Embassy of the United States

Reports on Russia

International Narcotics Control Strategy Report - 2007

Released March 2007
Bureau of International Narcotics and Law Enforcement Affairs

Country Report: Russia

Volume I: Drug and Chemical Control

I. Summary

In 2006, the Government of Russia (GOR) focused its efforts on prevention, legislation, and combating money laundering in response to the threat of narcotics trafficking along the "Northern Route" from Afghanistan through Central Asia into Russia. Afghan opiates transported along the Northern Route supply Russia's internal demand, as well as transit through Russia to the rest of Europe. In addition, heroin use contributed to a significant increase in the number of persons infected with HIV/AIDS and/or Hepatitis C, directly attributable to intravenous drug use. The Director General of the Federal Drug Control Service (FSKN) emphasized the need for international cooperation to combat drug traffickers that operate without regard to borders. The FSKN continued to work on plans to open liaison offices in ten countries, including Afghanistan. Trafficking in opiates from Afghanistan (primarily opium and processed heroin) and a new synthetic opiate injectable drug comprised of a mixture of heroin and 3-methylfentanyl (Beliy Kitai - White China) and their abuse were major problems facing Russian law enforcement and public health agencies. However, the FSKN reported that the sharp post-Soviet increases in the number of drug users has begun to stabilize. More than 90 percent of Afghan drugs arrive in Russia via Central Asia. The GOR has recognized the extent of the drug trafficking problem and is taking steps to address both the law enforcement and public health issues. Health education programs in schools are beginning to incorporate messages concerning the harmful effects of drug use and the links between injecting drugs and HIV/AIDS. Russia is a party to the 1988 UN Drug Convention.

II. Status of Country

Trafficking. Russia is both a transshipment point and a market for heroin, opium and other dangerous illegal substances such as "White China". Since the beginning of 2006, the FSKN has reported a sharp increase in seizures of 3-methylfentanyl by Russian law enforcement. In the first six months of 2006, FSKN recorded 321 seizures of 3-methylfentanyl, five times more than during the same period in 2005. The majority of these seizures were made in the Northwest and Western parts of Russia. Opiates transiting Russia originate almost exclusively in Afghanistan and are typically destined for the rest of Europe. The Russian border with Kazakhstan is roughly twice the length of the U.S.-Mexican border and poorly patrolled. Considering the resource constraints facing local law enforcement agencies, Russian authorities are unlikely to stop a significant proportion of the heroin entering their country. In February 2006, the FSKN reported that over 100,000 persons died in Russia of drug addiction compared to 30,000 homicide victims and 35,000 deaths due to road accidents- almost 5 percent of all crimes in Russia - are related to drugs. Per the Director, while there are 500,000 people officially registered as drug addicts in Russia, the actual numbers are 5-6 million, and possibly more. The annual revenue from illicit drug trafficking in Russia was estimated to be $15 billion. According to the FSKN, seizures have pushed up the price of almost every kind of drug across Russia. The average price for a gram of heroin (retail) in 2006 was $ 51.54. The average price in 2005 was $40, in 2004, $30 and in 2003, $20. Per gram prices (retail) for heroin were as low as $19 (in Perm Oblast) and as high as $132 (in Murmansk Oblast). The wholesale price for a kilo of heroin in 2006 was about $26,500 kg prices ranged from about $11,300 dollars to about $75,200.

Synthetic drugs produced in Russia usually take the form of amphetamine type stimulants and heroin analogues like methadone and mandrax. Clandestine amphetamine labs are occasionally reported in Russia, typically located in the northwest region of the country close to St. Petersburg or right across the border in the Baltic States. The St. Petersburg area had long been considered the primary gateway for foreign-produced MDMA (Ecstasy) smuggled into Russia. However, the Russian Federal Customs Service (FTS) reported that roughly half of the MDMA it seized in 2005 entered the country from Belarus and is typically manufactured in Poland. In 2006, the Deputy Director of FSKN, confirmed that a significant portion of synthetic drugs are smuggled to Russia from Europe, most often through the Baltic States, as well as through Ukraine and Belarus. The FSKN reported in September 2006 that 680 million doses of synthetic drugs had been seized in Russia since January. Synthetic opiates have shown up in Orenburg Oblast, a region where the USG has projects focused on HIV/AIDS prevention and drug demand reduction. The abuse of these synthetic opiates has directly resulted in an increase in death due to drug overdoses.

Although the MDMA tablets produced in Russia are of poor quality, the low prices (as little as $ 5.00 per tablet) are attractive to Russian youth compared to the $ 20.00 typically charged per tablet for MDMA tablets from the Netherlands. Methamphetamine is extremely rare in Russia. Cocaine trafficking is not widespread in Russia. Cocaine prices in Russia remain very high, though the drug is easily obtained. Disposable incomes in Russia have risen steadily over the past few years, while cocaine prices have remained static, making the drug more affordable to a growing pool of potential users. Cocaine is frequently brought into Russia through the port of St. Petersburg. Sailors aboard fruit carriers and other vessels operating between Russia and Latin America provide a convenient pool of potential couriers. Cocaine also enters Russia in cargo containers. Couriers traveling on commercial flights bring cocaine into Russia, often traveling through third countries in Europe as well as through the U.S. FSKN officials have identified a disturbing new trend in narcotics trafficking - the use of the Internet to sell illegal drugs. According to the FSKN, Russia is home to hundred of websites which market illegal drugs both in Russia and abroad. The FSKN has reported that it is attempting to develop technology to interrupt web-based drug trafficking.

