[Congressional Record Volume 164, Number 36 (Wednesday, February 28, 2018)]
[Senate]
[Pages S1268-S1271]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                      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.

                          ____________________