The basis of the Russian Federation's anti-money laundering / combating the financing of terrorism (AML/CFT) measures is found in Federal Law No. 115-FZ on Combating Legalization (Laundering) of Criminally Gained Income and Financing of Terrorism, which became effective on 1st February 2002 and was amended in October 2002 to include terrorist financing. A 2003 Financial Action Task Force (FATF) report based on the 2002 (old) FATF methodology concluded that the Russian Federation substantially complies with the essential FATF Recommendations concerning the minimum requirements for membership. However, there is no subsequent information publicly available as to Russia's compliance with the Financial Action Task Force's (FATF) Recommendations based on the (2004) new methodology. According to a 2007 U.S. Department of State (DoS) report, through aggressive enactment and implementation of comprehensive AML/CFT legislation, Russia now has a well-established legal and enforcement framework to deal with money laundering and terrorism financing. Furthermore, the report indicates that Russia has the legislative and regulatory framework in place to pursue and prosecute financial crimes such as money laundering and terrorism financing but that serious vulnerabilities still remain. Corruption and deficiencies in the business environment undermine Russia's efforts to establish a well-functioning AML/CFT regime, and Russia should work to increase the effectiveness of its confiscation laws and their implementation including enacting legislation providing for the seizure of instruments, in addition to the proceeds, of criminal activity.

General Overview

A 2003 Financial Action Task Force (FATF) report based on the 2002 (old) FATF methodology concluded that the Russian Federation substantially complies with the essential FATF Recommendations concerning the minimum requirements for membership. In other words, it has established a money laundering offence for serious crimes (Recommendation 4) with a threshold; it has implemented identification requirements for customers and beneficial owners (albeit somewhat unsatisfactorily) (Recommendations 10 and 11); and it has established and implemented a mandatory suspicious transaction reporting system (Recommendation 15). Taking into account the entire system for combating money laundering, the Russian Federation was admitted as a member of FATF. (FATF 2003, p. 18) However, there is no information publicly available as to Russia's compliance with the FATF's Recommendations based on the 2004 (new) methodology.

Furthermore, based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), since the Anti-Money Laundering (AML) law was enacted in February 2002 Russia has made significant progress in a short timeframe in developing and implementing an AML regime. The government has taken major steps relating to terrorism financing and has adopted amendments to its AML legislation to address a number of deficiencies. According to the report, although the regime for AML has improved in Russia, the system is still at risk due to several remaining weaknesses. However, according to the IMF report, Russia has demonstrated a strong political will to effect changes and address the significant problem money laundering poses to the integrity of its financial systems and efforts should continue toward building a robust AML/CFT regime in compliance with international standards. (IMF 2003, pp. 34-35)

According to a 2007 U.S. Department of State (DoS) report, through aggressive enactment and implementation of comprehensive money laundering and counterterrorism financing legislation, Russia has a well-established legal and enforcement framework to deal with money laundering and terrorism financing. The report further indicates that Russia has the legislative and regulatory framework in place to pursue and prosecute financial crimes, including money laundering and terrorism financing, however, serious vulnerabilities still remain. (U.S. DoS 2007)

The FATF reports that the cornerstone of the Russian Federation's AML/CFT (combating the financing of terrorism) measures is Federal Law No. 115-FZ on Combating Legalization (Laundering) of Criminally Gained Income and Financing of Terrorism, which became effective on 1st February 2002 and was amended in October 2002 to include terrorist financing. Federal Law 115-FZ is comprehensive in that it places AML/CFT obligations (including reporting obligations) on all entities performing operations with monetary funds or other assets in the territory of the Russian Federation. This includes credit institutions, insurance companies, professional participants in the securities markets, leasing companies, pawnshops, post offices (who perform money remittance services), gambling services, buyers and sellers of precious metals and stones, entities managing investment funds and entities managing non-government pension funds. In January 1997, the Russian Federation enacted Article 174 of the Criminal Code, which purportedly criminalized money laundering. Amendments were made to the Criminal Code in August 2001, which resulted in Article 174 in its current form and Article 174.1. When these two provisions came into force on February 1, 2002, they together effectively criminalized money laundering. (FATF 2003, pp. 14-15)

