The best team in European soccer. Row houses in Manhattan. Yachts in a Barcelona shipyard. These are some of Russian oligarchs’ favorite things. They are also, suddenly, a source of leverage for Western governments trying to punish Vladimir Putin’s friends.
On Saturday, the White House joined leaders of France, Germany, Italy, the United Kingdom, Canada, and the European Commission in announcing the creation of a “transatlantic task force” to uncover and block the foreign assets of Russian oligarchs close to President Vladimir Putin. For the moment, that announcement has raised more questions than it answers. Such as: How plaintively must a Russian billionaire appeal for peace to keep his Lamborghinis? How many homeless families could we house in the world’s most expensive apartments? And who gets Roman Abramovich’s Chelsea FC, which is said to be worth more than $3 billion?
Keeping money in the capitalist strongholds of London and New York has long been considered an insurance policy against changing fortunes at home for tycoons the world over. For the richest Russians, it has not worked out that way. Sensing the bipartisan appeal of hoisting pitchforks in the general direction of other countries’ billionaires, American politicians have been talking a big game. The Manhattan borough president wants to seize their apartments. A Texas GOP congressman has proposed a new bill that would allow Americans to commandeer the yachts themselves. In Tuesday’s State of the Union address, Joe Biden said the U.S. and its allies would “find and seize their yachts, their luxury apartments, their private jets.”
The U.S. task force, the Department of Justice said on Wednesday, would be called Kleptocapture.
It’s easy to see why snatching fancy boats was appealing policy even before Russian artillery started bombing Kyiv last week. While broader sanctions hurt everyday Russians, it’s surprisingly simple to bring the hammer down specifically on the country’s richest and most powerful citizens, because they store an astounding amount of their wealth abroad. Some estimates project Russians have as much money abroad as in the country. It is very concentrated in the hands of just a few people. To effect political change in Russia, the economist Thomas Piketty suggested last month, Western nations should register and tax these holdings at a high rate.
The stakes have risen considerably since then.
Government officials in the U.K. and France have made promises similar to Biden’s to start the week. But don’t get your hopes up for handing mansions over to the homeless. In all three countries, governments can easily block access to assets from bank accounts to apartments, making it difficult or impossible for targets to use their holdings for years. But confiscating them permanently is decidedly more complicated.
“It’s not that we’re going to be giving the yachts away to the poor anytime soon,” explained John Smith, who served as director of the Office of Foreign Assets Control, or OFAC, until 2018. That’s the Treasury Department division charged with hunting down the assets of people on the sanctions list—one whose acronym, conveniently, sounds like what you say when you find out they’re after you.
Smith outlined what might happen if the U.S. expands its list of sanctioned persons. “Shopping centers, a luxury apartment in midtown [Manhattan]—what’s happening is that OFAC comes, everyone has to get out of the property, they padlock the door, and it sits. If it’s a yacht, it’s locked. That happens immediately. OFAC signs a piece of paper and it’s effective. You have to make sure it doesn’t sink.”
“But to take title,” he added, “it generally has to involve some kind of process.” Freezing is easy. Seizing is hard.
The rules are similar in many European countries. That means that those Russian-owned yachts in the Barcelona shipyard—which belong to Lukoil CEO Vagit Alekperov, industrialist Andrey Molchanov, and Chelsea owner Abramovich—could be stuck there, but probably won’t be used to transport refugees anytime soon.
Complicating matters further is the range of assets that might be vulnerable. It seems unlikely Boris Johnson will want to padlock London’s Stamford Bridge stadium, the home of the Chelsea team, though Abramovich was named a Putin crony by the Russian dissident Alexei Navalny last year. Abramovich has ceded day-to-day control of the team to its trustees, but has not yet been targeted by U.K. policy and was the subject of an angry confrontation between a Ukrainian journalist and Prime Minister Boris Johnson on Tuesday.
The first step for the task force will be deciding whom to sanction. Different countries have different working lists of who makes the cut. In the U.S., the Treasury Department runs a handy sanctions database of Specially Designated Nationals and Blocked Persons (SDN) where you can find the names (and addresses, if applicable) of individuals like President Vladimir Putin and Foreign Minister Sergey Lavrov.
Step two is hunting down assets. Maybe the oligarch’s name is on the account. But maybe it’s a business partner. Or an ex. “It’s very difficult to figure out at what point you put the ex-girlfriend of an oligarch on the list because she’s got a luxury apartment,” said Smith. The point is not hypothetical. The industrialist Dmitry Rybolovlev purchased New York City’s most expensive home for his daughter; Abramovich gave a bunch of Manhattan town houses to his ex-wife, who’s an American citizen; the sanctioned tycoon Oleg Deripaska, whose palatial homes in New York and Washington were raided by the FBI in October, says they belong to his family.
