20 May 2024

Russia’s Anti-Money Laundering (AML) Compliance: Financial Monitoring

May 20, 2024

BRACE Law Firm ©

The fight against money laundering and the financing of terrorism occurs at the international level and includes financial monitoring within the framework of countering the legalization of criminally obtained incomes.

To combat these phenomena effectively, international standards for countering money laundering, the financing of terrorism, and the proliferation of weapons of mass destruction are developed and continuously updated. A specialized intergovernmental organization, the Financial Action Task Force (the "FATF"), develops these standards and monitors their implementation by all states. The Bank of Russia actively participates in the work of the FATF and interacts with foreign partners on behalf of Russia.

In Russian legislation, Article 3 of Federal Law No. 115-FZ dated August 7, 2001, On Countering the Legalization (Laundering) of Criminally Obtained Incomes and the Financing of Terrorism (the "Federal Law No. 115-FZ") defines "legalization (laundering) of criminally obtained incomes" as "giving a lawful appearance to the possession, use, or disposal of monetary funds or other property obtained as a result of a crime". By its nature, the legalization of income amounts to the intentional distortion of data regarding the source of obtained funds and property to conceal the fact of their illegal acquisition and to create the possibility to freely own, use, and dispose of them.

Financial Monitoring Under 115-FZ

Current legislation does not contain a specific definition of financial monitoring; instead, the term is revealed through a comprehensive interpretation of the provisions of Federal Law No. 115-FZ in conjunction with the powers of the Federal Financial Monitoring Service (the "Rosfinmonitoring"). [1]

Financial monitoring can be defined as the activity of organizations and persons performing operations with monetary funds or other property, and government authorities exercising control over such operations, for the purpose of preventing, detecting, and suppressing acts related to the legalization (laundering) of criminally obtained incomes, the financing of terrorism, and the financing of the proliferation of weapons of mass destruction.

Article 5 of Federal Law No. 115-FZ contains an extensive list of financial monitoring subjects (organizations and individual entrepreneurs):

banks and non-bank credit organizations, credit consumer cooperatives, and microfinance organizations;
securities managers, dealers, brokers, securities register holders, and depositories;
management companies of investment funds, mutual funds, and non-governmental pension funds;
insurance companies and mutual insurance societies;
Russian Post;
pawnshops;
non-governmental pension funds (NPF);
telecommunications operators;
lottery and gambling organizers;
operators of investment and financial platforms;
companies that buy and sell precious metals;
operators of websites and applications for transactions with tokens, cryptocurrency, and other digital financial assets.

Financial monitoring is implemented through measures aimed at countering the legalization (laundering) of criminally obtained incomes, the financing of terrorism, and the financing of the proliferation of weapons of mass destruction. Article 4 of Federal Law No. 115-FZ classifies the following as such measures:

internal control, which is the activity of organizations performing operations with monetary funds or other property to identify operations subject to mandatory control and other operations related to money laundering and the financing of terrorism;
mandatory control, which is the aggregate of measures taken by the authorized body to monitor operations with monetary funds or other property based on information provided by organizations performing such operations, as well as the verification of this information in accordance with the legislation of the Russian Federation;
prohibition on informing clients and other persons of the measures taken, except for informing clients about measures taken to freeze (block) monetary funds or other property and the cancellation of such measures; the suspension of operations; the refusal to accept a client for service; the refusal to perform an operation; the refusal to enter into a bank account (deposit) agreement; the termination of a bank account (deposit) agreement; the application of measures providing for the non-performance of operations to debit funds from a bank account (deposit); the non-issuance of the remaining funds upon termination of a bank account (deposit) agreement or the failure to transfer them to another account or a third party's account at the client's request, and the reasons thereof; the need to provide documents on grounds provided for by Federal Law No. 115-FZ; and the Bank of Russia's classification of credit organization clients that are legal entities (individual entrepreneurs) into a high-risk group for performing suspicious operations;
other measures taken in accordance with federal laws. For example, if professional participants in the securities market or credit organizations repeatedly violate the requirements of Federal Law No. 115-FZ within one year, the Bank of Russia may decide to annul the license for professional activity in the securities market or revoke the credit organization's license. [2]

Measures aimed at countering the legalization of income do not include the establishment of additional (increased) commissions, fees, or other remuneration charged by organizations performing operations with monetary funds or other property when their clients perform operations with such funds or property.