Addict/User Population. The FSKN reports that there are 1.5 million drug users with 400,000 officially registered drug addicts in Russia's treatment centers. New models of cognitive therapy are being implemented in treatment centers in St. Petersburg, but substitution therapy has not been fully explored and remains politically sensitive. The Ministry of Health (MOH) estimates that up to six million Russians take drugs on a regular basis. The FSKN Deputy Director confirmed that around six million Russians take drugs, thus agreeing with the MOH estimate, adding that only one in twenty drug addicts are officially diagnosed. These figures are significantly higher than FSKN statistics cited in 2004 and suggest a new willingness by the GOR to acknowledge and combat drug use in Russia. In 2004, Cherkesov claimed that there were only 390,000 officially registered drug addicts in Russia and four to five million Russians who use drugs regularly, and in 2006, claimed that the rise in the number of drug addicts had been halted.) While the number of registered cases of drug use has stabilized, the number of drug overdoses in many regions is increasing due to the introduction of dangerous new substances such as White China. The lack of drug maintenance therapy to treat drug users contributes to the small number of registered cases of IDUs (Intravenous Drug Users) in treatment centers.

According to the MOH, as of August 2006, there were over 350,000 officially registered HIV/AIDS cases in Russia. However, unofficial estimates, including those by the United Nations AIDS program, put the figure much higher, with some suggesting that there are over one million HIV- positive Russians. Intravenous drug use continues to be the most common method of transmission of HIV/AIDS and Hepatitis C in Russia. There are estimates that nearly 70 percent of new HIV cases can be attributed to intravenous drug use and 90 percent of injecting drug users are Hepatitis C positive. With FY06 HIV/AIDS funding, the National Institute of Health has just begun work with Russian research facilities in St. Petersburg to explore alternative drug treatment regimens acceptable to the GOR. Naltrexone and Bupanorfin are two drugs currently registered in Russia, which may prove to be useful alternative drug treatment measures. A sign of progress is that the MOH has recently requested a special report prepared on medication assisted drug therapy. A group of key MOH health and social welfare officials and NGOs have recently returned from a study tour to the U.S. financed by USAID to observe effective social programs for high risk families and communities affected by drug use. This has resulted in a new committee in the MOH, which plans to put into action lessons learned from Baltimore, Providence, and New York City. In November 2006, the USG in collaboration with the MOH and the FSKN will sponsor a major technical workshop in St. Petersburg to improve access and quality of drug treatment and rehabilitation services for IDUs.

Trafficking Organizations. At the wholesale level, the trade in Afghan opiates within Russia is dominated by Central Asians. Tajiks, Uzbeks, and others with family, clan, and business ties to Central Asia transport Afghan heroin across the southern border with Kazakhstan (Russia shares a 7,000 km border with Kazakhstan) and into European Russia and western Siberia. The FSKN claims that 90 percent of drug kingpins in Russia are from Central Asia. Retail distribution of heroin and other drugs is carried out by a variety of criminal groups. Again, these organizations are typically organized along ethnic lines with Central Asian, Caucasian, Russian/Slavic, and Roma groups all active in drug trafficking.

III. Country Actions Against Drugs In 2006

Policy Initiatives. The FSKN was established in 2003 as the State Committee for the Control of Traffic in Narcotic and Psychotropic Substances (GKPN). Russian President Putin restructured the agency in 2004, which is now known as the Federal Drug Control Service (FSKN). The FSKN has 35,000 employees, with branch offices in every region of Russia. Since its creation the FSKN has stressed the importance of attacking money laundering and other financial aspects of the drug trade. The money laundering division of the FSKN cooperates closely with the Ministry of the Interior (MVD), the Federal Security Service (FSB), and the Federal Customs Service (FTS), but its main partner is the Federal Service for Financial Monitoring (FSFM). The FSKN has also continued its efforts to implement effective monitoring of the chemical industry. Prior to the creation of FSKN, precursor chemicals and pharmaceuticals were governed by a patchwork of regulations enforced by different agencies. Production, transportation, distribution, and import/export of controlled substances now require licensing from FSKN. The GOR has signed many bilateral agreements on counternarcotics cooperation. In 2005, during a visit of the FSKN Director to the U.S., the FSKN signed a Memorandum of Understanding with the U.S. Drug Enforcement Administration to enhance bilateral cooperation to combat illegal drugs and their precursor chemicals. Multilaterally, Russia and the other member nations of the Shanghai Cooperation Organization (SCO) have attempted to use the SCO as a vehicle to combat narcotics trafficking in Afghanistan and Central Asia. In 2006, Russia hosted the Paris II-Moscow I Ministerial Conference on Drug Routes from Afghanistan. This conference, organized by the MFA and UNODC, was a follow-on conference to a similar meeting in Paris in 2003 and addressed ways to combat Afghan drug trafficking, including the illicit traffic in precursors for the production of heroin. Representatives of more than 50 countries and 23 international organizations attended the conference.

