Russia

Task Force KleptoCapture: Unravelling illicit assets in the wake of Russia's invasion

A blog by Meraal Hakeem, a law student at the Arizona State University who is undertaking a legal research internship at the Basel Institute on Governance. In the aftermath of Russia’s invasion of Ukraine, the United States’ Department of Justice launched “Task Force KleptoCapture” in March 2022 to enhance its capacity to enforce sanctions and target assets suspected of bolstering the Russian regime. A stated objective of the Task Force was to use civil and criminal asset forfeiture mechanisms to seize confiscate assets of US-sanctioned individuals that could also be considered proceeds of crime. Spearheaded by the Department of Justice and drawing on the skills and resources of multiple law enforcement agencies including the Federal Bureau of Investigation, Marshals Service, Secret Service, Department of Homeland Security, Internal Revenue Service and Postal Inspection Service , the Task Force has now had almost 18 months to hunt down, freeze and subsequently confiscate proceeds of corruption, money laundering and sanctions evasion. But have they been successful in this part of their mission? Some major achievements In terms of permanent confiscation, the Task Force has already achieved a significant milestone. In February this year, USD 5.4 million belonging to Russian oligarch Konstantin Malofeyev was forfeited through unchallenged civil proceedings on the basis that he had been involved in an attempted sanctions violation. This figure, while substantial, pales in comparison to the total amount the Task Force has in its sights for potential criminal and civil confiscation. As of February 2023, the Task Force had frozen/restrained well over USD 500 million in assets belonging to individuals linked to the Russian regime, including: A USD 90 million luxury yacht owned by sanctioned Russian oligarch Viktor Vekselberg, allegedly involved in the violation of US bank fraud, money laundering and sanction statutes. A USD 300 million mega-yacht owned by Suleiman Kerimov, for violations of the International Emergency Economic Powers Act, money laundering and conspiracy laws. Two aircraft worth over USD 400 million owned by Roman Abramovich for violations of the Export Control Reform Act. A USD 45 million Boeing 737-7EM aircraft owned by Russian energy company PJSC LUKOIL and a USD 90 million Airbus A319-100 owned by sanctioned Russian oligarch Andrei Skoch for alleged sanctions violations and money laundering offences. 10 properties with a combined value of over USD 100 million linked to Russian oligarchs and agents, including luxury properties in Beverly Hills, New York, Washington DC and Florida. A clear early impact Having already achieved the forfeiture of USD 5.4 million, and with hundreds of millions more frozen or restrained, Task Force KleptoCapture has already shown it can have an impact. At the very least, the US has demonstrated how a concerted effort to target the proceeds of crime can achieve rapid results when backed by adequate resources and a strong asset recovery legislative framework. Beyond this, the Task Force has demonstrated an interesting approach to sanctions enforcement that goes beyond the norm, showing that it is possible to target sanctioned assets for forfeiture by proving that they are also the proceeds of crime. Taking this a step further, the US has also demonstrated how such funds can be subsequently repurposed to help victims of regimes under sanctions. In the context of Russia’s invasion of Ukraine, the US passed the Consolidated Appropriations Act of 2023, which authorises the US Attorney General to transfer any forfeited Russian-linked assets to Ukraine. The USD 5.4 million confiscated by Task Force KleptoCapture has already been authorised for transfer in this way, and it is likely that any future funds seized by the Task Force will be similarly directed. The required investment in infrastructure to rebuild Ukraine was estimated at approximately USD 411 billion back in March, and the number continues to grow as Russia’s war wages on. Initiatives such as Task Force KleptoCapture and the related Consolidated Appropriations Act have arguably provided one possible way for how at least a very small part of this bill could be funded. Learn more View our Working Paper 42: From sanctions to confiscation while upholding the rule of law by Andrew Dornbierer.

