The European Union has finally taken a nuclear option of adding Russia’s name to the official blacklisted as a high-risk country for money laundering and terrorism financing that will add to its financial system headaches.

Russia has been on the Financial Action Task Force (FATF) grey list for years, which has been an inconvenience but does not prevent Russian banks making international transfers. However, the regulations surrounding countries on the blacklist are much tougher and effectively make it extremely difficult to participate in the global financial system.

As featured in a bne IntelliNews cover story “Russian money infects London” in 2015, Russians have long used dodgy schemes and offshore banking havens to pay for goods and services overseas. However, in the pre-Putin era these schemes were more about avoiding taxes at home than organized crime groups laundering funds earned from illicit activity.

The most famous money laundering scandal was connected to Boris Yeltsin’s family in the late 1990s. The Mabetex Group, a Swiss engineering and construction company based in Lugano, was accused of paying bribes to top Russian officials in exchange for lucrative Kremlin renovation contracts. The firm was owned by Behgjet Pacolli, a Kosovar-Albanian businessman and the scandal exposed a vast network of offshore bank accounts used to hide money.

Then head of the Kremlin’s property management department, Pavel Borodin, was implicated as a central figure, who was responsible for awarding the renovation contracts to Mabetex. In 2001, Borodin was arrested in the US on a Swiss extradition warrant for alleged money laundering, although the charges were later dropped due to the lack of evidence.

An Italian bank executive from Banca del Gottardo responsible for Eastern Europe produced photocopies of the Yeltsin family's credit cards, including the signatures of Yeltsin and his daughters, that drew on the Mabetex account at the bank.

The FATF has resisted blacklisting Russia for years, which will have wide ranging consequences, including for the international energy markets, where Russia is still an active player.

The decision, reported by The EU on December 3, obliges all financial institutions operating within the bloc to apply enhanced due diligence and reams of paperwork to any transactions involving Russian individuals, entities, or assets. This includes stricter verification of client identities, deeper investigation of transaction sources, and increased reporting to national financial intelligence units.

“This move will force all financial institutions across the EU to increase scrutiny of any transactions involving Russia,” the report stated, adding that the measure will “further isolate Moscow financially”.

While the FATF — the global standard-setting body on financial crime — suspended Russia’s membership in February 2023 a year after its full-scale invasion of Ukraine, it has so far stopped short of formally blacklisting the country. The EU’s decision to act independently underscores growing frustration within European capitals over what they view as insufficient global action against Russia’s financial networks.

The blacklisting will affect a wide range of cross-border activity, from correspondent banking and trade finance to real estate, investment, and crypto transactions.

Legal and compliance experts expect the designation to further restrict Russian access to the European financial system, which has already been severely limited by successive waves of sanctions since 2022 starting with the SWIFT sanctions that were imposed only days after Russia’s invasion of Ukraine in February.