Russia – Know Your Customer (KYC) Rules

 

 

 

The current Russian administration aspires to establish Moscow as one of the key international financial centers.

However, despite significant progress in improving the legal and enforcement framework, the prevalence of money laundering (ML) in Russia, where there is a high level of organized crime and corruption, stands out as one of the major obstacles to this goal.

Domestic sources of laundered funds include organized crime, evasion of tax and customs duties, fraud, public corruption, and smuggling operations.

Criminal elements from Russia and neighboring countries continue to use Russia‘s financial system and foreign legal entities to launder money. Criminals invest and launder their proceeds in securities instruments, real estate, and luxury consumer goods.

Despite making progress in combating financial crimes, Russia remains vulnerable to such activities.

Russia‘s risk factors include the many large-scale financial transactions associated with its vast natural resources; the state‘s major role in the economy; the country‘s porous borders and its role as a geographic gateway between Europe and Asia; and chronic under-funding and lack of capacity of regulatory and law enforcement agencies. These factors help create an environment in which corruption and financial crimes flourish.

Russia is a member of the Financial Action Task Force (FATF) and two FATF-style regional bodies: the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) and the Eurasian Group on Combating Money Laundering and the Financing of Terrorism (EAG).

KNOW-YOUR-CUSTOMER (KYC) RULES:

 

Enhanced due diligence procedures for PEPs:

 

PEP is an abbreviation for Politically Exposed Person, a term that describes a person who has been entrusted with a prominent public function, or an individual who is closely related to such a person. The terms PEP, Politically Exposed Person and Senior Foreign Political Figure are often used interchangeably.

    • Foreign PEP: YES
    • Domestic PEP: YES

Russia – KYC covered entities

The following is a list of Know Your Customer entities covered by Russian Law:

    • Banks & Credit unions
    • Russian Post
    • Payment acceptance and money transfer services
    • Securities, insurance and leasing companies
    • Investment and non-state pension funds
    • Casinos and gambling outlets
    • Dealers in precious metals and stones
    • Real estate agents
    • Pawnshops
    • Microfinance organizations
    • Consumer credit cooperatives
    • Persons providing legal or accounting services

Russia – Suspicious Transaction Reporting (STR) Requirements:

Number of STRs received and time frame: 2,508,718 in the first half of 2011

Number of CTRs received and time frame: 1,242,459 in the first half of 2011

The following is a list of STR covered entities covered by Russian Law:

    • Banks & Credit unions
    • Securities markets
    • Investment and pension funds
    • Russian Post
    • Insurance sector
    • Leasing companies
    • Dealers in precious metals and stones
    • Casinos
    • Real estate agents
    • Lawyers, notaries, and persons providing legal or accounting services
    • Microfinance organizations
    • Consumer credit cooperatives

MONEY LAUNDERING CRIMINAL PROSECUTIONS/CONVICTIONS:

Prosecutions: 141 in the first half of 2011
Convictions: 113 in the first half of 2011

 

ENFORCEMENT AND IMPLEMENTATION ISSUES AND COMMENTS:

Through aggressive enactment and implementation of comprehensive anti-money laundering (AML) legislation, Russia has established a legal and enforcement framework to deal with money laundering and terrorist financing. In 2010, Russia adopted amendments to expand AML coverage to subsidiary branches, representative offices, and affiliates of financial institutions located outside the Russian Federation; make microfinance and short-term loans, which have grown significantly in Russia, subject to AML laws; and clarify definitions critical to enforcement.

Amendments to the Code of Administrative Infringements improve regulatory oversight related to AML legislation and broaden the authority of Rosfinmonitoring, Russia‘s financial intelligence unit (FIU), and the Central Bank of Russia to conduct investigations of ML violations.

AML law now makes it clear that identification is defined as the entirety of measures whereby the information about clients, their representatives and beneficiaries is established and the reliability of such information is confirmed. Order 59, issued by Rosfinmonitoring on February 17, 2011, requires customer due diligence where there are doubts about the veracity of previous identification.

While the Russian Federation has made steady progress overall in its AML/CFT implementation, some important issues remain. Russia needs to make sure that obligated entities are able to report every type of suspicious activity related to money laundering. Though the overall STR regime is working well in practice, presently there is no legal basis for reporting attempted occasional transactions. Furthermore, implementing regulations have not been issued for critical components of the 2010 amendments, such as monitoring of affiliates‘ operations outside the Russian Federation.

For years Russian banks did not properly understand the concept of beneficial owner, partly due to a lack of clarity in the law. While the term has now been better defined, private sector entities are still incorporating clarified definitions of beneficial owner into their AML practices.

While most international standards are applied in Russian legislation, several important discrepancies remain between the standards of international and local domestic banks. Some identification requirements are absent. Also, Russian AML law lacks more specific requirements pertaining to sanctions screening (like frequency of updates, screening of fields of transactions, transliterations, requirement for certain logic, etc). In addition, banks still are not able to refuse to carry out a transaction or to open an account when they have strong AML concerns regarding the transaction or prospective clients. Further attempts should be made to bring the AML efforts of all Russian banks to a more sophisticated level, including continued enhancement of the compliance training and certification process.

Current Russian law does not include insider trading as a predicate offense to money laundering. To address this deficiency, Law 224-FZ was adopted by the Russian Parliament in July 2010. Included in this law is an amendment to the Criminal Code to criminalize the deliberate use of insider information when carrying out transactions and giving recommendations to third persons; however, this provision will not take effect until 2014.

Russia also has made some recent progress regarding new technologies and non-face-to-face financial transactions. On June 27, 2011, Federal Laws No. 161-FZ and No. 162-FZ ―On the National Payment System‖ and its amendments were adopted, which among other issues address the regulation of new technologies used by financial institutions. Transactions under 15,000 rubles (approximately $500) are not subject to client identification requirements. Thus non-bank payment service providers can act as payment agents or bank payment agents and are exempt from AML/CFT identification requirements provided the payment amount is 15,000 rubles (approximately $500) or less. In other words, money can be remitted under this amount without opening a bank account, and non-face-to-face electronic payment facilities are permitted, provided the monthly sum total of remittances does not exceed 40,000 rubles (approximately $1,650). According to Rosfinmonitoring Order No. 103, which applies only to non-credit institutions, such client transactions executed remotely by payment service providers, as well as the issuance of orders to execute transactions requiring no personal contact with an institution, constitute a basis for submitting an STR to the FIU.

Although Russia continues to establish and develop anti-corruption measures, corruption continues to be a problem. The Government of Russia should continue to aggressively pursue corruption; similarly, it should continue to pursue increased transparency in the financial sector and ensure that domestic PEPs are monitored with the same scrutiny as foreign PEPs.

Russia hosts and funds the Secretariat of the EAG, and through this effort has contributed to improving the region‘s AML/CFT capacity. Russia should continue to play a leadership role through sustained involvement in regional and international bodies focusing on AML regime implementation.