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The Russian Illicit Financial Flows after the start of the War

Definitional uncertainty of illicit financial flows (IFFs)

Published onOct 27, 2023
The Russian Illicit Financial Flows after the start of the War

The term “illicit financial flows” (IFFs) is not defined in the international normative framework. For the purposes UNDOC defined it asall cross-border financial transfers, which contravene national or international laws1. The Classification of Illegal Financial Flows from the the United Nations encompasses a wide range of financial transfers conducted for diverse purposes: remittances from Criminal Activities, Transfers for Criminal Ends, Fund Transfers Involving Entities under Financial Sanctions, Evasion of Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) Measures and Evasion of Other Legal Obligations and others.

The World Bank defined Illicit financial flows as ’money illegally earned, transferred, or used that crosses borders2, with the ‘illegal’ aspect of wealth generation falling into three main categories: that the acts themselves are illegal (for example, tax evasion); the funds are the results of illegal acts (for example, smuggling and trafficking in minerals, drugs, and people), or the funds are used for illegal purposes. GFI (Global Financial Integrity) the US based think tank classifiesIllicit financial flows as funds that were illegally earned, transferred, and/or utilized across an international border3.

We can identify two important characteristics of illicit financial flows originating from definitions - this is the immoral or illegal source of their origin and the flow from one jurisdiction to another, that is, the cross-border nature of transactions. However, these two definitions miss an important aspect of IFF: funds that have been acquired corruptly and immorally, but not necessarily illegally. This is encapsulated, in English at least, in the word ‘illicit’.

At the same time, some definitions can distort perception, giving a false sense thatillicitmeans only illegal or criminal financial flows. It is necessary to make a separate observation and say that the huge part of illicit financial flows will not fall under the category of illegal, since they do not always have a criminal origin, but occur due to malicious distortion of trade transactions in the process of foreign economic activity. It makes sense to include trade misinvoicing to these. This observation is confirmed by GFI data, which has been analyzing cross-border illegal financial transactions for many years4.

Transborder trade operations and financial transactions related to customs violations, tax evasion and falsification of final destination on the delivery of goods even formally fall under the category of illicit financial flows.

Russia’s dimension in illicit financial flows

Russian Parallel import input in IFFs

Since the beginning of war between Russia and Ukraine and the implementation of numerous international and country-specific sanctions, Russia has been restricted in foreign economic trade and financial transactions, which has led to serious changes in illicit financial flows. At the same time, the networks of illegal operations and intermediaries established before the war allowed Russian actors to quickly adapt to sanctions and other prohibitions.

New practices that began after the start of the war related to the distortion of the real purpose of payment for the import of goods prohibited from importation due to sanctions to Russia have spread, which is the basis of the Russia parallel import program.

The lack of a clear definition of illicit financial flows provides a field for distorting the definition of so, and often for legitimizing illicit financial flows by governments in extraordinary situations like Russia. Despite the fact that banking compliance identifies such transactions as high-risk and potentially related to money laundering5, the FIU (Rosfinmonitoring) insists that financial institutions perceive these transactions as legitimate.

This leads to the erosion of anti-laundering, anti-sanctions and ethical standards in the Russia financial sector, directing Russia towards the group of countries from the black or gray lists of FATF.

Sanction avoiding and transformation of IFFs

Despite the apparent similarity, it is necessary to distinguish between foreign trade operations related to the supply of goods that are not produced in Russia through parallel imports (Coca-Cola, Apple and BMW) and deliberate circumvention of sanctions, for example, the supply of goods to Russia that have fallen under sanctions restrictions (dual-use goods, military equipment, software and etc.).

The changed supply chains due to sanctions have led to the transformation of the geography of Russia's economic partners. In February 2023, the European Bank for Reconstruction and Development published a report showing that exports from the EU and the UK to Armenia, Kyrgyzstan and Kazakhstan increased by 90% after sanctions were imposed. Some of these goods are high-tech items used by the military in Russia6.