Article 8 of Law 115-FZ provides for the establishment of Russia's financial intelligence unit (FIU), called the Federal Service for Financial Monitoring (FSFM). FSFM is an independent executive agency administratively subordinated to the Ministry of Finance (MoF). All financial institutions with an obligation to report certain transactions must report the required information to the FSFM. The FSFM is also the regulator for the real estate and leasing, pawnshops, and gaming services sectors. An administrative unit, it has no law enforcement investigative powers. Depending on the nature of the activity, the FSFM provides information to the appropriate law enforcement authorities for further investigation, i.e., the Economic Crimes Unit of the Ministry of Interior (MVD) for criminal matters, the Federal Drug Control Service (FSKN) for narcotics-related activity, or the Federal Security Service (FSB) for terrorism-related cases. (U.S. DoS 2007)

Various other regulatory bodies ensure compliance with Russia's anti-money laundering and counterterrorism finance laws. The Central Bank of Russia (CBR) supervises credit institutions; the Federal Insurance Supervision Service oversees insurance companies; the Federal Service for Financial Markets regulates entities managing nongovernmental pension and investment funds, as well as professional participants in the securities sector; and the Assay Chamber (under the Ministry of Finance) supervises entities buying and selling precious metals or stones. (U.S. DoS 2007)

In June 2005, President Putin approved a national strategy for combating money laundering and terrorism finance, part of which called for the creation of a new Interagency Commission on Money Laundering, comprised of twelve ministries and government departments. In addition to receiving, analyzing and disseminating information from the reporting entities, the FSFM has the responsibility of implementing the state policy to combat money laundering and terrorism financing. The Interagency Commission is chaired by the head of the FSFM and is responsible for monitoring and coordinating the government's activity on money laundering and terrorism financing. FSFM authorities credit cooperation among Commission members for the conviction of 257 individuals on money laundering charges between January and June 2006. (U.S. DoS 2007)

According to the 2007 U.S. DoS report, Russia is among the world's most sophisticated perpetrators of fraud and money laundering through electronic and internet-related means. To meet its goal of combating money laundering and corruption, Russia needs to follow through on its commitment to improve CBR oversight of shell companies and scrutinize more closely those banks that do not carry out traditional banking activities, including making all offshore operations subject to the identical due diligence and reporting requirements as other sectors. To prevent endemic corruption and deficiencies in the business environment from undermining Russia's efforts to establish a well-functioning anti-money laundering and counterterrorism finance regime, Russia should strive to stamp out official corruption, particularly at high levels, and to increase transparency in the financial sector and the corporate environment. Russia should also commit adequate resources to its regulatory and law enforcement entities in order to help them fulfill their responsibilities. Additionally, Russia should work to increase the effectiveness of its confiscation laws and their implementation including enacting legislation providing for the seizure of instruments, in addition to the proceeds, of criminal activity. (U.S. DoS 2007)

The Principles

1. Legal Systems and Related Institutional Measures

II

A 2003 Financial Action Task Force (FATF) report based on the 2002 (old) FATF methodology concluded that the Russian Federation substantially complies with the essential FATF Recommendations concerning the minimum requirements for membership. In other words, it has established a money laundering offence for serious crimes (Recommendation 4) with a threshold; it has implemented identification requirements for customers and beneficial owners (albeit somewhat unsatisfactorily) (Recommendations 10 and 11); and it has established and implemented a mandatory suspicious transaction reporting system (Recommendation 15). Taking into account the entire system for combating money laundering, the Russian Federation was admitted as a member of FATF in 2003. (FATF 2003, p. 18) However, there is no information publicly available as to Russia's compliance with the FATF's recommendations relating to this Principle based on the 2004 (new) methodology.

In January 1997, the Russian Federation enacted Article 174 of the Criminal Code which criminalized money laundering. Amendments were made to the Criminal Code in August 2001, which resulted in Article 174 in its current form and Article 174.1. When these two provisions came into force on 1st February 2002, they together effectively criminalized money laundering. All offences in the Criminal Code (except those relating to tax and capital flight) are predicate offences for money laundering. The penalties for committing money laundering offences under either Article 174 or 174.1 are more severe if committed by an organized group, by a group of persons by prior agreement, or by a person in an official position. (FATF 2003, p. 14)

