Euro SIFMANet Warsaw Report

In late January 2023, RUSI’s Centre for Financial Crime and Security Studies (CFCS) hosted a roundtable in partnership with the Polish Institute of International Affairs in Warsaw. The discussion, held under the Chatham House rule, gathered representatives from government ministries and agencies, the private sector – including banking institutions, law firms and consulting companies – and civil society. The event was part of RUSI’s ongoing study of EU sanctions implementation and wider responses to illicit finance (Euro SIFMANet) funded by the National Endowment for Democracy.

The Polish Legal Framework

The roundtable opened with a candid statement from representatives of Poland’s public sector, who noted that before the Russian invasion of Ukraine, pressure to implement EU sanctions was low, as they had little or no connection with either the strategic goals of Polish foreign policy, or with individuals/entities and their assets in Poland. In view of the limited scope of those sanctions, this included the sanctions imposed on Russia in 2014. This lack of focus was also reflected by private sector participants, with one representative of the legal sector noting that sanctions had not featured in their work on transaction due diligence, despite the presence of a range of EU sanctions regimes.

However, sanctions on Russia since February 2022 have brought to the fore the need to increase Poland’s capabilities to facilitate their implementation. Participants from the public sector stated that Poland has now cut off all reliance on Russia for its energy supply and severed most links to Russian businesses, a process termed by one participant as the ’de-russification’ of the Polish economy. With only 2.8% of Polish exports heading to Russia, Poland already had relatively limited connections with the Russian economy (for example, the country does twice as much trade with the Czech Republic as it does with Russia). In the view of roundtable participants, this limited economic connection with Russia is partly related to the countersanctions Russia has applied to Poland, for example on agricultural products. Still, following Poland’s commitment to effectively implement sanctions to weaken Russia’s capacity to fund and resource its military capabilities, the country has introduced new legislation relating to sanctions. This legal strengthening is underpinned by firm social support for countering Russian aggression against Ukraine, which incentivises both the public and private sectors to apply an unambiguous approach to sanctions implementation.

More specifically, representatives from the Polish public sector emphasised that Poland complies not only with UN and EU sanctions, but also with UK and US sanctions, as many transactions are conducted in those countries’ currencies.

On top of the EU’s sanctions regulations and designations, in 2022 Poland introduced additional legislation offering ‘specific solutions in counteracting the promotion of aggression against Ukraine and serving to protect national security’. A representative from the National Revenue Administration (NRA) provided a detailed description of the country’s new legislative framework, in which the Ministry of Finance is charged with implementing sanctions, and can impose administrative penalties for non-compliance. Within this ministry, the NRA has the most resources to take charge of these issues and is tasked with the supervision of sanctions implementation. However, multiple other agencies have relevant competencies in the national sanctions framework. Customs authorities monitor the transit of goods, and local customs offices can conduct audits and impose administrative penalties. And while the Financial Supervisory Authority audits the financial sector, the Ministry of Economic Development and Technology issues licences for trade on armaments and dual-use goods.

Among the novelties introduced by the new legislation was the creation of a national sanctions list. The national list is managed by the Ministry of the Interior and aims to include names of persons and entities beyond those listed by the EU. In order to identify potential additions to the domestic list, Polish authorities look into entities that are not on the EU list but are identified as having Russian or Belarusian shareholders or board members. To this end, the Ministry of Foreign Affairs (MFA) shares the list with Polish embassies abroad to get further information from the countries they are based in. There are currently 38 individuals and 39 entities on Poland’s national sanctions list. The representative from the NRA at the roundtable noted that some of the listed entities are companies with known links to high-profile Russian individuals established in Poland through the Netherlands, Singapore and Switzerland. The same authority explained that listing has reportedly had a meaningful impact on these companies, with some closing overnight as a result, leading to bankruptcy proceedings. In a testament to Poland’s efforts, representatives from the public sector estimated that assets amounting to €1 billion have been frozen in the country.

As described by the NRA representative, the new sanctions Acts also imposed a national embargo on coal from Russia and Belarus, and introduced administrative penalties for non-compliance, which can amount to 20 million zlotys (around €4.2 million) and prison sentences of three to 15 years. Furthermore, Poland has also introduced new tools such as temporary compulsory administration, which was created to manage the frozen assets of entities subject to sanctions. This legal tool can be used to provide support to the workplaces of sanctioned entities, in order to enable business operations that serve a public utility to keep running, or to protect national economic interests.

Participants from the public sector were keen to emphasise that Poland is an active contributor of sanctions proposals to the EU and stated that Poland is widely regarded among member states as a good source of sanctions ideas that, they argued, would result in the design of new packages of EU restrictive measures, if not immediately, then certainly at a later date. They believe that the delay in integrating Poland’s ideas into packages at the EU level impacts the effectiveness of those packages.

In sum, a government representative described Poland as a ‘good runner’ in implementing sanctions, but emphasised that the implementation of sanctions is a ‘relay race’, in which Poland needs the member states that have closer economic links with Russia to pick up the baton of commitment to effectively implement sanctions.

Challenges to Implementation

National authorities estimate the level of non-compliance among Polish businesses to be very low. In fact, representatives from the public sector added that the country’s main problem is over-compliance beyond what is legally mandated, especially from financial institutions.

To assess the level of compliance, representatives from Poland’s financial intelligence unit (FIU) explained that the unit conducts audits and onsite inspections of obliged entities in both financial and non-financial sectors. The majority of investigations are related to customs fraud and the creation of fake customs codes. Under the new sanctions mandate, sanctions inspections have become an add-on to general anti-money-laundering inspections, and authorities have completed two inspections, with three more currently underway. Inspected institutions are most commonly banks, payment service providers, logistics companies and art dealers.

A representative from the FIU explained that currently around seven to nine entities are suspected of having breached sanctions but noted that most of them are not Polish. A representative of another public authority added that some of these identified entities are Dutch companies transferring goods to a sanctioned Russian entity, and that their organisation is now investigating whether this was done intentionally. In this case, the source of information was the customs authorities, who have access to information related to the transfer of goods and were supported by the contribution of financial intelligence from Georgia regarding capital transfers to Russia.

However, despite Poland’s efforts, participants from the public sector acknowledged that the country faces challenges in the implementation of sanctions. In particular, there are struggles with multi-layered corporate structures, and authorities described a recent example in which they identified a company that had been established in Poland by a Russian oligarch as a subsidiary of a company based in the British Virgin Islands. Representatives from both public and private sectors voiced their intention to be proactive in these operations, but reported that they sometimes face difficulties identifying these complex cases. Participants from the public sector explained that they try to reach out to the intelligence community to obtain relevant information, but its confidential nature means that this information cannot be shared with businesses. For this reason, the introduction of national sanctions lists has proved helpful as a means of alerting the private sector to individuals and entities of concern and enabling the freezing of their assets.

Another challenge highlighted by the public sector was the confiscation of frozen assets. Representatives of public authorities explained that legal barriers continue to hinder confiscation, for example, the need to identify a connection to a criminal offence. They added that they often receive questions about the low number of assets frozen in Poland, but they explained that this matches the fact that there are very few Polish entities listed in EU sanctions lists, and trade between Poland and Russia is limited. The introduction of a domestic list aims to facilitate improvements in this regard.

Yet, despite the confidence of the country’s public authorities in their work, representatives from the private sector voiced concerns over a lack of clarity in the sanctions rules themselves and noted that there were issues related to interpretation of these measures. Participants noted that freezing accounts is simple, but freezing tangible property presents added difficulties. Similarly, it was considered unclear as to what the approach should be in the case of a company where only a small portion of the shares is held by a sanctioned oligarch. These doubts were described by representatives from the banking sector as a major source of uncertainty for businesses, which fear not only the financial penalties associated with facilitating sanctions evasion, but also the reputational implications, the latter being described by a representative from a law firm as the primary driver of sanctions implementation in the private sector. The same participant also observed that sanctions had brought an unexpected bonus in some cases, as they could be used to trigger ‘force majeure’ on contracts that their clients wanted to terminate with Russian clients.

A representative from the MFA explained that the ministry had received around 2,000 requests from the private sector for support on interpretation of sanctions regulations, and noted that they had replied to most of them, with the most common questions (and accompanying answers) published on the Ministry of Finance’s website. In contrast, the private sector expressed disappointment at the lack of outreach from the public sector and explained that, while information might be public, authorities should nevertheless approach businesses to raise awareness, provide guidance and support their implementation efforts.

