Embassy of the United States

Reports on Russia

International Narcotics Control Strategy Report - 2008

Released March 2008
Bureau of International Narcotics and Law Enforcement Affairs

Russia Country Report

Volume I: Drug and Chemical Control

I. Summary

Trafficking in opiates from Afghanistan and their abuse were major problems facing Russian law enforcement and public health agencies in 2007. The Ministry of Health (MOH) estimates that up to six million Russians (of a population of 143 million) or 4.2 percent take drugs on a regular basis. Russian officials estimate that about 10,000 people die annually of drug overdoses and another 70,000 deaths are considered drug-related. There are estimates that nearly 70 percent of new HIV cases can be attributed to intravenous drug use and 90 percent of injection drug users are Hepatitis C positive.

The Federal Drug Control Service (FSKN) reported that the sharp post-Soviet increases in the number of drug users has begun to stabilize. The Government of Russia (GOR) has begun to take steps to address the public health issues associated with drug use. Health education programs in schools and outreach programs for youth and other vulnerable populations are beginning to incorporate messages concerning the harmful effects of drug use and the links between injecting drugs and HIV/AIDS. However, government-supported drug addiction treatment programs are ineffective and not widely available. Russia is a party to the 1988 UN Drug Convention.

II. Status of the Country

Russia is both a transshipment point and a user market for heroin, opium, marijuana, Ecstasy and other dangerous illegal substances including a synthetic injectable opiate comprised of a mixture of heroin and tri-methylfentanyl called "White China." Opiates in Russia originate almost exclusively in Afghanistan, and are often ultimately destined for Europe. The 7000-kilometer Russian border with Kazakhstan is roughly twice the length of the U.S.-Mexican border and poorly patrolled. Retail distribution of heroin and other drugs within Russia is carried out by a variety of criminal groups which include, but are not limited to Russian Organized Crime, Central Asian, Caucasian, Russian/Slavic, and Roma groups.

III. Country Actions Against Drugs In 2007

Policy Initiatives. The FSKN, originally established in 2003 as the State Committee for the Control of Traffic in Narcotic and Psychotropic Substances (GKPN), was restructured in 2004 to become the Federal Drug Control Service (FSKN). The FSKN has 35,000 employees, with branch offices in every region of Russia. Since its creation the FSKN has stressed the importance of attacking money laundering and other financial aspects of the drug trade. The money laundering division of the FSKN cooperates closely with the Ministry of the Interior (MVD), the Federal Security Service (FSB), and the Federal Customs Service (FTS), but its main partner is the Federal Service for Financial Monitoring (FSFM). The FSKN has also continued its efforts to implement effective monitoring of the chemical industry. Prior to the creation of FSKN, precursor chemicals and pharmaceuticals were governed by a patchwork of regulations enforced by different agencies. Production, transportation, distribution, and import/export of controlled substances now require licensing from FSKN.

On October 19, 2007, President Vladimir Putin signed a decree establishing the State Anti-Narcotics Committee. The stated purpose of the newly-established governmental steering body is to develop proposals for the President on national anti-narcotics policy, to coordinate the activities of various government agencies, and to participate in international drug enforcement cooperation efforts. The Committee is chaired by the FSKN Director and is comprised of seven federal ministers, 14 heads of federal services, a Ministry of Foreign Affairs representative, vice speakers from the Duma and the Federation Council, and other officials. Anti-narcotics commissions will be established at the regional level and will be headed by the heads of regional administrations.

Internationally, President Vladimir Putin has authorized the FSKN to station 50 officers in foreign states to facilitate information sharing and joint investigations. The FSKN planned to open liaison offices in ten countries in 2008: Austria, Afghanistan, Iran, Kazakhstan, Kyrgyzstan, China, the U.S., Tajikistan, Ukraine, and Uzbekistan. The GOR has also indicated that its drug liaison officer in Kazakhstan will also work with the Central Asian Regional Information and Coordination Centre (CARICC), which is being established by the UN Office on Drugs and Crime and will be based in Almaty, Kazakhstan. CARICC will serve as a regional focal point for communication, analysis and exchange of operational information in "real time" on cross—border crime, as well as a center for the organization and coordination of joint operations. CARICC includes Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan in addition to Russia.