Accomplishments. Russia now has a legislative and financial monitoring structure that facilitates the tracking, seizure, and forfeiture of all criminal proceeds. Russian legislation provides for investigative techniques such as search, seizure and the compulsion of documents production. Legislation passed in 2004 entitled "On Protection of Victims, Witnesses and Other Participants in Criminal Proceedings" extends legal protection to all parties involved in a criminal trial. Prosecutors or investigators may recommend that a judge implement witness protection measures if they learn of a threat to the life or property of a participant in a trial. Steps taken to protect a program participant could include personal and property protection, change of appearance, change of identity, relocation, and transfer to a new job. In 2005, the GOR issued implementing regulations and provided money from the Federal budget for implementation of the legislation.

One of the key obstacles in Russia's struggle with drug trafficking is a lack of experience with prosecuting narcotic-related cases. The FSKN Director has commented publicly that the courts must give stiffer sentences to drug traffickers. It is rare that criminals who have committed serious drug crimes in Russia are given the maximum 20-year sentence. However, Russia's legislators and politicians continue to address this problem, demanding stiffer sentences for narcotic-related crimes and establishing a legal framework that is beginning to work effectively against drug dealers. On February 7, 2006, the GOR approved amendments to the Criminal Code that reduce the minimum punishable amounts of illegal drugs subject to prosecution. This amendment was a reversal of a legislative change adopted in November 2003, which had reduced the sentence for possession of drugs for personal use from a maximum of three years in jail to a fine. The amendments introduced the sizes of "large" and "especially large" amounts of drugs to be used in determining sentences for drug-related crimes and eliminated the category of average dose. The amendments classified as large/especially large amounts exceeding the following amounts in grams of: poppy straw (20/500), hashish (2/25), heroin (0.5/2.5), marijuana (6/100), opium (1/25), and methadone (0.5/2.5).

Law Enforcement Efforts. On March 27, 2006, President Putin issued Decree No. 263 On Official Representatives of the Federal Drug Control Service of the Russian Federation to Foreign States authorizing FSKN to station 50 officers (representatives and their deputies) in foreign states to facilitate information sharing and joint investigations. The officers will be based in Russian diplomatic missions but will not be part of embassy staff in order to give them more flexibility in dealing with their counterparts. The FSKN had earlier already established a drug liaison office in Dushanbe, Tajikistan and is now on track to open an office in Kabul in 2007. Seizure statistics: The following figures reflect total drug seizures for 2005 and the first half of 2006 by all law enforcement agencies in Russia: (all figures are in kg/source: FSKN)

Corruption. Controlling corruption has been a stated priority for the Putin administration. However implementing this policy is a constant challenge. Inadequate budgets, low salaries, and lack of technical resources hamper performance, sap morale, and encourage corruption. Evidence indicates the scope and scale of official corruption have grown markedly in the past several years. Officials from the FSKN report that corruption is a problem within their agency. In an effort to decrease corruption, the FSKN Director endorsed a Code of Honor in 2005 for FSKN personnel. The Code is a brief list of rules of conduct that guide the activities of every FSKN employee. FSKN officials report that over 100 law enforcement officers were arrested in 2005 for drug trafficking. Figures for 2006 are not yet available. In May 2006, five FSKN officers were accused of extortion and detained in Moscow. The case is currently under investigation. There were no reported cases of high-level narcotics related corruption. As a matter of government policy, the GOR does not encourage or facilitate illicit production or distribution of narcotic or psychotropic drugs or other controlled substances, or the laundering of proceeds from illegal drug transactions. No GOR senior officials were known to engage in, encourage, or facilitate the illicit production or distribution of such drugs or substances, or the laundering of proceeds from illegal drug transactions.

Agreements and Treaties. Russia is party to the 1988 UN Drug Convention, the 1961 Single Convention on Psychotropic Substances and its 1972 Protocol, and the 1971 UN Convention on Psychotropic Substances. The U.S.-Russia Mutual Legal Assistance Treaty (MLAT), entered into force on January 31, 2002.Russia is a party to the 1994 Agreement on Coordination and Cooperation of Customs Authorities in Combating Illicit Distribution of Narcotics and Psychotropic Substances signed by Belarus, Ukraine, Armenia, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. Russia is a party to the UN Corruption Convention and the UN Convention against Transnational Organized Crime and its protocols against trafficking in persons and migrant smuggling.