Control in the sphere of countering the legalization (laundering) of criminally obtained incomes and the financing of terrorism is exercised by control (supervisory) authorities in the relevant field of activity (for example, the Bank of Russia in the banking sector). The self-regulatory organization of auditors exercises control over audit organizations and individual auditors; bar associations of the subjects of the Russian Federation control advocates; and notary chambers of the subjects of the Russian Federation control notaries (Article 9.1 of Federal Law No. 115-FZ).

If there are no control (supervisory) authorities in the sphere of activity of a financial monitoring subject, Rosfinmonitoring exercises control (supervision).

The subject of control is the compliance by financial monitoring subjects with the requirements established by Federal Law No. 115-FZ, regulatory legal acts of the Russian Federation adopted in accordance with it, and regulations of the Bank of Russia, as well as the execution of decisions made based on the results of control (supervisory) events.

To identify risks of non-compliance with such requirements, Rosfinmonitoring organizes and conducts remote monitoring, which consists of analyzing incoming information. The results of remote monitoring are transferred to control (supervisory) authorities and are also used independently by Rosfinmonitoring when exercising control (supervision) in the specified area.

Control (supervisory) authorities apply a risk-based approach, which provides for the classification of the activities of financial monitoring subjects into a certain risk level of non-compliance with the requirements established by Federal Law No. 115-FZ. Rosfinmonitoring and the relevant control (supervisory) authorities conduct risk assessments of operations (transactions) performed for the purpose of money laundering and the financing of terrorism in the sphere of activity of financial monitoring subjects by economic sectors (sectoral risk assessment), taking into account the results of the national risk assessment.

Operations Subject to Mandatory Control

In accordance with Article 6 of Federal Law No. 115-FZ, operations with monetary funds or other property are subject to mandatory control if the amount of the operation equals or exceeds 1 million rubles, or equals or exceeds an equivalent amount in foreign currency, and by its nature, the operation belongs to one of the following types.

Operations with monetary funds in cash:

withdrawal from or credit to the account of a legal entity of monetary funds in cash;
purchase or sale of cash foreign currency by a physical person; acquisition of securities by a physical person for cash;
receipt by a physical person of monetary funds via a bearer check issued by a non-resident;
contribution by a physical person of monetary funds in cash to the authorized (share) capital of an organization.

Credits or transfers to an account, the provision or receipt of a credit (loan), or operations with securities if at least one of the parties is a physical person or legal entity registered, residing, or located in a state (territory) that does not comply with FATF recommendations, or if the specified operations are performed using an account in a bank registered in such a state (territory). Such countries include the Islamic Republic of Iran and the Democratic People's Republic of Korea. [3]

Operations on bank accounts (deposits):

opening a deposit in favor of third parties with the placement of monetary funds in cash;
crediting monetary funds to an account (deposit) or debiting funds from the account (deposit) of a legal entity or a foreign structure without forming a legal entity, the period of activity of which does not exceed 3 months from the date of registration (incorporation), or crediting/debiting funds if no operations have been performed on the specified account (deposit) since its opening.

Other operations with movable property:

placing precious metals, precious stones, jewelry made from them, and scrap of such items or other valuables in a pawnshop;
payment of insurance compensation to a physical or legal entity or receipt of an insurance premium from a physical or legal entity for types of insurance such as life insurance (in case of death, reaching a certain age, or another event), pension insurance, life insurance with periodic payments (rents, annuities), and/or the policyholder's participation in the insurer's investment income. [4]
provision of property under a financial lease (leasing) agreement;
receipt of monetary funds that serve as a condition for a physical person's participation in gambling;
transfer or payment of winnings to a physical person upon the occurrence of a gambling result;
payment, transfer, or provision of winnings to a physical person from participation in a lottery;
provision of interest-free loans to physical persons and/or other legal entities by legal entities that are not credit organizations, as well as the receipt of such a loan.

