Indictment Alleges Use of Shell Companies, Nominees, Foreign Bank Accounts and Real Estate
On December 7, 2022, the United States Attorney’s Office for the Eastern District of New York (“DOJ”) unsealed a seven-count indictment against Andrii Derkach. In the corresponding press release, Derkach is described as a “Kremlin-backed Ukrainian politician and oligarch” who attempted to “influence the 2020 U.S. Presidential election on behalf of the Russian Intelligence Services.” Derkach was charged with conspiracy to violate the International Emergency Economic Powers Act (“IEEPA”), bank fraud conspiracy, money laundering conspiracy, and four counts of money laundering. His wife, Oksana Terekhova, is alleged to be a co-conspirator and is referred to as “Co-Conspirator 1” in the indictment. The investigation was “coordinated through the Justice Department’s Task Force KleptoCapture, an interagency law enforcement task force dedicated to enforcing the sweeping sanctions, export controls, and economic countermeasures that the United States . . . has imposed in response to Russia’s unprovoked military invasion of Ukraine.”
In connection with the indictment, the DOJ is requesting both criminal forfeiture of two Beverly Hills condominiums at issue in the indictment, as well as civil forfeiture in a parallel proceeding. If successful, the DOJ would seize both the condominiums and proceeds in an investment and banking account held by Derkach’s alleged business entity. Derkach remains at large.
This appears to be another in the long line of actions and sanctions brought against alleged Russian oligarchs and Russian agents, especially those with close connections to Russian Intelligence Services, in response to Russia’s invasion of Ukraine (of which we have blogged about here and here). As long as Russia remains active in Ukraine, it is likely that federal law enforcement will continue to focus on the actions and assets of high-profile Russian oligarchs and agents in the U.S. Financial institutions should continue to remain vigilant, as we have blogged about here, in rooting out attempts to evade sanctions.
The Indictment
According to the indictment, the scheme began in 2013, with the purchase of two condominiums in Beverly Hills by Derkach and Terekhova through a nominee. Prior to purchasing the two condominiums, Derkach and Terekhova directed the nominee to create two corporate entities, 73DT Business Properties, LLC (”73DT”) and 7D Business Bureau, Inc. (“7D”). To conceal Derkach’s ownership, only the nominee and Terekhova’s name appeared on the corporate documents.
After creating those entities, Derkach directed $3.92 million to be paid to the nominee through two British Virgin Island shell companies with bank accounts in Latvia and Switzerland. According to the indictment, these shell companies had no operations and no affiliation with Derkach. The nominee used those funds to purchase the two condominiums on behalf of Derkach and Terekhova—in the name of 73DT—for approximately $3.1 million. Nowhere did the nominee, Derkach, or Terekhova, indicate Derkach’s true interest in the 73DT or his or Terekhova’s status as a politically exposed person (“PEP”).
With the help of the nominee, Derkach and Terekhova then used 7D to open various financial accounts. Derkach and Terekhova funneled the remaining money, about $800,000, from the nominee’s account into two brokerage accounts and finally to a business checking account at a California-based bank, all ostensibly opened by 7D. When attempting to open the first brokerage account, Terekhova indicated that Derkach was a PEP but stated that Derkach would not be a beneficiary of the account. The bank offering the brokerage account refused to open it “citing extensive negative press” about Derkach. When the nominee asked Derkach whether this was true, Derkach allegedly “stated that the bank must have confused him with another person named ‘Andrii Derkach.’” Thereafter, the nominee, Derkach, and his wife concealed Derkach’s true interest in 7D and the fact that Derkach and his wife were PEPs.
The Alleged Evasion of Sanctions
Derkach was added to the List of Specially Designated Nationals and Blocked Persons (the “SDN List”) by the Department of Treasury’s Office of Foreign Asset Control (“OFAC”) on September 10, 2020 because he allegedly was an “active Russian agent for over a decade” with “close connections [to] the Russian Intelligence Services” and played a role in Russian attempts to “undermine the 2020 U.S. presidential election” by “cultivating false and unsubstantiated narratives concerning U.S. officials.” (On January 11, 2021, Derkach’s two alleged entities—NabuLeaks and Era-Media TOV—were added to the SDN List by OFAC.)
Under Executive Order 13848—issued pursuant to the IEEPA—and the OFAC regulations implementing it, 31 C.F.R. § 579.101, et seq., any entity owned, directly or indirectly, by an individual sanctioned for election interference are blocked, regardless of whether the entity was also on OFAC’s SDN List. Moreover, the regulations prohibit the use of blocked funds to pay for the maintenance of property.
Here, Derkach allegedly used the blocked funds in the California-based bank account to make payments related to the condominiums into spring 2022, well after he was sanctioned. According to the indictment, Derkach and Terekhova’s efforts to conceal his interest in the bank account amount to a conspiracy to violate the IEEPA as well bank fraud and money laundering conspiracy. Derkach allegedly committed money laundering violations by transferring funds post-addition to the SDN-list. The funds were derived from “specified unlawful activity” because they were involved in Derkach’s alleged conspiracy to violate the IEEPA.
Although the accounts were opened well before Russia’s invasion of Ukraine, this case raises many of the red flags noted by the Financial Crimes Enforcement Network (“FinCEN”) in its March 7, 2022 alert regarding potential efforts to evade the sanctions and other U.S.-imposed restrictions implemented in connection with the Russian Federation’s invasion of Ukraine: (1) the use of shell companies to conduct international wire transfers, (2) the use of corporate vehicles to obscure ownership, source of funds, and countries involved, and (3) the use of third parties to shield the identify of sanctions persons and PEPs. It was only through these devices—and the help of the nominee—that Derkach was able to allegedly conceal his ownership of the funds and interest in the Beverly Hills condominiums.
Finally, this action is consistent with the government’s continued focus on real estate as a potential money laundering vehicle. FinCEN issued on December 6, 2021 an Advanced Notice of Proposed Rulemaking (“AMPRM”) to solicit public comment on potential requirements under the Bank Secrecy Act for certain persons involved in real estate transactions to collect, report, and retain information. As we have blogged, the ANPRM envisions imposing nationwide recordkeeping and reporting requirements on specified participants in transactions involving non-financed real estate purchases, with no minimum dollar threshold. FinCEN has not yet followed up with proposed regulations.
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