[Congressional Record Volume 164, Number 36 (Wednesday, February 28, 2018)]
[Senate]
[Pages S1268-S1271]
RUSSIAN FINANCIAL INFLUENCE
Mr. REED. Mr. President, I come to the floor to give the first of
several speeches on Russia's hybrid warfare operations against the
West. Today, I want to highlight one aspect of this ongoing
destabilization effort: the Kremlin's malign financial influence.
It is clear we need a whole-of-government approach and a
comprehensive strategy to counter Russian aggression. A particular
focus should be devoted to reducing secrecy in our financial system. It
is a simple fact: Bad actors need money to conduct their activities.
Yet our current financial system's opaqueness serves the interests of
malevolent forces.
Greater transparency will make it harder for the Kremlin and its
cronies to exert malign financial influence on our shores. The lack of
transparency in our system is problematic for our banks here at home.
The global nature of our financial system means that foreign actors can
take advantage of our institutions for their own gain, which has
implications for our national security.
I have looked at this issue through the lens of my work as ranking
member of the Armed Services Committee, as well as my service on the
Banking Committee and the Select Committee on Intelligence. Money
laundering and other financial crimes are among the tools deployed by
Russia as part of the Kremlin's larger influence campaign, which has
been used against the United States and our allies and partners to
advance the strategic and political goals of Russia. These activities
are being used as weapons which threaten U.S. national security.
The Kremlin's use of malign financial influence is subtle and is part
of a larger, coordinated operation of hybrid aggression by the Kremlin
using a broad spectrum of military and nonmilitary tools at its
disposal. Russia recognizes that, for now, its military capabilities
are limited relative to the United States and NATO, and it will seek to
avoid a direct military conflict with the West. Instead, Russia deploys
tactics that leverage its strengths and exploit our systematic
vulnerabilities.
As laid out in the Russian National Security Strategy of 2015, the
Kremlin's approach to conflict includes weaponizing tools and resources
from across government and society. The Russian strategy states:
``Interrelated political, military, military-technical, diplomatic,
economic, informational, and other measures are being developed and
implemented in order to ensure strategic deterrence and the prevention
of armed conflicts.''
This describes what may be called a Russian ``hybrid'' approach to
confrontation below the threshold of direct armed conflict, a method
that has been developing and escalating since the earliest days of
Putin's rise to power in Russia. The main tenets of the Kremlin's
hybrid operations are: information operation with cyber tools--which
people commonly think of as hacking--propaganda and disinformation,
manipulation of social media, and malign influence, which can be
deployed through political or financial channels.
As a nation, we are beginning to unpack what happened in the 2016
Presidential election with respect to certain aspects of Russian hybrid
operations. For example, we are learning how the Russians combined
hacking operations with the release of information timed for maximum
political damage. We have also learned more about Russia's manipulation
of social media with Kremlin-linked cyber armies. But we have yet to
understand the depths of how the Kremlin has used money as a weapon and
how it has harmed our national security and our democracy. For this
aspect of its hybrid arsenal, Russia is using money as a tool of
warfare to exploit the vulnerabilities of our democratic institutions
to its advantage.
The Russian system of corrupt financial influence rests on Putin's
domestic power structure. The Putin regime is fundamentally a
kleptocracy, which is a system where corrupt leaders use their power to
exploit their country's people and natural resources in order to extend
their personal wealth and personal power. Putin has systemically
fostered kleptocratic conditions by exploiting state funds and
resources to reward a group of close associates, commonly referred to
as oligarchs. Many of these associates have a personal connection to
Putin and have gained their positions of power or fortune due to their
relationship with him. Often these political and personal relationships
were forged in childhood, early adulthood, or during Putin's days in
the KGB and the St. Petersburg government.
In exchange for wealth, privilege, and often impunity, this group of
Putin's cronies are readily deployed to act on behalf of Kremlin
interests. As Russian scholar and journalist Joshua Yaffa detailed,
``Oligarchs finance the `black ledger,' . . . money that does not go
through the budget but is needed by the state, to finance elections and
support local political figures, for example.' Funds leave the state
budget as procurement orders, and come back as off the books cash, to
be spent however the Kremlin sees fit.''
