In his State of the Union address following Russia’s invasion of Ukraine, President Joe Biden boldly proclaimed: “To the Russian oligarchs and the corrupt leaders who bilked billions of dollars off this violent regime: No more. We are joining with European allies to find and seize their yachts, their luxury apartments, their private jets. We’re coming for your ill-begotten gains.”
Biden then announced that the Department of Justice is assembling a “dedicated task force to go after the crimes of Russian oligarchs.” What does this mean? How easy is it for the U.S. government to seize the assets of “oligarchs”?
Also, how can U.S. businesses that may have contact with wealthy Russians protect themselves in this new enforcement environment?
Sanctions vs. Forfeiture
The distinction between sanctions blocking and forfeiture is important to understanding what the U.S. government can and can’t do with respect to the property of oligarchs. Blocking sanctions are imposed by the Department of Treasury’s Office of Foreign Assets Control (OFAC) based on a declaration of a national emergency by the president pursuant to the International Emergency Economic Powers Act (IEEPA).
As of March 10, Biden declared the situation an emergency. President Obama declared such an emergency in 2014 after Russia’s annexation of Crimea. The emergency order has been amended and expanded several times and these orders have provided the basis for OFAC’s designation of various Russian oligarchs and politically exposed persons (PEP’s) as specially designated nationals (SDNs).
When someone is designated an SDN, all of their property, including property belonging to entities in which they own a 50% or more interest, is “blocked.” The SDN need not be criminally charged or convicted and the property need not have any connection to the reasons for the designation.
Absent a license from OFAC, U.S. persons are prohibited from engaging in any transactions in the blocked property, including buying, selling, and authorizing withdrawals or distributions.
No judicial order is required for the designation or blocking and opportunities for judicial review are limited. While blocking property is a harsh measure that renders the property unusable, it does not result in seizure of the property by the U.S. government.
By contrast, a successful forfeiture action does result in seizure by the government. There are two kinds of forfeiture: (i) criminal forfeiture, which is based on a criminal conviction of the property owner and (ii) civil forfeiture, which often involves an in rem civil action against the property without a corresponding criminal prosecution.
In both types of forfeiture, the DOJ, which has responsibility for prosecuting forfeiture actions, must prove, to the satisfaction of a judge or jury, that the property to be seized is either the proceeds or instrumentality of a crime. Prosecuting such actions will be the main job of the new task force.
What Can We Expect From the DOJ Task Force?
We should not expect quick results. Forfeiture requires, at a minimum, (i) identifying the assets (ii) identifying the ultimate beneficial owner of the assets and (iii) proving in court that the assets are connected to criminal activity.
Identifying the assets and connecting them to the oligarch can be difficult, especially if the assets are hidden behind a daisy chain of offshore shell companies in multiple secrecy jurisdictions. Proving the underlying crime that generated the assets can be even more difficult.
Many oligarchs initially acquired their “ill-begotten gains” in rigged privatizations of formerly Soviet property in the early 1990s. The proceeds of those rigged privatizations were then often invested in ostensibly legitimate businesses, allowing many oligarchs to now show a legitimate source for the funds used to purchase, say, a penthouse on 5th Avenue in New York City.
Moreover, proving the underlying crime often requires evidence from the country in which the crime was committed. If the oligarch has money and political influence (almost the definition of an oligarch), he may be able to corrupt the mutual legal assistance treaty (MLAT) process that the U.S. uses to obtain evidence from foreign countries.
For example, he may bribe local prosecutors to ignore a U.S. MLAT request. Even worse, he may bribe them to create false exculpatory evidence showing that the money he invested in the U.S. was, for example, a legitimate corporate dividend rather than the proceeds of crime, thus essentially sabotaging the U.S. prosecution.
This is not to say that such cases are impossible to prosecute. Former Ukrainian Prime Minister Pavel Lazarenko, who is currently wanted in Ukraine on corruption charges, was convicted in federal court in San Francisco in 2004 of laundering the proceeds of various corrupt schemes in Ukraine. He was sentenced in 2009 to 97 months in prison and his U.S. mansion (worth approximately $6.75 million) was forfeited.
But such cases are rare and the Lazarenko case took years, largely due to the evidentiary and legal hurdles faced by the prosecutors.
Since the State of the Union address, many civil society activists have been collecting evidence about oligarchs’ assets with the intention of providing this information to law enforcement authorities, including the DOJ task force. In some cases, they have published photographs of yachts, jets and palaces allegedly belonging to oligarchs.
The French foreign ministry seized a yacht belonging to Sechin and according to reports, Germany seized a yacht belonging to oligarch Alisher Usmanov. These new civil society and international efforts may make the DOJ’s investigations more successful than in the past.
Other governments have also taken unprecedented steps with respect to the oligarchs.
For example, on March 10, the U.K. sanctioned Igor Sechin, the chief executive officer of Rosneft, and Roman Abramovich, the owner of the Chelsea soccer team. U.K. Prime Minister Boris Johnson stated that the U.K. would be “ruthless” in pursuing the oligarchs.
On March 15 the U.K. sanctioned 370 individuals, including 51 oligarchs and their family members. Those sanctioned included oligarchs Mikhail Fridman, Pyotr Aven, and German Khan (none of whom have yet been sanctioned by the U.S.).
Then, on March 16, U.S., U.K., Australia, Canada, the European Commission, Germany, Italy, France, and Japan officially launched the Russian Elites, Proxies, and Oligarchs (REPO) multilateral task force that will facilitate cooperation among members in the identification and seizure of oligarchs’ assets.
What Does This Mean for U.S. Businesses?
While seizing the U.S. assets of Russian oligarchs may be hard, it appears that the administration and DOJ are now prepared to commit the necessary time and resources. As noted above, these efforts will likely now be aided by civil society and foreign law enforcement in a way that they have not been before.
This means that U.S.-based businesses that service, directly or indirectly, wealthy individuals from the former Soviet Union, such as real estate brokers, asset managers, luxury goods dealers, art dealers and others should expect heightened scrutiny from U.S. law enforcement.
This scrutiny may include requests for interviews, grand jury subpoenas, and, in the event of knowing facilitation of money laundering, criminal prosecution.
To protect themselves, businesses should make sure that they have robust compliance and due diligence processes in place. These processes should generally include: (i) identification of the UBOs of counter-parties; (ii) screening of them against restricted party lists; (iii) public source research about their reputations; (iv) enhanced due diligence by outside specialist firms as needed; (v) certification by clients that the funds to be used in a transaction are legitimate in origin and (vi) training of employees on how to recognize red flags of potential money laundering.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Tom Firestone is co-chair of Stroock & Stroock & Lavan’s White Collar & Internal Investigations practice and a partner in its National Security/CFIUS/Compliance Practice group. He specializes in complex transnational investigations and international risk management and represents companies and individuals before the DOJ, the SEC, the U.S. Treasury, and other agencies.