Risk Update

Russia Risks — Financial Risk, AML, Sanctions, KYC, Compliance Considerations

How One Oligarch Used Shell Companies and Wall Street Ties to Invest in the U.S.” —

  • “Using a network of banks, law firms and advisers in multiple countries, Roman Abramovich invested billions in American hedge funds.”
  • “In July 2012, a shell company registered in the British Virgin Islands wired $20 million to an investment vehicle in the Cayman Islands that was controlled by a large American hedge fund firm.”
  • “The wire transfer was the culmination of months of work by a small army of handlers and enablers in the United States, Europe and the Caribbean. It was a stealth operation intended, at least in part, to mask the source of the funds: Roman Abramovich.”
  • “For two decades, the Russian oligarch has relied on this circuitous investment strategy — deploying a string of shell companies, routing money through a small Austrian bank and tapping the connections of leading Wall Street firms — to quietly place billions of dollars with prominent U.S. hedge funds and private equity firms, according to people with knowledge of the transactions.”
  • “The key was that every lawyer, corporate director, hedge fund manager and investment adviser involved in the process could honestly say he or she wasn’t working directly for Mr. Abramovich. In some cases, participants weren’t even aware of whose money they were helping to manage.”
  • “The manager of the fund, which oversaw billions of dollars but wasn’t a big name on Wall Street, provided a detailed accounting of his involvement on the condition that neither he nor his firm be named.”
  • “The fund manager hired Mourant, an offshore law firm, to get the paperwork for the Cayman vehicle in order. The managing partner of Mourant did not respond to requests for comment.”

SRA on “The importance of complying with Russian financial sanctions” —

  • “In the wake of the UK Government imposing sanctions on Russia, we want to remind you and your firm of the importance of your role in ensuring all measures and restrictions are complied with. We have also set out the actions we are taking to both assess and support compliance.”
  • “Breaching the financial sanctions requirements can result in criminal prosecution or a fine by OFSI. However, our Code of Conduct also requires all firms we regulate to keep up to date with and follow the law and regulation relating to their work, and we would take disciplinary action should we see evidence of serious non-compliance.”
  • “Your firm must have appropriate policies in place to ensure you comply with sanctions legislation, including carrying out regular and appropriate checks of sanctions lists. We expect you to take your responsibilities under the regime to safeguard the UK and protect the reputation of the legal services industry seriously.”
  • “The financial sanctions regime prevents law firms from doing business or acting for listed individuals, entities or ships (without a licence). Firms should check the financial sanctions lists before offering services or undertaking transactions for clients. If an individual is on the sanctions list and subject to an asset freeze, firms may not deal with those funds or make resources available to that person.”
  • “We are commencing a process of spot checks on firms to assess compliance with the financial sanctions regime.”
  • “You must take a risk-based approach to preventing money laundering, meaning you must understand the risks of how your business may be used to launder money and take steps to appropriately mitigate those risks.”
  • “Concerns have been raised about Strategic litigation against public participation (SLAPP), the term used to describe misuse of the legal system to discourage public criticism and reporting or action to address serious concerns (such as corruption/money laundering). It can include preliminary steps as well as actual litigation, for example letters from firms suggesting that litigation may follow.”
  • “The Rule of Law and our legal system provides that there is a right to legal advice and representation for all. However, you must ensure that proceedings are pursued properly and that your duties to your client don’t override your public interest obligations and duties to the court. That means for example you must not bring cases that are not properly arguable; bring excessive or oppressive proceedings; or mislead or take advantage of others.”

Ethics, Sanctions or Reputation? Why Are Firms Really Leaving Russia?” —

  • “That all 25 major commercial law firms with a presence in Russia have confirmed plans to leave in such a short space of time is nothing short of monumental. Even two weeks ago few would have predicted such a rout. But it would be a mistake to believe they are all thinking the same way.”
  • “Law.com International’s U.K. team discussed these exact questions and more on a webinar this week all about the war and its implications for the industry… A generous interpretation of events would surmise that firms have pulled out for ethical reasons. They do not want to operate in a regime that wages unprovoked war on a democratic state. Some firms – though not many – have said as much. One London partner is travelling by car to Poland to personally deliver sleeping bags and medical kit to Ukrainian refugees.”
  • “A more cynical view would be that the decision is simply a commercial one. Sanctions have forced firms to stop acting for many clients and the Russian operations weren’t very profitable anyway. An excellent analysis of limited liability partnership accounts by Jack Womack found most firms for which data is available had seen their Russia revenues declining and most had suffered a loss at least once in recent years.”
  • “An even less charitable view is that firms are thinking only about their reputation. It doesn’t look good to graduates and clients and therefore we need to follow the herd and be seen to be taking action. Particularly as companies (and indeed clients) like BP, Shell, Coca Cola, PepsiCo and McDonalds—companies not exactly known for their glittering ethical records—are pulling out.”
  • “Likely, all three issues will have been factored into the decisions to close in Moscow. But if a ceasefire does happen and the war ends – and let’s hope it does soon – then the question some firms will be asking is when they can re-open in the country. At that point we’ll learn what was motivating each firm.”

German Law Firm to Retain Moscow Presence in Rare Move” —

  • “German corporate law firm Advant Beiten is to maintain its Moscow office, in a sharply counter-narrative move that comes at a time when most other Western firms are exiting Russia.”
  • “Though its Moscow office remains open, a spokesperson said the firm had ceased work for clients which have any connection to the Russian state or are affiliated with any Russian state-owned enterprises, and would not be accepting new instructions from any such clients.”
  • “The Moscow office currently has one partner, 14 lawyers and tax advisors, for a total headcount of 38 (including business support staff), according to another spokesperson. It opened the office in 1992.”
  • “Like many other firms, Advant Beiten has condemned the conflict and is engaging in humanitarian support for Ukrainians.”
  • “Meanwhile, Gleiss Lutz, one of Germany’s largest full-service firms with six offices in Germany plus Brussels and London, said that it does not have an office in Russia and stopped accepting mandates immediately after February 24, then the invasion began. “

Other interesting, recent stories I’ve noted, which may be of interest: