IRS probe targets oligarchs to ID sanctioned properties

IRS investigators assigned to a task force targeting Russian oligarchs are using a variety of techniques to identify and freeze sanctioned property, with capabilities that include untangling bundles of cryptocurrency meant to obscure their ownership and following trails of money through anonymous financial structures.

 The KleptoCapture task force, which operates under the Department of Justice, was set up earlier this month in response to the Russian invasion of Ukraine and includes at least five different federal law enforcement agencies. It supports a mission that’s taking a “broader view” of what it means to illegally assist in sanctions evasion, according to a senior Justice Department official.

“Financial institutions, banks, money transmission services and cryptocurrency exchanges who willfully fail to maintain adequate anti-money laundering policies and procedures and allow these oligarchs to move money” will be targeted in the investigation, the official said. 

 Former IRS chief investigator Don Fort, who led the criminal investigation unit from 2017 to 2020, said the task force “has jurisdiction not only over tax crimes but also over the money laundering laws,” adding, there are “a lot of tools at their disposal.”

 One of the techniques available to investigators involves dismantling so-called cryptocurrency tumblers, services that pool together different digital currencies to make them difficult to trace. The IRS has successfully broken down and attributed tumbled cryptocurrencies in the past, according to Fort.

 A $3.6 billion seizure of stolen cryptocurrency made in February involved thwarting a number of sophisticated laundering techniques, according to the Justice Department, including a practice known as “chain hopping,” whereby criminals quickly convert one cryptocurrency into another in order to remain anonymous. 

 Other evasive tactics spotted in the February bust included depositing stolen funds across a range of markets and currency exchanges on the dark web, as well as making large volumes of transactions in a short period of time to obscure where the funds were coming from. 

 While the task force describes itself as using “the most cutting-edge investigative techniques,” the biggest challenge may come from the United States’ own decidedly low-tech ownership laws, which have long allowed for wealthy individuals to possess property anonymously through the designation of unnamed “beneficial owners.” 

 The designation allows the government-registered owner of an asset to be different from the true economic owner, who often goes unidentified. 

 “One of the most challenging things for financial investigators is the use of obscured beneficial ownership,” Fort said. “That’s one of the challenges that they’ll be up against.”

 Thanks in part to its ownership laws, the U.S. currently ranks as the second most financially secretive country in the world, just behind the Cayman Islands and ahead of Switzerland, according to an index maintained by the Tax Justice Network, a Britain-based nonprofit.

 “There’s long been a view that the U.S. has been one of the world’s biggest tax havens because of the ability to stand behind a corporate structure without having to disclose a connection to it,” said Scott Michel, a tax attorney with Caplin & Drysdale.

 While Congress last year enacted the Corporate Transparency Act, which increases the reporting requirements for beneficial owners, critics say the legislation doesn’t go far enough.

 “Due to the limited scope of the Corporate Transparency Act and numerous exceptions in its application, we cannot yet conclude that the US is practicing effective beneficial ownership registration,” Andres Knobel, a researcher with the Tax Justice Network, wrote in a 2021 blog post. “Nevertheless, the law does mark a seismic shift.”

Senate Finance Committee Chairman Ron Wyden (D-Ore.) has said that the committee is “taking a hard look at loopholes and preferences in our tax system that allow [Russian President Vladimir] Putin’s oligarchs to hide assets and avoid taxes on the assets they’ve stashed in the United State.”

 Wyden has called for additional funding for the IRS criminal investigations unit, characterizing it as “starved of resources” despite playing “a critical role in going after illicit Russian assets.”

Wyden has also proposed revoking the preferential corporate tax rate of 10.5 percent for companies doing business in Russia, as well as the country’s foreign tax credit. 

 “Russian taxes are funding the bombing of hospitals, women, and children,” the senator tweeted on Monday. “If American companies keep paying taxes to Russia, they shouldn’t be subsidized by American taxpayers.”