Meeting with Director of the Federal Financial Monitoring Service Yury Chikhanchin

Published: 13.02.2021

V. Putin: Mr. Chikhanchin, I would like to begin our meeting today with matters pertaining to the arrangement of monitoring and oversight of the budget funds movement. I understand that there will be many more issues to discuss, but I suggest that we begin with this particular one.

Yu. Chikhanchin: If I may ask you, please take a look at these slides.

Mr. President, first of all, I would like to say that we have already launched, by and large, a mechanism for monitoring and overseeing the spending of the budget funds. Treasury and anti-monopoly follow up, monetary and credit follow up of the customs and tax services, banking support and our monitoring mechanism have already been introduced. Together with the ministries and departments I have mentioned, we are also working actively with the Government, in particular with its Analytical Centre, to develop criteria for assessing contract execution risks, regarding both contractors and customers, and to create mechanisms for mitigating such risks. We also cooperate closely with the Inter-Agency Working Group on Countering Illegal Financial Transactions (the one you have established) to coordinate joint measures for the specific cases. As of today, we are monitoring the spending of around 2.5 trillion rubles, about 36,500 contracts and around 20,000 contractors and customers.

What have we achieved in 2020 in terms of preventive measures? In cooperation with the Federal Antimonopoly Service, we have identified some 270 cartel agreements involving 49.2 billion rubles, terminated contracts with unscrupulous contractors worth some 29 billion rubles, and prohibited about 100 contractors from working on the contracts because they failed the fit and proper test.

The focus of our attention in terms of national projects remains on road construction, education and demography where, in our opinion, the risks are high today.

Regarding roads, we are currently working with the Ministry of Transport and are jointly assessing specific risks and ways of mitigating them. I believe that we will eventually work with other ministries on this project.

In disrupting criminal activity efforts, we have assisted in opening of about 1,000 criminal cases as well as in identifying and seizing of nearly 125 billion rubles. Violators have voluntarily reimbursed 5.5 billion rubles, and more than 20 billion rubles has been returned to the state budget.

In assessing the overall mechanism, it is worth mentioning the achieved results. In the past two years, the number of shell companies (involved in the public procurement process) has diminished about five-fold, due to our joint efforts. Cashing out of money is also down 35 percent, and illegal capital export has decreased three-fold.

We intend to work at both the federal and regional levels. We are working very closely with a number of regions, in particular with the Novgorod and Tula regions. For example, we have exposed kindergarten construction contracts in the Republic of Khakassia where prices were overstated two-fold. In coordination with the General Prosecutor’s Office, we are now investigating the contracts and persons who ordered them.

V. Putin: Khakassia?

Yu. Chikhanchin: Yes, Khakassia.

I would like to say a few words about several national projects.

Healthcare - We are working to prevent and stamp out violations in the healthcare sector.

In terms of preventing violations, we have achieved specific results on some criminal cases. In Bashkortostan, we have succeeded in securing decision to cancel the contract for building a surgical facility, and its dishonest executor is now listed among other unscrupulous contractors. A similar situation has shaped up in the Stavropol Territory where the contract worth 1.5 billion rubles was cancelled. Unfortunately, some criminal cases have been instituted, in particular regarding a tuberculosis hospital for children in Vladikavkaz and some medical centers in Novosibirsk.

We are now focusing particularly on the funds allocated to counter the COVID-19 pandemic. In cooperation with the Central Bank, we have developed certain criteria and introduced a special code number, which the banks use to inform us about suspicious transactions involving these funds. This allowed us to identify the criminal activity in the Irkutsk Region. The regional healthcare minister was arrested, and 30 million rubles of stolen funds has been seized as well. Much the same kind of work is underway in St. Petersburg. I am referring to the construction and refurbishment of medical centers. A certain affiliation was spotted there, and we are looking into it jointly with the General Prosecutor’s Office.

I would also like to point out several demography-related issues. In particular, we are now working in cooperation with the Federal Security Service, the Ministry of Internal Affairs and the Investigative Committee, on a case related to trafficking in babies under the guise of surrogacy maternity services. I believe this practice is bad for our demography.

Second, we have exposed criminal groups involved in prostitution and human trafficking activities.