Working Paper sheds fresh light on the sanctions and confiscation debate

As the war in Ukraine intensifies, calls are growing for states to confiscate Russian assets frozen under sanctions and redirect them to provide support to Ukraine. Our latest Working Paper argues that states can and should do this by enhancing the effectiveness and scope of established asset recovery measures​​​​ – not by introducing new untested mechanisms that risk inviting future legal challenges, defeating the purpose of sanctions and violating the rule of law. Go straight to Working Paper 42: From sanctions to confiscation while upholding the rule of law​​​​ or read the key takeaways: Executive summary In light of recent world events, political leaders around the world have questioned whether it is justifiable to confiscate assets frozen under financial sanctions in order to redirect them to the victims of state aggression. Some states have even sought to introduce legislative mechanisms to make it possible to confiscate an asset frozen under sanctions, purely on the basis that the asset has been made subject to a sanction. One state – Canada – has already done so. The intention behind these mechanisms is clear: assets frozen under sanctions could be confiscated and repurposed to provide assistance and compensation to the victims of the sanctioned target. In the context of the Ukraine war, for example, proponents argue that these measures will allow states to permanently confiscate Russian-linked assets under sanction and redirect them to provide support to Ukraine. The debate Should states be able to confiscate sanctioned assets\ purely on the basis that they have been sanctioned? The justifiability and legality of mechanisms such as Canada’s is currently the subject of debate. Two key issues include whether the confiscation of assets in such circumstances: is acceptable in the context of established legal rights and norms; defeats the primary purpose of sanctions as a tool of coercion. Issues of property and due process rights With regards to the first point, the lack of adequate judicial oversight included in such mechanisms, and the fact that these mechanisms aim to permanently deprive sanctioned targets of their assets, raises serious questions surrounding property and due process rights. If such a mechanism was introduced in Europe for example, it is likely to be challenged on the grounds that it violates Protocol 1 Article 1 as well as Article 6 of the European Convention on Human Rights. If such mechanisms were also applied to state-linked assets such as sanctioned assets belonging to central banks then this would also raise concerns regarding a possible infringement of domestic and international laws relating to state immunity. Undermining the purpose of sanctions With regards to the second point, permitting the confiscation of sanctioned assets arguably annuls the coercive purpose of sanctions regimes to act as a tool to persuade targets to cease their adverse behaviour. If states are permitted to confiscate sanctioned assets and make it impossible for a target to retrieve their frozen assets then this effectively removes any incentive for the target to change their behaviour. In such cases, rather than operating as tools of coercion, sanctions would instead primarily operate to punish a target and provide compensation to the victims for the harm that has been caused. Of course, some have argued that there is a greater need for these latter objectives, particularly in the context of the war in Ukraine where financial assistance is required urgently. Others however argue that despite the urgency this situation presents, the long-term objective of sanctions should remain coercion, particularly if sanctioning states wish to compel the aggressing state, Russia, to contribute to post-war reconstruction efforts in the future. Other options through which to confiscate assets under sanction There are, in addition, several established avenues for seeking war reparations that should also be explored. Such established measures that states could adopt and apply to target sanctioned assets include: Traditional conviction-based confiscation measures, including ‘extended confiscation’ mechanisms Non-conviction based confiscation NCB measures Unexplained wealth laws These measures could be used to target: Assets that are involved in sanctions violations Sanctioned assets that are also the proceeds of crimes unrelated to the sanctions regime, such as corruption or organised crime offences Unexplained wealth Maximising effectiveness of established asset recovery mechanisms While these avenues may be limited, and can only result in the permanent confiscation of a portion of sanctioned assets, states could take various steps to maximise their effectiveness. For example legislative amendments could be considered to broaden the scope of relevant terms like ‘money laundering’ and to specifically permit confiscated assets to be redirected to the victims of state aggression. Domestic and international coordination could be improved by creating dedicated law enforcement bodies for example, or through participating in international coordination initiatives. Importantly, these avenues target established criminal activity and/or include defined judicial processes through which a targeted person can challenge any attempts to confiscate their property. Therefore they can be applied without unacceptably infringing on legal rights. Moreover, if states take measures to enhance the effectiveness and scope of established asset recovery measures, additional benefits can be derived for the broader fight against financial crime and kleptocracy. The bottom line: maintaining the rule of law Opting for mechanisms that abide by established legal rights will not only significantly increase the chance of recovering assets without subsequent legal challenges. It will also ensure that the very reason for targeting the assets in the first place – namely to seek justice and compensation for acts of aggression – is not undermined through the erosion of the rule of law. \ The term ‘sanctioned assets’ is used as a shorthand to refer to assets of a sanctioned person or country. Learn more Download the Working Paper. Watch or read the main takeaways from a December 2022 panel discussion on asset recovery developments since the start of the war in Ukraine.