Russia's kleptocratic system reinforces Putin's power in several
ways. First, he controls who profits from state coffers, making the
recipients of state largess indebted to him. Second, he can outsource
projects of financial influence, which provides him with access to
private wealth streams and gives him plausible deniability if the
projects have a nefarious aspect. Finally, this system allows Putin to
ensnare oligarchs who may have enriched themselves through a corrupt
deal or committed crimes that were state-sanctioned.
Not only has Putin been able to use corruption to protect his power
base at home, but he has then exported his kleptocratic system as part
of his arsenal of hybrid warfare. The Kremlin has studied the gaps in
Western society and leverages the oligarchs' wealth through the system
of power Putin created, to buy our influence, distort our markets, and
warp our democratic institutions.
[[Page S1269]]
As the Center for Strategic and International Studies report, ``The
Kremlin Playbook,'' notes, ``Corruption is the lubricant on which this
system operates, concentrating the exploitation of the state resources
to further Russia's networks of influence.'' A byproduct of this malign
financial influence is the use of ill-gotten gains to further fuel the
cycle of corruption and fund other aspects of the Kremlin's hybrid
aggression.
As I mentioned, Putin and his inner circle often deploy these
financial influence tactics through an oligarch. These intermediaries
are not officially affiliated with the government and appear to operate
independently, which makes them harder to detect and gives the Kremlin
plausible deniability.
In conventional warfare, the tools of war are implements of physical
destruction, but under Putin's tactics of financial malign influence
the tools are the same as any large-scale criminal organization:
offshore tax havens and banking centers, shell companies, money
laundering, with the addition of Russian majority-owned state banks.
Russian malign financial influence and the proceeds from this
activity are harming our national security and corrupting our
democratic institutions. As described in ``The Kremlin Playbook,''
``The mechanisms of Russian influence are designed to thrive in Western
democracies because they use Western rules and institutions and exploit
their systematic weaknesses.''
And these tactics appear to be updated versions of similar tools used
against us in the past. As Russian expert Brian Whitmore wrote, ``In
many ways, Russian corruption is the new Soviet communism. The
Kremlin's black cash is the new red menace.''
He further described this threat as ``a web of opaque front
corporations, murky energy deals and complex money laundering schemes
which ensnare foreign elites and form a ready-made Kremlin lobby.''
Let's think about that for a second. The Kremlin is buying off
foreigners to do its bidding within its own societies. And the way they
are buying influence is obscured through exploiting Western banking
laws and international financial systems. We have no way of knowing
whom this money is going to or what it is buying. Russia is using our
blind spot to advance their political and strategic goals and, in the
process, corrupt and warp our institutions from within.
Let's take a look at how they are doing it. One way the Kremlin is
asserting malign financial influence is through personal relationships,
established by oligarchs or through other Kremlin-linked business
executives. As Vice President Biden and former Deputy Assistant
Secretary of Defense Michael Carpenter warned in a recent article in
Foreign Affairs, this arrangement ``gives the Kremlin enormous leverage
over wealthy Russians who do business in the West and over Western
companies that do business in Russia. Moscow can ask (or pressure) such
businesspeople and companies to help finance its subversion of
political processes elsewhere.''
One oligarch who used this method is Oleg Deripaska. Deripaska has
been a close Putin ally for decades. Deripaska is transparent about how
his wealth was deployed as a tool for the Kremlin, stating:
If the state says we need to give it up, we'll give it up.
I don't separate myself from the state. I have no other
interests.
He served as the benefactor for a variety of political activities
that advanced Kremlin interests. According to the Wall Street Journal,
this financial backing included paying Paul Manafort, who later became
Trump's campaign manager, $10 million a year to advance Kremlin
interests in Ukraine, Georgia, and Montenegro. Investigations from NBC
News and the New York Times found that Deripaska fronted Manafort an
estimated $60 million for other business ventures and loans, moving the
funds through shell companies in Cypress and the Cayman Islands.
A second way these influence activities can be deployed is through
Russian majority state-owned banks. These banks do not function like
the ones we deal with every day. In fact, these banks often don't care
about making profits at all. Instead, they are using money as a weapon
of influence, to advance the Russian state or enrich people who may
ultimately advance the Kremlin's aims.