Cultivation/Production. There are no official statistics on the extent of opium cultivation in Russia, and the USG has no evidence to suggest that more than 1,000 hectares of opium are cultivated. In Russia, there are small, illicit opium poppy fields ranging in size from one to two hectares. Typically the opium fields are small backyard plots or are located in the countryside concealed by other crops. In Siberia, in the Central Asian border region, and in the Omsk-Novosibirsk-Tomsk area, opium poppies are widely cultivated. Cannabis grows wild throughout Russia and is also cultivated in quantities ranging from a few plants to plots of several hectares. Every year, Russian authorities carry out the "Operation Poppy" eradication effort, aimed at illicit cannabis and poppy cultivation. In 2006, Operation Poppy identified numerous illicit plantations of cannabis, primarily in Primorskiy Kray and Altay Kray and about 40 metric tons of narcotic plants were destroyed. Primary cannabis cultivation areas are Primorye, Altay, as well as Amur Oblast and the Republic of Tuva.

Drug Flow/Transit. Opiates (and hashish to a lesser degree) from Afghanistan are carried across the Central Asian states and into Russia. The FSKN estimates that 60 metric tons of heroin are annually smuggled into Russia from Afghanistan via Central Asian countries on the "Northern Route." Contraband is typically carried in vehicles along the region's highway system that connects it to the populated areas of southwestern Russia and western Siberia. The Russian cities of Yekaterinburg, Samara, Omsk, and Novorossisk have emerged as hubs of trafficking activity. Couriers also frequently use the region's passenger trains. Incidents involving internal body carry or "swallowers" are common. Cocaine destined both for Russia and transit to Western Europe enters the country through the port of St. Petersburg. Synthetic drugs manufactured in Russia and elsewhere in Europe flow in both directions across Russia's western borders. Again, much of this smuggling activity appears to be concentrated in the northwest area around St. Petersburg.

Each year, law enforcement agencies of Russia and several of its neighbors participate in Operation Kanal. Kanal is an interdiction blitz during which extra personnel are stationed at railroad stations, airports, border crossings, and other checkpoints. During Kanal 2005, 881 individuals were detained and 1,396 kg of illegal drugs were seized in Russia. Kanal 2006 is being implemented in three phases: the first phase took place in May 2006 and focused on the interdiction of precursor chemicals. The second phase is currently underway and is focusing on synthetic drugs. The third phase had not yet been scheduled at the time this report was drafted. For the first time, DEA agents have been invited to observe. FSKN officials continue to report a significant increase in drug trafficking into Russia following the withdrawal of Russian border guards from the Afghan/Tajik border in 2005. Russian forces had been stationed in Tajikistan after the dissolution of the Soviet Union, but departed after the expiration of the agreement governing their presence.

Domestic Programs/Demand Reduction. Russian authorities are attempting to implement a comprehensive counternarcotics strategy that would combine education, health and law enforcement. FSKN is tasked with demand reduction among its other responsibilities and has recently begun a large-scale public awareness campaign. Russian law enforcement authorities also have come to support the idea that demand reduction should complement law enforcement efforts to reduce supply. With support from the USAID Healthy Russia 2020 project, demand reduction messages are being incorporated into a Ministry of Education sanctioned health education curriculum for high school students and training materials for teachers. This program has been tested in Ivanovo (the eighth poorest oblast in Russia) and has been expanded to Irkutsk and Orenburg, two oblasts on the key drug trafficking routes. The problem of drug use among homeless teens has reportedly reached extraordinary levels in St. Petersburg. The Doctors of the World Program, which works with street children, reported that about 70 percent of children age 11 and younger (on a small sample of 30) were injecting homemade substances and 30 percent of these young people were HIV positive. While the knowledge of HIV risks is high even among drug users, the messages have not yet translated into behavioral changes and injecting practices. In 2006, the FSKN and National Health League launched a preventive program called Health Wave - Take Care of Yourself aimed at children's health and prevention of drug addiction in four cities (Samara, Saratov, Volgograd and Astrakhan).

IV. U.S. Policy Initiatives and Programs

Policy Objectives. The principal U.S. counternarcotics programmatic goal in Russia is to help strengthen Russia's law enforcement capacity, both to meet the challenges of international drug trafficking into and across Russia, and to help improve cooperation of Russian law enforcement authorities with U.S. law enforcement agencies.

Bilateral Accomplishments. In 2002, the U.S. Department of State, Bureau of International Narcotics and Law Enforcement Affairs (INL) negotiated a Letter of Agreement (LOA) with the GOR allowing direct assistance to the GOR in the area of counternarcotics and law enforcement assistance. DEA provided INL-funded counternarcotics training to over 100 trainees in 2006, drawn from the FSKN, the MVD, and the Federal Customs Service. In 2007, DEA will again offer INL-funded counternarcotics training to Russian law enforcement. In FY 2006, the DEA Office of International Training and the Moscow Country Office, with funds provided by INL, worked together to organize numerous additional narcotics law enforcement training events. In FY 2007, DEA is planning to hold a one-week Forensic Chemist Seminar, funded by INL. This seminar will focus on advanced signature (i.e., seized opiate origin) analysis techniques, including the analysis of Southwest Asian heroin, and to explore joint experience in conducting signature analysis. Progress continued on the Southern Border Project, an effort that will eventually lead to the establishment of three mobile drug interdiction task forces based in Orenburg, Chelyabinsk, and Omsk, all near the Russian- Kazakh border. The U.S. also provided technical assistance in support of institutional change in the areas of criminal justice reform, mutual legal assistance, anticorruption and money laundering.

