How a Russian forgery scheme evaded sanctions

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0:32Good morning from the Financial Times. Today is Tuesday, September 22nd, and this is your FT News Briefing. Russian payments have gotten around banking sanctions, and Polymarket is making a play for Europe. Plus, Germany's political crisis is now the EU's problem. I'm Sonia Hudson, in for Mark Filipino, and here's the news you need to start your day.

1:07A forgery scheme backed by the Kremlin moved almost$7 billion through global banks. They include Standard Chartered and Citigroup. The FT got its hands on tens of thousands of files. They show how an alternative payment system used money laundering techniques to move the funds. This all happened despite sanctions on Russia. The FT's Chris Cook helped break this story, and he joins me now to talk about it. Hi, Chris. Hiya. Before we get into how this scheme worked, can you start by telling us about the backdrop here? What is this alternative payment system called A7, and how does it tie in with Russian sanctions?

1:50So after the full-scale invasion of Ukraine in 2022, the West and allies of Kiev tried to cut Russian businesses basically off from the global financial system by denying Russians access to SWIFT. Now, SWIFT is a messaging system between banks. And that's really important because that's how you send money over borders. So that strategy was actually pretty successful. In response to that, Russia has tried to build up alternatives, the most important of which is A7. The promise of A7 was that it could still enable cross-border transactions using a combination of high-tech new payment structures and crypto payments.

2:30The reality is actually it's a bit more old-fashioned than that. It's money laundering. Yeah. Tell me more about how this Kremlin-backed system, A7, did this. So we've got access to this enormous leak and they would set up a front company in some third country, so say the United Arab Emirates, they would get some cash laundered into the account, a bank account held by that front company. And then if a person in Russia needed to pay a person, say in China, they would get that person in the UAE to send money to that person in China. And if the banks ask questions like, why is it that you keep sending money to random people in China?

3:12Like what does it actually do for a living? A7 had an enormous forgery factory that was industrially producing fake paperwork, particularly invoices, to justify the payments. So it was, in some senses, quite high tech, but actually it was a very old-fashioned sort of invoice fraud style of money laundering. Okay, so basically, A7 found a way to get money to banks in the SWIFT system. Those banks would then use SWIFT to send those funds to other financial institutions. How did the banks respond to these transactions? There's a bit of a cat and mouse game there. So we can see lots of the banks raising questions about where the money is coming from.

3:55There's one big event that we set out when Standard Chartered got a bit suspicious about money flowing into its customers accounts from Kyrgyzstan. And we know that that was enough really to cause A7 to have to change its process. And we can see in the data them switching to paying less from Kyrgyzstan and more from the UAE. So we've named a few banks in the article where A7 was either able to open accounts like First Abu Dhabi or banks like Sander Chartered where their own customers were being paid by people using A7 as a money processing service. And in all those cases, they told us they'd actually spotted this previously themselves and dealt with these customers.

4:36All the banks involved in the story told us that they took money laundering very seriously. We asked A7 for comment. We didn't get any reply. We asked the Kyrgyz banks for comment. We didn't get any reply. Now, Chris, this investigation obviously shows there are some pretty major limitations to sanctions on Russia, you know, at least$7 billion worth of limitations. What lessons do you think the international banking system can learn here? So I think there's good news and there's bad news for allies of Kiev in all this. The bad news is if you can penetrate a bank that's inside Swift, you can go quite a long way and send quite lots of money.

5:16The good news is Russia doesn't seem to have an alternative to using this system. So if you can make correspondent banking cleaner and better and more robust, there's a real chance that you can do real damage to people who don't share democratic values. Chris Cook is the FT's enterprise editor. Thanks, Chris. Thanks so much.

5:44Polymarket is betting on Europe. The FT has learned that the New York-based prediction markets platform has been lobbying regulators in the EU and the UK. That's according to people familiar with the matter. Polymarket is asking to be treated as a financial services group instead of a gambling company. Prediction markets allow people to bet on future events, things like sports matches, election results, even central bank decisions and the weather. Polymarket is popular in the U.S., but its growth in Europe has been limited. Countries there prohibit prediction markets for retail investors. Polymarket said it is, quote, committed to engaging early and openly with policymakers and regulators.