The Russian arms dealer case: how Peru recovered stolen assets from a Swiss bank account through non-conviction based confiscation

I recently participated in a panel on the role of non-state actors in the recovery of stolen assets and proceeds of corruption at the 2020 International Anti-Corruption Conference, at which I presented the so-called “Russian arms dealer case”. The case is relatively small in monetary terms – around USD 700,000 plus interest – but hugely significant in terms of asset recovery efforts and international co-operation. In this case, the Peruvian State used a non-conviction based confiscation technique to recover a bank account frozen in Switzerland. The account contained illicit commissions paid in the context of the purchase of war planes by the Peruvian government during the armed conflict with Ecuador. This case was the first of a series of cases between Peru and Switzerland applying non-conviction based confiscation techniques. It has paved the way for other proceedings, some of which are still pending in the tribunals. This case also illustrates one way in which the Basel Institute, through its International Centre for Asset Recovery ICAR , provides assistance to victim countries in recovering assets stolen through corruption. In addition to this type of technical assistance on specific asset recovery cases, ICAR also delivers capacity building programmes and contributes to states’ efforts to introduce legislative and institutional reforms to facilitate asset recovery. All of the facts described below are contained in the relevant and publicly available Swiss and Peruvian jurisprudence. Case study: the Russian arms dealer Vladimiro Montesinos Torres was the chief of the Peruvian intelligence service and advisor of former Peruvian President Alberto Fujimori in office from 1990 to 2000 . Montesinos headed a criminal organisation through which he systemically distributed bribes to public officials to accumulate influence over vast areas of government, the media and public life in Peru. Fujimori and Montesinos orchestrated large procurements for the Peruvian state that were tainted with corruption and resulted in massive losses for Peru. Together with their enablers, they stole several US billions of dollars in public assets from Peru. In 1998, Montesinos and Fujimori instigated the purchase of military aircraft by the Peruvian state. The vendor was a Russian state-owned company by the name of Rosvooruzhenie, whose vice-director was a Russian citizen called Yuri Khozyainov. Montesinos and his allies received illicit commissions totalling more than USD 16 million in relation to a single procurement contract. These commissions were paid into two Swiss bank accounts at First International Bank of Israel FIBI and Bank Leumi in Zurich. This scheme, as well as later acts of money laundering, were detected and subsequently investigated in several jurisdictions, including Peru, Switzerland and Luxembourg. It was later revealed that Khozyainov was deeply implicated in Montesinos’ money laundering scheme. Of the USD 16 million in illicit commissions, around USD 708,000 were forwarded to an account held by Khozyainov at the bank Credit Lyonnais. The bank reported Khozyainov's account to the Swiss Financial Intelligence Unit FIU and it was subsequently frozen as part of a Swiss money laundering investigation. A few years later, Peru also investigated the case, applying non-conviction based confiscation techniques. It requested and exchanged evidence with Switzerland through the formal channels of mutual legal assistance MLA . Khozyainov appealed the seizure of the assets in Switzerland, claiming Peru did not grant him a due process and that the freeze violated the Swiss MLA regulations. In February 2014, the Swiss Federal Court rejected Khozyainov’s appeal and upheld the