Operations with digital financial assets are subject to mandatory control. Digital financial assets are understood as digital rights, including monetary claims, the ability to exercise rights under equity securities, and participation rights in the capital of a non-public joint-stock company. Digital currency, in turn, is recognized as a set of electronic data that are offered and/or can be accepted as a means of payment that is not a monetary unit.[5]

At the same time, Federal Law No. 115-FZ does not contain specific requirements for the mandatory control of operations with digital currency. However, in practice, bank clients are increasingly performing operations to purchase digital currency (including so-called "stablecoins") on global multifunctional cryptocurrency exchanges. This method of acquiring digital currency is legal in many states, including the Russian Federation. Nevertheless, the responsible departments of credit organizations express doubts about operations when bank clients, who have not previously shown signs of suspicious activity for the purposes of Federal Law No. 115-FZ, intend to purchase a significant volume of digital currency on a crypto-exchange.

An operation related to the circulation of digital currency is a sign indicating the unusual nature of the operation (transaction). If, based on the information provided in the documents for the operation (for example, in a payment document), a credit organization has doubts about classifying a client's operation as suspicious, the credit organization has the right to request additional documents and information to decide on its classification. As one of the measures aimed at preventing suspicious operations, a credit organization may exercise the right to refuse to perform the operation. [6]

An operation with cash and/or non-cash monetary funds performed under a real estate transaction is subject to mandatory control if the amount equals or exceeds 5 million rubles, or an equivalent amount in foreign currency.

The following operations are not subject to mandatory control: operations related to the payment of taxes and fees, customs payments, insurance contributions to the Pension and Social Insurance Fund of the Russian Federation, the Federal Compulsory Medical Insurance Fund, and other mandatory payments to the budget system established by law; payment for housing and communal services; payment of commission fees for operations (transactions) performed by organizations; and the accrual of interest on deposits and other financial instruments.

All operations of non-profit organizations related to the receipt or expenditure of monetary funds and/or other property are subject to mandatory control, provided such an organization is not a government authority, a state extra-budgetary fund management body, a state corporation, a state company, a public law company, a consumer cooperative, a state (municipal) educational institution (preschool or general education), a real estate owners' association (including a homeowners' association), a gardening or horticultural non-profit association, an employers' association, or a chamber of commerce and industry registered in accordance with the law.

Operations on the accounts of organizations of strategic importance for the military-industrial complex and the security of Russia are subject to mandatory control if their amount exceeds 10 million rubles. Furthermore, Rosfinmonitoring must be notified of every opening, closing, or change in account details of these enterprises, as well as the purchase or sale of securities.

It is also necessary to monitor operations on separate accounts of contractors under the state defense order. For them, the monitoring threshold is lower — 600,000 rubles.

Rosfinmonitoring maintains a list of countries from which transfers are subject to control. This is limited access information — banks receive it through personal accounts on the Rosfinmonitoring website. If money arrives from a payer in such a country, it falls under control regardless of the amount. Additionally, if a physical person uses a card issued in a country from this list, all cash withdrawal operations must be monitored.

Money transfers through the post fall under control when their size exceeds 100,000 rubles. The same rule applies to refund operations for communication services.

Operations with monetary funds or other property are subject to mandatory control if at least one of the parties is an organization or physical person included in the list of organizations and physical persons known to be involved in extremist activity or terrorism, or a legal entity directly or indirectly owned or controlled by such an organization or physical person, or a physical or legal entity acting on behalf of or at the direction of such an organization or physical person. The Government of Russia establishes the procedure for determining and notifying financial monitoring subjects of the list of such organizations and persons. Information on the organizations and persons included in this list must be posted on the Internet.

Financial Control Measures

Financial monitoring subjects perform identification of clients. Identification is a set of measures to establish specific information about clients, their representatives, beneficiaries, and beneficial owners, and to confirm the accuracy of this information using original documents and/or duly certified copies and/or state and other information systems.

