(Bloomberg) — Politicians around the world have made a show of talking tough about taking away the comforts of Russia’s wealthy elite after the country’s invasion of Ukraine. Yet actually seizing those assets will be much more difficult.
There are layers of shell companies and vast troves of wealth hidden in tax havens. Elites might transfer assets to relatives or, in the case of superyachts and private jets, park them in out-of-reach jurisdictions. Cryptocurrencies further complicate the global hunt.
The key difference, according to lawyers, economists and ex-government officials interviewed by Bloomberg, is that sanctions can be passed relatively quickly, while seizure is a more drastic step that involves a potentially lengthy legal process.
Still, the level of cooperation signaled by governments is unprecedented, with parallel sanctions coming down in the European Union, U.K. and U.S.
President Joe Biden’s administration said Thursday it would sanction eight wealthy Russians and their families, including billionaire Alisher Usmanov, after unveiling a unit called “KleptoCapture,” which will complement a transatlantic task force.
Whether the moves turn out to be largely symbolic or something more will depend on several critical factors. Here are some of them.
Property Rights
Taking assets is especially tricky when dealing with Russia, where tycoons amassed the foundation for their wealth decades ago and have reinvested proceeds from Soviet privatizations into legitimate businesses.
Seizures demand a civil or criminal legal process that needs court approval, said Alex Iftimie, a partner at Morrison & Foerster and a former senior national security official at the Justice Department.
A common basis is violating money-laundering laws. In the pursuit of Russian wealth, efforts to seize assets will likely involve gathering information from other countries, according to Anders Aslund, a professor at Georgetown University who has written about the effectiveness of past rounds of sanctions against Russia.
Property rights in the U.S., U.K. and elsewhere are the foundation for legal challenges to seizing assets.
“You’ve got to be very, very clear on what those assets are. Are they proceeds of a crime? If so, what is the crime?” said Justine Walker, global head of sanctions, compliance and risk at ACAMS, a trade organization for specialists in detecting financial crimes.
Even for assets frozen under sanctions, not seized, individuals can appeal to be delisted or sue to be unblocked, said Ori Lev, a partner at Mayer Brown who formerly led the enforcement division of the Treasury’s office of foreign assets control.
Still, courts have held that individuals without a U.S. presence don’t have due process rights under the Constitution, Lev said.
Concerns over due process can be addressed by limiting asset seizures to people connected to Putin and maintaining a “high threshold” for targets, said Gabriel Zucman, a University of California at Berkeley economics professor who researches wealth, inequality and tax havens.
Blocking Boats
Two brushes with superyachts in the EU this week illustrate how sanctions don’t go as far as seizures.
In France, customs officials blocked Rosneft Chief Executive Officer Igor Sechin’s superyacht from an urgent departure from the Mediterranean port of La Ciotat, near Marseille, according to the French Finance Ministry.
Sechin was sanctioned by the bloc on Monday. However, the asset has not been seized by the state.
In Germany, Usmanov’s superyacht is docked in Hamburg and will need an export waiver to depart. A local ministry said “no yacht leaves port that is not allowed to do so.”
Meanwhile, many Russian-owned luxury yachts are out of reach of countries that have imposed penalties. Among those vessels cruising around the Maldives right now is the 465-foot Nord, owned by Alexey Mordashov, a steel billionaire who was sanctioned by the EU on Monday.
Shell Game
Superyachts and private jets are one thing. Other forms of wealth — bank accounts, trust funds, or apartments cocooned inside a series of offshore companies — are less conspicuous.
“Regulators that need to track down assets and transactions en masse may be overwhelmed by their volume,” said Yuliya Guseva, a professor at Rutgers Law School.
One formidable obstacle: shell corporations.
“It’s quick and easy to set up companies and to combine hundreds of such companies into complex networks across the globe, often in highly secretive offshore jurisdictions,” said Rebecca Lee, chief impact officer at OpenCorporates, which maintains a global database of corporations. “It is often impossible” to find out who has ultimate control, she said.
There’s precedent for Russian elites to evade sanctions this way.
Shell companies linked to Arkady and Boris Rotenberg, two brothers close to Putin, transferred more than $120 million to Russia during a four-day window in 2014 after the annexation of Crimea, according to a 2020 report by the U.S. Senate’s Permanent Subcommittee on Investigations.
The brothers, who were again sanctioned by the U.S. on Thursday, also used an intermediary to buy art for companies they owned or funded, according to the report. The purchases, at auction houses and through private dealers in New York, amounted to $18.4 million.
“The targeted individuals use sophisticated ways to hide their assets,” Lev said. “The international, multilateral approach to this can only increase its effectiveness.”
Cryptocurrency Challenges
Cryptocurrencies further complicate the effort to enforce sanctions. They bypass traditional financial institutions, giving criminals and those suspected of wrongdoing a new way to conceal the illicit origins of funds.
“We are at a crossroads with cryptocurrency, and frankly we need to focus on a new category of crime and that’s the use of cryptocurrency to conduct criminal activity,” Deputy Attorney General Lisa Monaco said Wednesday on Bloomberg TV.
Law enforcement agencies have recently scored wins in tracking down crypto wealth. Still, it took the U.S. more than five years to seize the $3.6 billion in Bitcoin stolen during a hack of the Bitfinex currency exchange.
Speeding Up
To exert pressure on Putin, governments will have to act fast. To some experts, the cooperation through a transatlantic task force is reason to think potential seizures will be swifter this time around.
The authority asserted by the Justice Department to muster resources of other government branches will also help ensure the effort doesn’t get mired in court fights, Iftimie said.
“The wheels of justice turn slowly, so the key with this task force is to serve as an accelerant,” he said.
So-called asset reshuffling by targeted Russian tycoons can be a potential issue, Zucman said. That could be addressed by pushing offshore centers to join the effort. Switzerland, which has long been attractive for wealthy Russians because of its discretion and light-touch regulation, has already followed in the EU’s footsteps. Monaco has also adopted sanctions.
“If avenues are closed off in the U.K., and the U.S., even Switzerland, Singapore, where is the money going to go?” said Justyna Gudzowska, director of illicit finance policy at the Sentry, an organization that investigates global networks that benefit from conflict and kleptocracy. “It’s going to go to the weakest link.”
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