The transformation of Russia's trade flows towards countries that have not joined promotional programs against the Russian economy poses new challenges to the regulators of Georgia, Kazakhstan, Azerbaijan, Armenia, Kyrgyzstan and a number of other countries ’friendly’ to Russia. The need to urgently change their approaches to Russian transactions is caused by the imposition of the US sanctions on Kyrgyzstan economic entities7 and including some Russia’s neighboring countries Kazakhstan, Georgia, Azerbaijan, Armenia, Uzbekistan and Tajikistan in a BIS watchlist8.

The risks of an increase in the volume of illicit financial transactions to circumvent sanctions through the countries of the Caucasus and Central Asia are amplified by the fact that Russia has long been in the top countries with the largest trade value gaps, which indirectly indicate the presence of illicit financial flows to/from Russia9.

The Russia shadow economy influence on IFFs

A ‘shadow economy’ is defined by the Oxford Dictionary as the ‘illicit economic activities existing alongside a country’s official economy.’ It is the market in which goods and services are traded illegally, to avoid government regulation or taxation10.

Sanctions expand the shadow economy and contribute to the spread of state corruption. Sanctions against the former Republic of Yugoslavia and Iraq (Saddam Hussein) and Haiti11. Illegal activity is increasing as political, military and business elites, as well as criminal networks, have used opportunities to smuggle prohibited goods. The reaction of the regimes to the sanctions, in turn, exacerbated the difficulties faced by their populations, forcing citizens to turn to the informal sector in order to survive.

The growth of the shadow economy due to sanctions leads to an increase in illicit financial flows. The annexed territories (Lugansk, Donetsk, Kherson) cannot actually exist in the global economic system and functioning as territories with a long list of economic restrictions, forced these territories into the shadow economy zone.

In fact, coal12 and metal13 supplies from occupied territories are perceived as illicit financial flows and are being investigated by the US and EU authorities.

Transformation of the IFF’s after the war started

New challenges, including sanctions, Russian individuals movement restrictions and additional banking control, forced the Russian operators of illicit financial schemes to change not only the geography of flows, but also the models of illicit financial flows.

On one hand cryptocurrencies have become a salvation for many Russians who were forced to flee the war outside the country, but on the other hand сrypto have also become the basis for the functioning of illicit financial flows, providing anonymity, transaction speed and security for participants in such schemes.
Transparency International Russia conducted research14 and identified 20 exchange offices in the business center of Moscow that provide services for the uncontrolled movement of cash to the UK and Europe. No checks are carried out on the sources of the origin of money and the identity of those sending and receiving money.

The US Justice Department opened a criminal case against the son of the Russian governor of the Krasnoyarsk region, Artem Us, who acted as a facilitator in a scheme to avoid sanctions for the supply of dual-use goods for Rostec (Russia state-owned corporation) and schemes for buying and selling sanctioned oil from Venezuela using cryptocurrency15.

The newest impact of Russia’s year-long invasion on the global illicit financial flows is the emergence of the shadow fleet industry associated with the transportation of sanctioned Russian oil. According to the consulting group Windward, the Russian shadow fleet has about 600 vessels, the mysterious ownership of which is designed to hide their transportation of sanctioned Russian oil/wet cargo since the beginning of the war with Russia16. Russian oligarchs being sanctioned by western governments managed to transfer their money sometimes in very extravagant methods such as an informal payment system known as Hawala. The quasi-banking financial system is often used for operations by terrorist groups, drug and human traffickers17.

Russian actors, facing increasing isolation from foreign currency and financial systems, used illicit gold markets and gold laundering to generate profits and transfer funds across borders18. Gold's physical mobility outside digital financial networks, such as SWIFT, makes it difficult to trace. Moreover, it can be easily laundered in global markets by concealing its origins.


The sanctions restrictions imposed on Russian business, the existence of the annexed Ukrainian territories in Russia, which are excluded from international cooperation, together with the ignoring of illicit financial transactions by Russian regulators, create a potential threat to global economic stability emanating from Russian actors. The transformation of Russian illegal financial flows after the start of the war and the inability of Western regulators to effectively control them indicates the need to find new approaches and strengthen cooperation between a wide range of international and national actors.

Executive director, Transparency International Russia, professor (Brīvā Universitāte)

DOI: 10.55167/5f088e1c8a69

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