On February 7, 2006, amendments to the Criminal Code reduced the minimum punishable amounts of illegal drugs a user can possess before he/she is subject to prosecution. This reversed legislation adopted in November 2003 that reduced the sentence for possession of drugs for "personal use" from a maximum of three years in jail to a fine. The 2006 amendments eliminated the category of "average dose" and defined the quantities of "large" and "especially large" amounts of drugs to be used in determining sentences for drug-related crimes as follows (amounts in grams): poppy straw (20/500), hashish (2/25), heroin (0.5/2.5), marijuana (6/100), opium (1/25), and methadone (0.5/2.5).

Russian legislators continue to press for harsh penalties for drug traffickers. At the end of 2007, a bill was pending before the Duma that would amend the criminal code to criminalize imports into Russia of synthetic analogs of narcotic substances, shift the authority to investigate such offenses from the Customs Service to FSKN, and stiffen the penalty from a fine to seven years in prison.

Law Enforcement Efforts. Through November 2007, the MVD registered 216,062 crimes related to illicit drug trafficking, the identification of 96,692 perpetrators, and 134,370 cases referred for prosecution. The following table reflects total drug seizures for 2006 and the first nine months of 2007 by all law enforcement agencies in Russia (all figures are in kg; Source: FSKN):

According to the FSKN, seizures have pushed up the price of almost every kind of drug across Russia. The average retail price for a gram of heroin in 2007 was $56.00 versus $ 51.54 in 2006. The average price in 2005 was $40, in 2004 it was $30 and in 2003 it was $20. The wholesale price for a kilogram of heroin in 2007 is about $26,000. Prices ranged from about $11,300 to about $75,200 per kilogram depending on quality and distance from Russia's border with Kazakhstan.

Clandestine amphetamine labs are occasionally reported in Russia. In November 2007, the FSKN reported that 100 grams of amphetamines, 300 tablets of methamphetamine and numerous rocket propelled grenades were discovered in a laboratory in the Rostov Region. The investigation resulted in the arrest of a 25-year-old post-graduate chemistry student from a local university who was alleged to be in control of the drug-production site. The FSKN also reported that, in 2007, six (6) kg of tri-methylfentanyl were seized at a clandestine laboratory in St. Petersburg. A seizure operation at a clandestine laboratory in Moscow region resulted in the discovery of tri-methylfentanyl, along with methadone and amphetamines. Further investigation by Russian authorities revealed that the chemical process for producing the seized drugs had been shortened dramatically, indicating that laboratory operators had an extensive background in chemistry and were very familiar with the chemical conversion process. The FSKN reports that a majority of tri-methylfentanyl seizures occur in small amounts (300-600 grams) in the northwest and western parts of Russia.

Although MDMA (Ecstasy) tablets produced in Russia are of poor quality, the low prices (as little as $5 per tablet) are attractive to Russian youth compared to the $20 typically charged for each tablet for MDMA from abroad (primarily The Netherlands and Poland). The St. Petersburg area is considered the primary gateway for foreign-produced MDMA smuggled into Russia. In 2007, Russian authorities seized 1.6 kg of MDMA from two Lithuanians in Voronezh, Russia—a city approximately 500 miles south of Moscow: an example of traffickers from the Baltic States entering the country from St. Petersburg and making drug deliveries not just to Moscow, but to some of the more remote parts of the country as well.

On November 1, 2007, FSKN and FSB agents seized ten (10) tons of acetic anhydride (AA) and arrested three subjects in Dzerzhinsk — a town approximately 250 miles east of Moscow where the only AA-producing factory in Russia is located. The seized precursors were said to be just part of a much larger delivery to drug traffickers in Afghanistan. Russian authorities believed that the AA was to be shipped by truck to Afghanistan, by way of Tajikistan and disguised as a solvent used in plastic production, as well as mosquito repellant.

Cocaine abuse is not widespread, but is increasing. Disposable incomes in Russia have risen steadily over the past few years, while cocaine prices have remained static, making the drug more affordable to a growing number of potential users. Cocaine is easily obtained in Moscow and St. Petersburg. Cocaine is frequently brought into Russia through the ports of St. Petersburg, and to a lesser extent Novorossiysk. Sailors aboard fruit carriers and other vessels operating between Russia and Latin America provide a convenient pool of potential couriers. In an example of effective international law enforcement cooperation, the U.S. Drug Enforcement Administration (DEA) and Russian law enforcement agencies conducted operations which resulted in several significant seizures, totaling more than 124 kg of cocaine and $127,200 in U.S. currency during the first nine months of 2007. Each of these seizures involved Latvian, Ukrainian and Russian crewmembers aboard banana vessels smuggling multi-kilogram cocaine shipments from South America to St. Petersburg. Another less common smuggling method involves couriers traveling on commercial flights bringing cocaine into Russia, often through third countries in Europe, as well as the U.S.