According to a report by the U.S. Department of State (DoS) in 2007, through aggressive enactment and implementation of comprehensive money laundering and counterterrorism financing legislation, Russia has a well-established legal and enforcement framework to deal with money laundering and terrorism financing. Russia has the legislative and regulatory framework in place to pursue and prosecute financial crimes, including money laundering and terrorism financing. The cornerstone of the Russian Federation's anti-money laundering (AML)/counter-terrorist financing (CFT) measures is Federal Law No. 115-FZ on Combating Legalization (Laundering) of Criminally Gained Income and Financing of Terrorism, which became effective on 1st February 2002 and was amended in October 2002 to include terrorist financing. Federal Law 115-FZ is comprehensive in that it places AML/CFT obligations (including reporting obligations) on all entities performing operations with monetary funds or other assets in the territory of the Russian Federation. (FATF 2003, p. 15; U.S. DoS 2007)

Terrorist financing is a criminal offence pursuant to Article 205.1 of the Criminal Code. Persons who provide a timely warning or otherwise assist in preventing a terrorist act are released from criminal responsibility provided that those circumstances can be proven by the investigative authorities under the supervision of the prosecutor and provided that those actions do not constitute another crime. Subsequently, the Russian Federation has enacted several pieces of legislation and issued executive orders to strengthen its ability to fight terrorism. On January 11, 2002, President Putin signed a decree on Measures to Implement the United Nations (UN) Security Council Resolution (UNSCR) No. 1373 of September 28, 2001. Noteworthy among this decree's provisions are the introduction of criminal liability for intentionally providing or collecting assets for terrorist use, and the instructions to relevant agencies to seize assets of terrorist groups. (FATF 2003, pp. 14-15; U.S. DoS 2007)

The Russian Federation has ratified the 1988 United Nations (UN) Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention) and a number of other key international instruments relating to combating money laundering and terrorist financing. The funds or assets of terrorists or terrorist financiers can be frozen without delay and this information subsequently submitted to the UN Security Council in accordance with the United Nations resolutions. On May 26, 2004, became a party to the UN Convention against Transnational Organized Crime. In November 2002, Russia ratified the UN International Convention for the Suppression of the Financing of Terrorism. Russia also became a signatory to, and ratified on May 9, 2006, the UN Convention against Corruption. (FATF 2003, p. 15; U.S. DoS 2007)

Russian legislation provides for the tracking, seizure and forfeiture of criminal proceeds. None of this legislation is specifically tied to narcotics proceeds. Legislation provides for investigative techniques such as search, seizure, and the identification, freezing, seizing, and confiscation of funds or other assets. Authorities can also compel targets to produce documents. Where sufficient grounds exist to suppose that property was obtained as the result of a crime, investigators and prosecutors can apply to the court to have the property frozen or seized. Law enforcement agencies have the power to identify and trace property that is, or may become, subject to confiscation or is suspected of being the proceeds of crime or terrorist financing. The law allows the Federal Service for Financial Monitoring (FSFM), in concert with banks, to freeze possible terrorist-related financial transactions for one week: banks may freeze transactions for two days, and the FSFM may follow up with freezing for an additional five days. (U.S. DoS 2007)

Article 8 of Law 115-FZ provides for the establishment of Russia's financial intelligence unit (FIU), called the Federal Service for Financial Monitoring (FSFM). FSFM is an independent executive agency administratively subordinated to the Ministry of Finance. All financial institutions with an obligation to report certain transactions must report the required information to the FSFM. The FSFM is also the regulator for the real estate and leasing, pawnshops, and gaming services sectors. An administrative unit, it has no law enforcement investigative powers. Depending on the nature of the activity, the FSFM provides information to the appropriate law enforcement authorities for further investigation, i.e., the Economic Crimes Unit of the Ministry of Interior (MVD) for criminal matters, the Federal Drug Control Service (FSKN) for narcotics-related activity, or the Federal Security Service (FSB) for terrorism-related cases. (U.S. DoS 2007)

Various other regulatory bodies ensure compliance with Russia's anti-money laundering and counterterrorism finance laws. The Central Bank of Russia (CBR) supervises credit institutions; the Federal Insurance Supervision Service oversees insurance companies; the Federal Service for Financial Markets regulates entities managing nongovernmental pension and investment funds, as well as professional participants in the securities sector; and the Assay Chamber (under the Ministry of Finance) supervises entities buying and selling precious metals or stones. (U.S. DoS 2007)