An example is the Vnesheconombank, commonly known as VEB. The U.S.
Treasury Department described VEB as a ``payment agent for the Russian
government.'' This bank is essentially controlled by Putin's inner
circle as the President picks the chairman and the Prime Minister sits
on its supervisory board. Foreign Policy journalist Elias Groll deemed
the bank ``a precision-guided diplomatic weapon.'' As such, VEB has
taken on a range of projects with one common goal--to advance Kremlin
interests. VEB financed a large share of the $50 billion Sochi
Olympics, attempted to shore up the troubled Ukrainian steel industry,
and underwrote the losses of key Putin cronies whose financial
interests were hurt by U.S. and EU sanctions.
VEB is under sanctions for its role in financing Kremlin aggression
against Crimea and eastern Ukraine. VEB garnered headlines because it
was used as a cover for a spying ring with efforts to recruit people
such as Carter Page, who later became a Trump campaign associate.
According to the Department of Justice, conversations recorded between
these Russian spies reveal that they saw tactics of financial influence
as a way to gain Page's cooperation. In addition, VEB Chairman Sergey
Gorkov, a close Putin ally, met with Jared Kushner in December 2016,
while VEB remained under sanctions. While the Trump administration said
that the meeting was in Kushner's capacity as an incoming government
official, a spokesman for Putin said that it was for business reasons.
This bank is losing billions of dollars funding projects of political
and strategic value to the Kremlin, bailing out oligarchs and being
used as cover for spies. These activities don't match with those of a
``normal bank.''
Another tool of Russian financial influence is offshore banking
centers or tax havens, which refers to financial institutions in a
place that is different from where the depositor lives. Usually this is
done for the financial and legal advantages the location provides,
including secrecy and little or no taxation. The Russians have used
these centers to facilitate the movement of money out of Russia. Once
money finds a home in an offshore banking center, it can be relabeled
as ``foreign'' and then can move back to Russia or to a third
destination with the origin and ownership of the funds obscured.
The Panama Papers--a leak of over 11 million files from one of the
world's largest offshore law firms--showed that between 2007 and 2013,
nearly $2 billion had been funneled through offshore accounts to those
in Putin's inner circle. Top centers for Russian offshore banking
include Cyprus, the Bahamas, the British Virgin Islands, Switzerland,
and Bermuda. Russian experts, Michael Weiss and Peter Pomerantsev,
noted: ``These destinations, prized for their secrecy laws and tax
havens, often make cameos whenever Russian corruption scandals are
exposed in the international press.''
Cypress became a particularly important haven for the Kremlin after
the United States and the European Union issued sanctions against
Russia for its aggression in Crimea and eastern Ukraine. Cyprus
provided a haven for Russian oligarchs and others from Putin's inner
circle to keep their money safe from sanctions and served as a
launching point for the money to be used to finance further malign
influence activities.
Often the Kremlin and Kremlin-linked actors utilize offshore tax
havens and shell companies together. Shell companies are legal entities
that generally have no physical assets or operations and may be used
solely to hold property rights or financial assets. Russia has
exploited these shell companies as a tool to obscure true ownership,
fund shady deals, launder ill-gotten gains, and further the cycle of
corruption.
One Kremlin-linked money laundering operation, commonly referred to
as the laundromat, moved an estimated $20 billion out of Russia through
Eastern Europe and then to banks around the world. The Russian
journalists who uncovered the scheme found that the beneficiaries were
Russian business executives who had state contracts with Russian
Government or government-owned entities worth the equivalent of
hundreds of millions of U.S. dollars.
[[Page S1270]]
The money was laundered by 21 shell companies based in the United
Kingdom, Cypress, and New Zealand.
While it is easy to dismiss this as a problem that occurs in other
countries rather than our own, Kremlin and Kremlin-linked actors are
also exploiting our own laws in the United States to deploy these tools
of financial influence. They are taking advantage of laws that do not
require disclosure of who really owns a company or whose money is
really funding these entities. They are taking advantage of the secrecy
permitted in our system to continue their corrupt practices and
intertwine their money into our systems.