Disclosure requirements in recent years have made it easier to figure out who owns what, especially when it comes to U.S. bank accounts. Since 2015, Washington has also started requiring title insurance companies to hand over the names behind LLCs making all-cash property purchases in major U.S. cities. The press tends to figure out who is buying trophy properties in cities like Manhattan and London. But ownership rules vary from state to state, and it’s likely that sophisticated buyers still manage to hide most of their holdings. “It’s an incredibly complex and difficult challenge for the U.S. and other governments to dig deep enough through these layers of shell companies and offshore venues to locate all the property involved,” said Smith. There will likely be, he said, “a long and arduous job ahead.”
Step three: asset freeze. Money is the easy part, since U.S. financial institutions pay close attention to the SDN list and will block accounts at a moment’s notice. Real property, if you can find it, is not hard to lock up. “They can’t access the property. They can’t sell the property because no U.S. person could engage in a transaction with them. So if they want to make the asset liquid in any way, they have to ask OFAC permission,” said Ryan Fayhee, a sanctions lawyer and former prosecutor at the Department of Justice. “What happens if there’s a water leak? As a matter of law, as crazy as it sounds, the plumber would have to contact OFAC and get a license.”
It’s like in X-Men, suggested Michael Parker, a money laundering specialist and former OFAC investigator, when Magneto gets put in a plastic cage to stop him from using his powers.
Step four is where Joe Biden may be a little ahead of his skis. “Ownership has not been extinguished [by an asset freeze],” Parker said. “In forfeiture, on the other hand, the U.S. government is taking full ownership, and that’s a constitutional issue.” Freezing can be done instantly. Seizing is going to take a lawyer, or 10.
To claim and redistribute frozen foreign assets, the feds have to demonstrate they were used to commit crimes, obtained with the proceeds of a crime, or that their seizure could compensate victims of their owners’ crimes. Police departments do sometimes just take people’s things in the United States, a process called “civil forfeiture” that’s been derided by the ACLU, among others. But it’s unlikely quick and dirty forfeiture tactics used on the assets of small-time drug dealers will work on the yachts of lawyered-up tycoons.
“The government can’t just go out and take something because they say it belongs to a bad guy,” said Brian Frey, a former DOJ prosecutor. “The courts are going to be involved, and there’s only so fast you can make the courts move.”
Several lawyers pointed me toward the case of 650 Fifth Avenue, a Manhattan office building that was partly owned by a foundation with ties to Iran. The Department of Justice brought a case in 2008 that the foundation had violated U.S. sanctions on Iran; the building’s ownership was not resolved until the conclusion of a jury trial in 2017, at which the judge also ruled the U.S. could distribute money from the building’s sale to families of victims of terrorist attacks. (Joe Biden may face a similar ordeal as he tries to execute a controversial decision to redistribute billions of dollars belonging to the Afghan Central Bank to victims of the 9/11 attacks.)
And that was just one building. Operation Kleptocapture could be going after hundreds.
As critics have pointed out, the real solution was to pass laws decades ago to make ownership more transparent. The U.K., for example, is now considering an “Economic Crime Bill” that would require foreign companies to reveal who really owns property. It’s a bit late for that to help us now.
The potential targets of this new task force seem to be quaking in their loafers nevertheless. Roman Abramovich says he’s working on negotiating for peace in Ukraine. Evgeny Lebedev, a Russian-British billionaire who owns the Evening Standard and sits in the House of Lords, pleaded for peace on the front page of the paper. Other Russian businessmen have made similar public statements in recent days.
But do those men still have the ear of Vladimir Putin? If they are pushing him to back off, it’s not working. In a report last year, the Russian economist Vladislav Inozemtsev questioned the utility of targeting the Deripaskas and Abramovichs of the world in order to shift Putin’s policies, noting that the stereotype of the oligarch gallivanting abroad is a few years out of date. Instead, Inozemtsev argued, Putin has more recently encouraged a “nationalization of elites” in which his inner circle keeps more money at home.
“In other words,” Inozemtsev wrote, “sanctions against oligarchs would affect the part of Russian big business whose owners are most critical of the current regime and would result in an opposite effect to that desired: the value of the assets of sanctioned ‘oligarchs’ would drop sharply, and their companies would be quickly bought out by the state or by corrupt officials who have long been in business.” Those close to Putin, meanwhile, “would be covered by the new Russian laws providing that the state budget should compensate them for the losses caused by foreign nations’ activities.”
Inozemtsev’s solution? “Only a strict energy import embargo could make Russia feel the pain,” he wrote. It’s the one thing the West seems unable to do.