Nearly all financial institutions submit reports to the FSFM via encrypted software provided by the FSFM. According to press reports, Russia's national database contains over four million reports involving operations and deals worth over $877 billion. The FSFM estimates that Russian citizens may have laundered as much as $8 billion in the first three quarters of 2006. The FSFM receives approximately 30,000 transaction reports daily. Of these daily reports, 25 percent result from mandatory (currency) transaction reports, and 75 percent relate to suspicious transactions. During the first eight months of 2006, the FSFM carried out 2,700 financial investigations, referring 1,050 of them to law enforcement agencies for possible criminal investigations. According to the MVD, in the first half of 2006 Russian law enforcement investigated 6,300 cases of money laundering, sent 3,500 of the cases to court, and convicted 257 individuals on money laundering charges. Both the FSFM and MVD report that the number of suspicious transaction reports in 2006 has grown nearly ten-fold over the previous year, an increase which both agencies attribute to a greater focus government-wide on financial crimes and terrorism financing. (U.S. DoS 2007)

The FSFM reports that in regard to terrorism financing, it has compiled a list of 1,300 organizations and individuals suspected of financing terrorism, 400 of which were foreign. There are five sources of information that may designate entities for inclusion on the FSFM's list of proscribed organizations. International organizations' designations, such as the UN 1267 Sanctions Committee, constitute the first source. Second, Russian court decisions provide a basis for inclusion. Third, resolutions from the Prosecutor General can identify individuals and organizations for inclusion. Fourth, Ministry of Interior investigations serve as a basis for inclusion if subsequent court decisions do not dismiss the investigation's findings. Finally, bilateral agreements, which include information sharing regarding entities on the counterpart's entities list, may provide a basis for inclusion on the FSFM list. As of a year ago, the FSFM has uncovered 113 bank accounts related to organizations and individuals included on Russia's terrorist list. (U.S. DoS 2007)

Russian legislation now provides that both resident and non-resident natural persons can export foreign currency under the same conditions. Currency in amounts exceeding USD 10,000 may be exported upon presentation of a customs declaration confirming the previous importation of the funds. For amounts below USD 10,000 but above USD 3,000, a written customs declaration must be submitted without additional documentation. For amounts equal to or below USD 3,000, no customs declaration is necessary. Written customs declarations must also be presented when removing precious metals or stones from Russia. The information collected by the customs authority through these measures is available on request to the FMC of Russia according to Article 9 of the Federal Law 115-FZ. (FATF 2003, p. 16)

Russia became a full member of the Financial Action Task Force in June 2003 and participates as an active member in two FATF-style regional bodies. It is a member of the Council of Europe's Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL) and was instrumental in the creation of the Eurasian Group on Combating Legalization of Proceeds from Crime and Terrorist Financing (EAG). The EAG Secretariat is located in Moscow. In December 2005, under the auspices of the EAG, the FSFM established the International Training and Methodological Center of Financial Monitoring (ITMCFM). The main function of the Center is to provide technical assistance to EAG member-states, primarily in the form of staff training for FIUs and other interested ministries and agencies involved in AML/CFT efforts. The ITMCFM also conducts research on AML/CFT issues. As Chairman of the EAG, Russia's FIU continues to play a strong leadership role in bringing the region up to international standards in its capacity to fight money laundering and terrorism financing. Given its role in the creation and maintenance of the EAG, Russia has also demonstrated the will and capability to improve the region's capacity for countering money laundering and terrorism financing. Nevertheless, according to the 2007 U.S. DoS report, serious vulnerabilities remain as Russia is among the world's most sophisticated perpetrators of fraud and money laundering through electronic and internet-related means. (U.S. DoS 2007)

2. Preventive Measures - Financial Institutions

II

A 2003 Financial Action Task Force (FATF) report based on the 2002 (old) FATF methodology concluded that the Russian Federation substantially complies with the essential FATF Recommendations concerning the minimum requirements for membership. In other words, it has established a money laundering offence for serious crimes (Recommendation 4) with a threshold; it has implemented identification requirements for customers and beneficial owners (albeit somewhat unsatisfactorily) (Recommendations 10 and 11); and it has established and implemented a mandatory suspicious transaction reporting system (Recommendation 15). Taking into account the entire system for combating money laundering, the Russian Federation was admitted as a member of FATF in 2003. (FATF 2003, p. 18) However, there is no information publicly available as to Russia's compliance with the FATF's recommendations relating to this Principle based on the 2004 (new) methodology.

