International Narcotics Control Strategy Report - 2006
Russia Country Reports
Released by the Bureau for International Narcotics and Law Enforcement Affairs, March 2006
Drug and Chemical Control
I. Summary
In 2005, the Government of Russia (GOR) intensified its counternarcotics efforts in response to the threat of narcotics trafficking along the "Northern Route" from Afghanistan through Central Asia into Russia. Afghan opiates transported along the Northern Route supply Russia's internal user demand, as well as transit through Russia to the rest of Europe. In addition, heroin use contributes to the significant increase in the number of persons infected with HIV/AIDS and/or Hepatitis C, due to intravenous drug use. Press reports claim that one hundred Russians each day are infected with HIV/AIDS. Federal Drug Control Service (FSKN) Director General Cherkesov emphasized the need for international cooperation to combat drug traffickers that operate without regard for borders. The FSKN plans to open liaison offices in ten countries, including Afghanistan, in 2006. In November 2005, the FSKN signed a Memorandum of Understanding with the U.S. Drug Enforcement Administration ( DEA) to enhance bilateral cooperation to combat illegal drugs and their precursor chemicals. Trafficking in opiates from Afghanistan (primarily opium and heroin) and their abuse continued to be major problems facing Russian law enforcement and public health agencies, although the FSKN reports the sharp post-Soviet increases in the number of drug users has begun to stabilize.
Russia handed over control of the Afghan/Tajik border to Tajikistan in June 2005. Following withdrawal, FSKN officials report the drug flow into Russia has increased significantly. More than 90 percent of Afghan drugs arrive in Russia via Central Asia. The GOR has recognized the extent of the drug trafficking and is taking steps to address both the law enforcement and public health issues. Health education programs in schools are beginning to incorporate messages concerning the harmful effects of drug use and the links between injecting drugs and HIV/AIDS. Russia is party to the 1988 UN Drug Convention.
II. Status of Country
Russia is both a transshipment point and a market for heroin and opium. Opiates transiting Russia originate almost exclusively in Afghanistan and are typically destined for the rest of Europe. The Russian border with Kazakhstan is roughly twice the length of the U.S.- Mexican border and poorly patrolled. Considering the resource constraints facing local law enforcement agencies, Russian authorities are unlikely to stop a significant proportion of the heroin entering their country.
Synthetic drugs produced in Russia usually take the form of amphetamine type stimulants (ATS) and heroin analogues like methadone and mandrax (methaqualone). The FSKN reports that the use of illegal synthetic drugs increased dramatically in 2005. Clandestine amphetamine labs are occasionally reported in Russia, typically located in the northwest region of the country close to St. Petersburg or right across the border in the Baltic States. The St. Petersburg area had long been considered the primary gateway for foreign-produced MDMA (ecstasy) smuggled into Russia. However, the Russian Federal Customs Service (FTS) reported that roughly half of the MDMA it seized in 2005 entered the country from Belarus and is typically manufactured in Poland. Although the MDMA tablets produced in Russia are of poor quality, the low prices (as little as $5.00) are attractive to Russian youth compared to the $20 typically charged for MDMA tablets from the Netherlands. Methamphetamine production is extremely rare in Russia.
Russia is a legitimate producer of acetic anhydride (AA), which is a widely used industrial chemical, but also is a precursor chemical used in the clandestine production of heroin from opium. The FSKN and Russian Customs report that the small number of legitimate production facilities in Russia is subject to strict government regulation. However, they acknowledge that diversion of AA may occur. Other precursors such as ergotamine (for LSD), red phosphorous (for methamphetamine), and acetone (used in several substances) are also produced in Russia. There have been no reports of large-scale diversion of these other chemicals for illicit uses.
Cocaine trafficking is not widespread in Russia. Cocaine prices in Russia remain very high, though the drug is easily obtained. Disposable incomes in Russia have risen steadily for seven years, while cocaine prices have remained static, making the drug more affordable to a growing pool of potential users. Cocaine is frequently brought into Russia through the port of St. Petersburg. Sailors aboard fruit carriers and other vessels operating between Russian and Latin America provide a convenient pool of potential couriers. Cocaine also enters Russia in cargo containers. Couriers traveling on commercial flights bring cocaine into Russia, often traveling through third countries in Europe as well as through the U.S.
