What consequences could sanctions against Russian financial intelligence lead to?

Rosfinmonitoring found itself under EU blocking sanctions . A number of states stopped the exchange of financial information with Russia even before the restrictions were introduced, but new sanctions may complicate interaction with friendly countries

On December 18, the European Union imposed sanctions against Rosfinmonitoring and its head Yuri Chikhanchin. The sanctions were introduced on the same day that the service added writer Boris Akunin to the register of terrorists and extremists (listed under his real name - Grigory Chkhartishvili). The rationale for the sanctions states that financial intelligence consistently adds to this list individuals and organizations that are critical “of the Kremlin,” including journalists and Western social networks.

“The sanctions imposed by the EU against Rosfinmonitoring will not affect the work of the agency. Rosfinmonitoring will continue to implement its powers to combat money laundering, the financing of terrorism and extremist activities, as well as to improve legislation in this area,” a representative of the service told RBC.

Commenting on the rationale for the sanctions, he drew attention to the fact that the functionality of maintaining a register of “terrorists and extremists” was assessed by the Financial Action Task Force (FATF) in 2019 and there were no questions. “Since then, the procedure for maintaining the list has not changed,” emphasized the representative of Rosfinmonitoring.

“As for the exchange of information, a number of unfriendly countries, for political reasons, unilaterally stopped mutual exchange with Rosfinmonitoring before the introduction of the mentioned sanctions,” he said.

RBC looked into how the new restrictions would affect Rosfinmonitoring’s activities in combating money laundering and the financing of terrorism.

What does financial intelligence do?

The Federal Service for Financial Monitoring was created in 2001. “The main activities of Rosfinmonitoring revolve around developing rules for the operation of the financial market and conducting analytics, so it can be assumed that the global introduction of EU sanctions against Rosfinmonitoring and its head cannot have a negative impact on the work of the department, since the key tasks of its work are concentrated within the country “, says Ilya Zharsky, managing partner of the Veta expert group. He reminds that the scope of activities of Rosfinmonitoring also includes the functions of ensuring interaction and information exchange with the competent authorities of foreign states in the field of combating money laundering.

What do the new sanctions mean?

This is the first case of introducing blocking sanctions against a competent public service in the field of combating money laundering and the financing of terrorism (AML/CFT), notes Kira Vinokurova, partner of the Pen & Paper Bar Association. Blocking sanctions primarily mean blocking the assets of a person on the territory of the state that has imposed sanctions, and a ban on providing him with economic and other benefits, continues Vinokurova.

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However, Rosfinmonitoring does not have direct interests in the EU, as well as real estate and assets to block, Zharsky notes. The introduction of blocking sanctions is a demonstration of the EU policy of their quantitative expansion, since in fact the financial intelligence services of European countries stopped exchanging information with Rosfinmonitoring even earlier, adds Kristina Ikaeva, senior lawyer in the commercial practice of the Kosenkov and Suvorov law firm.

What will fundamentally change is that the competent authorities of the EU member states will have a legitimate reason not to share information with Rosfinmonitoring, while informally this exchange has already been frozen at the level of several countries. Now the agreements are under threat and could be completely torn off or suspended for many years, adds Vinokurova. The representative of the department emphasizes that the service is “actively developing cooperation with the financial intelligence services of states interested in ensuring the security of the national and global financial systems.”

At the same time, Rosfinmonitoring is already under sanctions from Australia and Canada, and Chikhanchin is on the sanctions lists of the UK and the USA . Also, Rosfinmonitoring’s membership has been suspended or frozen in the FATF and the Egmont group, recalls Denis Primakov, head of the Sanctions Law and Compliance practice at KIAP: “Therefore, the inclusion of the organization and its head in EU sanctions simply complements the already complex picture of the department’s interaction with other financial intelligence agencies."

EU blocking sanctions will not lead to an increase in money laundering crimes, Ikaeva believes: “For Russian individuals and legal entities, KYC/AML procedures (verification of client funds. - ) in foreign countries can be tightened, and within Russia Rosfinmonitoring will continue to carry out its activities without hindrance activity".

Will there still be an exchange of information with friendly countries?

It cannot be ruled out that financial intelligence services of friendly countries will be forced to limit cooperation with Rosfinmonitoring in order to avoid falling under secondary sanctions, Ikaeva warns. There is a risk that Turkey , China , CIS countries, etc. will stop interacting with the service on anti-money laundering issues, trying not to fall under the article on circumventing EU sanctions, Vinokurova agrees.

“The official position of countries may differ from actions in practice. Countries that continue financial interaction with Russia may be subject to close monitoring, and AML/CFT procedures may also be tightened for Russian individuals and legal entities. Probably, on a number of the most important issues, the exchange of information will not stop (for example, in the field of terrorism),” says Ikaeva.

According to Zharsky, with a high probability, requests or important information addressed to colleagues from abroad from Rosfinmonitoring to other states may be processed with a delay or be ignored if these states support sanctions or are not interested in such information. Moreover, Rosfinmonitoring has already encountered such situations after the suspension of its membership in the FATF, he emphasized.

“Such sanctions will impede the international exchange of information that allows us to combat both tax evasion and money laundering. But this is the proverbial double-edged sword, since sanctions will have an unconditional negative effect not only on incoming flows of such information, but also on outgoing ones,” says Dmitry Gorbunov, partner at the law firm Rustam Kurmaev and Partners.

Will interaction with the FATF become more complicated?

Rosfinmonitoring's participation in the FATF was suspended in February 2023. Rosfinmonitoring then called this decision unfounded and emphasized that it would continue to take measures to combat money laundering, terrorist financing and other serious crimes, including by intensifying international cooperation with interested countries. At the same time, Russia still has fairly high ratings in the FATF, and the organization did not include it in the gray or black lists, which include countries with high risks of money laundering.

The FATF consists not only of EU member states, so EU sanctions should not have a negative impact on Russia’s position in the organization, but there is such a risk, says Vinokurova: “It is still doubtful that the FATF will consider the actually forced cessation of information exchange with Rosfinmonitoring by the EU as grounds for inclusion in these lists (gray or black. -), however, we cannot exclude this possibility.” Gorbunov believes that sanctions may have an impact on Russia’s rating in the FATF, since in fact Russia is becoming less transparent for this organization. There must be more serious reasons for including Russia on the black or gray list, Zharsky disagrees.

Kristina Ikaeva reminds that Russia remains a member of the Eurasian Anti-Money Laundering Group (EAG), and therefore is obliged to comply with money laundering standards, even despite blocking EU sanctions. Russia has also applied to join ESAAMLG, an anti-money laundering group in Eastern and Southern Africa, as an observer. “Since ESAAMLG is an associated member of the FATF, participation in ESAAMLG will allow Russia to avoid financial isolation if it receives status in the organization,” the lawyer emphasized.