From a peak of financial transactions going in and out of Russia in December, the market has been halted by western sanctions on President Putin. However, enforcing some of them would be difficult because shell structures veil the ownership of money.
Money transactions going in and out of Russia spiked in December, Shane Riedel, CEO of Elucidate, told Opto. “It was part of a long-term pattern representing a sustained increase of cash moving into Russia over SWIFT during the course of 2021,” he explained.
Elucidate is a data-based technology company that identifies financial crime risk. It has an index, the Elucidate FinCrime Index (EFI), which is a regulated benchmark defining the standard for measuring financial crime risk.
Riedel is a veteran in the financial sector having worked with Goldman Sachs, Citibank, HSBC and Standard Chartered Bank largely in financial crime-related fields. The inbound funds from Russia doubled in December, while the outbound money rose 500%, he said. The exact reason for the spike is still a topic of discussion.
A few potential explanations that Elucidate is investigating include political pressure in Russia to onshore assets previously held abroad; increase in commercial activity inside Russia on behalf of non-Russian clients; and movement of outbound transfers to other channels.
However, a catch when tracing Russian money tends to be the complicated shell company structures, which make it hard to identify the real owners or the end point of money flow, Riedel explained.
For instance, money may be sent offshore to an investment haven like the Cayman Islands in a company owned by a trustee or nominee, and the relationship between the trustee and the real owner may be an informal one. When banks try to investigate where the money went, the nominee may turn out to be a signatory unaware of the funds or their end use.
“Increase in the use of such vehicles over the past 24 months lead to significant challenges for banks as they seek to look behind the curtain of ownership,” Riedel said.
As a result of the Russia-Ukraine war, Riedel expects a deterioration in terms of financial crime in both countries. The risk will be reflected in Elucidate’s flagship index.
“In the case of Russia, this resulted from the imposition of sanctions on both banks and individuals, and the virtual inability to move assets within the country while remaining separate from sanctioned parties,” Riedel explains. Major payment platforms have exited Russia and therefore mostly only sanctioned entities remain, leaving fewer means to make international transfers. Yet, the incentive to make transfers are high as the local currency collapses. Riedel said this is a typical situation that spurs financial crime.
In Ukraine, the reason for deterioration of law and order in general comes from authorities being distracted by the war. This “will adversely impact the risk environment and create an opening for criminal elements,” Riedel said. “The role of the state to investigate or monitor criminal activity is severely reduced ”
Perhaps, transacting through China is a way around the western sanctions for Russia as the country dips into its gold reserves to support its currency. “Conceivably, there is certainly a precedent for that, with Iran having utilised Chinese banks and Chinese payment mechanisms to bypass sanctions,” Riedel explained. He believes sanctioned money will percolate into the market. From a peak in Russian transactions, the market came to a screeching halt.
“I don’t think it went to bitcoin,” Riedel said, explaining that such a move would have affected the bitcoin price. “I believe that that that money is finding its way or it may be laying low right now. It will ultimately start to move again.”
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