III. Country Actions Against Drugs in 2005
Policy Initiatives. The FSKN was established in 2003 as the State Committee for the Control of Traffic in Narcotic and Psychotropic Substances (GKPN). Russian President Putin issued an edict in July 2004 calling for the restructuring of FSKN. The FSKN has 35,000 employees, with branch offices in every region of Russia. Since the FSKN's creation, Director Cherkesov has stressed the importance of attacking money laundering and other financial aspects of the drug trade. 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 the FSKN.
Accomplishments. 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 search, seizure and the compulsion of documents production.
In 2002, Russia's financial intelligence unit, the Financial Monitoring Committee (FMC), became operational (the FMC has since been renamed the Federal Service for Financial Monitoring or FSFM). The FSFM has responsibility for coordinating all of Russia's anti-money laundering and counterterrorist financing efforts. Legislation passed in 2001 requires financial institutions to report suspicious transactions to the FSFM.
In 2004, Russia passed new witness protection legislation. Russian law previously provided limited protection for testifying witnesses, but the provisions were weak and ineffective. The new legislation, entitled "On Protection of Victims, Witnesses and Other Participants in Criminal Proceedings" expands 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 new legislation requires implementing regulations. The GOR is working on such regulations, but they have not yet been published.
One of the key obstacles in Russia's struggle with drug trafficking is a lack of experience with prosecuting narcotics- related cases. FSKN Director Cherkesov has commented publicly that the courts must give stiffer sentences to drug traffickers. It is rare that criminals who have committed serious drug crimes in Russia are given the maximum 20-year sentence. However, Russia's legislators and politicians continue to address this problem, demanding stiffer sentences for narcotics -related crimes and establishing a legal framework that is beginning to work effectively against drug dealers.
Law Enforcement Efforts. In November 2004, the FSKN announced it would establish a system of drug liaison offices (DLOs). FSKN officers will be stationed in approximately ten foreign countries to facilitate information sharing and joint investigations. The FSKN has already established an office in Dushanbe, Tajikistan, and plans to open an office in Kabul in early 2006.
The average price for a gram of heroin (retail) in 2005 was in the $40 range. The range in 2004 was $30 and in 2003, $20. The wholesale price for a gram of heroin in 2005 was between $20-$30. Per gram prices as low as $10 and as high as $50 have been reported.
FSKN officially reported seizing 3.9 metric tons of heroin in 2004 and 1.5 metric tons of heroin in the first half of 2005. At a November 2005 press conference, Cherkesov stated that the year-to-date total was over four metric tons of heroin seized by all law enforcement agencies. The FSKN further reported the seizure of 102.3 metric tons of narcotics and psychotropic and other powerful substances in 2004 and that 129.7 metric tons were seized by all Russian law enforcement agencies in 2004. Final figures for 2005 are not yet available.
Corruption. Controlling corruption has been a stated priority for the Putin administration since its inception. However implementing this policy is a constant challenge. Inadequate budgets, low salaries, and lack of technical resources hamper performance, sap morale, and encourage corruption. Evidence indicates the scope and scale of official corruption have grown markedly in the past several years. Officials from the FSKN report that corruption is a problem within their agency. In an effort to decrease corruption, Cherkesov endorsed a Code of Honor in 2005 for FSKN personnel. The Code is a brief list of rules of conduct that are supposed to guide the activities of every FSKN employee. FSKN officials report that about 100 law enforcement officers were arrested in 2004 for drug trafficking and stated that the figures for 2005 (not yet available) will be even higher. There were no reported cases of high-level narcotics related corruption, but given the scale of drug trafficking in Russia, some probably exists. Russia has signed but has not yet ratified the UN Convention Against Corruption.
