Monday, December 4, 2023

Want to rein in Russian oligarchs? Target the wealth managers, study says.

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For more than a year, Western nations have used sanctions to target connected Russian businessmen in the hope they would pressure President Vladimir Putin to end the war in Ukraine. From Sardinia to Fiji, authorities seized superyachts and villas tied to the oligarchs. In Washington, the Justice Department formed the special task force, KleptoCapture, to track down the hidden assets of Russia’s blacklisted elite.

But now, a team of researchers at Dartmouth University says those efforts, while cathartic, were largely ineffective. Instead, the researchers say in a new study, Western governments should focus on going after the experts — the lawyers, accountants and bankers — who manage the oligarchs’ offshore wealth.

The West has imposed a barrage of sanctions on top Russian figures. See how they’re connected to Putin.

This method is essentially a “financial missile guidance system” for those countries hoping to punish business titans with ties to Putin, said Brooke Harrington, a professor of sociology at Dartmouth and one of the authors. Her point: By targeting specific wealth management professionals with links to multiple oligarchs, they can disrupt the finances and alliances of large numbers of the elite in one fell swoop.

These managers “are the linchpins binding the global system of offshore finance, without whom the system could not function,” Harrington and her colleagues wrote in the study. The study is based on a trove of data from the Offshore Leaks Database provided by the International Consortium of Investigative Journalists (ICIJ).

The removal of these professionals, they said, would mean “cutting off the expertise pipeline … a more encompassing punishment than losing access to a specific bank account or yacht or private jet.”

Indeed, Russia’s plutocratic class might be particularly vulnerable to this approach. About 60 percent of Russian wealth is held offshore, compared to the 10 percent global average for the ultrawealthy, according to a 2017 report by the National Bureau of Economic Research.

Russia’s modern oligarchs boast vast holdings across industries, including banking, petrochemicals, metals and technology. They first emerged amid the Soviet Union’s collapse when a run on state enterprises allowed them to cash in. Now, they include some of the most influential names in Russian business and politics, an exclusive group of powerful men whose investments span the globe.

But while the United States and its allies have embarked on an extraordinary effort to isolate Putin and his wealthy associates — adding around 1,500 new individuals and entities to sanctions lists in Britain, the United States and the European Union over the past year — few of Russia’s most prominent tycoons have publicly turned against their leader. And the researchers say there is growing evidence that some of them have been able to evade Western sanctions.

What is an oligarch, really?

In recent years, the United States has increasingly relied on sanctions to achieve its foreign policy objectives. The measures — including trade embargoes or bans on financial transactions — prohibit U.S. companies from doing business with targeted individuals or entities. They also allow the U.S. government to seize assets in its jurisdiction, made all the wider by the role of the U.S. dollar in the global financial system.

But part of the problem, experts say, is that going after individuals or companies that do business with blacklisted oligarchs is time-consuming and complicated. In the study, the researchers note that traditional sanctions on regimes targeting individual oligarchs or offshore jurisdictions “have proved easier to bypass than policymakers expected.”

That’s because “they have mistakenly targeted the spokes of a wheel rather than the hub around which the whole system turns,” they write.

But by running the names of Russian sanctions targets through the database, the team was able to spot patterns they might not have found by simply reading the documents, said Ho-Chun Herbert Chang, an incoming assistant professor of quantitative social science at Dartmouth who led the data research.

One trend they noticed when mapping the system of relationships is that Russian oligarchs were often clustered around specific firms or individuals, even when there was no formal connection. It appeared, the study said, that they were choosing wealth management experts “by word of mouth from family and friends.”

“Russian oligarchs seem to be more reliant on trust in terms of figuring out which intermediaries to use,” Chang said.

The Russian businessmen also tended to rely on smaller, boutique wealth management firms, which appeared more willing to gamble on — or charge higher fees for — clients that come with legal or reputational risks. Chang and his team estimated that if these firms were removed from the offshore networks serving the Russian elite, it would cause more disruption than just taking out a specific financial entity linked to an oligarch.

As an example, the report highlights Markom Management Ltd., a London-based firm whose relatively small number of clients included a disproportionate number of Kremlin-linked businessmen, according to the study data and a Senate staff report detailing some of the connections.

The Senate Subcommittee on Investigations published a report in 2020 that found that Markom Management’s Russian-born founder, Mark Omelnitski, assisted several members of the Rotenberg family, which has long-standing ties to Putin, “in their efforts to evade U.S. sanctions.”

Chang said their analysis discovered other potential connections, but understanding the true nature of the arrangements is difficult by design. Indirect relationships are common in offshore finance, Harrington said, “in order to preserve plausible deniability about connections” to particular clients.

According to the research team, former Markom client Boris Rotenberg, a childhood friend of Putin, used a firm with a P.O. box address in the British Virgin Islands, a well-known tax haven, to handle the paperwork for some offshore banking. At least 20 other companies also used that P.O. box as their address, the data mapping showed, with clients whose names turned up on sanctions lists, including Alisher Usmanov, an oligarch that the Treasury Department has said is “close to Putin,” and Vladimir Kiriyenko, the son of Putin’s deputy chief of staff.

An email sent to a Markom Management address requesting comment was returned as undeliverable, while a person who answered a phone number associated with the firm said it had been “dissolved.” She did not give her name. A separate email sent to an address associated with Omelnitski at a Cyprus-based firm was also returned as undeliverable.

Western policymakers have already started to take aim at the intermediaries, the study says. In February, the Treasury Department announced more sanctions against Russia, including a number of Moscow-based firms that manage money for Russian tycoons. Britain, the United States and the European Union have all also imposed restrictions on the provision of some offshore expertise to Russian oligarchs.

The ultimate aim, however, is to exert even more pressure so that Russia’s elite abandon Putin and force him to give up in Ukraine, said Harrington.

“A more targeted use of state-backed sanctions means a shorter war and less loss of life,” she said.

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