The Road Ahead. The GOR places high priority on counternarcotics efforts and has indicated a desire to deepen and strengthen its cooperation with the United States and other countries, particularly in light of its 2006 chairmanship of the G-8 and chairmanship of the Council of Europe. The USG will continue to encourage and assist Russia to implement its comprehensive, long-term national strategy against drug trafficking and use with multidisciplinary sustainable law enforcement assistance projects that combine equipment, technical assistance and expert advisors.

Volume II: Money Laundering and Financial Crimes

Russia's financial system does not attract a significant portion of legal or illegal depositors, and therefore Russia is not considered an important regional financial center. Criminal elements from Russia and neighboring countries continue to use Russia's financial system to launder money because of familiarity with the language, culture, and economic system. The majority of laundered funds do not appear to be from activities related to narcotics production or trafficking, although these activities occur. Experts believe that most of the illicit funds flowing through Russia derive from domestic criminal or quasi-criminal activity, including evasion of tax and customs duties and smuggling operations. Despite making progress in combating financial crime, Russia remains vulnerable to such activity because of its vast natural resource wealth, the pervasiveness of organized crime, and a high level of corruption. Other factors include porous borders, Russia's role as a geographic gateway to Europe and Asia, a weak banking system with low public confidence in it, and under-funding of regulatory and law enforcement agencies. However, due to rapid economic growth in various sectors, the number of depositors has steadily been increasing.

Russia has recently changed its laws to allow direct foreign ownership and investment in Russian financial institutions. Net private capital inflows for 2006 amounted to $41.6 billion according to the Russian Central Bank, an increase from $1.1 billion in 2005. In contrast to the capital flight that occurred during the 1990s, the majority of more recent outflows involved the legitimate movement of money to more secure and profitable investments abroad, which reflects the maturing of the Russian business sector. However, a portion of this money undoubtedly involved the proceeds of criminal activity. According to official statistics, the trend toward net capital inflows involves the transfer of assets from tax havens, such as Cyprus and the Virgin Islands, previously known to be popular destinations for Russian capital outflows in the 1990s.

Russia has the legislative and regulatory framework in place to pursue and prosecute financial crimes, including money laundering and terrorism finance. The Russian Federation's Federal Law No. 115-FZ "On Combating Legalization (Laundering) of Criminally Gained Income and Financing of Terrorism" became effective on February 1, 2002, with subsequent amendments to the laws on banking, the securities markets, and the criminal code taking effect in October 2002, January 2003, December 2003, and July 2004, respectively. Law RF 115-FZ obligates banking and nonbanking financial institutions to monitor and report certain types of transactions, keep records, and identify their customers.

According to the original language of RF 115-FZ, institutions legally required to report include: banks, credit organizations, securities market professionals, insurance and leasing companies, the federal postal service, jewelry and precious metals merchants, betting shops, and companies managing investment and nonstate pension funds. Amendments to the law that came into force on August 31, 2004 extend the reporting obligation to real estate agents, lawyers and notaries, and to persons rendering legal or accounting services that involve certain transactions (e.g., managing money, securities, or other property; managing bank accounts or securities accounts; attracting or managing money for organizations; or incorporating, managing, and buying or selling organizations).

Various regulatory bodies ensure compliance with Russia's anti-money laundering and counterterrorism finance laws. The Central Bank of Russia (CBR) supervises credit institutions; the Federal Insurance Supervision Service oversees insurance companies; the Federal Service for Financial Markets regulates entities managing nongovernmental pension and investment funds, as well as professional participants in the securities sector; and the Assay Chamber (under the Ministry of Finance) supervises entities buying and selling precious metals or stones.

The CBR has issued guidelines regarding anti-money laundering (AML) practices within credit institutions, including "know your customer" (KYC) and bank due diligence programs. Banks are required to obtain and retain for five years information regarding individuals and legal entities and beneficial owners of corporate entities. Banks must also adopt internal compliance rules and procedures and appoint compliance officers. The amendment to Law 115-FZ has required banks to identify the original source of funds and to report to the financial intelligence unit (FIU) all suspicious transactions since July 2004. Institutions that fail to meet mandatory reporting requirements face revocation of their licenses to carry out relevant activity, limits on certain banking operations, and possible criminal or administrative penalties. An administrative fine of up to $16,700 can be levied against an institution, with a fine of up to $700 on an officer of an institution. The maximum criminal penalty is 10 years in prison with applicable fines.

