Why Western Law Enforcement Should Target Russia’s Ruling Elite

by Ethan S. Burger

In contrast to their strident rhetoric about Russia’s annexation of Crimea, the EU and the U.S. have imposed only limited, albeit targeted, sanctions, primarily against Russian President Vladimir Putin’s inner circle.  By imposing sanctions on Bank Rossiya and Mr. Timchenko, Western leaders are sending a tacit message that some of Mr. Putin’s personal wealth kept in the West is potentially in jeopardy.

These sanctions, however, are unlikely to achieve their primary purpose – forcing Russia to respect its neighbors’ sovereignty.  Unfortunately, Russia’s withdrawal from Crimea is entirely unrealistic, at least in the near term.  Thus, the West is witnessing Moscow’s continued use of ethnic Russians in Eastern Ukraine and Moldova’s Transnistria region as a flimsy pretext to intervene in the domestic affairs of its neighbors. New waves of reactive sanctions may be too late.  Obama’s third wave of sanctions included Igor Sechen, head of Rosneft and other Russian citizens and Russian companies.

Consequently, the West should expand its current sanctions in two ways.  First, their scope should expand to cover a significantly larger share of the Russian political and economic elite.  Second, Western law enforcement should target the Russian ruling elite’s wealth held illegally in Western bank accounts, securities and real estate.  Much of its wealth, secreted away in the West for safekeeping, is the fruit of the poisonous tree under foreign, domestic Russian, and international law.

If the West were to adopted change its law enforcement priorities by elevating its approach, it would merely being selective in choosing whom to investigate and possibly prosecute.  There would be one clear difference, however, the rule of law would be observed in applying the law against members of the Russian elite.  In contrast, Mr. Putin and the Russian regional authorities on numerous occasions used using Russian law enforce and prosecutorial bodies as a tool against their political enemies as a means to expand their own power and wealth.

In contrast, the West should follow the Russian authorities’ lead, but to advance foreign policy objectives in a manner compatible with the rule of law.  In a nutshell, the West should advance “lawfare” to further its policy objectives.  Western legal, regulatory and tax bodies should examine closely whether Russian members of the elite have broken the law in making their Western investments.  Such a Western “reset” could inflict real economic pain on a key constituency in Mr. Putin’s powerbase.  For reasons of personal economic security, they might even influence Mr. Putin to change course.

The OECD Anti-Bribery Convention and the U.S. Foreign Corrupt Practices Act

In the 1990s, the EU, the IMF, the U.S. and the World Bank spent hundreds of millions of dollars in Russia to promote the rule of law, with little to show for it.  One legacy of these efforts, however, is that the Russian constitution provides that international treaties and norms take precedence over Russian law.  If Russia and its citizens violate treaties that Russia has signed or the rules of the international organizations to which it belongs, the West should use any available enforcement mechanisms available envision by the international agreement or the organization’s rules.  For example, Russia is party to the OECD Anti-Bribery Convention and, as of April 2012, has assumed the obligations of a party to the convention.  There are likely many cases that European nations could prosecute based on the legislation that they enacted to fulfill their obligations adopted pursuant to the OECD Convention.

U.S. law enforcement has been active on Russia matters; now’s the time to step up its efforts even further.  Indeed, this has already occurred to some extent, but at too low a level to further the new objectives being sought.  Over the years, the Criminal Fraud Section of the Department of Justice has won cases against Diebold Inc., Eli Lilly & Company, Hewlett-Packard and Siemens AG in connection with their activities in Russia.  It would seem that given the level of corruption in Russia and the large share of major Russian commercial entities that qualify as “instrumentalities” under the Foreign Corrupt Practices Act (FCPA), the cases being investigated (or that have been investigated) represent only the tip of the iceberg.

The concept of “instrumentalities” is particularly relevant as it is common for the Russian state to own outright or otherwise control almost all large Russian enterprises.  Their senior management would generally qualify as “foreign officials” under the FCPA.  While “foreign officials” are not subject to prosecution under the FCPA, persons falling within the scope of the FCPA (as well as their agents and facilitators) would be subject to prosecution as they would probably qualify as “bribe payors” and co-conspirators.  In addition, if Russian officials were publicly exposed as “bribe recipients,” it may have consequences for them both at home and abroad, and even provide foreign law enforcement some useful information in related matters.

Similarly, the Securities and Exchange Commission (SEC) has taken up many of the same FCPA cases as has DOJ that relate to business in Russia (e.g., Diebold Inc., Eli Lilly, and Pfizer).

