Now extensive sanctions have been imposed by the European Union, the United States, Canada and many other countries on Russian (state) companies, Russian leadership and oligarchs, the next question is of course how these can be enforced. Blocking ships and payments is being done and many commentators call for the tracing and confiscation of assets of Russian government officials and oligarchs world-wide. The US Department of Justice has even set up a special taskforce, dubbed KleptoCapture which will be targeting their ‘yachts, jets, real estate and other assets‘. Merrick Garland, the US Attorney General, noted that no stone will be left unturned.
Last week the European Commission already announced that it will be launching ‘a transatlantic task force that will ensure the effective implementation of our financial sanctions by identifying and freezing the assets of sanctioned individuals and companies that exist within our jurisdictions‘. Meanwhile reports of seized oligarchs’ yachts come in, such as the one seized in Germany from Alisher Usmanov on 2 March and the one seized in France from Igor Sechin today. Of course the whereabouts of the yachts which are suspected to be owned by an oligarch can be traced rather easily, however how to prove the actual ownership? And the ownership of planes, real estate, investments? Tracing the assets from people who have had 30 years of experience and had the top global legal advisors as their enablers in hiding these assets, is not a straightforward task.
Based on my experience in asset tracing, I will dive in this blog post into the methodology of asset tracing in general and will apply this to the current situation, while pointing out the obstacles one may run into. (NB. I will only look at the asset tracing itself, not at the asset forfeiture which has its own (legal) challenges. )
Asset tracing methodology
Generally, in asset tracing one could approach the assets from three angles, i.e. their origin, their movements and their current whereabouts. To obtain information on the assets, there are four types of information sources that should be considered: documents, public records (open source information), witnesses and classic investigative methods. A structured asset tracing methodology would give attention to all three angles and would combine the information from all four source types. We will take a look at the information these source types hold and see how these could help the search for the oligarchs’ assets.
Documents
Typically in fraud cases, the asset tracing starts with a ‘follow the money’ strategy; starting from the point where funds were stolen or embezzled the investigator looks at the paper trail to see where it went. Bank transfers, corporate ownership, communication with involved facilitators; all leave (little) bread crumbs with clues where the assets could be. However, the challenge lies in obtaining the relevant documents. Often this may require legal action such as a subpoena (in a criminal case) or a court order (in civil asset tracing) for disclosure of documents or information. A well known tool from civil asset tracing are the orders known in the UK and Ireland as a Norwich Pharmacal order based on which third parties (such as banks) can be forced to disclose information. Having a legal title based on which a court order or subpoena for disclosure could be requested is however a conditio sine qua non in many cases where a paper trail needs to be followed. In practice this methodology therefore requires a close cooperation between the investigator and a lawyer / prosecutor.
That said, if there is no clear point of origin, such as may be the case with the assets of the oligarchs, it is unclear where to start and, more importantly, there may be no legal title based on which access to documents or a court order for disclosure could be obtained. Obviously the current sanctions have changed the equation and governments have a legal title to go after the assets of sanctioned entities and individuals. But still, where to start?
Also other significant hurdle exist. Oligarchs have been facilitated over the past decades, by trust offices and law firms worldwide, building bullet proof corporate structures to obfuscate and secure their assets. Even if it is a public secret who owns a certain yacht, that does not mean that it will possible to legally prove that ownerships which may be necessary to freeze it and have it forfeited. Perhaps the ownership can be traced to a trust or to a nominee, however it may be impossible to proof that the real beneficial owner is a sanctioned individual. Especially when the nominees have nothing to gain from cooperating with authorities, proving ownership may take years in courts.
Also it needs to be taken into account that in the current situation those who have facilitated the oligarchs in hiding their assets have an incentive to hide their own tracks, and with that could be further obfuscating the ownership of the assets. A clear case in point is the apparent request this week by Credit Suisse to investors to destroy documents linked to oligarch yacht loans. Such a move by a large financial institution is of course unbelievable from a legal and corporate social responsibility point of view. Nonetheless, it is also indicative of the obstacles an investigator may run into when following the paper trail. Because when a large institution like Credit Suisse is willing to (request to) destroy documents, smaller financial and legal facilitators will most likely also be willing and able to do so.
Public records
The second and increasingly relevant type of information source, are public records and other open sources of information. The amount of information available in open sources is staggering and increasingly accessible with ease. Not only more and more corporate registries have become fully available online, also new sources of information have become available. A prominent example of such a new source of information are the registers showing ultimate beneficial ownership of legal entities in the European Union which are increasingly online available.
In addition, there have been a number of leaks of records which normally are not publicly available, such as the offshore leaks on corporate ownership in offshore jurisdictions and most recently the leak of Credit Suisse bank records. More often than not these leaks contain information on exactly those who are currently sanctioned.
And of course, fraudsters and oligarchs alike have the propensity to flaunt their wealth by showing off with yachts, expensive cars and other extravagances, which all leave a trail in the public domain, especially on social media. I believe that ‘The Secret of the St. Princess Olga‘ is still one of the nicest examples on how social media combined with AIS data can lead to the attribution of yacht ownership to a Kremlin official.
That said, even though there is an increasing amount of information in public records and other open sources, it does not mean that tracing assets has become an easy puzzle. Filing requirements differ per jurisdiction and often the detail needed to trace tangible assets is buried in filed financial reports which are generally not indexed and thus need to be retrieved and reviewed manually.