FSKN officials have also pointed to the use of the Internet to sell illegal drugs. According to the FSKN, Russia is home to hundreds of websites which market illegal drugs both in Russia and abroad. The FSKN has reported that it is attempting to develop technology to interrupt web-based drug trafficking.

Russia now has a legislative and financial monitoring structure that facilitates the tracking, seizure, and forfeiture of all criminal proceeds. Russian legislation provides for investigative techniques such as wiretapping, search, seizure and the compulsory production of documents. Legislation passed in 2004, entitled "On Protection of Victims, Witnesses and Other Participants in Criminal Proceedings" extends legal protection to all parties involved in a criminal trial. Prosecutors or investigators may recommend that a judge implement witness protection measures if they learn of a threat to the life or property of a participant in a trial. Steps taken to protect a program participant could include personal and property protection, change of appearance, change of identity, relocation, and transfer to a new job. The GOR has issued implementing regulations and provided money from the federal budget for implementation of the legislation. The Presidential Administration has submitted cooperating witness legislation to the Duma, where it is expected to win passage.

In 2006, asset forfeiture laws were reinstated to Russian legislation, enabling the courts to seize the property of a convicted drug trafficker if it is demonstrated that the property was purchased with drug proceeds.

Corruption. Evidence indicates the scope and scale of official corruption in Russia have grown markedly in the past several years. There were no reported cases of high-level narcotics-related corruption. In May 2006, five FSKN officers were accused of extortion and detained in Moscow. The case remains under investigation. Over the period October 2006 to October 2007, criminal proceedings were initiated against 16 FSKN officers. This included the general in charge of the FSKN's Department of Operative Support, who was charged with abuse of power and illegal wiretapping for profit. There is no indication that these charges were drug-related.

As a matter of government policy, however, the GOR does not encourage or facilitate illicit production or distribution of narcotic or psychotropic drugs or other controlled substances, or the laundering of proceeds from illegal drug transactions. No GOR senior officials were known to engage in, encourage, or facilitate the illicit production or distribution of such drugs or substances, or the laundering of proceeds from illegal drug transactions.

Agreements and Treaties. Russia is party to the 1988 UN Drug Convention, the 1961 Single Convention as amended by its 1972 Protocol, and the 1971 UN Convention on Psychotropic Substances. The U.S.-Russia Mutual Legal Assistance Treaty (MLAT), entered into force on January 31, 2002. Russia is a party to the UN Corruption Convention and the UN Convention against Transnational Organized Crime and its protocols against trafficking in persons and migrant smuggling.

The GOR has signed over 30 bilateral agreements on counternarcotics cooperation including a Memorandum of Understanding with the U.S. Drug Enforcement Administration to enhance bilateral cooperation to combat illegal drugs and their precursor chemicals. In October 2007, the Russian FSKN and the European Union's Monitoring Centre on Drugs and Drug Addiction signed a Memorandum of Understanding to promote the exchange of information and technical expertise on the use of illegal drugs.

Cultivation/Production. There are no official statistics on the extent of opium cultivation in Russia, and the USG has no evidence to suggest that more than 1,000 hectares of opium are cultivated. There are small, illicit opium poppy fields ranging in size from one to two hectares in Siberia, in the Central Asian border region, and in the Omsk-Novosibirsk-Tomsk area. Typically the opium fields are small backyard plots or are located in the countryside concealed by other crops. Cannabis grows wild throughout Russia and is also cultivated in quantities ranging from a few plants to plots of several hectares. Every year, Russian authorities carry out the "Operation Poppy" eradication effort, aimed at illicit cannabis and poppy cultivation. Primary cannabis cultivation areas are Primorye, Altay, as well as Amur Oblast and the Republic of Tuva. In 2007, FSKN officials reported stepped-up efforts to eradicate cannabis being grown on national park land around Sochi, the site of the 2014 Olympic Winter Games.

Drug Flow/Transit. Opiates (and hashish to a lesser degree) from Afghanistan are smuggled into Russia through the Central Asian states along the "Northern Route." The FSKN estimates that 60 MT of heroin (are smuggled into Russia annually from Afghanistan. Contraband is typically carried in vehicles along the region's highway system that connects populated areas of southwestern Russia and western Siberia. Smuggling vehicles often utilize cover loads such as onions, cabbage, watermelons and honey. Couriers sometimes use the region's passenger trains and incidents involving internal body carriers or "swallowers" are also common.

