How Putin Uses Money Laundering Charges to Control His Opponents

The Magnitsky case highlights Russia's multi-faceted corruption problem.
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Russian President Vladimir Putin (left) speaks with Defense Minister Sergei Shoigu (right) and Chief of Staff Valery Gerasimov during a flight to watch military exercises in Russia's Zabaykalsky region July 17, 2013. (Reuters/Aleksey Nikolskyi)

Last Thursday, Sergei Magnitsky was convicted of tax evasion. The only problem was he was not there to hear the verdict read. Magnitsky was killed in Moscow's Butyrka prison in 2009, likely as a result of beatings and a lack of medical treatment. His crime was uncovering a $230 million tax fraud involving members of the government while working as a lawyer for William Browder (an American investor who was also convicted in absentia).

But Magnitsky's conviction is not simply an example of the capricious nature of the legal system in Russia; it is a view into how the use of money laundering, financial laws, and Russia's financial intelligence unit are used to control political dissent.

Recently, Putin launched a much publicized "de-offshorization" campaign aimed at fighting corruption and countering the flight of money from the country, much of it acquired illicitly. This initiative was launched in response to revelations that Russia was losing vast sums of money every year (estimated at $56.8 Billion in 2012), and that many state officials--from the heads of security agencies to the chair of the Russian Duma's ethics committee--had significant overseas assets (including condos in Miami, worth an estimated $2 million). Much of this wealth was being sent to offshore tax havens in Europe and beyond. Russian holdings in Cyprus amounting to over $30 billion (largely the proceeds of corruption or deposited as a form of tax avoidance) also inspired this campaign. (This scheme of tax avoidance is called "round tripping," whereby the proceeds made in Russia are registered with a shell company based in Cyprus, then repatriated to Russia avoiding taxes due to a taxation agreement between the two countries). These revelations gave Putin the expedient cover with which to launch "de-offshorization," which included banning state officials from having overseas assets. The idea is that, by forcing Russian elites to hold their money inside the country, Putin can cement their loyalty by threatening their bank accounts.

The Democracy Report

As Russian Duma Deputy Dmitry Gorovtsov noted on the new law banning state officials overseas assets, "This law is about political, and not legal, control. It will be applied selectively and subjectively."

The statement is particularly prescient due to the fact that corruption is an integral part of Putin's rule, forming the foundation of his patronage system but costing an estimated $300 billion in an economy of $1.5 trillion, or 16 percent of its yearly GDP. Unsurprisingly, Russia was rated worst among countries surveyed for the perceived likelihood of paying bribes in Transparency International's 2011 Bribe Payers Index. As NYU Professor Mark Galeotti notes, "Politics determines everything and corruption is mobilized as a weapon against enemies (and a treat for friends). Your abuses get publicized as a result of your losing influence within Putin's court, not the other way round, reflecting the vagaries of factional politics in that court."

Hence, Putin's calls for action at the G8 summit in June on offshore tax havens, de-offshorization and the recent tightening of anti-money laundering laws are aimed at strengthening his ability to control the elites of the country and to shore up his political base.

But patronage is only one aspect of the tandem that underpins the stability of the Kremlin; the other is coercion. Supporters are kept in line through an implicit threat to throw them in jail and to seize their assets should their loyalty be called into question. The ability to provide financial incentives--through the acceptance of dubious business practices--acquires their support, the threat of jail and repossessing their assets ensures it. A silent agreement between Putin and business elites was reached in the aftermath of Yukos CEO Mikhail Khodorkovsky being thrown into jail in 2003 for attempting to challenge Putin politically (Khodorkovsky was also charged with additional money laundering and fraud charges in 2010 as he was nearing the end of his first sentence). As William Partlett of Columbia University and the Brooking's Institute said about the incident, "The message to other oligarchs was clear: follow the rules or face devastating legal consequences."

This approach has its origins in the beginning of Putin's rule in 2000, when he began to institute a system of governance carefully modeled around the needs of a vertical power structure controlled by himself. The political and business elites of the country were allowed to continue their activities as usual, in exchange for their personal loyalty to the system and their promise to forgo any opposition to the Kremlin.

This support was ensured through the selective enforcement of Russia's financial and money laundering laws. "His (Putin) plan was to use reformed formal legal institutions to complement his personalized rule," Partlett notes, "In fact, strong legal institutions were a means to an end--a tool for ensuring that he could punish those who did not comply with his informal rules of the game through selective prosecution."

The crux of Putin's ability to punish dissenters revolves around Russia's financial intelligence unit, Rosfinmonitoring. Putin created Rosfinmonitoring--under the direct control of the president and placed it in the charge of a fiercely loyal subordinate, Viktor Zubkov (also the Chairman of the Board of Directors of the natural gas and oil giant Gazprom). Rosfinmonitoring, and the laws criminalizing money laundering (Russian Federal Law No. 115-FZ ), were established on the recommendation of the U.S. and European powers, who sought to institutionalize a global anti-money laundering regime in the 1990's and early 2000's. This push was led by the Financial Action Task Force (FATF), a Paris based organization that sets rules and recommendations for countries to combat money laundering--its head is now Vladimir Nechayev (a veteran of the defunct Federal Tax Police and more recently Rosfinmonitoring). One of their primary recommendations was the creation of a financial intelligence unit to oversee the country's banks and financial institutions. These units require financial institutions to pass along information regarding transactions and account information that are considered suspicious. In the West, this information is used to combat organized crime and terrorism. In Russia, it is also used to create a compendium on the financial holdings of the country's elites. This information is held as assurance in the event that it is needed to draw up legal charges.

Moreover, businessmen like Browder or Khodorkovsky are not the only targets of money laundering charges. Opposition figure and anti-corruption activist Alexei Navalny is currently being tried in the provincial city of Kirov on charges of embezzlement stemming from his time as an advisor to the regional governor. The likely turnout of this highly politicized trial is unfortunately already clear: in Russia 99 percent of defendants tried by judges are convicted, with the judge overseeing Navalny's case has not given a single acquittal in 130 cases over the last two and a half years.

The use of money laundering laws against not only businessmen but opposition figures is aimed at giving Putin a degree of legitimacy in his crackdown against human rights. By using accusations of financial impropriety, crackdowns can be labeled law enforcement actions as opposed to directed political actions.

As Leon Aron of the American Enterprise Institute notes, "Putin's variation of the repression regimen is what might be called the suffocation- with-a-soft-pillow approach: selective but constant harassment of opposition leaders and activists; the 'investigation' of these figures' private affairs, often resulting in administrative and criminal charges that lead to fines or short-term detentions..."

But Rosfinmonitoring's power derives from their monopoly over information, namely, the unfettered access to anyone's business dealings and financial accounts. But its monopoly ends at Russia's borders, and that makes offshore tax havens like Cyprus, Latvia, Luxembourg and Israel, to name a few, all the more dangerous. They undercut Putin's ability to threaten the elite's financial dealings when they move their assets and businesses outside Russia. Accordingly, offshore tax havens became the centerpiece of the recent G8 meeting, and why Putin plans on using Russia's G8 presidency in 2014 to forge a consensus on offshore tax havens. These agreements will enable access to financial information no matter where accounts are held, increasing the strength of Rosfinmonitoring further.

The effectiveness of Rosfinmonitoring and financial laws has become glaringly apparent in recent years. The verdict on Thursday was merely another example. And because of this, Magnitsky will now be famous not only for the landmark Magnitsky Act passed by Congress, but for becoming the first person in Russian history to be tried and convicted posthumously.

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Presented by

Andrew S. Bowen

is an editorial assistant at The Interpreter, a Russian language translation and analysis journal.

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