The SEC and DOJ, are in the process of finalizing a case against Hewlett Packard in which the company will pay in excess of $100 million as part of the settlement.  Perhaps in connection with a stricter enforcement policy on matters involving Russia, the prison terms and fines DOJ seeks could be higher than in the past.  The SEC is empowered only to impose fines.

Russian Organized Crime and RICO

The past two decades have witnessed the global spread of Russian organized criminal groups.  It is not an exaggeration to say that it is unclear where the Russian state ends and organized crime begins.  Investigation of Russian organized crime should be a high priority for U.S. law enforcement today.

It is likely that RICO cases largely occurring in the U.S. will have tentacles originating in Russia.  Hence, DOJ’s successful prosecution of some RICO matters in the U.S. could have significant repercussions for the Russian elite both in the rodina and abroad.

Kleptocracy Forfeiture Actions

It receives scant attention compared to FCPA enforcement, but another prong of the DOJ’s efforts to combat bribery and corruption is its Kleptocracy Asset Recovery Initiative under which prosecutors in the DOJ Asset Forfeiture and Money Laundering Section work in partnership with federal law enforcement agencies to forfeit the proceeds of foreign official corruption.

Proceeds of crime are forfeitable using civil standards, where the burden of proof is significantly easier (i.e., more likely than not as opposed to “proof beyond a reasonable doubt”).  In July 2009, Attorney General Eric Holder praised DOJ’s Organized Crime Drug Enforcement Task Forces and Asset Forfeiture Programs for their “proven track record of destroying drug trafficking organizations by arresting and prosecuting their leadership and by seizing their financial infrastructure.”  These techniques could also be applied to Russian “value launders” having assets that illegally entered the U.S. or were used to acquired property in a manner inconsistent with American law. 

The Financial Action Task Force and the U.S. Bank Secrecy Act

The Financial Action Task Force (FATF) is an organization that sets standards for anti- money laundering and counter-terrorist financing (AML/CTF) policies. Russia joined FATF in 2003. By doing so, Russia agreed to observe certain recommendations in this area and be examined by other FATF members for the purpose of assessing whether it has adopted laws consistent with the relevant AML/CTF standards and are actually applying them.  In a sense, this lays the foundation for other countries holding Russia, its citizens and legal entities accountable for complying with generally-accepted norms in this area.

If the U.S. government were more vigilant in assuring that the U.S. private sector is fulfilling its “know your customer rules” obligations pursuant to the Bank Secrecy Act (BSA), it would ironically merely be acting in a manner consistent with Russian law and Russia’s international obligations.

Members of the Russian elite are renowned for laundering ill-gotten gains, often in the U.S. The U.S. Financial Crimes Enforcement Network should instill in U.S. financial institutions the importance of identifying all assets of high net worth Russians in the U.S. to ensure that they have not violated the BSA.

Many have suggested that the dramatic increase in the prices of luxury real estate in London, New York, Los Angeles, Miami, Sydney and elsewhere is due to money-laundering by Russian and Eurasian nationals.  In a sense, the term “money-laundering” is a misnomer as it is really “value laundering.”  Real estate agents and sellers in all-cash transactions with Eurasians should be on notice that the purchaser could be involved in placing illicit funds (including money that has avoided taxation in Russia).

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Forcing Russian elites to uphold domestic and international legal obligations is not just fair game – it might even deter further aggression and bloodshed.  There is no need to invent new countermeasures. The U.S. and Europe could achieve significant policy ends simply by applying the real legal tools at their disposal.

Ethan S. Burger is a Washington-based attorney and legal consultant. Recently, he was a Senior Lecturer with the University of Wollongong’s Law Faculty and its Centre for Transnational Crime Prevention, where he was a consultant to the Queensland Crime and Misconduct Commission’s asset forfeiture program.

Previously, he was a Project Director and Associate Research Professor at American University’s School of International Service’s Transnational Crime and Corruption Center for a U.S. Department of Justice-sponsored project concerned with organized crime and corruption in Russia.

He has taught on an adjunct basis at the Georgetown University Law Center, Washington College of Law and University of Baltimore.

He has written more than 100 publications and given presentations at numerous events, including those of the American Bar Association, Harvard University’s Davis Center, Columbia University’s Harriman Institute, International Bar Association, International Law Institute, International Monetary Fund, Kennan Institute, New York University, Royal Institute of International Affairs (Chatham House), University of Toronto’s Center for Criminology, and the World Bank.