To disrupt this trafficking, each year since 2003, law enforcement agencies of the member states of the Collective Security Treaty Organization-CSTO (Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan) have participated in "Operation Canal." Operation Canal's operations are bi-annual, weeklong interdiction blitzes during which extra personnel are stationed at critical junctures on the Russian border and in Central Asia to conduct increased searches of suspected drug smugglers and inspections of their vehicles for drugs, drug proceeds and precursor chemicals. In 2007, Operation Canal blitzes took place from August 28 to September 3 and again from November 26 to December 3. The 2007 operations included observers from Azerbaijan, China, Latvia, Lithuania, Mongolia, Poland, the U.S. Drug Enforcement Administration (DEA), Uzbekistan, Ukraine, Finland, Estonia, as well as officers from FSFM and INTERPOL. As a result of these two week-long operations, the Russian FSKN reported that law enforcement agencies from the CSTO seized 890 kilograms of heroin, 1,348 kilograms of hashish, 35 kilograms of synthetic drugs, 1.366 weapons, 26,105 rounds of ammunition, and precursor chemicals. Russia and the other member nations of the Shanghai Cooperation Organization (SCO) have also attempted to use the SCO as a vehicle to combat narcotics trafficking in Afghanistan and Central Asia.

An example of the volume of opiates being smuggled into Russia was the May 2007 seizure of 436 kilograms of heroin in Moscow. This very significant seizure was one of the largest in recent years and followed other large seizures in Moscow, including a July 2006 seizure of 242 kg of heroin, an October 2006 seizure of 158 kg of heroin, and two seizures in August 2005 of 165 kg of heroin and 156 kg of heroin, respectively.

The Russian cities of Yekaterinburg, Samara, Omsk, and Novorossisk have also emerged as hubs of trafficking activity. A 362 kilogram heroin seizure was recorded in Orenburg in 2005.

The seizure of 20 tons of poppy straw in St. Petersburg in October 2007, which took place aboard a vessel that originated in The Netherlands, also demonstrated the importance of St. Petersburg as a major smuggling gateway not just for cocaine shipments, but for all types of drugs.

Synthetic drugs manufactured in Russia and elsewhere in Europe (The Netherlands and Poland) flow in both directions across Russia's western borders. Again, much of this smuggling activity appears to be concentrated in the northwest area around St. Petersburg.

FSKN officials continue to allege a significant increase in drug trafficking into Russia following the withdrawal of Russian border guards from the Afghan/Tajik border in 2005. Russian forces had been stationed in Tajikistan after the dissolution of the Soviet Union, but departed after the expiration of the agreement governing their presence.

Domestic Programs/Demand Reduction. Russian authorities are attempting to implement a comprehensive counternarcotics strategy that combines prevention, treatment, and law enforcement. A federal program, was launched in September 2005, aimed at reducing by 2010, the scale of drug abuse in Russia by 16-20 percent compared to the 2004 level, a reduction of the drug user population by 950-1,200 persons. FSKN is tasked with demand reduction among its other responsibilities and has recently begun a large-scale public awareness campaign. With support from the USAID "Healthy Russia 2020" project and the U.S. Department of State, Bureau for International Narcotics and Law Enforcement Affairs (INL), demand reduction messages are being incorporated into a Ministry of Education-sanctioned health education curriculum for high school students and training materials for teachers.

Healthy Russia also established a peer-to-peer outreach program that targets youth approximately 15 to 18 years of age through vocational schools, youth clubs, NGO activities, summer camps and other special programs set up by regional governments to reach teenagers at greatest risk. These programs have been tested in Orenburg (one of the top ten regions most affected by HIV/AIDS in Russia) and Ivanovo (the eighth poorest oblast in Russia) and have been expanded to Irkutsk and Sakhalin, two oblasts on the key drug trafficking routes. The peer-to-peer program encourages youth to discuss the impact of substance abuse and introduces life skills to avoid drug use. In 2006, the FSKN and National Health League launched a preventive program, called Health Wave—Take Care of Yourself, aimed at children's health and prevention of drug addiction in four cities (Samara, Saratov, Volgograd, and Astrakhan).

