By Joyce Chia-Yi Lin

From an anti-money laundering perspective, Russia's invasion of Ukraine in 2022 poses significant risks related to money laundering and terrorist financing. Conflict areas are particularly vulnerable to these risks, as criminal and terrorist organizations exploit chaos and instability to carry out illicit activities. In the case of Ukraine, the conflict has resulted in large amounts of money being moved across borders, often with little regulation and high money laundering risks. This situation is further exacerbated by the use of cryptocurrencies, which provide anonymity and can be easily used to transfer funds across borders.

On February 24, 2023, the international anti-money laundering organization the Financial Action Task Force (FATF) suspended Russia's membership.[1] Russia, which joined the FATF in 2003, is suspended, however, it is still obliged to implement FATF's anti-money laundering rules.[2]

Anti-money laundering regulations and requirements have changed significantly as a result of Russia's invasion of Ukraine. Governments around the world are aware of the need to strengthen anti-money laundering regimes to prevent criminal and terrorist organizations from exploiting conflicts for financial gain. Other measures have also been taken to prevent money laundering and terrorist financing in affected areas, including taking real action to deal with complex transactions, remittance and drawdowns in banking systems in a detailed way.

There has been a major shift in the global anti-money laundering landscape, as governments and financial institutions have recognized an urgent need to consolidate their anti-money laundering regimes to mitigate the risks posed by illegal actions. In response, regulators have introduced a number of changes and requirements to strengthen anti-money laundering compliance in affected regions. For example, governments and financial institutions have strengthened due diligence requirements and increased monitoring of financial transactions to prevent illicit financial activities in conflict areas. These measures aim to increase the transparency and traceability of financial transactions to mitigate risks associated with money laundering.

This article intends to explore the loopholes in international money laundering prevention measures in recent years and the overall situation vis a vis circumvention of sanctions since the Russo-Ukrainian war began.

As early as 2018, Russia established two offshore financial special administrative zones,[3] in the easternmost and westernmost parts of Russia, to attract foreign investment and domestic enterprises with low taxes. Before the Russo-Ukrainian war, Russian overseas enterprises that were attracted by tax incentives and transferred their registration places to the afore-mentioned two administrative regions had successfully evaded the economic sanctions which had been imposed on Russia, which indirectly shielded the assets of Russian billionaires from being frozen. In mid-2018, four months after the U.S. Treasury Department imposed sanctions on seven Russian tycoons suspected of having ties to Valdimir Putin, the Russian government created additional escape clauses for these tycoons in exchange for extremely favorable terms of interests.[4] Therefore, since 2018, more than 70 companies have transferred their registration places from overseas to the afore-mentioned Russian special zones, because these overseas areas[5] are not Russian territories and they cooperate with US sanctions.[6] If these companies want to evade sanctions, they newly register in the Russian special zones, which is the most effective way.

Currently, the world's well-known tax havens include the Cayman Islands, British Virgin Islands, Bahamas, Bermuda, and Monaco, etc. Most of them use low taxes and loose regulations to attract multinational enterprises to register and then, through layers of subsidiaries, use highly liquid "non-entity asset transactions" such as stocks, bonds, and hedge funds, and use tax haven confidentiality clauses to block relevant institutions from accessing "non-physical assets" when financial regulatory standards in various countries are loose or inconsistent.[7] The inability to trace the "Ultimate Beneficial Owner" has provided cover for wealthy people to launder money or evade taxes.

The Organized Crime and Corruption Reporting Project (OCCRP)[8] exposed the methods used by Eastern European countries to assist Russia in money laundering in 2014. It was the first comprehensive study that analyzed how billions of dollars flowed out of Russia after money was laundered from 112 bank accounts in Eastern European countries, and then flowed into banks around the world. Finally, most of the funds flowed to the overseas accounts of Russian businessmen.

In addition, to remit funds out of Russia, many Russian companies use 21 shell companies established in the United Kingdom, Cyprus and New Zealand to post between accounts, use transactions between different shell companies to create false debts, and then transfer funds to a court in Moldova, a small country in Eastern Europe, and apply for a payment order. A Russian company that intended to launder money in the form of a court order then transferred the money to a bank designated by the court in the disguised form of payment of debts. The Russian company also had an account with the designated bank and finally transferred US$8 billion from the bank's related accounts to various countries for use; this method was also used by the Latvian bank Trasta Komercbanka, which has successfully replicated it, and US$13 billion has been laundered through various shell companies.[9] This money laundering model has been around for many years, and most Eastern European countries are still high-risk countries for money laundering. In addition, after the rise of blockchain and cryptocurrency, a large number of ransomware and cryptocurrency-based money laundering activities have also appeared in Eastern Europe. Eastern Europe is the fifth largest market for cryptocurrency activities in the world. Since the Russo-Ukraine war, high-risk or illegal encryption currency activities have increased rapidly in Eastern Europe, with up to 18.2% of all cryptocurrencies received in Eastern Europe coming from the addresses associated with high-risk or illegal activity, much higher than other regions.[10]

It is very difficult to track down cross-border money laundering or tax evasion. The EU passed an anti-money laundering law as early as 1990. In 2015, the EU launched the fourth version of the Anti-Money Laundering and Terrorist Financing Directive (AMLD IV), which allows the public to inquire about beneficiary information to increase the transparency of the ownership of listed companies. After the International Consortium of Investigative Journalists (ICIJ) disclosed the Panama Papers in 2016, it made real money laundering records of politicians and wealthy businessmen public, showing that it is very difficult to trace the ultimate beneficiaries in practice. Therefore, in 2018, the European Union revised and released the fifth version of the Money Laundering Prevention Law (AMLD V,) allowing the public to inquire about the ultimate beneficiary information of listed companies, increasing corporate transparency.[11]

After the outbreak of the Russo-Ukrainian war, money laundering prevention, exposing the sources of false information and combating terrorism have become even more important. The sanctions launched by Europe and the United States to freeze the overseas assets of Russian tycoons and politicians only scratch the surface and fail to address the core issues - offshore finance and inter-bank money laundering. This is the weakness of European and American sanctions against Russia. If they want to cut off Russia's money, European and American countries should work together and start from two directions. One is to crack down on overseas finance to legally cover various illegal transaction methods, and the other is to punish relevant financial institutions that assist Russia in money laundering.

Taiwan enacted the Money Laundering Prevention Law in 1996 and joined the Asia-Pacific Money Laundering Prevention Group (APG) in 1997. However, in the following years, the relevant legal system did not keep pace with the times. In 2011, it was listed by the APG on the enhanced tracking list. Fortunately, in 2022, Taiwan was selected as the North Asia representative of APG, which shows that the world is beginning to recognize Taiwan's performance in money laundering prevention in traditional financial institutions; however, it lags behind in cryptocurrency money laundering. Taiwan defines cryptocurrency as "a digital representation of value with the use of cryptography and distributed ledger technology or other similar technology that can be digitally stored, exchanged, or transferred, and can be used for payment or investment purposes,"[12] which seems to have narrowed the definition of virtual assets and created regulatory loopholes. It is also inconsistent with the definition of the technology neutrality principle proposed by FATF. In practice, cryptocurrency fraud groups are mostly located in Russia, China, Thailand, the United States and other countries, and use cryptocurrency exchange and money laundering to transfer money. After transferring several times, it is difficult to trace the link between the final withdrawal and the initial fraud.13 In terms of law enforcement, the government should break away from the traditional banking and financial concept of identifying the "ultimate beneficiary" and the legal concept of uninformed "bona fide third parties" and change it to " chasing people with cash flow " in order to keep up with the new criminal method of money laundering in a generation of cryptocurrencies.