A beneficial owner is a person who ultimately, directly or indirectly (through third parties), owns (has a predominant participation of more than 25% in the capital) a client that is a legal entity or has the ability to control the client's actions. The beneficial owner of a client who is a physical person is considered to be that person, unless there are grounds to believe that the beneficial owner is another physical person.

A beneficiary is a person to whose benefit the client acts, including on the basis of an agency agreement, contracts of mandate, commission, or trust management, when performing operations with monetary funds and other property.

Identification of clients that are legal entities involves providing information on the name, legal form, taxpayer identification number or foreign organization code, information on existing licenses to carry out activities subject to licensing, domain name, website address (if any), primary state registration number, and address of the legal entity. For legal entities registered under the laws of a foreign state, the registration number, place of registration, and address in the state of registration must also be provided.

One interesting case concerning the provision of such information was considered by the Arbitration Court of the Far Eastern District in Case No. A04-6243/2023. Banking service rules established that the "full or partial failure to provide documents/information upon the bank's request, as well as the provision of unreliable or improperly formatted documents/information or violation of the procedure and deadlines for their provision determined by the bank, is considered a material breach by the client of the terms of the account agreement", resulting in the bank charging a penalty. However, the courts stated that "Federal Law No. 115, as well as other federal laws, does not contain provisions allowing credit organizations, as measures to counter money laundering, to establish special sanction measures, such as a commission for failure to provide documents at the bank's request or a penalty accrued in connection with the failure to provide requested documents within the established period". [7]

A legal entity is obliged to possess information about its beneficial owners and take reasonable and accessible measures under the circumstances to establish their surname, name, and patronymic (if any), citizenship, date of birth, identity document details, data from documents confirming the right of a foreign citizen or stateless person to stay (reside) in the Russian Federation, residential address (registration) or place of stay, and taxpayer identification number (if any).

A legal entity must update information about its beneficial owners regularly, but at least once a year, or in case of a change in information. It must document the information obtained and store it for at least five years from the date of receipt.

A legal entity has the right to request information necessary to establish its beneficial owners and update obtained data from physical and legal entities who are founders or participants of that legal entity or otherwise control it.

Financial monitoring subjects also study clients and assess the risk of clients performing operations for the purpose of money laundering/financing of terrorism.

The effectiveness of the mechanism for countering illegal financial flows is only possible if the financial system itself blocks the economic activity of criminal elements. Thus, banks have the right to refuse to open accounts, deposits, or perform operations for clients whose good faith is in doubt. However, sometimes even bona fide clients may receive refusals if they have not provided banks with sufficient information or if banks mistakenly assessed their operations as suspicious.

KYC Platform

Identifying suspicious operations is a complex and expensive task for banks. The Bank of Russia continuously provides them with methodological support, for example, by defining the main signs of suspicious operations and providing banks with information about persons who were previously refused banking services due to doubts about their good faith. The "Know Your Customer" platform facilitates this activity. This service allows banks to receive information from the Bank of Russia about the risk level of their clients — legal entities and individual entrepreneurs — performing suspicious operations. This system provides the necessary information about the involvement of potential and existing clients in suspicious operations, reducing both bank costs and the number of unjustified refusals to clients.

The functioning of the KYC platform consists primarily of dividing clients into three risk groups: Green, Yellow, and Red, which imply low, medium, and high risk levels, respectively. Bank clients are assigned to groups based on analytical databases held by the Central Bank. Classification occurs according to several criteria:

criteria for evaluating the legal entity or individual entrepreneur, the type and nature of its activity, and financial results (for example, number of employees, unreliability of information in the Unified State Register of Legal Entities, presence of bankruptcy proceedings, indicators from main reporting forms, etc.);
criteria for evaluating operations on accounts in credit organizations (for example, information on transfers between own accounts, amounts and grounds for withdrawing funds from bank accounts, amounts and grounds for transferring funds to non-residents or foreign banks, etc.);
criteria for evaluating the founders and participants of the legal entity or the physical person registered as an individual entrepreneur (all information about the aforementioned persons, information on composition, structure, and changes in the founder (participant), head of the legal entity, or individual entrepreneur);
criteria for evaluating the affiliation of a bank client with other legal entities or individual entrepreneurs performing suspicious operations (this includes the client's affiliation with other persons who have already been classified by the Bank of Russia in the high-risk group, as well as the coincidence of the device identifier from which the client accessed the automated system or software for the purpose of transferring funds with the device identifiers of other persons, including those classified in the high-risk group);
criteria based on information received from government authorities.

