This Week in AML

Making Russia Sanctions More Effective

Sanctions against Russia have been a meaningful part of the support for Ukraine by the United States and the European Union. A significant challenge to the sanctions has been the efforts by bad actors and supporters of Russia to evade them. John and Elliot discuss the evasion problem, how the US is working with its allies to increase the impact of the sanctions, and ideas from some economists on increasing sanctions effectiveness.


Making Russia Sanctions More Effective - TRANSCRIPT

Elliot Berman: Hi John, how are you this week?

John Byrne: Hello. Hi, Elliot. Good. Obviously we are recording this earlier in the week than typical because we have the a m L partnership form that starts on Wednesday. We're very excited about that. You've done a tremendous amount of work in helping us coordinate, organize, and we've been able to get through our steering committee some wonderful presenters and participants.

So definitely looking forward to the second annual Forum. But we wanted to make sure that we got a chance to flag an issue or two before the week got away from us. And there's a lot going on. One of the things related to Russia has certainly has been ratcheted up after the Ukraine attacks, is sanctions.

And so there was a couple things in the sanction space. I know we wanted to highlight One was the Under Secretary of Treasury for Terrorism and Financial Intelligence, Brian Nelson has just returned from Europe on a whole host of meetings and themes that he covered. And Treasury will do these, what they call readouts which they published the other day.

And this is a summary of a number of the things that were discussed and the coverage. So I assume you saw that.

Elliot Berman: I did. And it was a very active trip. The entire focus of it really was as it says in the readout, continued close coordination with partners and allies on countering Russian sanctions evasion, and limiting Russia's ability to obtain materials for its war against Ukraine.

So you and I have talked a little bit about sanctions of evasion in the past, and we've certainly AML RightSource has done a lot about the sanctions programs that were put in place immediately after the invasion. But this is an interesting topic. And the other thing we're gonna talk about focuses on the effectiveness of the sanctions.

But they were talking about topologies and red flags and looking to figure out how to plug some of the holes that evaders are using. There were meetings in Germany and Italy Austria and Switzerland. What were some of the specific conversations that they had John?

John Byrne: The typologies, and we've mentioned these before they restated a number of them, particularly unusual atypical payment terms and methods, large cash payments routing through third countries that are otherwise not involved in the transactions. So some of those things are well known to our compliance community, but may not be so much to the business side. Also, redirection of goods to third countries that have  limited restrictions or re-exports to Russia.

That's what we're gonna reference in a few minutes in the Swiss meeting, I thought it was interesting that they met or they attended round tables with the Swiss Bankers Association and obviously as we know, the historic knock on Switzerland, as in the banking space is well known. And the fact that the conversation was to hear various perspectives on, as you mentioned, sanctions of evasion and the vulnerability of illicit finance was pretty important. So I think the fact that the Swiss bankers stepped up and was part of that discussion is important.

They also met with Lichtenstein, their prime minister there. And talked about their progress in improving their AML framework, which, is something that FATF always looks at. So I think the other part of it is Nelson made the case in various places that with the banks specifically about the state of their exposure to Russia, what are the plans to manage these sanctions?

And again, how to. How to look for sanction evasion activities. Again, a lot of really good examples of collaboration. We'll have to see how it works in real time, as they say. I understand that this week. The assistant secretary, according to the same summary, Elizabeth Rosenberg is going to be going to a whole host of countries on technical engagements to strengthen sanctions enforcement.

So the US is clearly working on sanctions and export controls beyond what they normally do, and that is policy encouragement. And I think that sort of leads us to the other story that we saw that we can move on to. But anything else about the the meetings that Nelson had that you wanna flag?

Elliot Berman: No, I think you covered it well. I would just emphasize the point you made that this is a lot about cooperation. The US did not act unilaterally in putting sanctions in place. And that means that keeping the group together requires a lot of touchpoints.

And this is a meaningful touchpoint. Where Under Secretary Nelson spoke with a lot of people. I'm sure delivered a consistent message. And I'm sure heard concerns raised about the impact that some of these sanctions are having on European economies, but the European Union and the UK have been steadfast to this point.

So I think it's important to keep having those conversations and it's nice that we have access to that information.

John Byrne: So another area in the sanction space that gets debated quite a bit is the high level effectiveness. How do these work? Do they work? Is that they've been constantly used for as long as you and I have been in the AML community, so for decades. Sanctions seemingly more recently in the past, maybe five, six years, maybe even a little bit longer there certainly has been a dramatic increase in the use of sanctions, which is, an overall national security tool and obviously does a lot of things.

But there was a meeting in last, late last week that the Wall Street Journal reported on, and this was a meeting of a series of experts, which included some Harvard economists, including a sanctions expert, Ricardo Hausmann, which he's written books and done quite a bit in the space. And the headline sort of says it, but we wanna talk about some of the specifics.

The headline of the story in the Journal is, Sanctions Against Russia Could Be Better, These Harvard Economists say. And so they looked at both the US response and the EU response. And again, from a very high level, there's some very specific things both in the story, and I assume in the round table though I've not seen any documents other than than this characterization.

