Russia’s oligarchs emerged from the Soviet era as a new class of moneyed industrialists. Some have made their mark beyond Russia’s borders, amassing real estate portfolios, companies and even football clubs.

They support an international service industry of wealth managers, investment advisers, real estate agents, luxury brands, elite schools, personal trainers and nutritionists. But for all the success stories, there are some “bad apples” who have exploited many of the same international financial centres and corporate structures as legitimate businessmen in order to conceal illegal and dishonest behaviour.

High-profile investigations have demonstrated the difficulties of stopping the flows of money and assets out of Russia. In March this year, the Global Laundromat investigation by the OCCRP showed how more than 20 billion dollars had been moved out of Russia between 2011-2014 in a scheme involving wealthy and influential Russian citizens who had links to government officials and the FSB. The money was laundered through a network of companies and European banks, much of it going through accounts with the now disgraced Latvian bank Trasta Komercbanka, which had its licence revoked in 2016.

Transparency and controls

Against the backdrop of global scandals like the Panama Papers and the Global Laundromat, the international business and compliance environment is toughening up, making it more challenging to move money and assets out of Russia.

Tough new protocols have been introduced to encourage transparency, led by the OECD’s common reporting standard (CRS), which has been endorsed by more than 80 jurisdictions, including Russia, which signed up in May 2016. These agreements allow the exchange of information between tax authorities of different countries about financial accounts and investments. Designed to stop tax evasion, it demonstrates a clamping down against individuals attempting to cloak their dealings in complete secrecy. 

Banks’ secrecy protocols have made it difficult for them to fight the accusations that they have been too lax on money laundering, but this too is changing. Banks and corporate services providers are required to have good internal controls to order to meet anti-corruption and money laundering protocols, and to protect themselves from association with shady dealings.

Rule of law

While moves towards greater transparency still have some way to go, commercial courts are often called on to examine international business disputes worth many millions of Euros.  The courts are supported by agreements for mutual recognition of judgements between EU member states and beyond.

Russian businessmen often take their disputes to Cyprus.  An EU member state, Cyprus has a well-developed judicial system which is largely based on UK common law and rules of equity, a rich arsenal of bilateral and multilateral treaties, and a stable of professional services companies and wealth managers.

One current case in Cyprus between two Russian nationals concerns the ownership of a mine in Russia.

The plaintiff in the case is seeking $113,000,000 in damages, claiming that his share in the mining business was fraudulently taken from him using forged documents. Last year the judge took the decisive step of granting a worldwide freezing order against the first defendant, businessman Ruslan Borisovich Rostovtsev. He also ordered Rostovstev and Cypriot corporate service provider Abacus to disclose details of Rostovstev’s assets. Like those connected to the Laundromat scheme, Rostovtsev appears to have used a series of opaque structures involving nominees and fiduciaries to manage his affairs, stretching from Russia, through Seychelles, Belize and Liechtenstein. He was also a director of a UK company. It is only through litigation that his former business partner can apply to punch through the corporate veil of secrecy.

The Cyprus court has recently dismissed an application by Rostovtsev seeking to suspend the disclosure orders. The judge noted that assets appear to have been transferred after the date the worldwide freezing order was granted. The disclosures are deemed necessary to make sure that the worldwide freezing order is observed and to prevent the defendant from moving the assets out of reach of the plaintiff and the courts. The case continues.

Finding a way forward

The Cyprus case demonstrates how the courts are called upon to halt the movement of assets internationally in multi-million dollar disputes, but broader progress is needed to restore confidence in doing business with wealthy Russians, and to restore credibility in the international business environment as a whole. Investigations like the Global Laundromat and the Panama Papers show the potential scale of abuse, and how difficult it is to detect.

Greater cooperation between national crime fighting agencies and the implementation of the common reporting standard are making a difference. Banks’ adherence to international sanctions and implementation of stricter internal systems and controls also helps prevent money laundering.

In Russia, Putin’s repatriation agenda is making it more difficult for citizens to move money out of the country. Russia’s first exchanges of financial information under OECD’s common reporting standard (CRS) are expected to take place in 2018 for information covering 2017.

These steps towards greater controls, reporting and sharing of information are beginning to have an impact, making it less easy for dishonest individuals to use networks of companies to hide wrongdoing. But there is still a considerable way to go.