freezing order Decision RR.2013.164 . In February 2016, the Peruvian courts ordered the confiscation of Khozyainov's Swiss bank account and, two months later, requested Switzerland to execute the decision and to hand over the assets, including interest. Switzerland granted MLA and executed the request in June of that year, but Khozyainov appealed to the Swiss Federal Criminal Court. The court rejected his arguments and ordered the return of the frozen assets to Peru Decision RR.2016.147 . Arguing a further violation of rights of constitutional nature, Khozyainov lodged an appeal at the Swiss Federal Supreme Court, which ultimately ruled that that the Peruvian investigation and trial was fair in all aspects. The value of early preparatory meetings Among the many lessons learned in this process was the great importance of preparatory meetings between central and executing authorities. It is continuously pointed out in international fora that for an asset recovery case to be successful it needs to be closely coordinated between requesting and requested states. We profoundly adhere to this statement. In practice this means that substantive work needs to be undertaken as a basis for such discussion and coordination. The case examined here has provided Peru and Switzerland with the opportunity to discuss in detail the mechanisms Switzerland will use to recognise and execute the Peruvian decision based on a typology of confiscation which is unknown in the Swiss legal framework. On the other hand, these preliminary meetings allowed the Peruvian authorities to understand the conditions in the Swiss domestic legal framework for the execution of foreign confiscation orders. Creating precedent-setting jurisprudence Obviously, the above-mentioned exercise requires innovative thinking and a deep knowledge of both legal systems as well as the languages and legal traditions. ICAR’s specialists, in close coordination with prosecutors of the requesting and requested state, supported these efforts. The end conclusion was that both legal systems had equivalent provisions for dealing with similar underlying facts. This enabled the Peruvian decision to be admitted in Switzerland for execution. Financial investigations at the heart of asset recovery Independently of the underlying legal action that led to the recovery of the illicit assets, Switzerland’s capacity to cooperate in such asset recovery scenarios depends on two main preconditions pertaining to the foreign procedure. First, the respect of due process requirements in the victim state. Second, that the asset is of criminal origin, i.e. is linked to a crime. This is necessary in order to execute the foreign decision through MLA in criminal matters. It is no simple matter to demonstrate in court that assets – especially when they undergo several transformations in a money laundering scheme – are the proceeds of a crime. In the course of our work in Latin America, ICAR’s financial investigators and their Peruvian counterparts had been able to establish with a high degree of certainty that the assets in the Swiss accounts originated in the Peruvian treasury. To do this, they needed to analyse a large amount of financial data received by Peru through MLA channels. The financial reports were able to reconstitute the paper trail and were used by the Peruvian prosecutors to satisfactorily support their claim in the domestic courts. At the same time, the financial investigation showed without a shadow of doubt that the assets result from the corruption offence perpetrated by Montesinos and his associates. This in turn provided the legal argument that the Swiss authorities needed to cooperate in criminal matters, even if the underlying foreign confiscation order did not result from ordinary criminal proceedings but from a non-conviction based confiscation action.

