Euro SIFMANet Tbilisi Report
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+ European Sanctions and Illicit Finance Monitoring and Analysis Network: Tbilisi Report
+Tom Keatinge and Gonzalo Saiz | 2023.12.21
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+Discussions revealed the particular challenges that Georgia faces in implementing sanctions against Russia – and how its partners can help.
+ +Georgia, as a country which borders Russia and has ambitions to join the EU, is in a difficult geopolitical situation. The raft of sanctions that the EU and allies have imposed on Russia therefore raises serious questions for Tbilisi.
+ +As an EU candidate country, Georgia is expected to align with the EU’s Common Foreign and Security Policy (CFSP), which includes the numerous restrictive measures imposed on Russia. However, with 20% of its territory – Abkhazia and the Tskhinvali region or South Ossetia – under Russian occupation, Georgia faces the challenge of striking a balance. On the one hand, it has sympathy and solidarity with Ukraine given the Russian occupation. On the other, it wants to avoid actions that lead to further Russian aggression against Georgia.
+ +In November 2023, the Centre for Financial Crime and Security Studies at RUSI, in collaboration with the Regional Institute of Security Studies (RISS), hosted a series of roundtable discussions in Tbilisi with Georgian authorities and representatives from the private sector and civil society. The aim of these discussions was to obtain insights into Georgia’s position on the international sanctions against Russia and the current Georgian efforts, within their national jurisdiction, to prevent circumvention and evasion. This engagement is part of the European Sanctions and Illicit Finance Monitoring and Analysis Network (SIFMANet), supported by the National Endowment for Democracy.
+ +Georgia’s Approach to Financial Sanctions Against Russia
+ +On 25 February 2022, the government of Georgia announced its decision not to implement international sanctions against Russia. However, in reality, Tbilisi’s approach to sanctions is far more complex. Alignment with the EU’s CFSP is important for Georgia’s EU candidacy status and the country’s connections to global markets and correspondent banking relations effectively mandate compliance with these restrictions. Under these conditions, without the introduction of any new laws in Georgia, the National Bank of Georgia (NBG) instructed the country’s financial sector to comply with the sanctions imposed by the US, the EU and the UK. To support compliance in the sector, the NBG has a dedicated anti-money laundering (AML) department that is liaising with banks on sanctions and conducts inspections in relation to sanctions against Russia.
+ +A representative from the NBG highlighted that businesses in Georgia have boosted their resources dedicated to sanctions and are increasingly adopting programmes to check and identify sanctions issues. The NBG representative noted that they are aware of the complex rules and licences related to the monitoring of goods and services under restrictions, as well the cost of compliance for the private sector. Although businesses seek support from the NBG, Georgia’s central bank faces the challenge of responding to questions about foreign sanctions regimes over which it has no control, and no insight beyond what is on the relevant sanctions coalition websites. For this reason, the NBG intends to guide the private sector in the right direction but informs financial institutions that they must assess their own risks.
+ +A representative from Georgia’s Banking Association expressed its satisfaction with the performance of the banking sector on sanctions, due to the effectiveness of AML and sanctions procedures that the industry has in place. However, the participant noted that several banks operating in Georgia are part of regional banking groups in countries that are not implementing sanctions, such as Turkey, Kazakhstan or Azerbaijan. This creates risk. The Banking Association representative added that the services of VISA and Mastercard credit cards of Russian banks in Georgia had been suspended to comply with international sanctions.
+ +A representative from the Bank of Georgia (BOG) also described its limited risk appetite for customers from Russia and transactions related to the country – these are now subject to enhanced due diligence procedures. The BOG, one of the main banks in Georgia with 2.5 million customers, is listed on the London Stock Exchange, so it is under the supervision of the UK Financial Conduct Authority and therefore is required to comply with UK (and wider international) sanctions against Russia. The BOG currently has two co-directors – one for general financial crime issues and another oversees the sanctions programmes – in its compliance department, as well as 80 employees in the “second line of defence”.
+ +Against this background, the number of suspicious transaction reports in Georgia has increased. Participants explained that the financial sector has expanded its criteria of high-risk activities to include: international transactions; transactions in US dollars; high-net-worth individuals; and jurisdictions under suspicion of facilitating sanctions evasion, among others. Georgia has taken significant steps to mitigate risks of breaching international sanctions, for example, the Tbilisi City Hall terminated the almost $50 million-contract for 44 subway cars for the Tbilisi Metro, that was agreed with the EU-sanctioned Russian company Metrovagonmash. However, private sector representatives noted that while businesses will not trade with a company that raises clear red flags, the emerging challenge is around companies that pose “yellow flags”. To ensure compliance in Georgia, correspondent banks now ask Georgian banks about their transaction monitoring systems, their automated alerts systems, the percentage of false alerts generated, the number of transactions rejected, and the resources allocated to effectively check these procedures.
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When Sanctions Come Home: The Case of Otar Partskhaladze
As many participants in the workshops noted, the topic of Russia sanctions is highly politicised. Nothing illustrates this more than the case of Georgian citizen, businessman and former prosecutor Otar Partskhaladze, who was sanctioned by the US in September 2023.
Partskhaladze and two companies of which he owned a majority were sanctioned for allegedly facilitating malign Russian influence in Georgia led by Russia’s Federal Security Service (FSB), and personally profiting from his FSB connection
In June 2023, in line with a change in the law that had been criticised by the IMF and other experts as damaging the NBG’s independence, a new governor was appointed. Following the designation of Partskhaladze, the newly appointed governor, Natia Turnava, issued an executive order that required a local court order before the assets of a Georgian national could be frozen under international sanctions. This overturned the NBG’s previous position that banks should implement Russia sanctions.