According to the FSKN, in February 2007, there were 400,000 officially registered drug addicts in Russia's treatment centers. However, a Human Rights Watch study (November 2007) concluded that the effectiveness of treatment offered at state drug treatment clinics "is so low as to be negligible" and constitutes a "violation of the right to health." New models of cognitive therapy are being implemented in treatment centers in St. Petersburg, but substitution therapy (such as programs using methadone or buprenorphine) has not been fully explored, and remains illegal and politically sensitive. The U.S. National Institutes of Health has begun work with Russian research facilities in St. Petersburg to explore alternative drug treatment regimens acceptable to the GOR. A sign of progress is that the MOH has requested a special report on medication-assisted drug therapy. In 2007, the USAID partner, Trans Atlantic Partners Against AIDs, financed a study tour to China for a small group of leading Russian politicians, activists, governmental officials, and narcotics experts to observe the Medication Assisted Therapy (MAT) program for treating HIV-positive clients who are also chronic substance abusers, particularly injection drug users.

IV. U.S. Policy Initiatives and Programs

Policy Objectives. The principal U.S. counternarcotics programmatic goal in Russia is to help strengthen Russia's law enforcement capacity, both to meet the challenges of international drug trafficking into and across Russia, and to help improve cooperation of Russian law enforcement authorities with U.S. law enforcement agencies. The U.S. also promotes programs to reduce demand for narcotics and advocates for more effective treatment programs for drug users.

Bilateral Accomplishments. In 2002, the U.S. through the Bureau for International Narcotics and Law Enforcement Affairs (INL) negotiated a Letter of Agreement (LOA) with the GOR allowing direct assistance to the GOR in the area of counternarcotics and law enforcement assistance. Three on-going projects include the "Southern Border Project," an effort that will eventually lead to the establishment of drug interdiction units along the Russian-Kazakh border in the Siberian cities of Orenburg, Chelyabinsk, Omsk, Saratov and Kurgan; the "Northwest Customs Project," which provides technical assistance to the Federal Customs Service in St. Petersburg and Kaliningrad; and the "Southern Seaports Project," which includes technical assistance to the Federal Customs Service at the Caspian and Black Sea seaports of Astrakhan, Novorossisyk and Sochi. As part of the NATO-Russia Council's counternarcotics project, DEA and Russian trainers will conduct six training courses for Afghan and Central Asian counterparts at the Domodedovo training centre of the Ministry of the Interior in Moscow. These training courses will assist the Afghan and Central Asian police entities to combat major heroin organizations. The U.S. is also providing technical assistance in support of institutional change in the areas of criminal justice reform, mutual legal assistance, anticorruption, and money laundering.

The Road Ahead. The GOR places high priority on counternarcotics efforts and has indicated a desire to deepen and strengthen its cooperation with the United States and other countries. The USG will continue to encourage and assist Russia to implement its comprehensive, long-term national strategy against drug trafficking and use with multidisciplinary sustainable assistance projects that combine equipment and technical assistance.

Volume II: Money Laundering and Financial Crimes

Russia is a regional center. Its financial system does not attract a significant number of depositors, although due to rapid economic growth in various sectors, the number of depositors has steadily been increasing. Criminal elements from Russia and neighboring countries continue to use Russia's financial system to launder money because of familiarity with the language, culture, and economic system. The majority of laundered funds do not appear to be from activities related to narcotics production or trafficking, although these activities occur. Experts believe that most of the illicit funds flowing through Russia derive from domestic criminal activity, including evasion of tax and customs duties and smuggling operations. Despite making progress in combating financial crime, Russia remains vulnerable to such activity because of its vast natural resource wealth, the pervasiveness of organized crime, and, reportedly, a high level of corruption. Other vulnerabilities include porous borders, Russia's role as a geographic gateway to Europe and Asia, a weak banking system with low public confidence in it, and under funding of regulatory and law enforcement agencies. Russia's financial intelligence unit (FIU) estimates that Russian citizens may have laundered as much as U.S. $11 billion in 2007.

Russia has recently changed its laws to allow direct foreign ownership and investment in Russian financial institutions. Net private capital inflows for 2007 reached U.S. $82.3 billion according to the Russian Central Bank, an increase from U.S. $41.6 billion in 2006.