Collective Action and competition risk assessment: contradictory or complementary?

I recently spoke about Collective Action as part of a virtual panel discussion along with Andrey Tsyganov, Deputy Minister of Russia's Federal Antimonopoly Service, on the topic of New Russian Antimonopoly Regulations. The webinar was organised by the Russian Business Ethics Network and The Wharton School of the University of Pennsylvania Zicklin Center for Business Ethics Research, and is available on YouTube here. Antitrust and Collective Action is a topic that generates heated debate, in part I believe because the Collective Action approach is not commonly understood in this context. So to contribute to this debate, here are the thoughts I expressed in the webinar: Shivers down the spine? At first sight, the term “Collective Action” is likely to send shivers down the spine of any competition authority. The notion of competitor companies coming together to discuss anything at all might appear highly risky. But rest assured that Collective Action does not refer to class actions, in which multiple plaintiffs get together to sue. Nor does it mean workers striking for better conditions or collectively bargaining with their employer. Collective Action is a method to tackle corruption that primarily involves the private sector getting together with civil society and/or government representatives. It draws on the idea that complex, multi-faceted problems, need multi-stakeholder solutions. International standards in anti-corruption laws and regulations acknowledge the need for multi-stakeholder approaches to address corruption. Many governments now include Collective Action in official guidance documents, in some cases as evidence of top-level commitment by a company to tackling corruption or part of a proper compliance management programme. For example, the UK’s guidance on the UK Bribery Act, and even the German Competition Authority in German cite examples of Collective Action as helpful methods to exchange on best practices and train supply chains on integrity issues. But that’s not the only reason Collective Action is becoming more and more common. It’s because companies, governments and civil society representatives increasingly see the value of working jointly to solve shared problems and mitigate risks. Collective Action against anti-competitive behaviour All of us are well aware of the economic and social consequences of corruption. Among other things, it stifles competition and is a form of anti-competitive behaviour. Antitrust and corruption are often closely linked – just think of bid rigging, collusion and price fixing in public procurement. Collective Action initiatives frequently take aim at this sort of anti-competitive behaviour. Examples include procurement focused Integrity Pacts such as the building of nursery school in Hungary or the construction of a hospital in Slovenia. So Collective Action can help address antitrust risks. But are there also antitrust risks in Collective Action? The short answer is no. Collective Action can involve competitors coming together to share best practices in compliance, particularly anti-corruption compliance and fair competition. This does not entail sharing information about prices nor the conditions for doing business. To ensure that antitrust or monopoly concerns are transparently addressed, it is advisable to convene Collective Action involving the private sector with neutral facilitators. The importance of a facilitator was a top finding in our recent working paper on success factors and strategies for Collective Action. This is one role that we at the Basel Institute on Governance play, as well as offering guidance and resources on anti-corruption Collective Action. We have facilitated such groups in a wide range of industry sectors, from finance to engineering and technology. Converging risk assessments – and how Collective Action can help What we’re seeing as a developing trend in companies is the convergence of risk assessments in for example anti-corruption, human rights and enterprise risk management more broadly. Risk assessments are the first step in developing a response to reduce risks. The recent development in Russia for companies to conduct competition risk assessments is therefore an interesting development. It provides an opportunity for companies to combine this obligation with a corruption risk assessment, because the topics are closely linked. In Russia, the anti-monopoly compliance measures are not compulsory, but for those companies that do implement a programme, they also need to: Conduct a competition risk assessment Demonstrate what measures are aimed at reducing the risks Conduct monitoring Carry out training Identify the compliance officer responsible These topics are closely aligned with elements addressing corruption risks in a compliance programme. So, it seems reasonable to combine this risk assessment with other risk assessments, including on corruption. This is not just true for Russia but more broadly. It also makes good business sense for companies, through a structured Collective Action initiative, to share experiences and know-how on this topic. Compliance officers can work together to identify best practices in conducting such an assessment and aligning the methodology with other risk assessments. Compliance with laws and regulations is not an antitrust risk in itself. And pooling understanding of how best to address legal and compliance requirements is all about ensuring a level playing field - when compliance officers are at the table. Collective Action tools against covid-19-related risks The pandemic has led to multiple changes in the way companies and governments operate. There are simplified procedures for procurement, horizontal cooperation between competitors and so on. I cover some of these in a previous blog on integrity and anti-corruption in the private sector post-covid-19. These changes to laws and procedures, whether temporary or mid-term solutions, could be safeguarded by deploying Collective Action tools. These could be Integrity Pacts that are monitored by civil society or High Level Reporting Mechanisms for procurement procedures. They could also be initiatives where companies come together and commit to transparency declarations that are monitored and/or on internet platforms. In short, Collective Action offers support to companies, regulators and citizens at this difficult time. It is complementary to other measures such as financial rescue packages. And a Collective Action initiative focused on benchmarking and sharing experiences about risk assessments would, in the current context, be an extremely interesting way for companies in many sectors to start collaborating constructively.

Industry Program for Development of Anti-Corruption Compliance and Business Ethics in Moscow Transport Organizations