Let’s look at an example. The Dutch investigative consortium, Follow the Money, last week published an article on the assets in The Netherlands, which apparently belong to sanctioned Russian officials. One example they provide is Yuri Kovalchuk, who in their words is a ‘Member of the Ozero Dacha Cooperative, Putin’s inner circle’s holiday resort. Main stockholder of the bank Rossiya, better known as ‘Putin’s personal banker’. Kovalchuk is apparently (I did not verify) the ultimate beneficial owner of two legal entities registered in The Netherlands, i.e. Invintel B.V. and ABR Investments B.V. However, what are the tangible assets?
If we look at the most recent balance sheet for the year ending 31 December 2020 as filed for one of these two, Invintel B.V., we see the following:
We see 75.4 billion in non-current assets on the balance sheet and 54.9 billion rubles in current assets. Non-current assets usually are divided in three categories: tangible assets, intangible assets, and natural resources. Examples of non-current assets include shares, intellectual property, real estate, and equipment. Examples of current assets are cash and cash equivalents, accounts receivable and marketable securities. There is however no formal requirement in The Netherlands to file any further details on the (current or non-current) assets held by legal entities. Simply showing the overall value on the balance sheet fulfils the filing requirements. Some entities do disclose their assets, most actually do not.
Therefore the public record trail appears to end here as the financial report of Invintel B.V. does not disclose what the non-current and current assets as shown on the balance sheet exactly are. Of course if we dive deeper into the filed documents, we find that in 2014 the entity’s main asset was their 40% share in another legal entity registered in the Netherland with the name T2 (Netherlands) B.V.:
The filed financial report by T2 (Netherlands) B.V. for the year ending 31 March 2021 confirms that Invintel B.V. was at that moment indeed even a 50% shareholder, with the other 50% held by the (also sanctioned) VTB Bank. Yeah, we are one step closer to the assets!
However, it is all still paper: we have nothing tangible yet to freeze and forfeit. If we dive in further, it appears that the ultimate asset, held via another two subsidiaries in Sweden, was Tele2 Russia which was actually taken over by Rostelecom in February 2020.
The T2 (Netherlands) B.V. balance sheet shows that after the sale of Tele2 Russia the current assets of T2 (Netherlands) B.V. (138 billion roubles) consists of loans which are provided to the shareholders. So we return to the balance sheet of Invintel B.V. for the year ending 31 December 2020 where we indeed see an incoming loan in the year 2020. Thus while the non-current assets largely (but not fully) consist of the shares in T2 (Netherlands) B.V., that entity also has provided (approximately) the same value in loans. Therefore in fact the non-current assets are worth only a fraction of what is shown on the balance sheet. Can you still follow it?
What the above shows is that, just as tracking Russian military units across battlefield operations based on open sources requires a solid foundational knowledge of, and insight in how the Russian military is organised, also tracing assets based on public records requires a solid understanding of corporate structures, finance and accounting. Even though nowadays much more information is publicly available, you still need to understand what you’re looking at, and be able to reconcile the financial information from different sources, often across borders, while taking currency fluctuations, diverging fiscal years and other (deliberate) complexities, such as circular intercompany loans, into account. It is really not as easy as suggested by some.
Witnesses
Another information source which is relevant in asset tracing, are obviously witnesses. No matter how well hidden, there are always individuals involved in the hiding of the assets, or having (some) knowledge about the whereabouts of assets. Investigators mostly like to talk to so-called ‘formers’. Former wives and former girlfriends are great sources when it comes to identify personal bank accounts, credit cards, remote hideaways in the Alps, cozy apartments in Paris and other assets which are personally used by the target outside the public eye.
Former business partners – and in particularly those with whom the relationship ended in litigation – form another very relevant source of information, for example on used corporate structures, close associates (who may held assets as nominee), enablers used for transactions and so on. Former employees may have relevant information on, for example, how they were paid and who is doing what in the oligarch’s enterprise. Former contractors could shed a light on how they were paid and even former neighbours could have relevant information on who they have seen at the house and so on.
Of course also current friends and business partners have relevant information, however usually they have less incentives to talk to investigators. Or perhaps under the current circumstances they realise that now is perhaps the best time to start talking.
Classic investigative methods
The last type of information source which can be relevant in asset tracing, are the classic investigative methods (other than the three mentioned above). Think of methods such as surveillance, dumpster-diving, interception of communications, using informants and so on. Obviously the legality of these methods differs per jurisdiction and there are also significant differences between the application of these methods in criminal asset tracing compared to civil efforts to trace assets. Also, such methods generally require quite a lot of capacity, especially surveillance for example.
Still, one would be surprised how much information a single investigator can learn by some observations in the surroundings of a target. Who is he with, who does he meet and where, which buildings does he visit, how does he pay his restaurant bills, what car is he driving, what does his trash reveal, etc. Obviously, like all previously discussed methods, these classic methods of information gathering are not a panacea, however should be seen as a source for yet another few pieces of a larger puzzle.
Summary
By rigorously and smartly combining information from all four source types with a solid understanding of corporate structures and finance, it is possible, even against hardened targets such as oligarchs, to identify their assets. That does require however a dedicated team of professionals with sufficient time and resources.
Currently certainly a world-wide momentum exists to go after oligarchs’ assets and it is promising to see that especially the US and French governments, but also civil society, are using that momentum. Nonetheless, tracing tangible assets and attribute their ownership to sanctioned individuals to the extent that freezing, seizure and forfeiture can take place while holding up to legal scrutiny, still is easier said than done.