On the second issue, in addition to our colleagues from Russia’s law enforcement agencies, we are also working with Turkey and the UAE to track down the beneficiaries and participants of all these dealings.

There is a similar situation regarding the environment issue. I would like to cite the following example: in cooperation with the Federal Security Service, the Ministry of Internal Affairs and the Federal Agency for State Property Management, we are now working to stop misappropriation of the state-owned property, in particular, mineral water wells in the North Caucasus. I think they will be recovered back to the state soon.

V. Putin: Good.

Yu. Chikhanchin: With regard to the social sphere, I would like to draw your attention to the following: after people started receiving pandemic-related benefits, certain fake ‘law firms’ began to make money out of it. Now, jointly with the Ministry of Internal Affairs, the  General Prosecutor’s Office and the Investigative Committee, as well as with the Moscow Government and the Moscow Region Government, we have exposed several such companies, and they have been closed. The General Prosecutor’s Office is currently checking about 30 other companies.

We continue to keep track of property transactions, especially the ones involving easy-term mortgages.

I would like to say a few words about state defence procurement order. In general, we have seen proof of the wisdom of your decision to create a system of monitoring the defence procurement process. Working together with the Ministry of Defence and law enforcement agencies since the law came into effect, we have reduced the number of shell companies involved in the defence procurement process by 37 percent and the number of shadow transactions by about 40 percent. Overall, the number of suspicious transactions has been reduced three-fold. Of great assistance in this respect are the banks that have been authorized to work with the state defence procurement order, first of all Promsvyazbank. It should be pointed out that the number of the bank’s transactions involving the state defence procurement order has increased by approximately eight times and the number of clients has more than tripled.

Regrettably, crimes have been committed in the sphere of state defence procurement order. Based on our information, over 120 criminal cases have been instituted, damages worth 9 billion rubles have been exposed, 2.4 billion rubles have been seized, and 1.5 billion rubles have been voluntarily reimbursed. We are now working with the Federal Security Service on several criminal schemes related to the defence procurement.

As regards specific industries, I would like to say a few words about forestry.

V. Putin: As far as I am aware, one of the schemes involves splitting up contracts, followed by asset siphoning.

Yu. Chikhanchin: Yes, we see that large contracts are being split up into smaller ones, which makes them more difficult to monitor. We are working closely together with the Federal Security Service on this scheme.

Speaking about forestry, the situation has been gradually changing during the past two years as the law enforcement agencies have become more active in this area. We are working together with the Federal Security Service, the Ministry of Internal Affairs, General Prosecutor’s Office and the Investigative Committee, and the work especially activated after the State Council meeting devoted to forestry had taken place.

V. Putin: So, the efforts have brought results?

Yu. Chikhanchin: Yes. Work is ongoing especially actively in Siberia, particularly in the Krasnoyarsk Territory, under the guidance of the plenipotentiary envoy. Criminal cases have been instituted in the Tomsk and Irkutsk regions, including corruption-related ones. The proceedings launched in the Far East and the Urals have to do with the smuggling of timber. Efforts in the Northwestern Federal District are designed to identify foreign beneficiaries involved in these shadow schemes.

We continue working in the fisheries sector, where over 30 criminal cases have been opened with our assistance alone. I would like to say a few words about the so-called ‘crab case’, the high-profile one. We continue working on it; over 20 criminal proceedings have been initiated, and we are now investigating foreign involvement together with our financial intelligence colleagues from Japan, South Korea, Europe and the United States. I believe we will find the money and recover it back to the state.

V. Putin: It includes customs duties and tax arrears?

Yu. Chikhanchin: Yes, it involves tax and other arrears.

I would like to highlight the energy industry issue. Here too, work is underway in cooperation with the Federal Security Service, the Ministry of Internal Affairs, the General Prosecutor’s Office, the Customs and the Ministry of Energy, focusing primarily on the companies that abuse trust, raise tariffs and move money abroad. About 100 criminal cases were initiated in 2020, damages amounting to 11 billion rubles were ordered to be reimbursed, and 9.5 billion rubles were seized. Most importantly, the Ministry of Energy believes that these efforts made it possible to limit increases in tariffs. This, of course, will relieve some social tensions to a certain extent.