The last criterion relates to organizations and individual entrepreneurs who have already committed unlawful acts in the area of money laundering and terrorist financing.

Classification into a risk group can be based on one of the listed criteria or a combination thereof. However, criteria that do not directly indicate a client's performance of suspicious operations cannot be the reason for classifying them in the high-risk group. A credit organization uses the KYC platform as an auxiliary tool for internal control, as the final decision in assessing a client's good faith and assigning them to a risk group always remains with the bank.

In the transactional servicing of clients, the KYC platform is designed to solve the following tasks:

minimize subjectivity by risk managers of commercial banks and the number of unjustified refusals to legal entities and individual entrepreneurs;
more accurately determine the nature of the business and the transactions performed from the standpoint of anti-corruption legislation;
respond to suspicious operations in a timely manner by having access to the overall picture of the company across all financial organizations;
reduce costs for processing large amounts of data on each client when approving services;
suppress suspicious operations and money laundering more accurately and quickly.

When an organization or physical person is included in the list of organizations and physical persons known to be involved in extremist activity or terrorism, financial monitoring subjects freeze (block) monetary funds or other property immediately, but no later than one business day from the date such information is posted on the authorized body's official website. They must inform Rosfinmonitoring immediately, but no later than one business day following the day such freezing (blocking) measures were applied.

Suspension and Refusal to Perform Operations

Financial monitoring subjects suspend operations with monetary funds for 5 business days from the day such an operation should have been performed if at least one of the parties is:

a legal entity directly or indirectly owned or controlled by an organization or physical person against whom measures to freeze (block) monetary funds or other property have been applied, or a physical or legal entity acting on behalf of or at the direction of such an organization or person;
a physical person performing an operation with monetary funds or other property aimed at receiving or spending wages in an amount exceeding 10,000 rubles in a calendar month.

Financial monitoring subjects refuse to perform an operation if, as a result of implementing internal control rules, employees of the organization performing operations suspect that the operation is being performed for the purpose of money laundering or the financing of terrorism. Signs of such an operation may include:

the confusing or unusual nature of the operation (transaction), having no obvious economic sense or obvious legal purpose, or the non-compliance of the operation (transaction) with the organization's activity goals established by its constituent documents, as well as the non-compliance of the client's operation (transaction) with the activity declared upon acceptance for service and/or during the course of service;
the identification data of an operation participant coincide with the identification data of a physical or legal entity specified in a request from the authorized body for additional information within the framework of countering money laundering, provided the request states the need to pay increased attention to the operations of that physical or legal entity;
the crediting of large sums of monetary funds within a short period to the account of a client — a legal entity or a foreign structure without forming a legal entity—on which operations had not been performed for more than the last 3 months or were insignificant during that period compared to the usual activity of that client, with the subsequent withdrawal of funds in cash or their transfer to an account in another credit organization within one or several days;
the performance by a resident client of an operation related to the fulfillment of obligations under a foreign trade contract where the recipient of monetary funds or goods (works, services, intellectual activity results) is a non-resident who is not a party to the contract;
a contract provides for the export by a resident of goods (works, services, intellectual activity results) or import payments in favor of non-residents registered in states and territories providing a favorable tax regime and/or not providing for the disclosure and provision of information when performing financial operations. [8]

If financial monitoring subjects suspect that an operation is suspicious, they may:

request (additionally request) documents and information from the client (for example, about the operation being performed, the source of funds, counterparties, the reality of business activities, etc.) and use other information sources;
establish a deadline for providing the requested documents and information (in accordance with the terms of the concluded agreement and the bank's internal rules);
invite the client to a meeting for oral explanations;
visit the client's place of business;
decide to revise the degree (level) of risk of the client performing suspicious operations;
limit (limit) remote banking services and the use of bank cards.

