beginning of its path if Russia is blacklisted – and this will significantly complement the sanctions regimes in place.

Some may be cautious about isolating Russia from the global financial system. However, one should think of the threat it poses, the moral case for action, as well as the authority of those making decisions. If a respected organisation such as the FATF cannot deal with a criminal at its table, this casts a dark shadow on its viability in the long run – one only needs to look at the latest statements from the UN, which is facing the exact same situation. In addition, we need to be smart enough to look beyond the horizon for looming threats in the not-so-distant future, sending a loud and clear signal to those that consider themselves to be superpowers: “The rules are the same for everyone and have to be respected. No crime will pay”.

Olha Vasylevska-Smahliuk is a Ukrainian MP and Chair of the Subcommittee on the Functioning of Payment and Information Systems and Prevention of Money Laundering of the Verkhovna Rada of Ukraine Committee on Finance, Taxation and Customs Policy.