I would like to say a few words about anti-corruption efforts. Again, in cooperation with the law enforcement agencies, primarily with the General Prosecutor’s Office, we have identified the most important corruption-prone areas which include federal and municipal procurement, state property management and budget funds spending. Corrupt officials can be found wherever there are affiliations, preferences and conflict of interest.

What is our work based on? Primarily, it includes suppression and preventive measures. Here, in cooperation with the Presidential Executive Office, anti-corruption commissions at the ministries and the panel of judges, we have checked over 75,000 civil servants who are currently employed or seeking employment. Several hundred applicants for public posts have been denied employment based on our materials.

In terms of suppression, we have conducted over 5,000 financial investigations and about 500 criminal cases have been instituted with our participation. We have exposed assets worth 35 billion and have already recovered assets worth 38.5 billion in corruption cases.

I would like to say a few words about combating drug trafficking. Here, we are working on the financial component with the State Anti-Drug Committee in cooperation with the Ministry of Internal Affairs, the Federal Security Service and the General Prosecutor’s Office, as well as with our colleagues from other countries. Usually, narcotic drugs come from abroad and money goes abroad as well. We are now working with over 30 financial intelligence units as part of just one case. Besides that, criminal cases have been initiated with our participation in a number of countries, particularly in Belarus, Moldova and Spain.

We are facing the following risks. Drug traffickers actively use electronic payment systems and cryptocurrencies. In cooperation with the law enforcement agencies and the Academy of Sciences, we have first of all developed a digital service that allows us to analyze crypto transactions. This enables us to track cryptocurrency transactions and, most importantly, we are now developing indicators and criteria which could allow us to single out crimes amid the flow of transactions. A number of criminal cases have been already opened. We are working closely with our colleagues from other countries, such as Finland (financial intelligence unit), Luxembourg, Liechtenstein, Belarus, Malta and others. This project is monitored by the Government, and the Ministry of Digital Development is helping us see it to completion this year.

I would like to say a few words about working with financial institutions. They are the main providers of information for us, and the situation is as follows. We have drafted 13 bills in coordination with the Central Bank, which were adopted into laws and enacted. The operation of eight shadow platforms has been terminated. The share of high-risk banks decreased by about 60 percent; some had their licenses revoked, others were punished in other ways. Banks have applied the criteria which they had helped develop to prevent suspicious transactions involving about 190 billion – from being either integrated into or withdrawn from the legal economy. The volume of suspicious transactions has been reduced by more than half over the past two years.

But criminals are looking for new mechanisms. We have ousted them from banks, so because they have no chance with banks, they are using notary services – have notaries sign various deals. A new law has been enacted, allowing notaries, from 2021, to refuse to notarize transactions they find suspicious. Last year, they identified such transactions worth about 25 billion. Fraudsters also continue using the judicial system for illegal purposes, such as  false bankruptcy attempts.

V. Putin: To secure court decisions, right?

Yu. Chikhanchin: Yes, promissory notes, bankruptcies and things like that.

We have taken part in more than 5,000 court hearings as a third party with total claims exceeding 600 billion. And I must say that this work is yielding results: about every tenth case, the court rules against the applicant, and this again means we have prevented the misuse of about 70 billion through the courts.

Because people’s incomes have dropped somewhat, various firms have emerged that offer ways to make quick money. In particular, we have worked together with the Bank of Russia, the General Prosecutor’s Office, the Ministry of Internal Affairs and the Federal Security Service to terminate the activities of a foreign company, Antares Limited, which offered investments in cryptocurrency.

We are working with our colleagues from nine countries to identify the beneficiaries of this scheme; the suspicious website has been blocked. We are now figuring out how much money has been embezzled, how it was done, who was involved, and how many. This happened in the Siberian Federal District and in the Far East.

In the European part of Russia, we have encountered a slightly different pattern. Some so-called pseudo-brokers were selling various financial services. We joined efforts with the General Prosecutor’s Office, also with the Bank of Russia and our colleagues from abroad (from about a dozen countries, in particular Cyprus, Estonia, and Finland helped us) and identified about 350 foreign websites, and the Federal Service for Supervision of Communications, Information Technology and Mass Media blocked them.

V. Putin: Are foreign online platforms also used here?

Yu. Chikhanchin: Yes. They are doing the same thing. In both the first and second case, the individuals involved are based abroad, and they cannot even be traced.