The Russian Federation has a legislative and regulatory framework in place to pursue and prosecute financial crimes, including money laundering and terrorism finance. Federal Law No. 115-FZ "On Combating Legalization (Laundering) of Criminally Gained Income and Financing of Terrorism," introduced in 2001, obliges banking and nonbanking financial institutions to monitor and report certain types of transactions, maintain records, and identify their customers. According to RF 115-FZ, institutions legally required to report include banks, credit organizations, securities market professionals, insurance and leasing companies, the federal postal service, jewelry and precious metals merchants, betting shops, and companies managing investment and nonstate pension funds. Other obliged entities include real estate agents, lawyers and notaries, and to persons rendering legal or accounting services that involve certain transactions.

Various regulatory bodies ensure compliance with Russia's anti-money laundering and counterterrorism finance (AML/CTF) laws. The Central Bank of Russia (CBR) supervises credit institutions; the Federal Insurance Supervision Service oversees insurance companies; the Federal Service for Financial Markets regulates entities managing nongovernmental pension and investment funds, as well as professional participants in the securities sector; the Federal Service for Financial Monitoring (FSFM) regulates real estate and leasing companies, pawnshops, and participants in the gaming industry; and the Assay Chamber (under the Ministry of Finance) supervises entities buying and selling precious metals or stones.

The CBR has issued guidelines regarding AML practices within credit institutions, including "know your customer" (KYC) and bank due diligence programs. Banks must obtain, and retain for a minimum of five years from the date of the termination of the business relationship, information regarding individuals, legal entities and the beneficial owners of corporate entities. Banks must also adopt internal compliance rules and procedures and appoint compliance officers. The AML Law (Law 115-FZ) requires banks to identify their customers before providing natural or legal persons with financial services. Banks are required to report all transactions subject to mandatory or suspicious transaction requirement to the to the financial intelligence unit (FIU). Credit institutions that fail to meet mandatory or suspicious reporting requirements face revocation of their licenses, limits on certain banking operations, and possible criminal or administrative penalties. The CBR can levy administrative fines on credit institutions and officials of credit institutions for violations of Russia's AML/CTF law. Criminal liability does not apply to legal persons under Russian law. The maximum criminal penalty for natural persons convicted of money laundering or financing terrorism is 10 years in prison in addition to applicable fines.

All obligated financial institutions must monitor and report to the government any transaction that equals or exceeds 600,000 rubles (approximately U.S. $22,700) and involves or relates to cash payments, remittances, bank deposits, gaming, pawn shop operations, precious stones and metals transactions, payments under life insurance policies, or persons domiciled in countries determined by the Russian Government to be deficient in AML/CTF. Obligated institutions must also report real estate transactions valued at 3,000,000 rubles (approximately U.S. $115,400) or more. Financial institutions must develop criteria for determining suspicious transactions and report such transactions to the FIU in a timely fashion. All transactions involving an entity or person included on the Russian government's list of those involved in extremist activities or terrorism must be reported to the FIU.

Under Order 1317-U, Russian financial institutions must inform the CBR when it establishes correspondent relationships with nonresident banks in operating in offshore zones (as defined by the Russian Federation in Annex 1 of this Order). The CBR recommends that financial institutions apply enhanced due diligence to transactions with nonresident institutions. Foreign banks may only open subsidiary operations on the territory of Russia. The CBR must authorize the establishment of a subsidiary operation, and these subsidiaries must be subject to domestic Russian supervisory authorities. Foreign banks are not permitted to open branches in Russia. Russian banks must also obtain CBR approval to open operations abroad.

According to the Law No. 395-I "On Banks and Banking Activities," credit institutions must identify and inform the CBR of all appointments of individuals to senior management positions and to the managing and supervisory boards. Russian law prohibits the appointment of anonymous parties or proxy individuals to a credit institution's managing or supervisory board. The CBR has the authority to deny the appointment of a senior official if the official does not meet "fit and proper" requirements established by the CBR.

Russia has established a Deposit Insurance System (DIS) for banks. To gain admission to the DIS, a bank must verifiably demonstrate to the CBR that it complies with applicable banking and AML/CTF laws. Currently, 911 of Russia's 1,145 banks participate in the DIS.