Agreements and Treaties. Russia is party to the 1988 UN Drug Convention, the 1961 UN Single Convention as amended by the 1972 Protocol, and the 1971 UN Convention on Psychotropic Substances. A mutual legal assistance treaty is in force between the United States and Russia. As a result of the provision in the MLAT for designating a central authority and point of contact, a separate office responsible for implementing international assistance requests has been formed within the Russian General Procuracy. To date, Russia has provided MLAT assistance in two narcotics-related cases and has received a third request for assistance from the USG. Russia is a party to the UN Convention Against Transnational Organized Crime and its protocols against migrant smuggling and trafficking in persons.
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. In Russia, there are small, illicit opium poppy fields ranging in size from one to two hectares. Typically, the opium fields are small backyard plots or are located in the countryside concealed by other crops. In Siberia, in the Central Asian border region, and in the Omsk-Novosibirsk -Tomsk region along the border with Kazakhstan, opium poppies are widely cultivated. 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. In 2005, Operation Poppy identified and destroyed numerous illicit plantations of cannabis, primarily in maritime areas and the Altai region.
Drug Flow/Transit. Opiates (and hashish to a lesser degree) from Afghanistan are carried across the Central Asian states and into Russia. The FSKN estimates that 60 tons of heroin are smuggled annually into Russia from Afghanistan via Central Asian countries on the "Northern Route." Contraband is typically carried in vehicles along the region's highway system that connects it to the populated areas of southwestern Russia and western Siberia. The Russian cities of Yekaterinburg, Samara, Omsk, and Novorossisk have emerged as hubs of trafficking activity. Couriers also frequently use the region's passenger trains. Incidents involving internal body carry or "swallowers" are common.
At the wholesale level, the trade in Afghan opiates within Russia is dominated by Central Asians. Tajiks, Uzbeks, and others with family, clan, and business ties to Central Asia transport Afghan heroin across the southern border with Kazakhstan and into European Russia and western Siberia. The FSKN claims that ninety percent of drug kingpins in Russia are from Central Asia. Retail distribution of heroin and other drugs is carried out by a variety of criminal groups. Again, these organizations are typically organized along ethnic lines with Central Asian, Caucasian, Russian/Slavic, and Roma groups all active in drug trafficking.
Cocaine destined both for Russia and in-transit to Western Europe enters the country through the port of St. Petersburg. Synthetic drugs manufactured in Russia and elsewhere in Europe flow in both directions across Russia's western borders. Again, much of this smuggling activity appears to be concentrated in the Northwest region around St. Petersburg.
In 2004, there were multiple seizures of large quantities of ephedrine tablets that had originated in Turkey. In 2005, there was one report of a large seizure of ephedrine in both bulk powder and tablet forms that had originated in China. These seizures were not associated with any evidence of large-scale methamphetamine production. Ephedrine tablets are often sold in Russia in their original form as a low- cost stimulant.
Each year, law enforcement agencies of several CIS countries participate in Operation Kanal. Kanal is an interdiction blitz during which extra personnel are stationed at railroad stations, airports, border crossings, and other checkpoints. In Russia, 881 individuals were detained and 1,396 kilograms of illegal drugs were seized during Kanal 2005.
Russian forces were stationed in Tajikistan after the dissolution of the Soviet Union. At that time, their stated goal was to prevent incursions by Islamic extremists. This arrangement was formalized in a 10-year agreement signed in 1993. During that time, narcotics interdiction became one of their primary functions. In May 2003, the agreement governing the presence of Russian forces on the Tajik-Afghan border expired. In June 2005, Russia handed over control of the Afghan/Tajik border to Tajikistan. FSKN officials report that the withdrawal of Russian border guards from the Afghan/Tajik border has led to a significant increase in drug trafficking into Russia.
Demand Reduction. The FSKN reports that there are 1.5 million drug users with 400,000 officially registered drug addicts in Russia's narcological centers. New models of cognitive therapy are being implemented in narcological centers in St. Petersburg, but substitution therapy (i.e., maintenance using some artificial opiate like methadone) has not been fully explored and remains politically sensitive. The Ministry of Health estimates that up to six million Russians take drugs on a regular basis. These figures are significantly higher than FSKN statistics cited in 2004 and suggest a new willingness by the GOR to acknowledge and combat drug use in Russia. In 2004, Cherkesov claimed that there were only 390,000 "officially registered" drug addicts in Russia and four to five million Russians who use drugs regularly.