The cornerstone of the Russian Federation's anti-money laundering (AML)/counter-terrorist financing (CFT) measures is Federal Law No. 115-FZ on Combating Legalization (Laundering) of Criminally Gained Income and Financing of Terrorism, which became effective on 1st February 2002 and was amended in October 2002 to include terrorist financing. Federal Law 115-FZ is comprehensive in that it places AML/CFT obligations (including reporting obligations) on all entities performing operations with monetary funds or other assets in the territory of the Russian Federation. This includes credit institutions, insurance companies, professional participants in the securities markets, leasing companies, pawnshops, post offices (who perform money remittance services), gambling services (such as totalizators, bookmakers, lotteries and prize funds), buyers and sellers of precious metals and stones, entities managing investment funds and entities managing non-government pension funds (collectively referred to as reporting organizations). Reporting organizations that fail to comply with the recording, record-keeping or reporting obligations of the AML/CFT laws or their own internal control rules and their executives are subject to fines from 500 to 5,000 minimum wages or 100 to 200 minimum monthly wages respectively pursuant to Article 15.27 of the Code of Administrative Offences. In certain circumstances, a non-compliant reporting organization may have its license revoked. There are also criminal penalties for violating certain parts of the anti-money laundering law. (FATF 2003, p. 15)

The Russian Federation has customer identification procedures in place that begin to address the more general requirements of the FATF 40 Recommendations. Federal Law 115-FZ and various regulations emanating from the competent authorities responsible for supervising reporting organizations require all reporting organizations to perform customer identification procedures on both natural and legal persons. For legal persons, information must be collected concerning the composition of founders (participants), the management structure and its powers, the size of registered and paid up base capital or of the initial fund and cost of property. The opening of correspondent accounts is also subject to identification procedures. A credit institution can refuse to open an account or perform a transaction if a natural or legal person fails to submit adequate customer identification or other information; however, credit institutions do not now have the authority to close accounts if there is a suspicion of money laundering/terrorist financing (ML/TF). The FATF has recommended that legislation be passed to give them this authority. Despite the fact that these general measures largely comply with the FATF identification requirements, there are a number of significant shortcomings. Most significantly, the requirement to identify beneficial owners refers only to the notion of control of the funds without specifically relating to the notions of the source of funds or their beneficial ownership. This only partially addresses the identification of beneficial owners. The Russian Federation will need to address this shortcoming with more specific requirements relating to determination of beneficial ownership. (FATF 2003, pp. 16-17)

The opening of anonymous accounts has been prohibited since the Federal Law 115-FZ came into effect. After the adoption of the Federal Law 115-FZ only one bank in the Russian Federation provided for numbered accounts. Although client identification and documentation were performed when the accounts were opened, the FATF had previously identified numbered accounts as a weakness of the Russian system. Russian law prohibits the unilateral closing of bank accounts and changing the terms of the accounts to non-numbered accounts is a complex matter. Nevertheless, the Russian Federation has assured the FATF in the past that the contracts governing the terms of these accounts would be amended by February 2003. (FATF 2003, p. 17)

The Central Bank of Russia (CBR) has issued guidelines regarding anti-money laundering (AML) practices within credit institutions, including "know your customer" (KYC) and bank due diligence programs. Banks are required to obtain and retain for five years information regarding individuals and legal entities and beneficial owners of corporate entities. Banks must also adopt internal compliance rules and procedures and appoint compliance officers. The amendment to Law 115-FZ has required banks to identify the original source of funds and to report to the financial intelligence unit (FIU) all suspicious transactions since July 2004. Institutions that fail to meet mandatory reporting requirements face revocation of their licenses to carry out relevant activity, limits on certain banking operations, and possible criminal or administrative penalties. An administrative fine of up to $16,700 can be levied against an institution, with a fine of up to $700 on an officer of an institution. The maximum criminal penalty is 10 years in prison with applicable fines. Furthermore, internal control rules must establish procedures for ongoing account monitoring accounts, identifying suspicious transactions and transactions subject to obligatory control, collecting detailed customer and transaction information and reporting to the authorities as appropriate. Training and internal audit procedures should continue to be enhanced. Banking confidentiality does not pose an obstacle to the effectiveness of this system because Russian law expressly states that access to the reports and documents relating to ML/FT by authorized authorities is not a violation of banking secrecy. (U.S. DoS 2007; FATF 2003, p. 17)