Article 8 of Law 115-FZ provides for the establishment of Russia's FIU, called the Federal Service for Financial Monitoring (FSFM). FSFM is an independent executive agency that was administratively subordinated to the Ministry of Finance until September 2007, but which is now subordinated to the Prime Minister. The FSFM is responsible for receiving, analyzing, and disseminating reports from those entities obligated to file mandatory and suspicious reports. Nearly all financial institutions submit reports to the FSFM via encrypted software provided by the FSFM. According to the FSFM's annual report for 2006, Russia's national database contains 6.3 million reports on operations with monetary funds or other assets, with a total value of approximately $900 billion. The FSFM receives approximately 30,000 transaction reports daily. The FSFM is also the regulator for real estate and leasing companies, pawnshops, and gaming outlets. The FSFM is authorized to provide information to relevant law enforcement authorities for further investigation, i.e., the Economic Crimes Unit of the Ministry of Interior (MVD) for criminal matters, the Federal Drug Control Service (FSKN) for narcotics-related activity, or the Federal Security Service (FSB) for terrorism-related cases. As an administrative unit, it has no law enforcement or investigative powers.

The head of the FSFM chairs an Interagency Commission on Money Laundering, which is responsible for monitoring and coordinating the government's activity on money laundering and terrorist financing. Twelve ministries and government departments sit on the Commission.

Each of the seven federal districts comprising the Russian Federation contains an FSFM territorial office. The Central Federal District office is headquartered in Moscow; the remaining six are located in the major financial and industrial centers throughout Russia (St. Petersburg, Ekaterinburg, Nizhny Novgorod, Khabarovsk, Novosibirsk and Rostov-on-Don). The territorial offices coordinate with regional law enforcement and other authorities to enhance the information flow into the FSFM, and to supervise compliance with anti-money laundering and counter-terrorist financing (AML/CTF) legislation by the institutions that the FSFM supervises. Additionally, the territorial offices must identify and register at the regional level all pawnshops, leasing companies, real estate firms, and gaming entities under their jurisdiction. The regional offices also coordinate the efforts of the CBR and other supervisory agencies to implement AML/CTF regulations. Russia's AML legislation provides the FSFM with the appropriate authority to gather information regarding the activities of investment foundations, nonstate pension funds, gambling businesses, real estate agents, lawyers and notaries, persons rendering legal or accounting services, and sellers of precious metals and stones.

During the first half of 2007, the FSFM registered 5,603 crimes involving money laundering, compared to 7,957 reports for all of 2006. Interior Ministry officials reported that 4,535 of the 2007 cases went to trial. Both the FSFM and MVD report that the number of suspicious transaction reports (STRs) for the year roughly equaled those of 2006 and credit increased cooperation among law enforcement agencies for the number of cases brought to trial.

With its legislative and enforcement mechanisms in place, Russia has begun to prosecute high-level money laundering cases. During 2007, the CBR revoked the licenses of 44 banks for failing to observe banking regulations. Of these, 30 banks lost their licenses for violating Russia's AML laws. The CBR's initiative to prohibit individuals convicted of money laundering from serving in leadership positions in the banking community—a cause championed by Andrey Kozlov, the First Deputy Chairman of the CBR who was assassinated in 2006—remains pending.

Russian legislation provides for the tracking, seizure and forfeiture of all criminal proceeds, not just those linked to narcotics trafficking. Russian law also provides law enforcement bodies the authority to use investigative techniques such as search, seizure, and the identification, freezing, seizing, and confiscation of funds or other assets. Authorities can compel individuals to produce documents related to criminal activity, including money laundering. Investigators and prosecutors can apply to the court to freeze or seize property obtained as the result of crime, although there are some exceptions in the law restricting seizure of property identified as a primary residence. Law enforcement agencies have the power to identify and trace property that is, or may become, subject to confiscation or is suspected of being the proceeds of crime or terrorist financing. According to the AML/CTF law, financial institutions must freeze transactions suspected of involvement in terrorism finance for up to two days and report the transaction to the FIU. The FSFM may extend the freeze by an additional five days. A court order is required to extend the freeze beyond seven days.

In accordance with its international agreements, Russia recognizes rulings of foreign courts relating to the confiscation of proceeds from crime within its territory and can transfer confiscated proceeds of crime to the foreign state whose court issued the confiscation order. However, Russian law still does not provide for the seizure of instruments of crime. Authorities can seize businesses only if they can demonstrate that the businesses were acquired with criminal proceeds. Legitimate businesses cannot be seized solely on the basis that they were used to facilitate the commission of a crime.

Russia's Presidential Administration as well as law enforcement agencies have, however, expressed concern about ineffective implementation of Russia's confiscation laws. The government has proposed amendments that are currently under review by the Duma These amendments would facilitate the identification and seizure of criminal instrumentalities and proceeds. Russian law enforcement has adequate police powers to trace assets, and the law permits confiscation of assets. However, most Russian law enforcement personnel reportedly lack experience and expertise in these areas.