Representatives across all sectors also shared concerns related to the evasion risks posed by transactions with regional neighbours of Russia such as Turkey, Armenia, Azerbaijan, Kazakhstan and China. Representatives of Polish public authorities added that they are unable to collect information from entities abroad without the support of the authorities in the relevant jurisdiction, who can of course refuse to cooperate.

Representatives from the MFA described foreign direct investment (FDI) as a powerful tool to circumvent sanctions, through mechanisms such as the ‘citizen by investment’ schemes (also known as ‘golden passports’). Participants from both public and private sectors also discussed the use of active financial measures, whereby a rival can make strategic use of investments or donations into another state’s economy to gain influence in that society with the underlying intention of undermining its stability. These concerns make the screening of FDI an essential task, and yet participants complained that there is no unified procedure on FDI at EU level. Instead, FDI screening is at the discretion of individual member states, whose current approach, according to the Polish MFA, is to primarily look into investments in specific sectors, such as security or national infrastructure. However, these sectors are not the only ones that can present opportunities for bad actors to gain influence over another country, with participants from both public and private sectors expressing unease about foreign actors financing the targeting of civil society, donating to cultural and educational institutions, or funding extremist political campaigns.

Representatives of national authorities explained that they are currently awaiting a judgment from the European Court of Justice regarding Malta’s ‘golden passport’ scheme, also noting that loopholes in the Austrian scheme remain and have not yet been investigated. The EU is taking small steps to regulate investment schemes, through non-binding guidelines rather than via direct regulation. In fact, a representative from the MFA stated that efforts made to improve FDI screening and increase information-sharing come predominantly from the private sector. In this regard, the MFA representative recognised that Poland needs to improve its tools and analytical models to make sure no business under its jurisdiction has connections to a listed entity either in the country or abroad.

Roundtable Recommendations

Participants from the public sector expressed a belief that the most significant restrictive measures issued by the EU have been already adopted and there is little need for new sanctions; however, implementation is key and thus the main proposal from this sector is to focus on closing loopholes.

The decision by the EU to de-SWIFT Russian banks was an impactful measure. However, not all Russian banks were banned from SWIFT, which undercuts effectiveness and – as noted in previous SIFMANet roundtables – leaves open a loophole for abuse. A proposal put forth by the Polish MFA during the roundtable was to de-SWIFT all remaining Russian banks. However, representatives from all sectors predicted possible pushback in some cases, noting the reluctance of countries such as Germany or Italy to take measures against Gazprombank.

Representatives from the private sector also agreed on the need to target professional enablers, such as lawyers and accountants, within member states. These actors are supposed to be gatekeepers of the EU’s financial system but, without adequate regulation, they often serve to facilitate active financial measures from rival states and advance the interests of hostile actors in undermining the security and stability of the EU.

Participants from both public and private sectors also voiced concerns over the lack of available measures for taking steps against third countries for hosting Russian assets and/or facilitating evasion. The same participants did note the latest steps taken by the EU towards allowing for the sanctioning of third-country entities, in the most recent revision of Regulation 269. However, representatives from the public sector added that they expect challenges in achieving consensus among all 27 member states over imposing these sanctions, given a historical aversion to extra-territoriality.

Seeking to provide new creative proposals, participants from the private sector discussed leveraging the Carbon Border Adjustment Mechanism (CBAM) to further restrict Russian business. CBAM is a mechanism, expected to be operational from October 2023, through which non-EU businesses must fulfil the climate standards applicable to EU member states in order to import goods into the Union. However, several participants from the public and private sectors doubted the viability of using this tool for the implementation of sanctions, given that its mandate is entirely for environmental purposes.

The discussion also addressed the possibility of instrumentalising the debt that third countries, such as Serbia or Bosnia, have with the EU or the IMF as a means of applying pressure to encourage their compliance with sanctions. However, participants discussed the likelihood that this step would meet countermeasures from affected countries. For example, Turkey could leverage its migrant deal with the EU in retaliation.

Most importantly, attendees agreed that it is crucial to keep political attention and pressure sustained over time to make sanctions effective. To succeed, public sector participants highlighted the need to improve the communication and publicity around sanctions, in particular the impact they are having in restricting the Russian economy, to encourage both citizens and private businesses to commit the necessary resources to ensure sanctions are implemented effectively.

Gonzalo Saiz is a Research Analyst for Project CRAAFT and works at the RUSI offices in Brussels. His research focuses on the crime-terror nexus and its impact on terrorism financing in Europe.