Testing the Effectiveness of Targeted Financial Sanctions on Russia: Law or War?
This content delves into the impact and efficacy of targeted financial sanctions on Russia, exploring the use of shell companies, compliance challenges, and strategies for circumventing sanctions. It also discusses the proliferation of secrecy through shell companies and examples of evading sanctions via such entities. The analysis extends to the evolution of new sanctions and Magnitsky laws in the post-Cold War era.
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Presentation Transcript
Testing the Effectiveness of Targeted Financial Sanctions on Russia: Law or War? Jason Sharman, Michael Findley and Daniel Nielson Security Seminar Series, 9 May 2023
Sanctions, Shell Companies and Transparency Rules Untraceable shell companies and bank accounts as the main mechanisms for large-scale cross-border financial crime, including sanctions-busting Know Your Customer rule the cornerstone of global Anti-Money Laundering and sanctions regulations The Risk-Based Approach the central principle of the regulatory regime for both governments and the private sector The locus of compliance with financial transparency rules and sanctions: private sector for-profit firms
The Problem of Compliance: Rules and Reality Do the rules work? Simple question, hard to answer Lots of rules and sanctions, but anecdotally lots of scandals Flaws in the measures of effectiveness A new approach: rule-testing by rule-breaking in mystery shopping Testing the effectiveness of transparency rules and sanctions via email solicitations to banks and law firms
The Problem: Selling Secrecy via Shell Companies The advertising pitch 1: A corporation is a legal person created by state statute that can be used as a fall guy, a servant, a good friend or a decoy A person you control... yet cannot be held accountable for its actions. Imagine the possibilities! The advertising pitch 2: Would you like to be anonymous where your ex-spouse, boss, renters, mooching friends and family, and the government doesn t know your business? Our nominee service keeps your name and contact information off public records by listing a nominee name and contact information instead of yours.
Beating Sanctions via Shell Companies Iran, Alias and 650 Fifth Ave Manhattan North Korea and Solgan Invest LLP UK A Ukraine-Russia example: Vladimir Saldo Sanctioned June 2022 by UK government for aiding Russia November 2022 Saldo formed Grainholding Ltd UK
The New Sanctions and Magnitsky Laws The spread and evolution of new sanctions post-Cold War Sanctions targeted at individuals and groups not general Finance not trade is the key pressure point Sanctions applied by private for-profit actors (banks) not the state Sergei Magnitsky Russian anti-corruption investigator, killed 2009 Magnitsky Sanctions: US 2012, Canada 2015, UK 2017, EU 2020 Are new sanctions any more effective?
Field Experimental Logic The experimental logic in action: which Covid vaccines work? Testing drugs and vaccines: random allocation to control (placebo) and treatment groups Post-treatment comparison: is the treatment group healthier than the control? Difference is good, vaccines cause a decline in Covid From drugs and medicine to people and firms:is John more employable than Jennifer? Randomly allocating male and female-named identical post-doc applications to academics Post-treatment comparison of the interview and pay rate for male and female applicants: difference is bad, gender discrimination causes labour market inequity
Experiments and Transparency Rules Do firms know their customers? Do they screen out targeted individuals? The essence of the Risk-Based Approach: differential treatment of high- and low-risk profiles, discriminating between customers Random allocation of low-risk (control/unsanctioned) and high-risk (treatment/sanctioned) customer names via email solicitations Post-treatment comparison: comparing response rate, refusal rate, compliance rate for sanctioned and unsanctioned customer names Large difference between sanctioned and unsanctioned names indicates effectiveness, low or no difference indicates ineffectiveness
Mystery Shopping: The Approach Email Template My colleague and I currently operate a business consulting firm out of [Russia/control country], where we are both residents. We are currently in the process of expanding our firm overseas to reach clients in your region. Due to our company s growth, we desire to incorporate our firm internationally. We are currently looking into several incorporation services in order to get the best fit for our firm and want some more information on the services you offer. How much do your services cost? What sort of identifying documents do you require to start the process? If possible, we would like to incorporate our firm confidentially. We would appreciate any information on the incorporation process that you could provide, specifically with reference to the two above questions. We look forward to working with you towards establishing our firm worldwide. Due to frequent business trips, we ask that you please contact us via e-mail. [sanctioned name/non-sanctioned name]
A Sample Reply: Conspiring to Evade Sanctions Because your clients are russian citizen and the banks do not accept russian clients, we suggest to use full nominee service to set up the company and open the bank accounts. This is the best solution for you to be safe and confidental. We have set up our shelf companies with nominee director and nominee shareholder and set up each bank account with nominee signatory, so the bank won't see you as the beneficiary owner of the account, the bank can see the nominee beneficiary owner, so you will be full anonym. You can buy one company and use the account immediately and avoid the OECD tax exchange problem. If you buy any of these company + bank accounts you will receive all company documents, bank account details, internet login details, user name, password, tokens. So, everything you need to start immediately.
Round 1 Results 2019-2020, Countries with Magnitsky Sanctions Unsanctioned Sanctioned (Control) (Treatment) 3552 236 Total N 75.56% (2684) 77.54% (183) No Reply 13.03% (463) 13.56% (32) Refusal 6.92% (246) 4.66% (11) Compliant 4.14% (147) 4.24% (10) Non-Compliant
Round 2 Results May 2022, Countries with Magnitsky Sanctions Control Treatment 555 579 Total N 68.11% (378) 84.50% (489)*** No Reply 17.30% (96) 8.64% (50)*** Refusal 7.21% (40) 3.63% (21)*** Compliant 7.39% (41) 3.28% (19)*** Non-Compliant
War not Law? Assessing the Effectiveness of Magnitsky Sanctions Pre-war ineffectiveness of Magnitsky sanctions: no significant differentiation between sanctioned and non-sanctioned names by private firms Post-war effectiveness of Magnitsky sanctions: significant differentiation between sanctioned and non-sanctioned names by private firms Countries without Magnitsky sanctions showed same effect, despite absence of law Political/reputational rather than legal underpinnings of sanctions effectiveness Non-compliance: glass half-full or half-empty? Broader questions re effectiveness of new sanctions and experimental testing