I would like to mention our efforts aimed at combating the financing of terrorism. We are working in this sphere primarily under the auspices of the National Anti-Terrorist Committee. Working together with credit institutions and using the indicators that we have developed with the Federal Security Service and the Ministry of Internal Affairs, we have exposed over 2,300 individuals and over 1,000 legal entities suspected of being involved in or linked to terrorism-related financial activity. We have frozen the assets of over 1,200 individuals, and assets of another 1,600 persons were blocked in non-judicial procedures within the framework of the Interagency Commission that has been set up on the basis of your instructions. Twenty foreigners have been denied entry into Russia and over 250 terrorism-related cases have been opened, including 150 that are related to financing of terrorism. Working together with our colleagues from Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, we have identified some 1,200 persons linked to terrorism and have frozen their assets as well.

We are working together on specific cases involving the local cells of international terrorist organizations. I would like to say that together with the Ministry of Internal Affairs, the Federal Security Service and our Turkish colleagues, we have picked up the financial trail and identified the persons who were involved in the terrorist attack in Istanbul in 2017. A criminal case has been opened in Turkey and in Russia with our assistance. It was the first international terrorist act of such kind.

In addition to what I have already said, I would like to draw your attention to the following risks. We are working hard to minimize the risk of sanctions that may be imposed by foreign countries and international organizations against individuals and legal entities. There are two possible ways.

First of all, we are working with other anti-money laundering stakeholders to prevent criminal and suspicious funds from being transferred to foreign countries where they can be used as a reason for investigation by financial intelligence units and other security services and, subsequently, for imposition of sanctions.

Secondly, if we fail and this happens, we try to join forces with our foreign colleagues to settle each particular case without delay. If we find elements of a crime, we transfer the relevant materials to our law enforcement agencies for launching criminal proceedings. If not, we try to prove that this is regular business activity and that no legal action needs to be taken against our individuals or legal entities. As a rule, we find common ground with our foreign colleagues, who accept our opinion.

What tools are we using to resolve these problems? First of all, this is a Personal Account of the oversight authorities. It is being used by several dozens of thousands of financial and non-financial institutions that supply us with information. We transfer online information on any new risks, new typologies and new crimes and they quickly respond by sending us quality information. This is on the one hand. On the other hand, we can see how law abiding they are: each of them has a panel with several segments that show if they are violating anything by switching on a red signal. As a rule, they quickly eliminate any deficiencies and we do not have to visit financial institutions with inspection. This works remotely.

Secondly, we are now launching a personal account of law enforcement agencies where it is possible in the online mode to exchange information on the operational environment, respond to specific inquiries and situations, and receive training. I think we will try to integrate all law enforcement agencies in this system in 2021 and later to include other government authorities that are involved in the AML/CFT efforts.

We are closely cooperating with our International Training and Methodology Centre that allows us to teach and increase financial literacy of the general public. We trained 1,500 civil servants and more than 26,000 experts on financial institutions. We are also training our foreign colleagues, primarily from the Eurasian Group and the CIS: Belarus, India, Kazakhstan, China, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. We provided training to over 2,000 people. We are also using our International Network AML/CFT Institute that today incorporates 40 educational institutions from seven countries. They have the same educational and training programs and the same manuals that we compile and disseminate to our colleagues. We are developing them in cooperation with our colleagues as well. We have about 4,000 students from 30 countries undergoing training now. These are our tools. At present, we are actively working together with the Central Bank and the Ministry of Finance to increase financial literacy of the population. Needless to say, we are primarily working with our foreign colleagues. A lot of work is being done.

I would like to thank you very much for supporting the creation of the International Risk Assessment Center. The Government has allocated additional funds for us and I think we will launch this mechanism with our CIS colleagues fairly soon.

This is how we worked in 2020 and plan to work in 2021, if you support us.

V. Putin: Good. “Transparent blockchain” – what is it?

Yu. Chikhanchin: “Transparent blockchain” is exactly the mechanism that will allow us to see all movements of cryptocurrency, and expose any attempts to hide behind it. Cryptocurrency is ostensibly inaccessible, and makes it possible to hide the true beneficiary, but I think this mechanism will let us make all necessary revelations.

V. Putin: That’s good.