According to the Ministry of Health, as of October 2005, there were 335,000 officially registered HIV/AIDS cases in Russia. However, unofficial estimates, including those by the United Nations AIDS program, put the figure much higher, with some suggesting that there are over one million HIV-positive Russians. Intravenous drug use continues to be the most common method of transmission of HIV/AIDS and Hepatitis C in Russia. There are estimates that nearly 70 percent of new HIV cases can be attributed to intravenous drug use, and that 90 percent of injecting drug users are Hepatitis C positive.
Russian authorities are attempting to implement a comprehensive counternarcotics strategy that would combine education, health and law enforcement. FSKN is tasked with demand reduction among its other responsibilities and has recently begun a large-scale public awareness campaign. Russian law enforcement authorities also have come to support the idea that demand reduction should complement law enforcement efforts to reduce supply. With support from the USAID Healthy Russia 2020 project, demand reduction messages are being incorporated into a Ministry of Education sanctioned health education curriculum for high school students and training materials for teachers. This program has been tested in Ivanovo (the eighth poorest oblast in Russia) and plans to expand to Irkutsk and Orenburg, two oblasts on the key drug trafficking routes. The problem of drug use among homeless teens has reportedly reached extraordinary levels in St. Petersburg. The Doctors of the World Program, which works with street children, reported that about 70 percent of children age 11 and younger (on a small sample of 30) were injecting homemade substances and 30 percent of these young people were HIV positive. While the knowledge of HIV risks is high even among drug users, the messages have not yet translated into behavioral changes and injecting practices.
IV. U.S. Policy Initiatives and Programs
Policy Objectives/Initiatives. The principal U.S. counternarcotics 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 provide reliable Russian law enforcement partners for U.S. law enforcement.
Bilateral Accomplishments. In 2002, the U.S. Department of State, 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. In 2005, DEA International Training teams provided instruction to the agency's Russian counterparts in precursor chemicals, highway interdiction, and specialized training for drug enforcement unit commanders. Progress continued on the Southern Border Project, an effort that will lead to the establishment of three mobile drug interdiction task forces based in Orenburg, Chelyabinsk, and Omsk, all near the Russian-Kazakh border. The U.S. and Russia worked together to provide canine training to counternarcotics law enforcement officials from four Central Asian countries, training more than 45 law enforcement officials. The U.S. provided technical assistance in support of institutional change in the areas of criminal justice reform, mutual legal assistance, anticorruption and money laundering. U.S. Customs and Border Protection ( CBP) conducted 2 Border Security Seminars at Russian Customs training academies and Rostov-on-Don and Vladivistok. The training included equipment packages of nonintrusive inspection equipment. In 2005, the U.S provided $ 809,000 worth of equipment to Russian Customs and the FSKN in support of INL counternarcotics projects. In November 2005, the FSKN signed a Memorandum of Understanding with the U.S. Drug Enforcement Administration (DEA) to enhance bilateral cooperation to combat illegal drugs and their precursor chemicals.
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, particularly in light of its upcoming chairmanship of the G-8. 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 law enforcement assistance projects that combine equipment, technical assistance and expert advisors. DEA is scheduled to provide INL-funded counternarcotics training to over 100 trainees in 2006, drawn from the FSKN, the MVD, and the Federal Customs Service.
Money Laundering and Financial Crimes
Russia has enjoyed rapid economic growth in recent years, mainly driven by high world energy prices. However, Russia has been slow to complete structural reforms of the banking sector, and overall public confidence in Russian banks remains low. Russia's financial system does not attract a significant portion of legal or illegal depositors, and therefore Russia is not considered an important regional financial center. Over the past several years, however, Russia has committed significant resources to improve its ability to combat the laundering of criminal financial proceeds domestically and internationally. Through aggressive enactment and implementation of comprehensive money laundering and counterterrorism financing legislation, Russia now has well-established legal and enforcement frameworks to deal with money laundering and terrorism financing.