Based on the results of reviewing the requested documents, financial monitoring subjects may:

perform the operation;
decide to revise the degree (level) of risk of performing suspicious operations to which the client was previously assigned by the bank;
decide to qualify the operation as suspicious and send a corresponding message to Rosfinmonitoring, but still perform the operation;
limit the use of remote banking services, including bank cards;
decide to refuse to perform the operation and send a corresponding message to Rosfinmonitoring.

Regarding the limitation of remote banking services, we draw attention to the position of the Supreme Court of the Russian Federation, according to which "the company as a bank client is not deprived of the possibility of managing the movement of funds using settlement documents on paper". [9]

Based on information received from banks, a database of refusals is formed. The Bank of Russia continuously communicates this to banks. They take this information into account when assessing the level of risk of a client performing suspicious operations. However, such information cannot be used by banks as the sole ground for determining the client's risk level.

The bank is interested in resolving suspicions at its own level, so it requests additional documents from the client (potential client) and studies and analyzes them. The client is obliged to provide the documents requested by the bank. [10]

If financial monitoring subjects refuse to perform an operation, we recommend obtaining information about the reasons for the refusal decision, which must be provided within 5 business days from the date of the decision. After receiving the reasons for the refusal, if it is not specified which documents are required to review the decision, select documents that, in your opinion, indicate the absence of grounds for refusal. Present them to the financial monitoring subject with a request to review the previously made decision.

For example, when considering one of the cases in court, it was established that "the courts concluded that by sending explanations and documents upon request, the Company acted reasonably and in good faith, providing all documents available at that time. The courts considered the list of documents submitted by the Company at the Bank's request to be sufficient to confirm the operations on the settlement account". [11] This circumstance served as the basis for recognizing the bank's refusal to perform operations under payment orders as illegal.

In another case, the court noted that "the Bank conducted verification based on documents for the period from November 18, 2021, to February 16, 2022, while the Company submitted documents to the case materials outside the verification period; therefore, the Bank's conclusions about the suspicious nature of the operations on the Account were not documentarily refuted by the Company". [12]

Financial monitoring subjects must notify the client of the decision made based on the review of documents within 7 business days from the date of their submission.

Based on the results of reviewing the submitted documents, a decision may be made to eliminate the grounds for the refusal (your issue is resolved at the first level of rehabilitation), or the refusal decision may remain in force.

Requesting a review of a refusal decision is not limited to a single attempt. If new circumstances or documents are discovered, a new set of documents can be gathered and resubmitted for consideration.

The failure of financial monitoring subjects to fulfill their duty to inform about decisions made may serve as a basis for recognizing a refusal to perform an operation as illegal.

Thus, in granting the claims in Case No. A40-3450/2021, the courts noted that "no response from the bank was received within the period established by law or at the time of filing the statement of claim. The defendant also did not issue the plaintiff a message about the impossibility of eliminating the grounds that led to the refusal to perform the operation, thereby depriving the plaintiff of the opportunity to exercise the right to appeal to the Inter-Agency Commission of the Bank of Russia for the purpose of client rehabilitation". [13]

We note that current judicial practice under Federal Law No. 115-FZ is quite diverse, with rulings both in favor of clients and in favor of financial monitoring subjects. A separate article will be devoted to reviewing judicial practice.

If the refusal decision remains in force, one can apply to the Inter-Agency Commission established under the Central Bank of Russia (the "IAC").

The IAC includes representatives of the Bank of Russia and Rosfinmonitoring, as well as the Federal Customs Service, the Commissioner for the Protection of Entrepreneurs' Rights under the President of the Russian Federation, and all-Russian public organizations, unions, and associations of credit organizations that have joined the multilateral interaction agreement. Note that the IAC does not consider applications to appeal a refusal decision without going through the first level of rehabilitation.

A refusal decision can be appealed regardless of its date. A decision to assign a high-risk level can be appealed to the IAC within 6 months from the day following the date the bank's notification of such measures was received. If the notification was sent using remote banking services, chat, or email, the date of receipt is the day following the date the information was sent. If the notification was sent by registered mail, it is the 6th day from the date the bank sent the notification.

