Russia is using bags of cash and diamonds to avoid sanctions and fund its weapons program, expert says

• Russia is using illicit cash channels to fund covert activities, analysts say.
• An expert took Insider through how the networks operate.
• Kremlin is exploiting gaps in sanctions laws, but also using older methods like cash and diamonds.

Russia is using covert financial networks to fund its purchases of banned weapons technology, getting round Western sanctions in the process, analysts told Insider.

They described in unusual detail how the schemes work.

Pavlo Verkhniatskyi, a member of the International Working Group on Russian sanctions, provided exclusive insight to Insider on how Russia is exploiting the financial system.

He said this helps it buy microchips, specialised tools, and other key components used to build the missiles and drones it launches every day at Ukraine.

"Money is poured into the financial system and becomes, you know, a driving force or fuel for those black operations," said Verkhniatskyi, referring to Russia's covert tech procurement programs.

He called on the West to shift the focus of its sanctions regime and target the networks he described. He said attempts so far had only mixed success.

The Russian embassy in the UK did not immediately respond to a request for comment.

Dubious banks, and suitcases full of cash and diamonds

Verkhniatskyi, citing Ukrainian government sources, described the financial channels Russia is using to fund its covert weapons part trade.

He said that a favored tool is cash — usually the proceeds of the government's oil and gas sales. That money, he said, is then placed in accounts in countries such as Turkey and the UAE, where western sanctions are not closely enforced.

Under Western sanctions, banks must investigate suspicious transactions to make sure they're not being used to circumvent sanctions. So Russia attempts to obscure the real source of the money by using intermediary banks.

The purchases, Verkhniatskyi said, are brokered by networks of shell companies, which are often covers for Russian intelligence, These firms usually buy the sanctioned goods from trading firms or retailers in bulk he said.

Countries like Kazakhstan and Armenia, with traditionally close ties to Russia and weaker business laws, are used as bases for the shell companies.

Verkhniatskyi described the shell companies as "sleeping bears" some of which were set up before the invasion and were ready to activate once Western sanctions began to bite.

Banks dealing in dollars, the world's default currency, in theory have to comply with American sanctions or face reprisals from the US government.

But Kremlin agents have other options available that don't involve bank transfers that could trigger such checks, Verkhniatskyi said.

Some shell company agents hand over suitcases full of cash to suppliers or other valuables.

"There is also information on Russians using diamonds as payment methods for sanctioned goods," Verkhniatskyi said, citing Ukrainian government sources.

His claims are backed by a recent report by the UK's Serious Organised Crime & Anti-Corruption Evidence group. It found that the Kremlin's illicit cash flows are not just funding its tech procurement programs, but also disinformation campaigns and militant groups.

"Illicit finance is now an integral part of Russia's foreign and security policy," wrote Professor David Lewis from the University of Exeter in the study. "It is also critical to the Russian military and security services, enabling illicit defence supply chains, facilitating military deployments overseas, and funding a growing array of parastate military units."

But Russia lacks the capacity to buy the large numbers of banned tech items it needs through cash handovers alone, meaning it remains vulnerable to attempts to restrict the flow of Kremlin money through banks.

Blacklisting Russia

Verkhniatskyi said a vital step would be Russia on the blacklist of the Financial Action Task Force blacklist, an inter-governmental organization meant to stop financial wrongdoing. The move effectively isolates a country from the world's banking systems.

The FATF briefly suspended Russia in the wake of the Ukraine invasion, a largely symbolic move meaning it was restricted from involvement at a leadership level.

But it has so far hesitated in taking the more serious step of blacklisting Russia, amid concerns it could impact the neutrality of the FATF, and might not be effective.

Only three countries were blacklisted as of October 2023: North Korea, Iran, and Myanmar. A larger "grey list" of more than 25 countries also does not feature Russia

But Verkhniatskyi dismissed these concerns, and said that not punishing Russia was doing more damage to the institution's credibility.

"I think that the authority of FATF is undermined when they sit at the same table with the criminal state and keep on you know, working as normal," he said.

The FATF did not immediately respond to a request for comment from Insider.