Despite having the political will to combat financial crime and making noticeable progress in doing so, Russia remains vulnerable to such activity because of its vast natural resource wealth, the pervasiveness of organized crime, and a high level of corruption. Other factors include porous borders, Russia's role as a geographic gateway to Europe and Asia, a weak banking system, and under-funding of regulatory and law enforcement agencies. 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 likely occur. Experts believe that most of the dirty money flowing through Russia derives from domestic criminal or quasi-criminal activity, including evasion of tax and customs duties and smuggling operations.
Net private capital inflows for 2005 were $0.3 billion, according to the Russian Ministry of Finance, marking a reversal from the $9.3 billion in outflows in 2004. In contrast to the capital flight that occurred during the 1990s, the majority of more recent outflows involve the legitimate movement of money to more secure and profitable investments abroad, which reflects the maturing of the Russian business sector. However, at least a portion of this money undoubtedly involves the proceeds of criminal activity.
Russia has the legislative and regulatory framework in place to pursue and prosecute financial crimes, including money laundering and terrorism finance. The Russian Federation's Federal Law No. 115-FZ "On Combating Legalization (Laundering) of Criminally Gained Income and Financing of Terrorism" became effective on February 1, 2002, with subsequent amendments to the laws on banking, the securities markets, and the criminal code taking effect in October 2002, January 2003, December 2003, and July 2004. Law RF 115-FZ obligates banking and non-banking financial institutions to monitor and report certain types of transactions, keep records, and identify their customers.
According to the original language of RF 115-FZ, those institutions legally required to report included: banks, credit organizations, securities market professionals, insurance and leasing companies, federal postal service, jewelry and precious metals merchants, betting shops, and companies managing investment and non-state pension funds. Amendments to the law that came into force on August 31, 2004, extend the reporting duty to real estate agents, lawyers and notaries, and persons rendering legal or accounting services that involve certain transactions (e.g., managing money, securities, or other property; managing bank accounts or securities accounts; attracting or managing money for organizations; or incorporating, managing, and buying or selling organizations).
Article 8 of Law 115-FZ provides for the establishment of Russia's financial intelligence unit as an independent executive agency administratively subordinated to the Ministry of Finance. In March 2004, President Putin issued a decree to upgrade the unit, formerly called the Financial Monitoring Committee, to a service, now called the Federal Service for Financial Monitoring (FSFM). All financial institutions with an obligation to report certain transactions must send this information to the FSFM. The FSFM's mission is to implement a unified state policy to combat money laundering and terrorism finance, yet it has no law enforcement investigative powers. In June 2005, President Putin approved a national strategy for combating money laundering and terrorism finance, part of which called for the creation of a new interagency commission on money laundering. The Ministry of Justice established the commission in November 2005, which is comprised of 12 ministries and government departments. The new commission will be chaired by the head of the FSFM and will be responsible for monitoring and coordinating the government's activity on money laundering and terrorism financing.
Various regulatory bodies ensure compliance with Russia's anti-money laundering and counterterrorism finance laws. The FSFM is specifically responsible for regulating real estate and leasing companies, pawnshops, and gambling services. 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 non-governmental pension and investment funds, as well as professional participants in the securities sector; and the Assay Chamber (under the Ministry of Finance) supervises entities buying and selling precious metals or stones.
The CBR has issued guidelines regarding anti-money laundering practices within credit institutions, including "know your customer" (KYC) and bank due diligence programs. Banks are required to obtain and retain for five years information regarding individuals and legal entities and beneficial owners of corporate entities. Further, banks must adopt internal compliance rules and procedures and appoint compliance officers. Since July 2004, the amendment to Law 115-FZ now requires banks to identify the original source of funds and to report to the FSFM all suspicious transactions. Institutions that fail to meet mandatory reporting requirements face revocation of their licenses to carry out relevant activity, limits on certain banking operations, and possible criminal or administrative penalties. An administrative fine of up to $16,700 can be levied against an institution, with a fine of up to $700 on an officer of an institution. The maximum criminal penalty is 10 years in prison with applicable fines.
