Clamping down on Russia’s sanctions evasion

Allies of Ukraine gathering in Japan this week for the G7 summit may approach the next round of sanctions talks with trepidation. An agreement on restricting the Russian diamond trade is welcome but, from here, many of the grander proposals to stem the flow of money and critical goods to Russia raise diplomatic problems.

The EU and Japan oppose US proposals to ban all but a few specified categories of exports to Russia. Any move by the EU to block imports of refined products made from Russian crude will irritate India — and the US, if it drives up energy prices. If the EU further restricts exports passing through Russia en route to other places, it will hurt countries such as Kazakhstan.

But there are win-wins out there. There is one under-discussed tool used by Russia in almost every sanctions-evasion attempt: secrecy jurisdictions. The war is a good reason for leaders to focus, once again, on the offshore world.

What was once primarily a tax evasion industry has been swelled by loot-stashing. The multinational Russian Elites, Proxies, and Oligarchs Task Force issued an advisory in March noting that a lot of avoidance vehicles were “located in jurisdictions that are tax or corporate formation havens, which may afford a degree of secrecy to Russian elites and their proxies”.

But this goes much further than merely helping oligarchs stash their gains. Secrecy jurisdictions have been a key tool for Russia to get critical goods — from machine tools to semiconductors. As one expert group put it: their procurement networks consist of “long chains of shell and front companies, often established in low-disclosure jurisdictions or those with strategic [anti-money laundering] deficiencies”.

Look at the buying network recently revealed by the FT to be operating from a house in North London. Mykines Corporation LLP, which sent $1.2bn of sensitive goods to Russia, is a UK entity ultimately owned by a pair of British Virgin Islands companies — a secrecy jurisdiction.

Or take Gatik Ship Management: as the FT has reported, it is now one of the top ten biggest oil tanker fleets in the world — and it matters. It emerged from nowhere in the past year and has enabled the newly significant Russia-India energy flows. If it is owned by a Russian oil producer, it may be allowing evasion of the price cap. But it is shrouded in mystery. While Gatik itself is based in India, seemingly a part of Buena Vista Shipping in Mumbai, the vessels are owned via the Marshall Islands — one of the most extreme secrecy jurisdictions. The legal ownership of the assets it uses have been entirely hidden.

This is a common problem with shipping: vast vessels filled with toxic cargoes routinely sail through shallow waters — and no one ever knows who is ultimately responsible. The Iranian and Venezuelan oil trades have long relied on this. The US government knows which ships serve these routes — it is just difficult to work out who to indict.

The G7 need to start becoming less tolerant of companies — and ships — based in countries that do not have proper, open ownership records and effective regulation. This is not all about beating up small islands: the EU needs to redraft its own rules so that, once again, there is an obligation on all member states to list beneficial owners. Having a real human put their name to a company at least permits investigators a starting point.

In other jurisdictions, such as the UK, the problem is a lack of enforcement of corporate rules. Regulators — and the police — needed to be given the funding to actually start scrutinising companies and hunt down evasion.

Secrecy jurisdictions are not just about crooks hiding their wealth; they underpin the Russian war machine. The G7 should make them a priority.

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