An application can be sent to the IAC in one of the following ways:

apply to the Bank of Russia's online reception, indicating the complaint topic as "Application to the Inter-Agency Commission established in accordance with 115-FZ" (documents can be sent via multiple applications in compressed form);
submit the application and documents to the Bank of Russia's dispatch service;
send the application and documents via Russian Post.

Financial Monitoring in Foreign Trade

In foreign trade activities (VED), money laundering risks are minimized through currency control tools. For example, the instrument of repatriation is used, where an exporter is forced to return monetary funds received under foreign trade transactions. This allows for tracking the cross-border movement of funds under export-import transactions and identifying the counterparties of exporters and importers, including if such counterparties are located in free trade zones or offshore zones.

Analysts at Rosfinmonitoring and the Federal Customs Service encounter various money laundering schemes in their professional activities.

The following types of economic entities are most often involved in money laundering schemes:

credit organizations: banks, which provide for the performance of all financial transactions and may therefore be involved in unlawful schemes;
shell companies: fictitious companies are one of the most common elements of income legalization schemes;
offshore companies and offshore banks are also very often involved in income legalization processes;
realtors and dealers: these intermediaries, especially foreign ones, can be involved at the final stage of income legalization, when a significant part of the laundered funds is invested in real estate and luxury items;
brokers: may also be involved in money laundering schemes if they fail to comply with countering measures;
large corporations and industrial enterprises: commercial companies can also be used for money laundering purposes. Legalization in this case can be carried out by investing criminal assets into the purchase of company shares or stakes in authorized capital;
public catering enterprises and service sector organizations are also susceptible to involvement in money laundering schemes as they can generate significant volumes of cash, allowing criminals to mix illegal proceeds with legal revenue;
finance professionals, specifically accountants, economists, and financial consultants, can provide various services for organizing and supporting legalization schemes. [14]

Listed below are the tools most frequently used in money laundering schemes:

cash still plays a leading role as a tool for breaking the chain of financial operations stretching from a criminal source to "laundered" capital. Physical persons are often recruited for cashing out criminal proceeds by withdrawing funds previously transferred to their accounts through ATMs.
bank transfers and deposits. Since income legalization requires the use of the credit and financial system, bank transfers and deposits are in a high-risk zone.
international transfers are a variety of bank transfers. However, with the development of modern payment technologies, international transfers can be conducted via bank accounts as well as electronic money. International transactions are typically performed at the layering stage.
for law enforcement agencies, international transfers present certain difficulties in recovering illegally acquired funds regarding the establishment of jurisdiction.
digital or electronic currency systems provide varying levels of anonymity and allow for instantaneous non-cash settlements, which is also used by cybercriminals and launderers.
securities and promissory notes: the acquisition of shares and highly liquid securities using criminally obtained funds can be applied for legalization purposes;
forged contracts, financial statements, work acceptance certificates, estimates, bank and payroll cards, electronic money, and other items can be used as income legalization tools.

Money laundering in international trade can occur, for example, through price distortion, i.e., overstating or understating the value of goods and services. An exporter invoices a product at a price below the fair market value, and the importer resells the products on the open market, allowing the importer to receive funds in a significantly higher amount than if the exporter had invoiced the products at the market price. In this way, funds are transferred cross-border under the guise of a legal operation. Laundering can also occur by providing false information regarding the quality or type of product or service — for example, shipping relatively inexpensive goods that are described in documents as more expensive or entirely different goods.