Since the CBR issued Order 1317-U in August 2003, Russian financial institutions must now report all transactions with their counterparts in offshore zones. In some cases, offshore banks are also subject to enhanced due diligence and maintenance of additional mandatory reserves to offset potential risks undertaken by the Russian institution for specific transactions. The CBR has also raised the standards for "eligible" offshore financial institutions, thereby reducing their number. Overall wire transfers from Russian banks to offshore financial centers have dropped significantly as a result of such regulatory measures.
Foreign financial entities, including those from known offshore havens, are not permitted to operate directly in Russia; they must do so solely through subsidiaries incorporated in Russia, which are subject to domestic supervisory authorities. During the process of incorporating and licensing these subsidiaries, Russian authorities must identify and investigate each director of the Russian unit; therefore nominee or anonymous directors are, as a practical matter, not permitted under Russian law and regulation. In September 2005, the CBR completed its review of all banks that sought admission to the recently established Deposit Insurance System (DIS). To gain admission to the DIS, a bank had to verifiably demonstrate to the CBR that it complies with Russian identification and transparency requirements. Currently, 927 of Russia's estimated 1200 banks have been admitted to the DIS, effectively weeding out over 200 banks from Russia's banking system.
By law, Russian businesses must obtain government permission before opening operations abroad, including in offshore zones. A department within the Ministry of Economic Development and Trade (MEDT) reviews such requests from Russian firms, and once the MEDT approves, the CBR must then approve the overseas currency transfer. In either case, the regulatory body responsible for the offshore activity is the same as for domestic activity, i.e., the Federal Service for Financial Markets regulates brokerage and securities firms, while the CBR regulates banking activity.
All obligated financial institutions must monitor and report to the government: any transaction that equals or exceeds 600,000 rubles (approximately $20,000) and involves or relates to: cash payments, individuals or legal entities domiciled in states that do not participate in the international fight against money laundering, bank deposits, precious stones and metals, payments under life insurance policies, or gambling; all transactions of "extremist organizations" or individuals included on Russia's domestic list of such entities and individuals; and suspicious transactions.
Each of the FSFM's seven territorial offices corresponds with one of the federal districts that comprise the Russian Federation. The Central Federal District office is headquartered in Moscow; the remaining six are located in the major financial and industrial regions throughout Russia. The primary functions of the territorial offices are to coordinate with regional law enforcement and other authorities to enhance the incoming information flow into the FSFM, and to supervise compliance with anti-money laundering and counterterrorism financing legislation by institutions under FSFM supervision. Additionally, the satellite offices must identify and register at the regional level all pawnshops, leasing and real estate firms, and gaming entities under their jurisdiction. The regional offices also are charged with coordinating the efforts of the CBR and other supervisory agencies to implement anti-money laundering and counterterrorist financing regulations.
Russia's anti-money laundering law, as amended, provides the FSFM with the appropriate authority to gather information regarding the activities of investment foundations, non-state pension funds, gambling businesses, real estate agents, lawyers and notaries, persons rendering legal/accountancy services, and sales of precious metals and jewelry. Virtually all financial institutions submit reports to the FSFM via encrypted software provided by the FSFM. According to press reports, Russia's national database contains over four million reports involving operations and deals worth over $877 billion. The FSFM estimates that Russian citizens may have laundered as much as $7 billion in 2005. The FSFM receives approximately 10,000 transaction reports daily. Of these daily reports, 75 percent result from mandatory (currency) transaction reports, and the remaining 25 percent relate to suspicious transactions.
During the first ten months of 2005, the FSFM carried out 3,803 financial investigations, referring 2,026 of them to law enforcement agencies for possible criminal investigations. According to the Economic Crimes Unit of the Ministry of Interior (MVD), in 2005 Russian law enforcement investigated 7,269 cases of money laundering, sent 6,186 of the cases to court, and convicted 216 individuals on money laundering charges. Both the FSFM and MVD estimate that the number of suspicious transaction reports in 2005 has grown five-fold over the previous year, an increase which both agencies attribute to a greater focus government-wide on financial crimes and terrorism financing.
