Clamping down on Russia’s sanctions evasion

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Ukraine’s allies meeting in Japan this week for the G7 summit may approach the next round of sanctions talks with trepidation. An agreement to restrict trade in Russian diamonds is welcome, but from here on, many of the grander proposals to stop 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 exports to Russia. Any move by the EU to block imports of refined products made from Russian crude will irritate India and the United States, if it raises energy prices. If the EU further restricts exports passing through Russia en route to other places, it will hurt countries like Kazakhstan.

But there is a win-win out there. There is a little-discussed tool used by Russia in almost all sanctions evasion attempts: secret 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 augmented by loot hiding. The Russian multinational task force Elites, Proxies and Oligarchs issued a notice in March, noting that many circumvention vehicles were “located in jurisdictions that are tax havens or corporate formation havens, which may provide a degree of secrecy for Russian elites and their proxies.”

But this goes far beyond simply helping oligarchs hide their profits. Secret jurisdictions have been a key tool for Russia to obtain critical goods, from machine tools to semiconductors. As one expert group put it: Their acquisition networks consist of “long chains of shell and shell companies, often established in low-disclosure jurisdictions or those with [anti-money laundering] deficiencies”.

Look at the shopping network recently revealed by the FT operate from a home in North London. Mykines Corporation LLP, which shipped $1.2 billion worth of sensitive products to Russia, is a UK entity ultimately owned by a pair of companies from the British Virgin Islands, a secrecy jurisdiction.

or take Gatik Ship Management: As the FT has reported, it is now one of the ten largest tanker fleets in the world, and it matters. It came out of nowhere last year and has enabled the recently significant energy flows between Russia and India. If you are owned by a Russian oil producer, you may be allowing price cap avoidance. But it is shrouded in mystery. While Gatik is based in India, ostensibly as part of Buena Vista Shipping in Mumbai, the ships are owned by the Marshall Islands, one of the most extreme secrecy jurisdictions. The legal ownership of the assets you use has been completely hidden.

This is a common problem with shipping: large ships full of toxic cargoes routinely navigate through shallow water, and no one knows who is ultimately responsible. The Iranian and Venezuelan oil trades have long been based on this. The US government knows which ships operate on these routes; it’s hard to know who to accuse.

The G7 must start to be less tolerant of companies – and ships – based in countries that do not have proper and open property registries and effective regulation. It’s not just about hitting small islands: the EU needs to redraft its own rules so that, once again, all member states are required to list beneficial owners. Having a real human being put his name on a company at least gives investigators a starting point.

In other jurisdictions, such as the UK, the problem is a lack of compliance with corporate rules. Regulators, and the police, were to receive the funds to begin vetting companies and hunting down evasion.

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