5/4/15: Russian Offshore Capital Amnesty Law Proposal

Last week, Russian Duma received the government bill on amnesty for illegal expatriation of capital for private individuals.

• The bill will require those applying for amnesty to fully declare their offshore assets. 
• Upon declaration, that has to filled before the end of 2015, there will be no penalty for unauthorised expatriation. 
• The claimant is entitled, under the proposed law, to full confidentiality and do not have to disclose the sources of their assets held abroad. 
• The only liability that does arise under the proposal is the one relating to back taxes. In some cases, assets held abroad are subject to tax in Russia. 
• When that is the case, claimants will be required to settle any unpaid or underpaid tax obligations that arise from their ownership of the asset.
• The bill does not specify the full set of procedures for settling tax liabilities.

Illegal expatriation arises, for private citizens (excluding public and government officials, and elected representatives who are covered by more substantial restrictions on ownership and declaration of overseas assets), primarily from the restriction on expatriation of funds.

Some earlier versions of the bill required imposition of automatic fines on expatriated capital (this version was presented to the Government, but rejected in favour of a more liberal version), as well as a requirement to repatriate all foreign assets. The latter requirement was dropped in both versions considered by the Government and is not in the draft sent to Duma for consideration.

In the cases where foreign assets assets have been accumulated in the tax havens for the purpose of tax evasion, these assets will have to be repatriated. More on the current proposal here: http://www.bloomberg.com/news/articles/2015-03-26/russia-sets-terms-for-capital-amnesty-to-correct-past-mistakes-

At this stage, the new proposal does not cover assets acquired through illegal means, only assets expatriated for tax purposes. The new bill was developed in close cooperation with the intergovernmental Financial Action Task Force (FATF) on money laundering and other financial crimes, but FATF is not quite happy with the draft legislation. The reason for FATF objections is the lack of disclosure and information sharing. This is a serious matter, as failure to comply with FATF regulations can get Russia blacklisted. Russian Government is promising a separate bill to cover assets accumulated through money laundering and other criminal activities, but it remains unclear if this system of presenting separate pieces of legislation on several different, but potentially connected types of assets will satisfy the FATF. See more on this here: http://www.themoscowtimes.com/business/article/putin-s-capital-amnesty-could-put-russia-on-money-laundering-blacklist/514470.html.

Russian role within the FATF has been actively positive in recent years. However, Western sanctions during 2014 have led to some serious conflicts within the FATF, prompted primarily by the US delegation to the organisation that has clearly been using FATF as a vehicle for exerting geopolitical pressure on Russia (see http://www.reuters.com/article/2014/05/05/us-ukraine-crisis-moneylaundering-idUSBREA440RR20140505).

Question is: from the global perspective, is the new draft law a good thing or a bad thing?

Globally-allocated Russian capital, held by private individuals, can be divided into 3 (unequal in volume) types:

• Type 1 - the unknown quantum of assets acquired using illicit gains from activities in Russia, and illegally shifted out of Russian. This bit is not covered by the new legislation, but Russian Government has already said it plans to introduce a separate piece of legislation to cover these assets, and it has promised that it will fully comply with FATF.
• Type 2 - the unknown quantum of assets, probably similar to that covered by Part 1 and, together with Type 1 accounting for more than 2/3rds of all Russian-owned assets held abroad, has been expatriated to minimise tax exposures. Some of it legally, some illegally. This bit is covered by the proposed bill. As I understand it, Russian authorities can make a determination if some of the assets declared under Type 2 really relate to Type 1. If they do, Russian can notify FATF, but if they don't, Russian does not have to notify FATF.
• Type 3 - smaller share of Russian assets abroad is perfectly legal and is not covered by the proposed law. To-date, FATF had no complaints with Russia on these assets. 

Since 2002, Russia is deemed as compliant with FATF regulations. Under the current state of our knowledge about Russian assets held abroad, FATF has no systemic complaint against Russia. The new law will not reduce this level of compliance and will not undermine information available to FATF. It may even increase it, and the follow up law for dealing with Type 1 assets promises to increase it even further. So what is the point for threatening Russia with non-compliance and black-listing today? What is the basis for such a threat?

As non-specialist on FATF, I would welcome all informed comments on this issue from the readers.