U.S. Treasury Targeting Russia, Hawala in Efforts to Curb Corruption

The United States Treasury has announced new measures they are taking to fight the circulation of illegal funds by corrupt Russian oligarchs and diplomats, among other bad actors. The goal of the novel national strategy for combating illicit finance proposed by the Biden-Harris administration is to prevent wealthy Russian citizens and individuals with ties to Russia from profiting on the war in Ukraine, while also limiting the access these individuals have to the global financial system in wake of the ongoing conflict. The U.S. Treasury Department released a report outlining their strategy to combat corruption, with a key aim being to curb the misuse of both established and emerging vehicles to launder money. Among the priorities of the Treasury’s new regulations is the ability to prevent illicit actors from accessing the financial market through the use of anonymous shell companies to bring dirty money across international borders.³ Over the last decade, those with ties to the drug and human trafficking trades, politically exposed persons (PEPs), high-level political officials and oligarchs, and even terror organizations have increasingly sought to launder ill-gotten cash across American and international borders with little resistance via this means, hiding behind layers of complex beneficial ownership structures to avoid detection and subsequent apprehension.

            Another important aspect of the new strategy is increasing oversight on the sources of funds behind all-cash real estate purchases. As the average potential homebuyer has likely learned the hard way over the better part of the last two years, there has been a steep rise in individuals paying well above asking price and/or making all-cash offers on homes both in the United States and abroad. Unfortunately in a growing number of circumstances, the funds used in making these purchases in lucrative jurisdictions have been derived from illicit practices or the misuse of public funds. Since paying upfront with cash essentially eliminates a paper trail, this has allowed bad actors to collect valuable assets (many of which are growing exponentially in value with each passing day) that can ultimately be sold for huge gains, while effectively laundering their money in the process. The use of cash by criminals is not solely limited to real estate however. Terrorists in particular try to move cash across borders in bulk.  Sending funds through the regulated financial system (either through a bank or money remitter) in addition to using cash remain the primary ways terror groups are able to move money to fund their exploits, while some more sophisticated organizations and their supporters are already or are shifting to the use of virtual assets to do so. The Treasury notes that while it largely supports the growing shift toward a more digital financial services experience as a whole across the banking sector, these developments and the growth in popularity of still largely unregulated cryptocurrencies may also expand openings for criminal actors seeking to exploit cybersecurity and AML/CFT program vulnerabilities.¹

            Of course, moving mass quantities of cash requires a considerable amount of logistical oversight to be performed appropriately, a problem that Russian oligarchs appear to be facing at current. It is much easier to use digital payment systems to move funds on such a large scale. However, given that Russia has essentially been universally shunned from access to the global financial market, many notable figures have now turned to a payment system historically linked to terrorism. “Hawala”, as it is known, allows funds to be transferred from one entity to another without actually moving any money around. While it might sound unconventional, Hawala has several key similarities to certain mainstream payment systems, though transactions are not officially documented which makes financial transactions and those behind them much more difficult to track.² Al Qaeda used this system to facilitate the terrorist attacks of 9/11 as well as other major cogs in their long-tenured movement. More recently in 2020, Isis financial facilitators and money transfer companies that used Hawala were targeted by the Treasury as part of an effort to eliminate the extremist group’s revenue sources.² If the United States government is able to better combat this payment system, they can essentially kill two birds with one stone: stop corrupt Russians from moving their money and stop terrorist organizations from successfully funding themselves.

            The U.S. Treasury also acknowledges the pervasive threats of cyber attacks and the risks posed by drug trafficking, which are massive sources of illegal funds circulating in the market today. Overall, these challenges all appear to be part of a larger campaign by the Biden administration to continue combatting global corruption. Whether this effort is sincere or misguided remains to be seen – especially considering the billions in funding currently being proposed to the notoriously corrupt government of Ukraine. “Some of the most sophisticated money launderers and financial criminals in the world work on behalf of Russia,” a senior Treasury official said during a briefing with reporters. “They take advantage of these gaps to move and hide their money, including in the United States.”

Citations

1. National Strategy for Combating Terrorist and Other Illicit Financing. U.S. Department of the Treasury, May 2022. 
2. Tabahriti, Sam. “Sanctioned Russian Oligarchs May Resort to Payment Systems like Those Used by Terrorists, Experts Say.” Business Insider, Business Insider, 14 May 2022. 
3. Tokar, Dylan. “Treasury Targets Russia, Oligarchs as Part of Plan to Combat Illicit Finance.” The Wall Street Journal, Dow Jones & Company, 13 May 2022.