Furthermore, money laundering can occur through multiple invoicing for the same goods and services, conducting fictitious trade activities, or activities through shell companies, etc. A characteristic feature of such laundering is the presence of intent on the part of both the importer and exporter, who often have a prior agreement. [15]

Within the framework of money laundering through international trade, there is a risk of using non-resident legal entities and structures without forming a legal entity located in foreign jurisdictions. That is, trade operations are carried out through shell companies abroad, which are often controlled by the same persons. Countries with favorable taxation and countries from the gray list (for example, Albania, Bahamas, Botswana, Iceland, Mongolia, Pakistan, etc.) and black list (North Korea, Iran) of the FATF represent a particular danger in this case. [16]

One can identify the following indicators of money laundering schemes using foreign trade operations:

repeating transactions with identical (or nearly identical) product values (for example, 1,000 rubles per unit);
minimal settlement periods (sometimes within one day);
no more than 1 day is spent on formatting the delivery confirmation by different companies involved in the scheme;
settlements with shell companies are present in the scheme;
the settlement accounts of the supplier and the buyer are in the same bank;
lack of economic effect in settlements using promissory notes or bearer securities;
falsification of product imports;
receiving a bank credit or a loan from an organization in an amount equal to the VAT being reclaimed;
a significant discrepancy between the declared value of products at customs in different countries during export and import;
transit transfer of the same amount of funds through a chain from one participant to another within one day;
a VAT refund claim from a company whose partners include organizations with signs of shell companies;
turnover has grown significantly over a short period of time;
withdrawal of large cash amounts from an account;
making prepayments under foreign trade contracts followed by the termination of those contracts;
provision of an interest-free loan in foreign currency by a non-resident for a long term. [17]

Income legalization methods are very diverse and are constantly updated as technology and information systems develop and as the geopolitical situation and legislation change. Nevertheless, money laundering schemes possess typical signs, and their identification and subsequent analysis can increase the effectiveness of the efforts of financial monitoring subjects in the fight against illegal operations.

____________________________

References

[1] Decree of the President of Russia No. 808 dated June 13, 2012, On Issues of the Federal Financial Monitoring Service.

[2] Federal Law No. 39-FZ dated April 22, 1996, On the Securities Market; Federal Law No. 395-1 dated December 2, 1990, On Banks and Banking Activity.

[3] Order of Rosfinmonitoring No. 361 dated November 10, 2011, On Determining the List of States (Territories) That Do Not Comply with the Recommendations of the Financial Action Task Force (FATF).

[4] Law of the Russian Federation No. 4015-1 dated November 27, 1992, On the Organization of Insurance Business in the Russian Federation.

[5] Federal Law No. 259-FZ dated July 31, 2020, On Digital Financial Assets, Digital Currency, and on Amending Certain Legislative Acts of the Russian Federation.

[6] Letter of the Bank of Russia No. 12-4-2/2850 dated June 10, 2021.

[7] Resolution of the Arbitration Court of the Far Eastern District dated April 3, 2024, No. F03-648/2024 in Case No. A04-6243/2023.

[8] Regulation of the Bank of Russia No. 375-P dated March 2, 2012, On Requirements for the Internal Control Rules of a Credit Organization for Countering the Legalization (Laundering) of Criminally Obtained Incomes and the Financing of Terrorism.

[9] Determination of the Supreme Court of the Russian Federation dated January 23, 2018, in Case No. A53-30786/2016.

[10] Methodological Recommendations for the Entrepreneur 3.0 "What to do if the bank has limited operations on the account" (prepared by the Bank of Russia, Rosfinmonitoring, the Federal Customs Service of Russia, the Commissioner for the Protection of Entrepreneurs' Rights under the President of the Russian Federation, and the NSFR).

[11] Resolution of the Arbitration Court of the North-Western District dated April 4, 2024, in Case No. A56-8552/2023.

[12] Resolution of the Arbitration Court of the North-Western District dated March 19, 2024, No. F07-577/2024 in Case No. A21-4713/2022.

[13] Resolution of the Arbitration Court of the Moscow District dated February 17, 2022, in Case No. A40-3450/2021.

[14] Beketnova Yu.M. Analysis of Methods and Tendencies of Money Laundering during Import-Export Operations. Journal "Management", Vol. 9, No. 3, 2021.

[15] Ibid.

[16] Girich M.G., Levashenko A.D. Money Laundering in International Trade: Development of the "Red Flags" System. Journal "International Trade and Trade Policy", Vol. 7, No. 4(28), 2021.

[17] Beketnova Yu.M. Analysis of Methods and Tendencies of Money Laundering during Import-Export Operations. Journal "Management", Vol. 9, No. 3, 2021.