As Acting Deputy Assistant Attorney General Day testified at a recent
Banking Committee hearing, ``the pervasive use of front companies,
shell companies, nominees and other means to conceal the beneficial
owners of assets is one of the great loopholes'' in the anti-money
laundering regime of the United States. Similarly, the 2015 Treasury
Department's National Money Laundering Risk Assessment estimates that
$300 billion is generated annually in illicit proceeds of the United
States and cites shell companies as a means to move these funds into
our domestic banking system.
The global, interconnected nature of our financial system has also
been manipulated by Kremlin-linked actors to hold or move illicit funds
and launder their ill-gotten gains across the West. In one prime
example, Deutsche Bank was revealed to be helping Russian clients
illegally launder $10 billion between 2011 and 2015 in a mirror-trading
scheme in which rubles were surreptitiously converted into dollars.
This scheme would begin with Deutsche Bank's Moscow branch buying
Russian stocks in rubles. Shortly after, sometimes on the same day, a
related party would sell the same Russian stock in the same quantity
and at the same price through Deutsche Bank's London office, but in
dollars.
The New York State Department of Financial Services found that the
parties doing the buying or selling were closely related to both sides
such as through common ownership and that none of the trades
demonstrated any legitimate economic rationale. The New York State
Department of Financial Services concluded: ``By converting rubles into
dollars through security trades that had no discernible purpose, the
scheme was a means for bad actors within a financial institution to
achieve improper ends while evading compliance with applicable laws.''
Deutsche Bank paid $425 million to New York State in fines and an
additional $204 million to U.K. regulators for this money laundering
scheme.
Kremlin-linked actors have also used real estate to launder illicit
Russian funds in the United States and elsewhere. Often the purchase of
real estate is done through an intermediary, which both obscures the
true ownership of the property and hides the origin of the funds. These
purchases are often all-cash deals, which is particularly problematic
to trace and cut banks out of the process, which removes a crucial
layer of oversight. Indeed, FinCEN, the Treasury Department's Financial
Crimes Enforcement Network, called out all-cash real estate deals in
August of 2017 as an area of particular concern due to its lack of
anti-money laundering protections.
One recent example of using all-cash real estate as a means to
launder funds is the case of the Russian firm Prevezon. Prevezon is a
firm owned by Denis Katsyv, the son of the former Kremlin
Transportation Minister and a key Putin ally. Prevezon was charged by
the Justice Department in connection with laundering the proceeds of an
elaborate $230 million tax refund fraud scheme, including buying real
estate in Manhattan with some of the profits from this scheme.
As described, these tactics of financial influence, part of the
Kremlin's hybrid arsenal, have a corrupting and destabilizing effect on
our democracies. Beyond the tactic itself, which is deployed to advance
Kremlin aims, the ill-gotten gains created from these tactics continue
to serve to concentrate Putin's hold on power and fund other aspects of
Russian hybrid warfare operations.
Profits gained from tactics of financial influence have underwritten
the following malign activities: raising private militias to fight in
Ukraine and Syria; assisting Russian military intelligence with
conducting signals intelligence operations and other specialized
technology and training against the United States in the 2016 election;
funding troll operations that manipulate social media platforms in
information operations against us and our allies; paying construction
costs for a bridge between Crimea and the Russian mainland, which, once
completed, will help the Kremlin to solidify its illegal annexation of
Crimea.
The common link through all of these tools is secrecy. Putin and his
kleptocratic system thrives on secrecy and on hybrid operations that
blur the lines between legitimate economic activity and corruption, and
between conflict and cooperation.
We need to take a serious look at how our government is organized to
counter Kremlin hybrid operations in their totality. But one thing is
for certain; we need to reduce secrecy in our banking system, which
leaves us more vulnerable to the manipulation of our free market system
by the Kremlin and Kremlin-linked actors.
We are getting a reputation around the world as a place to go if you
want to hide money. This is contrary to both American values and the
traditional role of the United States as the enforcer of international
norms.
Starting in May of this year, many financial institutions will have
to collect and verify the identity of the beneficial owners of
companies at the time of an account opening as a result of Treasury's
customer due diligence rule. While this is a start, we need to go
further and pierce the veil of secrecy that has shrouded our system. We
heard testimony in the Banking Committee on ways to improve U.S.
disclosure requirements, including requiring disclosure of all
beneficial owners, regardless of ownership stake.