All obligated financial institutions must monitor and report to the government: any transaction that equals or exceeds 600,000 rubles (approximately $22,700) and involves or relates to cash payments, individuals or legal entities domiciled in states that do not participate in the international fight against money laundering, bank deposits, precious stones and metals, payments under life insurance policies, or gambling; all transactions of "extremist organizations" or individuals included on Russia's domestic list of such entities and individuals; and suspicious transactions. Since the Central Bank of Russia (CBR) issued Order 1317-U in August 2003, Russian financial institutions must now report all transactions with their counterparts in offshore zones. In some cases, offshore banks are also subject to enhanced due diligence and maintenance of additional mandatory reserves to offset potential risks undertaken when conducting specific transactions. The CBR has also raised the standards for offshore financial institutions, resulting in a reduction in the number of such institutions. Overall wire transfers from Russian banks to offshore financial centers have dropped significantly as a result of such regulatory measures. (U.S. DoS 2007)

Foreign financial entities, including those from known offshore havens, are not permitted to operate directly in Russia; they must do so solely through subsidiaries incorporated in Russia, which are subject to domestic supervisory authorities. During the process of incorporating and licensing these subsidiaries, Russian authorities must identify and investigate each director of the Russian unit, as nominee or anonymous directors are prohibited under Russian law. In September 2005, the CBR completed its review of all banks that sought admission to the recently established Deposit Insurance System (DIS). To gain admission to the DIS, a bank had to verifiably demonstrate to the CBR that it complies with Russian identification and transparency requirements. Currently, 927 of Russia's estimated 1,200 banks have been admitted to the DIS, effectively removing over 200 banks from Russia's banking system. (U.S. DoS 2007)

Nearly all financial institutions submit reports to the financial intelligence unit (FIU), the Federal Service for Financial Monitoring (FSFM), via encrypted software provided by the FSFM. According to press reports, Russia's national database contains over four million reports involving operations and deals worth over $877 billion. The FSFM estimates that Russian citizens may have laundered as much as $8 billion in the first three quarters of 2006. The FSFM receives approximately 30,000 transaction reports daily. Of these daily reports, 25 percent result from mandatory (currency) transaction reports, and 75 percent relate to suspicious transactions. During the first eight months of 2006, the FSFM carried out 2,700 financial investigations, referring 1,050 of them to law enforcement agencies for possible criminal investigations. According to the Ministry of the Interior of Russia (MVD), in the first half of 2006 Russian law enforcement investigated 6,300 cases of money laundering, sent 3,500 of the cases to court, and convicted 257 individuals on money laundering charges. Both the FSFM and MVD report that the number of suspicious transaction reports in 2006 has grown nearly ten-fold over the previous year, an increase which both agencies attribute to a greater focus government-wide on financial crimes and terrorism financing. (U.S. DoS 2007)

The FSFM reports that in regard to terrorism financing, it has compiled a list of 1,300 organizations and individuals suspected of financing terrorism, 400 of which were foreign. There are five sources of information that may designate entities for inclusion on the FSFM's list of proscribed organizations. International organizations' designations, such as the UN 1267 Sanctions Committee, constitute the first source. Second, Russian court decisions provide a basis for inclusion. Third, resolutions from the Prosecutor General can identify individuals and organizations for inclusion. Fourth, Ministry of Interior investigations serve as a basis for inclusion if subsequent court decisions do not dismiss the investigation's findings. Finally, bilateral agreements, which include information sharing regarding entities on the counterpart's entities list, may provide a basis for inclusion on the FSFM list. As of a year ago, the FSFM has uncovered 113 bank accounts related to organizations and individuals included on Russia's terrorist list. (U.S. DoS 2007)

With its legislative and enforcement mechanisms in place, Russia has begun to prosecute high-level money laundering cases. Through September 2006, the CBR revoked the licenses of 48 banks for failing to observe banking regulations. Of these, 25 banks lost their licenses for violating Russia's anti-money laundering laws. In 2005, the CBR conducted substantial work to improve the methodology for countering AML/CFT by credit institutions and the CBR regional branches, as well as to create conditions conducive to the effective implementation by credit institutions of AML/CFT legislation. The constant monitoring and analysis of credit institutions' statements and supervisory practices allowed the CBR to categorize the main types and signs of suspicious operations conducted by bank customers. Using the results of this work and seeking to prevent credit institutions from becoming involved in illegal activities and creating situations endangering the legitimate interests of depositors and creditors, the CBR issued letters in 2005 recommending credit institutions to tighten control over operations that might be connected with money laundering. To upgrade internal controls in credit institutions, taking into account the experience gained and international standards, the CBR issued new methodological recommendations on the elaboration by credit institutions of internal control rules relating to AML/CFT. (CBR 2006, p. 71; U.S. DoS 2007)