All obligated financial institutions must monitor and report to the government: any transaction that equals or exceeds 600,000 rubles (approximately $22,700) and involves or relates to cash payments, individuals or legal entities domiciled in states that do not participate in the international fight against money laundering, bank deposits, precious stones and metals, payments under life insurance policies, or gambling; all transactions of "extremist organizations" or individuals included on Russia's domestic list of such entities and individuals; and suspicious transactions.

Since the CBR issued Order 1317-U in August 2003, Russian financial institutions must now report all transactions with their counterparts in offshore zones. In some cases, offshore banks are also subject to enhanced due diligence and maintenance of additional mandatory reserves to offset potential risks undertaken when conducting specific transactions. The CBR has also raised the standards for offshore financial institutions, resulting in a reduction in the number of such institutions. Overall wire transfers from Russian banks to offshore financial centers have dropped significantly as a result of such regulatory measures.

Foreign financial entities, including those from known offshore havens, are not permitted to operate directly in Russia; they must do so solely through subsidiaries incorporated in Russia, which are subject to domestic supervisory authorities. During the process of incorporating and licensing these subsidiaries, Russian authorities must identify and investigate each director of the Russian unit, as nominee or anonymous directors are prohibited under Russian law. In September 2005, the CBR completed its review of all banks that sought admission to the recently established Deposit Insurance System (DIS). To gain admission to the DIS, a bank had to verifiably demonstrate to the CBR that it complies with Russian identification and transparency requirements. Currently, 927 of Russia's estimated 1200 banks have been admitted to the DIS, effectively removing over 200 banks from Russia's banking system.

By law, Russian businesses must obtain government permission before opening operations abroad, including in offshore zones. A department within the Ministry of Economic Development and Trade (MEDT) reviews such requests from Russian firms, and once the MEDT approves, the CBR must then approve the overseas currency transfer. In either case, the regulatory body responsible for the offshore activity is the same as for domestic activity, i.e., the Federal Service for Financial Markets regulates brokerage and securities firms, while the CBR regulates banking activity.

Article 8 of Law 115-FZ provides for the establishment of Russia's FIU, called the Federal Service for Financial Monitoring (FSFM). FSFM is an independent executive agency administratively subordinated to the Ministry of Finance. All financial institutions with an obligation to report certain transactions must report the required information to the FSFM. The FSFM is also the regulator for the real estate and leasing, pawnshops, and gaming services sectors. An administrative unit, it has no law enforcement investigative powers. Depending on the nature of the activity, the FSFM provides information to the appropriate law enforcement authorities for further investigation, i.e., the Economic Crimes Unit of the Ministry of Interior (MVD) for criminal matters, the Federal Drug Control Service (FSKN) for narcotics-related activity, or the Federal Security Service (FSB) for terrorism-related cases.

In June 2005, President Putin approved a national strategy for combating money laundering and terrorism finance, part of which called for the creation of a new Interagency Commission on Money Laundering, comprised of twelve ministries and government departments. In addition to receiving, analyzing and disseminating information from the reporting entities, the FSFM has the responsibility of implementing the state policy to combat money laundering and terrorism financing. The Interagency Commission is chaired by the head of the FSFM and is responsible for monitoring and coordinating the government's activity on money laundering and terrorism financing. FSFM authorities credit cooperation among Commission members for the conviction of 257 individuals on money laundering charges between January and June 2006.

Nearly all financial institutions submit reports to the FSFM via encrypted software provided by the FSFM. According to press reports, Russia's national database contains over four million reports involving operations and deals worth over $877 billion. The FSFM estimates that Russian citizens may have laundered as much as $8 billion in the first three quarters of 2006. The FSFM receives approximately 30,000 transaction reports daily. Of these daily reports, 25 percent result from mandatory (currency) transaction reports, and 75 percent relate to suspicious transactions.

Each of the FSFM's seven territorial offices corresponds with one of the federal districts that comprise the Russian Federation. The Central Federal District office is headquartered in Moscow; the remaining six are located in the major financial and industrial centers throughout Russia (St. Petersburg, Ekaterinburg, Nizhny Novgorod, Khabarovsk, Novosibirsk and Rostov-on-Don). The territorial offices coordinate with regional law enforcement and other authorities to enhance the information flow into the FSFM, and to supervise compliance with anti-money laundering and counterterrorism financing legislation by institutions under FSFM supervision. Additionally, the satellite offices must identify and register at the regional level all pawnshops, leasing and real estate firms, and gaming entities under their jurisdiction. The regional offices also are charged with coordinating the efforts of the CBR and other supervisory agencies to implement anti-money laundering and counterterrorist financing regulations. Russia's anti-money laundering law, as amended, provides the FSFM with the appropriate authority to gather information regarding the activities of investment foundations, nonstate pension funds, gambling businesses, real estate agents, lawyers and notaries, persons rendering legal/accountancy services, and sellers of precious metals and jewelry.