I applaud those who have already been thinking about this issue. This
includes recommendations, put out earlier this month by the Center for
American Progress, that call for concrete reforms, including curbing
abuses of shell companies, increasing FinCEN's budget, and amending
portions of the Bank Secrecy Act and Money Laundering Control Act in a
way that would provide greater transparency and regulation regarding
the sale of real estate.
There are also legislative fixes that have been proposed in the
Senate. I appreciate that my colleagues Senators Whitehouse, Feinstein,
and Grassley have introduced legislation, the True Incorporation
Transparency for Law Enforcement Act. I also recognize my colleagues
Senators Wyden and Rubio for introducing the Corporate Transparency Act
in the Senate. I know similar efforts have been made in the House of
Representatives.
I intend to take a close look at these legislative proposals but the
key, in my opinion, is making sure that we are able to trace these
shell companies back to who is specifically benefiting and directing
them; that is, any serious effort to determine ownership must stop only
when a specific individual or individuals have been identified. Too
often we take one step and find another shell company and stop right
there. That doesn't lead us to anyone. We have to find the individuals
who are benefiting from and directing these activities.
The use of these shell companies, as I have said repeatedly
throughout my comments, has a real effect on our national security. As
the Special Counsel indictment against what is commonly called the
``troll factory'' shows, close Putin ally Yevgeny Prigohzin was funding
an organization conducting what it called ``information warfare against
the United States.'' Prigohzin used 14 affiliated shell companies to
fund this operation as a way to hide the true source of funds. Without
the full investigatory power and subpoena power of the Special
Counsel's office, we probably would not have uncovered the true
ownership behind this operation. The Kremlin designs it that way, and
we can't let them keep getting away with it.
Part and parcel with exposing beneficial ownership would be to stand
up an interagency task force led by FinCEN to follow the flow of
illicit Russian money into the United States. This task force should
leverage the intelligence community, the State Department, and other
relevant government agencies to take a comprehensive
[[Page S1271]]
approach to uncovering where the money is going and how these ill-
gotten gains are being spent. Remaining passive and waiting, is not
going to deter, disrupt, and finally defeat these deliberate Russian
efforts to undermine our basic institutions.
I will continue to work with my colleagues on the Banking, Housing,
and Urban Affairs Committee, the Armed Services Committee, the Senate
Select Committee on Intelligence, and others to ensure that our
national security apparatus has the requisite authorities.
What we need now is initiative by the administration to fully
resource and to direct a comprehensive approach to detect, disrupt, and
prevent this Russian interference. We need to put the appropriate
resources against this threat. The heart of our democracy--our election
process--was attacked by the Russians. As we learned yesterday from
Admiral Rogers of Cyber Command, it is under attack as we speak today,
and we can expect the attacks against the 2018 election cycle to
increase with both frequency, boldness, and, unfortunately,
effectiveness if we remain passive--indeed, paralyzed--as we are today.
We have to recognize that the money that is being generated through
these malign financial activities is being used not only to enrich
Putin and his cronies but is being used to attack the United States
very effectively. Putin has exploited our own laws that favor financial
secrecy and has used clandestine tactics to his advantage at a
relatively inexpensive cost.
Increasing, for example, resources to FinCEN in the Treasury
Department or standing up and funding a task force, as I described, and
devoting the necessary resources to tracing shell companies back to the
people responsible would be a small fraction of what it would cost to
use conventional forces to deter Russian aggression. Indeed, deploying
a combat team to the Baltics is more expensive, I would suspect, than
setting up a team of experts here in Washington that will go after
these funding streams, and without the money, they cannot conduct their
operations.
Mr. President, we often hear the expression ``follow the money'' as a
way to identify the cause of a problem, and that is true here. Today,
we know that our democracy and many others are under attack by the
Government of Russia. Responding to this reality will require a
comprehensive strategy to counter Russian asymmetric and hybrid
tactics. However, as I laid out, an immediate step we can take is a
concerted effort to bring greater transparency to our financial system.
If we fail to do so, we will continue to have that very secrecy used
against our national security interests and the interests of all of our
allies.
Now is the time to act. We are being attacked. To sit back and absorb
the punches will lead only to defeat, not to a final victory over our
adversaries.
I yield the floor.
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