Exercising the powers assigned to it by law to verify credit institutions' compliance with the requirements of Federal Law No. 115-FZ, the CBR inspected 797 credit institutions and/or their branches in the course of banking regulation and supervision in 2005. The inspections focused on assessing the effectiveness of internal controls, including the quality and extent of the identification of customers and beneficiaries, the evaluation of the risk of customer involvement in money laundering, the consistency of the measures taken by a credit institution to detect suspicious operations conducted by its customers and the adequacy of the internal control rules to the specific activities of a credit institution. (CBR 2006, p. 71)

3. Preventive Measures - Designated non-Financial Business and Professions

II

A 2003 Financial Action Task Force (FATF) report based on the 2002 (old) FATF methodology concluded that the Russian Federation substantially complies with the essential FATF Recommendations concerning the minimum requirements for membership. (FATF 2003, p. 18) However, there is no information publicly available as to Russia's compliance with the FATF's recommendations relating to this Principle based on the 2004 (new) methodology.

The cornerstone of the Russian Federation's anti-money laundering (AML)/counter-terrorist financing (CFT) measures is Federal Law No. 115-FZ on Combating Legalization (Laundering) of Criminally Gained Income and Financing of Terrorism, which became effective on 1st February 2002 and was amended in October 2002 to include terrorist financing. Federal Law 115-FZ is comprehensive in that it places AML/CFT obligations (including reporting obligations) on all entities performing operations with monetary funds or other assets in the territory of the Russian Federation. This includes credit institutions, insurance companies, professional participants in the securities markets, leasing companies, pawnshops, post offices (who perform money remittance services), gambling services (such as totalizators, bookmakers, lotteries and prize funds), buyers and sellers of precious metals and stones, entities managing investment funds and entities managing non-government pension funds (collectively referred to as reporting organizations). Reporting organizations that fail to comply with the recording, record-keeping or reporting obligations of the AML/CFT laws or their own internal control rules and their executives are subject to fines from 500 to 5,000 minimum wages or 100 to 200 minimum monthly wages respectively pursuant to Article 15.27 of the Code of Administrative Offences. In certain circumstances, a non-compliant reporting organization may have its license revoked. There are also criminal penalties for violating certain parts of the anti-money laundering law. (FATF 2003, p. 15)

Article 8 of Law 115-FZ provides for the establishment of Russia's financial intelligence unit (FIU), called the Federal Service for Financial Monitoring (FSFM). FSFM is an independent executive agency administratively subordinated to the Ministry of Finance. All financial institutions with an obligation to report certain transactions must report the required information to the FSFM. The FSFM is also the regulator for the real estate and leasing, pawnshops, and gaming services sectors. An administrative unit, it has no law enforcement investigative powers. Depending on the nature of the activity, the FSFM provides information to the appropriate law enforcement authorities for further investigation, i.e., the Economic Crimes Unit of the Ministry of Interior (MVD) for criminal matters, the Federal Drug Control Service (FSKN) for narcotics-related activity, or the Federal Security Service (FSB) for terrorism-related cases. (FATF 2003, p. 15)

4. Legal Person and Arrangements & Non-Profit Organizations

II

A 2003 Financial Action Task Force (FATF) report based on the 2002 (old) FATF methodology concluded that the Russian Federation substantially complies with the essential FATF Recommendations concerning the minimum requirements for membership. (FATF 2003, p. 18) However, there is no information publicly available as to Russia's compliance with the FATF's recommendations relating to this Principle based on the 2004 (new) methodology.

5. National and International Co-operation

II

A 2003 Financial Action Task Force (FATF) report based on the 2002 (old) FATF methodology concluded that the Russian Federation substantially complies with the essential FATF Recommendations concerning the minimum requirements for membership. (FATF 2003, p. 18) However, there is no information publicly available as to Russia's compliance with the FATF's recommendations relating to this Principle based on the 2004 (new) methodology.