6:37Germany's political crisis is threatening the larger EU agenda, including its next budget. Brussels is bracing for months of uncertainty after this weekend's elections are forcing Chancellor Friedrich Merz to fight to keep his job. Henry Foy is the FT's Brussels bureau chief, and he joins me now. Hi, Henry. Hey, Sonia. So tell me why the outcome of the German election is a problem for the EU as a whole. So this past weekend, Chancellor Friedrich Merz's CDU, Christian Democratic Union Party, won just 4.9 percent of the vote in a small northeastern state of Germany. That's the party's worst result in any German state election in Germany's post-war history.

7:20This is all kind of compiled to leave Merz in a very, very precarious situation. There are people inside his own party questioning whether he should be the leader. And of course, it makes him very, very weak in the domestic parliament. That's a huge problem for the EU because the German chancellor, head of the EU's biggest state, its most important economy, wields really oversized power in Brussels in the big debates over the issues that need to be decided by the member states. And between now and Christmas, the EU needs to agree on its next seven-year shared budget. Yeah, Henry, tell me a little bit more about this budget.

7:59Right, so every seven years, Sonia, the EU's member states agree on the budget it covers. So the next one they're talking about is 2028 to 2034. The proposal for that one is 2 trillion euros. There are some countries that want to see traditional areas of spending, such as agricultural subsidies, development aid for poorer parts of the EU. Other countries are saying, no, we should be putting more money into defense investment, into startups, into new tech. And then into all that, you have Friedrich Mertz, Chancellor of Germany, potentially about to lose his job. And that's a huge problem because Germany is normally the country that at the end of the day, after all the fighting, months and months of negotiation on the budget, steps in and says, okay, here's a little bit more extra money that we're willing to pay to, if you like, grease the wheels of the machine and get a deal over the line.

8:48And this year, people are very, very worried that Germany just won't have the clout to do it. Why is it so important that the EU sign the new budget this year if it doesn't go into effect until 2028? That's a great question. And there's another political answer to that. Of course, there is the French presidential election in the spring of 2027. Also next year, we have the Polish election, the Spanish election, the Italian election. So essentially, four of the five biggest EU member states are going to go to the polls next year. And Germany, the biggest of the five, in massive domestic crisis at the moment.

9:27So people are aware that with all that politics next year and all the elections, nobody's going to be in the mood to pass a budget, which means they've got to get it done by the end of this year so that it can start paying out in January 2028. Well, where does this all leave EU officials then? Well, they're in a bit of a no man's land. If there is no deal by the end of this year, you may have to start having emergency budgets kicking in in 2028 using past amounts of money. The bigger question is, who is going to sit around the table to represent Germany? How much power will that person have? If it's Friedrich Mertz, people know that he won't have the same clout, the same voice he had before.

10:06If it's a successor to Friedrich Mertz, there'll be a whole new team, there'll be new officials around him, and potentially new policy priorities. And so that'll be something Brussels will have to adjust to. So essentially, there are no good options here. And that's really the biggest problem when a country as powerful and as important as Germany finds itself in massive domestic political trouble. Henry Foy is the FT's Brussels Bureau Chief. Thanks, Henry. Thanks so much, Sonia.

10:36Before we go, I've got some potentially bad news for all you ube lovers. The purple yam might soon be harder to come by. The Philippines is banning ube exports indefinitely. The country is the world's largest producer of the root vegetable, and it's trying to cement control of the supply as Ube goes through a global craze. It's going in everything from pastries to ice pops. This is mostly going to hurt Americans. The U.S. is the biggest consumer market for Ube.

11:12You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News briefing. Check back tomorrow for the latest business news. Thank you.

11:52your finances, and portfolio. Listen at schwab.com slash Washington Wise.

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