But one of the key conclusions is that there are what they consider to be too many exports to Russia are restricted by either the European Union or the US, but not by both. And so they feel that makes the sanctions regime ineffective because the need for coordination. And obviously you're talking EU and US, if we're allowing some things to go through or vice versa or the EU is, and the other countries are prohibiting those what is the value proposition?

And one of the things they looked at and again, reading from the story restrictions have been applied to the export of more than 5,000 products, typically bound for Russia. That's 44% of the country's total imports. But of the sanctioned products, only 43% of those have been restricted by both the US and the EU.

Two fifths by the EU and only 17% by the US only. Two fifths by sanctioned by EU only, and 70% by the US only. So certainly, you have to be an economist to know that seems logical. That if you don't have collaboration coordination, then the goal is not gonna be met. Right?

Elliot Berman: Yes. And as we've already talked about, these were coordinated. But it's interesting when you get down into the real details of individual products and things like that, that are really covered by the sanctions. It's interesting to see how big the gaps are. I think another part of the conversation that was had and is related in this article is that both coordination can increase effectiveness, but also focusing on components.

Much or more than finished products. That if you sanction the sale of components, you really you disrupt the supply chain and that really can have a more fundamental impact and a more effective impact than just finished products.

John Byrne: Yeah. More to come on that I'm sure as the debate continues, although, like I said, for us non-economists, their recommendations made sense. It seemed logical both the collaboration issue and also what you just mentioned in terms of capital goods versus what goes into making those goods.

It just seems that would make sense and I can't imagine that both government entities, the EU and the US, wouldn't try to learn from this. So obviously we'll continue to spend time on this. I think as there is some diminished support for the Ukraine War, not from many of us, but unfortunately some in the policy space, it's really important that you show effectiveness, and I think that's where these sorts of recommendations become pretty important.

Elliot Berman: Yes. It's clearly not a question of just the volume of sanctions, but it really is making them effective and I, there's been clear effort to do that. But that effort is not complete.

I'm sure that a lot of what is talked about in the Wall Street Journal article from the perspective of the Harvard economists is certainly not news to the people at OFAC or in the Treasury generally. But it, it did bring it into interesting relief and I think it's a nice roadmap in some ways for next step efforts in the coordination between the EU and the US.

John Byrne: Yeah, I think that's right.

Elliot Berman: So John, our May webinar which is May 25th at 1:00 PM Eastern Time. Registration available on our website. John, tell us a little bit about that, cuz I know you're managing that with some really great speakers.

John Byrne: We're doing two things. We're focusing on the broad topic of private public partnership, but we're using a specific example. We'll cover more than just the one example, but there's a really excellent example that

Don Fort, our advisory board member and former IRS:CI Chief had flagged for us cuz under his watch when he was the chief, the IRS working with four other countries came up with the, what they call the J five and the J five countries working together on issues like tax evasion and financial crime.

And so it's a good example of partnership within the public sector. So we're gonna walk through that. And then Marilu Jimenez, who is also a member of our advisory board, former Chief Compliance Officer at Banco Popular now runs her own compliance firm, has done a lot of work with public sector partners, both in Puerto Rico and globally.

And she's gonna talk about some of that, what goes into it , not just how important it is, but some examples of how that's worked. I know she's done a lot of work with the banking supervisor in Puerto Rico, working with the banks as well as with the regulators. So some really good examples of partnership being not simply just law enforcement and the financial sector, but the regulatory side as well.

So I think we're gonna give you what I know will be both some practical advice and some goals that perhaps you could think about reaching that maybe you hadn't thought about before.

Elliot Berman: That sounds great. So again reminder, you can register for that on our website. And John, I know you have some podcasts in the works too.

John Byrne: Yes. Able to sit down with our friend now who's done a few with us Liz Vaccaro, who's a lawyer with Antiquities Coalition. And we went into a deeper dive than you and I did, Elliot, on the recent art study for 2022 that the Art Basel Committee in conjunction with the UBS published.

So Liz has some interesting takes on that. And then later on this week, and we'll post it in a few weeks, going to have a video cast with Interaction. Interaction is an advocacy group that works on de-risking issues, particularly as it impacts specifically how it impacts humanitarian groups.

And the conversation is gonna be both around that challenge but also some positives. And that is, OFAC has recently adjusted their licensing processes. That Interaction is very complimentary about the goal. And they believe that plus passage of the UN Security Council, resolution 2664, which is the humanitarian exemption to its asset, freeze measures that are proposed by sanctioned regimes is something else that they believe will help the community that they serve.

So we're looking forward to that conversation. Pretty important. De-risking continues to challenge all of us, but it's always good when there's some positives you can point to and maybe it's a model for other aspects of trying to open up financial access to entities that certainly need it particularly in, in this day and age.

Elliot Berman: That sounds good. We're looking forward to that. John, I will actually, I'm gonna see you tomorrow. But you, we'll have an exciting week in Washington and we'll be back with our listeners next week as well.

John Byrne: Take care, Elliot. Safe travel.

Elliot Berman: Bye-bye.