According to the 2007 U.S. Department of State (DoS) report, through aggressive enactment and implementation of comprehensive money laundering and counterterrorism financing legislation, Russia now has a well-established legal and enforcement framework to deal with money laundering and terrorism financing. Russia has the legislative and regulatory framework in place to pursue and prosecute financial crimes, including money laundering and terrorism finance. The cornerstone of the Russian Federation's anti-money laundering (AML)/counter-terrorist financing (CFT) measures is Federal Law No. 115-FZ on Combating Legalization (Laundering) of Criminally Gained Income and Financing of Terrorism, which became effective on 1st February 2002 and was amended in October 2002 to include terrorist financing. (FATF 2003, p. 15; U.S. DoS 2007)

The Russian Federation has ratified the 1988 United Nations (UN) Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention) and a number of other key international instruments relating to combating money laundering and terrorist financing. The funds or assets of terrorists or terrorist financiers can be frozen without delay and this information is subsequently submitted to the UN Security Council in accordance with the United Nations resolutions. On May 26, 2004, Russia became a party to the UN Convention against Transnational Organized Crime. In November 2002, Russia ratified the UN International Convention for the Suppression of the Financing of Terrorism. Russia also became a signatory to, and ratified on May 9, 2006, the UN Convention against Corruption. (FATF 2003, p. 15; U.S. DoS 2007)

According to the 2007 U.S. DoS report, in accordance with its international agreements, Russia recognizes rulings of foreign courts relating to the confiscation of proceeds from crime within its territory and can transfer confiscated proceeds of crime to the foreign state whose court issued the confiscation order. However, Russian law still does not provide for the seizure of instruments of crime. Businesses can be seized only if it can be shown that they were acquired with criminal proceeds. Legitimate businesses cannot be seized solely on the basis that they were used to facilitate the commission of a crime. The financial intelligence unit (FIU), the Federal Service for Financial Monitoring (FSFM), reports that in regard to terrorism financing, it has compiled a list of 1,300 organizations and individuals suspected of financing terrorism, 400 of which were foreign. There are five sources of information that may designate entities for inclusion on the FSFM's list of proscribed organizations. International organizations' designations, such as the UN 1267 Sanctions Committee, constitute the first source. Second, Russian court decisions provide a basis for inclusion. Third, resolutions from the Prosecutor General can identify individuals and organizations for inclusion. Fourth, Ministry of Interior investigations serve as a basis for inclusion if subsequent court decisions do not dismiss the investigation's findings. Finally, bilateral agreements, which include information sharing regarding entities on the counterpart's entities list, may provide a basis for inclusion on the FSFM list. As of 2006, the FSFM has uncovered 113 bank accounts related to organizations and individuals included on Russia's terrorist list. (U.S. DoS 2007)

In February 2003, at the request of the General Procuracy, the Russian Supreme Court issued an official list of 15 terrorist organizations. The FSFM has signed cooperation agreements with the Financial Intelligence Units (FIUs) of 24 countries, including the United States. The FSFM has been an active member of the Egmont Group since June 2002, having sponsored candidate FIUs from the former Soviet republics, including current FIU members in Ukraine and Georgia. U.S. law enforcement agencies exchange operational information with their Russian counterparts on a regular basis. In 2005, Russian law enforcement agencies cooperated with the U.S. in a high-profile case that led to the conviction of a Russian national in a U.S. District Court on charges that he laundered over $130 million through a Moscow bank. The individual was sentenced to 51 months imprisonment and ordered to pay $17.4 million in restitution to the Russian government. This close cooperation between Russian and U.S. agencies has continued and strengthened in 2006. (U.S. DoS 2007)

Russia became a full member of the Financial Action Task Force in June 2003 and participates as an active member in two FATF-style regional bodies. It is a member of the Council of Europe's Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL) and was instrumental in the creation of the Eurasian Group on Combating Legalization of Proceeds from Crime and Terrorist Financing (EAG). The EAG Secretariat is located in Moscow. In December 2005, under the auspices of the EAG, the FSFM established the International Training and Methodological Center of Financial Monitoring (ITMCFM). The main function of the Center is to provide technical assistance to EAG member-states, primarily in the form of staff training for FIUs and other interested ministries and agencies involved in AML/CFT efforts. The ITMCFM also conducts research on AML/CFT issues. As Chairman of the EAG, Russia's FIU continues to play a strong leadership role in bringing the region up to international standards in its capacity to fight money laundering and terrorism financing. (U.S. DoS 2007)