During the first eight months of 2006, the FSFM carried out 2,700 financial investigations, referring 1,050 of them to law enforcement agencies for possible criminal investigations. According to the MVD, in the first half of 2006 Russian law enforcement investigated 6,300 cases of money laundering, sent 3,500 of the cases to court, and convicted 257 individuals on money laundering charges. Both the FSFM and MVD report that the number of suspicious transaction reports in 2006 has grown nearly ten-fold over the previous year, an increase which both agencies attribute to a greater focus government-wide on financial crimes and terrorism financing.

As part of administrative reforms enacted in 2004, the FSKN now has a full division committed to money laundering, staffed by agents with experience in counter narcotics and economic crimes. This division cooperates closely with the FSFM in pursuing narcotics-related money laundering cases. From January through August 2006, the FSKN reportedly initiated 1,332 money laundering cases and referred over 340 of these cases to the General Procuracy for prosecution. Consistent with Financial Action Task Force (FATF) recommendations, the criminal code was amended in December 2003 to remove a specific monetary threshold for crimes connected with money laundering, thus paving the way for prosecution of criminal offenses regardless of the sum involved.

With its legislative and enforcement mechanisms in place, Russia has begun to prosecute high-level money laundering cases. Through September 2006, the CBR revoked the licenses of 48 banks for failing to observe banking regulations. Of these, 25 banks lost their licenses for violating Russia's anti-money laundering laws. First Deputy Chairman Andrey Kozlov led the CBR's efforts to implement stronger anti-money laundering guidelines until his assassination in September 2006. He worked to implement the managerial and reporting requirements that made license revocation politically feasible, and had taken steps to prohibit individuals convicted of money laundering from serving in leadership positions in the banking community. This latter issue remains pending with the CBR. President Putin publicly committed to continuing Kozlov's work to preclude shadow economy groups from finding haven in the country's financial sector.

In October 2006, the Interior Ministry's Department for Economic Security reported that it had shut down a Georgian crime ring that had laundered as much as $9 billion from April 2004 to January 2005 through as many as five Russian banks. The announcement stated that the FSFM's analysis and cooperation with law enforcement authorities in Germany, Austria, Latvia, Lithuania, and Israel provided sufficient information to freeze the crime ring's bank assets. According to Interior Ministry representatives, two of the suspected banks' licenses had been revoked more than a year before the Department of Economic Security action.

Russian legislation provides for the tracking, seizure and forfeiture of criminal proceeds. None of this legislation is specifically tied to narcotics proceeds. Legislation provides for investigative techniques such as search, seizure, and the identification, freezing, seizing, and confiscation of funds or other assets. Authorities can also compel targets to produce documents. Where sufficient grounds exist to suppose that property was obtained as the result of a crime, investigators and prosecutors can apply to the court to have the property frozen or seized. Law enforcement agencies have the power to identify and trace property that is, or may become, subject to confiscation or is suspected of being the proceeds of crime or terrorist financing. The law allows the FSFM, in concert with banks, to freeze possible terrorist-related financial transactions for one week: banks may freeze transactions for two days, and the FSFM may follow up with freezing for an additional five days.

In accordance with its international agreements, Russia recognizes rulings of foreign courts relating to the confiscation of proceeds from crime within its territory and can transfer confiscated proceeds of crime to the foreign state whose court issued the confiscation order. However, Russian law still does not provide for the seizure of instruments of crime. Businesses can be seized only if it can be shown that they were acquired with criminal proceeds. Legitimate businesses cannot be seized solely on the basis that they were used to facilitate the commission of a crime.

The Presidential Administration as well as Russian law enforcement agencies have expressed concern about ineffective implementation of Russia's confiscation laws. The government has proposed amendments that are currently under review by the Duma (Parliament) which would make it easier to identify and seize criminal instrumentalities and proceeds. While Russian law enforcement has adequate police powers to trace assets, and the law permits confiscation of assets, most Russian law enforcement personnel lack experience and expertise in these areas.

The Russian Federation has enacted several pieces of legislation and issued executive orders to strengthen its ability to fight terrorism. On January 11, 2002, President Putin signed a decree entitled "On Measures to Implement the UN Security Council Resolution (UNSCR) No. 1373 of September 28, 2001." Noteworthy among this decree's provisions are the introduction of criminal liability for intentionally providing or collecting assets for terrorist use, and the instructions to relevant agencies to seize assets of terrorist groups. When this latter clause conflicted with existing domestic legislation, the Duma within the year approved an amendment to the anti-money laundering law, resolving the conflict and allowing banks to freeze assets immediately pursuant to UNSCR 1373. Article 205.1 of the criminal code, enacted in October 2002, criminalizes terrorist financing. On October 31, 2002, the Federation Council, Russia's upper house, approved a supplemental article to the 2003 federal budget, allocating from surplus government revenues an additional 3 billion rubles ($1.1 million) in support of federal counterterrorism programs and improvement of national security.