On terrorism finance, the FSFM reports that it has compiled a list of 1,300 organizations and individuals suspected of financing terrorism, 400 of which were foreign. To date, the FSFM has uncovered 113 bank accounts related to organizations and individuals included on Russia's terrorism list. Depending on the nature of the activity, the FSFM provides information to the appropriate law enforcement authorities for further investigation, i.e., the 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 part of administrative reforms enacted in 2004, the FSKN now has a full division committed to money laundering, staffed by agents with experience in counternarcotics and economic crimes. This division cooperates closely with the FSFM in pursuing narcotics-related money laundering cases. In 2005, the FSKN reportedly initiated approximately 1,550 money laundering cases and referred over 400 of these cases to the General Procuracy for prosecution. In July 2005, the FSKN announced that it had uncovered a major money laundering ring that was using an alternative remittance system to conduct illegal transactions involving money gained from drug smuggling. According to the FSKN's press service, the FSKN uncovered monthly transactions of up to $14 million that were linked to this criminal ring. The FSKN arrested four individuals, and opened criminal cases under Article 172 (illegal banking activities) and Article 174.1 (money laundering) of Russia's criminal code. Consistent with Financial Action Task Force (FATF) recommendations, the criminal code was amended in December 2003 to remove a specific monetary threshold for crimes connected with money laundering, thus paving the way for prosecution of criminal offenses regardless of the sum involved.
With its legislative and enforcement mechanisms in place, Russia has begun to prosecute high-level money laundering cases. In 2005, the CBR revoked the licenses of 37 banks for failing to observe banking regulations. Of these, 14 banks lost their licenses for violating Russia's anti-money laundering laws. In early 2005, the FSFM announced that it suspected ten unnamed banks of involvement in money laundering activities. Subsequently, the CBR announced that it was considering revoking the licenses of two banks for suspicion of money laundering. According to press reports, Russian law enforcement agencies conducted several raids and launched criminal investigations into banks suspected of money laundering. This increased targeting of suspect credit and non-credit institutions demonstrates Russia's broad-based commitment to enforcing its anti-money laundering and counterterrorism financing legislation and an improvement in compliance levels as a result of its actions.
Russia has a legislative and financial monitoring scheme that permits the tracking, seizure and forfeiture of criminal proceeds. None of this legislation is specifically tied to narcotics proceeds. Russian legislation provides for investigative techniques such as search, seizure, and compelling the production of documents, as well as the identification, freezing, seizing, and confiscation of funds or other assets. Where sufficient grounds exist to suppose that property was obtained as the result of a crime, investigators and prosecutors can apply to the court to have the property frozen or seized. 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. Moreover, the law allows the FSFM, in concert with banks, to freeze possible terrorist-related financial transactions up to one week. Banks may freeze transactions for two days, and the FSFM may follow up with freezing for an additional five 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 fully or partially 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. Businesses can be seized only if it can be shown that they were acquired with criminal proceeds. Legitimate businesses cannot be seized solely on the basis that they were used as "instruments" to facilitate the commission of a crime. The Presidential Administration as well as Russian law enforcement agencies have expressed concern about the ineffective implementation of Russia's confiscation laws. The government has proposed amendments that are currently under review by the Duma which would make it easier to identify and seize criminal instrumentalities and proceeds. While Russian law enforcement has adequate police powers to trace assets, and the law permits confiscation of assets, most Russian law enforcement personnel 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. On January 11, 2002, President Putin signed a decree entitled "On Measures to Implement the UN Security Council Resolution (UNSCR) No. 1373 of September 28, 2001." Noteworthy among this decree's provisions are the introduction of criminal liability for intentionally providing or collecting assets for terrorist use, and the instructions to relevant agencies to seize assets of terrorist groups. This latter clause, however, conflicted with existing domestic legislation. Accordingly, on September 24, 2002, the Duma approved an amendment to the anti-money laundering law, resolving the conflict and allowing banks to freeze assets immediately, pursuant to UNSCR 1373. This law came into force on January 2, 2003. Further, Article 205.1 of the criminal code, which was enacted in October 2002, criminalizes terrorist financing. On October 31, 2002, the Federation Council, Russia's upper house, approved a supplemental article to the 2003 federal budget, allocating from surplus government revenues an additional 3 billion rubles ($100 million) in support of federal counterterrorism programs and improvement of national security.
