There is rarely a quiet moment to reflect on threats to modern democracies and business posed by organised crime, corruption and illicit finance.
No sooner had experts convened – through forums such as the Global Initiative Against Transnational Organised Crime (GI-TOC) – to discuss tackling the cybercrime and cryptocurrency fraud that posed heightened risks during the Covid-19 pandemic, than the world was catapulted back to an era of war in Europe and deep economic sanctions against Russia.
Following Russia’s invasion of Ukraine in February and sanctions imposed on Vladimir Putin’s regime and its supporters by the USA, UK and European Union, all eyes have turned to Moscow’s reaction.
How will the world’s eleventh-biggest economy, rich in natural resources and with a Gross Domestic Product of $1.83 trillion, react to blanket bans on much of its economic activity? And what will be the impact on legitimate business globally – aside from the financial pinch and soaring cost of living likely to hit developing economies hardest?
Even casual consumers of news cannot have failed to see the immediate effects of sanctions – ranging from the withdrawal of major retail brands from Moscow’s shopping centres, disconnecting Russia from the SWIFT banking system that facilitates financial transactions, and halting non-football activities at Roman Abramovich-owned Chelsea FC in London.
But a critical immediate question is how Moscow and sanctioned individuals (the so-called ‘oligarchs’) will now try to circumvent sanctions to sustain themselves while much of the world refuses to do business with them.
According to the team at Geneva-based GITOC, one key sector to keep an eye on (so that legitimate businesses avoid getting embroiled in sanctions-busting activity) will be the global gold market. In a 21st Century now dominated by technology-aided trade, traditional commodities such as gold remain hugely influential – and vulnerable to illicit activity. Russia has been stockpiling gold, and offloading US dollars, since it was first hit by sanctions following the annexation of Crimea in 2014. According to GITOC, Moscow has now accumulated some $130bn worth of gold.
More recent primary sanctions (those imposed directly on sanctioned bodies or individuals) have already made it hard for Russia to access major financial and gold markets such as London, Switzerland and Singapore. But according to a new policy brief issued by Marcena Hunter, senior analyst at Geneva-based GI-TOC, the imposition of secondary sanctions – economic restrictions on third parties dealing with sanctioned bodies or individuals – could now become critical.
With so much global trade conducted in US dollars or through the UK’s influential money markets (gold is considered a money market instrument), Washington and London have warned those trying to circumvent sanctions, or third parties assisting sanctioned activities, to beware. London was Russia’s destination of choice for gold exports before the war in Ukraine. According to the Chatham House think-tank, the UK’s capital accounted for $16.9bn of Russia’s gold trade in 2020: the largest share globally.
That means that a lot of Russian gold could soon hit markets in states less inclined to impose or uphold sanctions (such as China, India or the United Arab Emirates)…or illicit markets for commodities.
The fear of secondary sanctions most likely worries China, which has a significant gold market in Shanghai but does a vast amount of business with Europe and the US. So, according to Marcena Hunter at GI-TOC, all of this suggests significant amounts of discounted, and disguised, Russian gold could be about to pass through other states sympathetic to Moscow or organised criminal networks capable of handling, and laundering, such wealth.
India, for example, is another major gold consumer – and has traditionally undertaken relatively weak due diligence on the origins of gold imports, which can then be made into jewellery and exported onwards. Meanwhile, some of Russia’s wealthiest individuals subject to sanctions own major gold mines in Africa.
Why is the movement of gold important to legitimate business leaders, I hear you ask? The answer is simple: billions of dollars worth of gold trade (and other methods of circumventing sanctions) amounts to a lot of business, even for criminals well-versed in laundering the proceeds. And such criminal enterprises will likely attempt to wash clean Russia’s dirty assets or revenues through ‘legitimate’ trades and business inside wealthy states. In these moments, it is imperative that good companies audit existing relationships and monitor new clients carefully.
Of course, it isn’t just gold or other physical assets that will be important – but the cash flows and related business that facilitates or follows any laundering processes. For example, even many illegitimate deals require legal agreements somewhere along the chain. So global law firms have been warned to be wary of clients potentially involved in sanctions-busting activities. In the UK, sanctioned activities cover almost all UK-incorporated firms and it is now a criminal offence to contravene, enable or facilitate sanctions breaches. Those caught doing so face up to ten years’ imprisonment.
Henry Smith, a partner at Control Risks, the UK-based global risk consultancy, explains: “Organisations should be clear on their direct and indirect relationships with Russia and Russian-owned organisations, and regularly evaluate their exposure to sanctioned entities and individuals as the range of prohibited or restricted entities and individuals continues to grow.”
Over a cup of coffee, a senior contact at Global Financial Integrity, the Washington-based think-tank monitoring and tackling illicit finance, once told me a great story which summed up the broader laundering risk to firms and economies.
Aware that Mexican drug cartels wanted to realise their illegal income inside the US (because of the high dollar value and inflated market), border guards in one state were alerted to smuggling risks at specific checkpoints. But after fruitless weeks of surveillance, the guards had made almost no new seizures.
Instead, a constant flow of expensive construction vehicles and materials passed through border points, heading for development sites near the US side of the border. Of course, the cartels had purchased the vehicles and hardware cheaply in Mexico and were selling them, often more expensively, for cash or dollar bank payments, in the US. Until the ruse was rumbled, this clever laundering (mis-invoicing) process took place under the noses of US border guards – and made the cartels millions of laundered dollars.
The battle against dirty money has intensified in recent years. But while sanctions against Russia attempt to tackle part of this problem, they also create new risks.
Beware those bearing gold-plated gifts.
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