The FSFM reports that in regard to terrorism financing, it has compiled a list of 1,300 organizations and individuals suspected of financing terrorism, 400 of which were foreign. There are five sources of information that may designate entities for inclusion on the FSFM's list of proscribed organizations. International organizations' designations, such as the UN 1267 Sanctions Committee, constitute the first source. Second, Russian court decisions provide a basis for inclusion. Third, resolutions from the Prosecutor General can identify individuals and organizations for inclusion. Fourth, Ministry of Interior investigations serve as a basis for inclusion if subsequent court decisions do not dismiss the investigation's findings. Finally, bilateral agreements, which include information sharing regarding entities on the counterpart's entities list, may provide a basis for inclusion on the FSFM list. As of a year ago, the FSFM has uncovered 113 bank accounts related to organizations and individuals included on Russia's terrorist list.

In February 2003, at the request of the General Procuracy, the Russian Supreme Court issued an official list of 15 terrorist organizations. According to press reports, the financial assets of these organizations were immediately frozen. In addition, Russia has assisted the United States in investigating high profile cases involving terrorist financing. In 2003, Russia provided vital financial documentation and other evidence that helped establish the criminal activities of the Benevolence International Foundation (BIF). In April 2005, a U.S. Federal Court convicted a British national for attempting to smuggle shoulder-held missiles into the U.S. with the intent to sell the weapons to a presumed terrorist group. The subject was arrested in a sting operation that involved 18 months of collaboration among U.S., Russian, and British authorities. He was found guilty on five counts, including material support to terrorists, unlawful arms sale, smuggling, and two counts of money laundering. However, Russia and the U.S. continue to differ about the purpose of the UN 1267 Sanctions Committee's designation process, and such political differences have hampered bilateral cooperation in this forum.

The United States and Russia signed a Mutual Legal Assistance Treaty in 1999, which entered into force on January 31, 2002. The FSFM has signed cooperation agreements with the Financial Intelligence Units (FIUs) of 24 countries, including the United States. The FSFM has been an active member of the Egmont Group since June 2002, having sponsored candidate FIUs from the former Soviet republics, including current FIU members in Ukraine and Georgia. U.S. law enforcement agencies exchange operational information with their Russian counterparts on a regular basis. In 2005, Russian law enforcement agencies cooperated with the U.S. in a high-profile case that led to the conviction of a Russian national in a U.S. District Court on charges that he laundered over $130 million through a Moscow bank. The individual was sentenced to 51 months imprisonment and ordered to pay $17.4 million in restitution to the Russian government. This close cooperation between Russian and U.S. agencies has continued and strengthened in 2006.

Russia became a full member of the Financial Action Task Force in June 2003 and participates as an active member in two FATF-style regional bodies. It is a member of the Council of Europe's Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL) and was instrumental in the creation of the Eurasian Group on Combating Legalization of Proceeds from Crime and Terrorist Financing (EAG). The EAG Secretariat is located in Moscow. In December 2005, under the auspices of the EAG, the FSFM established the International Training and Methodological Center of Financial Monitoring (ITMCFM). The main function of the Center is to provide technical assistance to EAG member-states, primarily in the form of staff training for FIUs and other interested ministries and agencies involved in AML/CFT efforts. The ITMCFM also conducts research on AML/CFT issues. As Chairman of the EAG, Russia's FIU continues to play a strong leadership role in bringing the region up to international standards in its capacity to fight money laundering and terrorism financing.

Russia ratified the Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime in January 2001. Russia is a party to the 1988 UN Drug Convention and on May 26, 2004, became a party to the UN Convention against Transnational Organized Crime. In November 2002, Russia ratified the UN International Convention for the Suppression of the Financing of Terrorism. Russia also became a signatory to, and ratified on May 9, 2006, the UN Convention against Corruption.

Through aggressive enactment and implementation of comprehensive money laundering and counterterrorism financing legislation, Russia now has well-established legal and enforcement frameworks to deal with money laundering and terrorism financing. Given its role in the creation and maintenance of the EAG, Russia has also demonstrated the will and capability to improve the region's capacity for countering money laundering and terrorism financing.

Nevertheless, serious vulnerabilities remain. Russia is among the world's most sophisticated perpetrators of fraud and money laundering through electronic and internet-related means. To meet its goal of combating money laundering and corruption, Russia needs to follow through on its commitment to improve CBR oversight of shell companies and scrutinize more closely those banks that do not carry out traditional banking activities, including making all offshore operations subject to the identical due diligence and reporting requirements as other sectors. To prevent endemic corruption and deficiencies in the business environment from undermining Russia's efforts to establish a well-functioning anti-money laundering and counterterrorism finance regime, Russia should strive to stamp out official corruption, particularly at high levels, and to increase transparency in the financial sector and the corporate environment. Russia should also commit adequate resources to its regulatory and law enforcement entities in order to help them fulfill their responsibilities. Additionally, Russia should work to increase the effectiveness of its confiscation laws and their implementation including enacting legislation providing for the seizure of instruments, in addition to the proceeds, of criminal activity. Finally, Russia should continue to play a leadership role in the region with regard to anti-money laundering and counterterrorist finance regime implementation.