The Russian Federation has enacted several pieces of legislation and issued executive orders to strengthen its ability to fight terrorism. The decree entitled "On Measures to Implement the UN Security Council Resolution (UNSCR) No. 1373 of September 28, 2001" introduces criminal liability for intentionally providing or collecting assets for terrorist use and instructs relevant agencies to seize assets of terrorist groups. Article 205.1 of the criminal code, enacted in October 2002, criminalizes terrorist financing. Banks can freeze assets suspected of involvement in terrorism finance immediately pursuant to UNSCR 1373.

The FSFM reports that it is monitoring 1,300 entities suspected of financing terrorism, including over 900 Russian citizens, 170 Russian organizations, and over 200 foreign entities. The Russian Government maintains a list of domestic and international organizations and individuals involved in extremist activities or terrorism. This list is distributed to all institutions subject to the AML/CTF law and is used by law enforcement agencies to target and seize assets. Russian authorities rely on five sources of information to compile the designated entities list: a) international organizations, such as the UN 1267 Sanctions Committee lists; b) Russian court decisions; c) designations made by the Prosecutor General; d) Ministry of Interior investigations (provided that subsequent court decisions do not reverse or dismiss the investigation's findings); and e) bilateral agreements to designate entities mutually determined to be involved in extremist or terrorist activity. At the request of the General Procuracy, the Russian Supreme Court has, to date, authorized an official list of 17 terrorist organizations.

The United States and Russia signed a Mutual Legal Assistance Treaty in 1999, which entered into force on January 31, 2002. Although Russia has assisted the U.S. in investigating cases involving terrorist financing, Russia and the U.S. continue to differ about the purpose of the UN 1267 Sanctions Committee's designation process. These political differences have hampered bilateral cooperation in this forum. U.S. law enforcement agencies exchange operational information with their Russian counterparts on a regular basis. The close cooperation between Russian and U.S. agencies has continued and strengthened in 2007.

Russia is a member of the Financial Action Task Force (FATF) and underwent its third mutual evaluation during the fourth quarter of 2007. The FATF's mutual evaluation report (MER) is expected to be released in June 2008. Russia is also a member of two FATF-style regional bodies (FSRBs). It is a member of the Council of Europe's Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL) and the Eurasian Group on Combating Legalization of Proceeds from Crime and Terrorist Financing (EAG), of which it was a co-founder. The EAG Secretariat is located in Moscow. The FSFM has established the International Training and Methodological Center of Financial Monitoring (ITMCFM) that exists to provide technical assistance, primarily in the form of staff training for FIUs and other interested ministries and agencies involved in AML/CTF efforts. The ITMCFM also conducts research on AML/CTF issues. As Chair of the EAG, Russia's FIU continues to play a strong leadership role in the region. The FSFM is a member of the Egmont Group The FSFM has signed cooperation agreements with the Financial Intelligence Units (FIUs) of 24 countries, including the United States.

Russia ratified the Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime in January 2001. Russia is a party to the 1988 UN Drug Convention, the UN Convention against Transnational Organized Crime, the UN International Convention for the Suppression of the Financing of Terrorism, and the UN Convention against Corruption.

Through aggressive enactment and implementation of comprehensive AML/CTF legislation, Russia has established legal and enforcement frameworks to deal with money laundering and terrorist financing. Russia has also contributed to improving the region's capacity for countering money laundering and terrorist financing. Nevertheless, serious vulnerabilities remain. Russia is home to some of the world's most sophisticated perpetrators of fraud and money laundering, who rely heavily on electronic and Internet-related means. Russia should improve federal oversight of shell companies and scrutinize more closely those banks that do not carry out traditional banking activities. To prevent endemic corruption and deficiencies in the business environment from undermining Russia's efforts to establish a well-functioning anti-money laundering and counter-terrorism finance regime, Russia should strive to stamp out official corruption, and to increase transparency in the financial sector and the corporate environment. Russia should also commit adequate resources to its regulatory and law enforcement entities to enable them to fulfill their responsibilities. Russia should work to increase the effectiveness of its asset forfeiture laws and their implementation including enacting legislation providing for the seizure of instruments, in addition to the proceeds, of criminal activity. Finally, Russia should continue to play a leadership role through sustained involvement in the regional and international bodies focusing on AML/CTF regime implementation.