In February 2003, at the request of the General Procuracy, the Russian Supreme Court issued an official list of 15 terrorist organizations. According to press reports, the financial assets of these organizations were immediately frozen. In addition, Russia has assisted the United States in investigating high profile cases involving terrorist financing. In 2003, Russia provided vital financial documentation and other evidence that helped establish the criminal activities of the Benevolence International Foundation (BIF). In April 2005, a U.S. Federal Court convicted a British national for attempting to smuggle shoulder-held missiles into the U.S. with the intent to sell the weapons to a presumed terrorist group. The subject was arrested in a sting operation that involved 18 months of collaboration among U.S., Russian, and British authorities. He was found guilty on five counts, including material support to terrorists, unlawful arms sale, smuggling, and two counts of money laundering. However, Russia and the U.S. continue to differ about the purpose of the UN 1267 Sanctions Committee's designation process, and such political differences have hampered bilateral cooperation in this forum.
Russia became a full member of the FATF in June 2003 and was the driving force behind the creation of the Eurasian Group on Combating Legalization of Proceeds from Crime and Terrorist Financing (EAG), which also includes Belarus, China, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan as members, and several other nations and multilateral organizations as observers, including the United States. The EAG Secretariat is located in Moscow. Since its inception, the EAG has held three plenary sessions (two in Moscow and one in Shanghai) in addition to several working group and typologies meetings. Russia, in its current role as President of the EAG, continues to play a strong leadership role in bringing the region up to international standards in its capacity to fight money laundering and terrorism financing.
The United States and Russia signed a Mutual Legal Assistance Treaty in 1999, which entered into force on January 31, 2002. The FSFM has signed cooperation agreements with the Financial Intelligence Units (FIUs) of 24 countries, including Belgium, Columbia, Cyprus, Czech Republic, Estonia, Finland, France, Israel, Italy, Korea, Latvia, Liechtenstein, Luxembourg, Monaco, Panama, Peru, Poland, Portugal, Slovenia, Sweden, Ukraine, the United Kingdom, the United States, and Venezuela. Additionally, the FSFM is an active member of the Egmont Group, having sponsored several candidate countries for membership in 2004. U.S. law enforcement agencies exchange operational information with their Russian counterparts on a regular basis. In 2005, Russian law enforcement agencies cooperated with the U.S. in a high- profile case that led to the conviction of a Russian national in a U.S. District Court on charges that he laundered over $130 million through a Moscow bank. The individual was sentenced to 51 months imprisonment and ordered to pay $17.4 million in restitution to the Russian government.
In addition to membership in the FATF, Russia holds membership in the Council of Europe's Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL). 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 and on May 26, 2004, became a party to the UN Convention against Transnational Organized Crime. In November 2002, Russia ratified the UN International Convention for the Suppression of the Financing of Terrorism. Russia also became a signatory to, but has not yet ratified, the UN Convention against Corruption.
Russia has developed a solid legislative and regulatory foundation for combating money laundering and terrorism financing. Given its role in spearheading the creation of the EAG, Russia has demonstrated both the political will and a capability to improve the region's capacity for countering money laundering and terrorism financing. President Putin also sent a clear signal of support when he approved a national money laundering strategy in June 2005 and charged an inter-agency commission to implement the strategy in the short term.
Nevertheless, some vulnerabilities remain. To meet President Putin's stated goal of combating money laundering and corruption, Russia needs to follow through on its commitment to improve CBR 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 counterterrorism finance regime, Russia should strive to stamp out official corruption, particularly at high levels, 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 in order to help them fulfill their responsibilities, and enact legislation that would provide for the seizure of instruments, as opposed to merely the proceeds, of criminal activity. Finally, Russia should continue to play a leadership role in the region with regard to anti-money laundering and counterterrorist finance regime implementation.