Among other implications of this decision, the IMF suspended its programme for Georgia over its concerns for the independence of the central bank.
Although Georgia’s financial sector has, in effect, complied with international sanctions, trade with Russia has continued to increase. This poses numerous challenges to tackling circumvention through Georgia. The following section looks more closely at the state of trade restrictions in Georgia and the related insights provided by participants at the workshops.
+ +Trade Restrictions Between Georgia and Russia
+ +Russia is Georgia’s third-largest trade partner, with 11.1% of Georgian exports going to Russia. Georgia has clearly stated that it will not implement trade sanctions against Russia.
+ +Still, Georgian authorities emphasised that Georgia is one of the main partners of the EU and the US in the region. While the combined EU market is Georgia’s main trade partner, the share is gradually decreasing. Georgian businesses understand the importance of the EU market and are motivated to increase their trade relations, but they require support from the EU to promote investment in the country to support trade decoupling from Russia.
+ +Participants emphasised that the complexity of monitoring supply chains makes it futile for international partners to tackle circumvention unilaterally. Georgian authorities stressed the resources they are allocating to supporting international partners, prioritising the list of 45 high-priority items, and they find discussions on secondary sanctions frustrating. To facilitate compliance, authorities also highlighted their interest in obtaining consolidated sanctions lists from the international coalition, given the costs of monitoring all the lists independently.
+ +According to participating authorities, since the beginning, Georgia conveyed to international partners that it would support their aims of preventing circumvention. Authorities noted that half of their capacity is currently focused on sanctions implementation, identifying banned EU goods bound for Russia and the parties involved in their trade. They also noted that the closure of trade borders with the EU via the Baltic states has led to a notable displacement of trade transit through Georgia.
+ +One side-effect of the introduction of international sanctions on Russia is that Georgia has become a regional re-export hub for used cars from the EU and the US. Both Brussels and Washington have demanded Georgia cease this trade with Russia. In August 2023, Georgia agreed to introduce this ban on the re-export of Western cars to Russia. However, participants at the workshop explained that this action has simply created another layer in the circumvention route. Georgia remains part of the supply chain, but cars are now first transported to Kazakhstan and are likely re-exported again to Russia, despite efforts to identify the real end-user. A further complication is the export of the spare car parts, given their dual-use nature. For their export, Customs requires official letters from manufactures on where these parts are going and how they will be used.
+ +More broadly, participants highlighted the circumvention challenge Georgia faces as a trading partner with the Eurasian Economic Union, a mechanism that Russia is increasingly using to obfuscate the destination of trade flows.
+ +Georgian authorities were concerned that the focus of sanctions discussions is dominated by financial integrity, neglecting the key role played by trade integrity, particularly when considering Georgia’s geographic location. Trade integrity requires a combination of export control capacity and trade transparency, which demands good customs communication channels between exporting and importing countries and capacity to monitor the supply chains. This system depends on the reporting information provided by the private sector, but businesses do not have the capacity to identify everything related to sanctions and thus information is incomplete. This is particularly true in the non-financial sector, which participants described as notably less experienced in sanctions implementation. Representatives from the private sector explained that while no meetings have been arranged with authorities to support sanctions implementation, a good cross-sector relationship exists whereby businesses can approach authorities to receive guidance and training when required.
+ +To improve its domestic controls, Georgia has received technical and capacity-building training from EU member states. The Ministry of Finance reported that as of 8 November 2023, Georgia had stopped 2,970 containers and denied 1,683 applications from companies to conduct operations related to goods and services subject to restrictions. As a small jurisdiction, the Georgian authorities see these numbers as a sign of success. However, they raised frustrations with the time it takes the EU or the US to respond to queries about trucks stopped at the border.
+ +Georgian authorities at the roundtable also share the concern expressed by international partners regarding the involvement of Russia’s Federal Security Service (the FSB) in establishing front companies in third countries. Investigations into FSB-facilitated circumvention schemes are ongoing.
+ +The flow of land-based exports from Georgia to Russia – which some participants suggested might be complicated by the development of a north–south trade corridor between Iran and Russia – continues to attract international attention. However, Georgian authorities pointed to an overlooked yet significant challenge that they face: monitoring maritime transport.
+ +The Challenges of Maritime Trade
+ +Monitoring land-based trade is a complex and resource-consuming effort for Georgia. Detecting banned goods transported in trucks at the border with Russia and identifying the real end-user of the products is a challenging task. Alongside this task, Georgia also has access to the Black Sea and monitoring maritime trade entering and leaving its ports presents significant challenges.
+ +Georgia’s Maritime Transport Agency is monitoring vessels and their cargo to prevent the circumvention of international sanctions. Representatives from the agency described the challenge that the small six-hour vessel inspection window poses. Authorities must operate within this period, and delays in obtaining the necessary answers from the beneficial owners of vessels can be problematic.
+ +A representative of the Maritime Transport Agency explained that, between August and September 2022, several companies wanted to re-flag their vessels with the Georgian flag, but they were identified to be Russian so Georgia denied their requests. Still, a major challenge the Agency faces in this regard is the presence of vessels with flags from non-cooperative jurisdictions. Georgian authorities try to communicate with the reported beneficial owners in these jurisdictions – notably British Overseas Territories in the Caribbean – but often fail to establish contact.
+ +Georgia also faces a unique challenge on maritime trade through the ports of Russian-occupied Abkhazia. Georgia monitors trade through these ports but has no control over this activity. Georgian authorities track vessels in Abkhazia that involve suspicious beneficial owners and offshore jurisdictions and shares these reports with international partners. Authorities described how the vessels that Georgia tracks from Russia to Abkhazia go to Turkish ports to obfuscate their origin. By visiting Turkish ports, they can obtain the necessary papers to then access EU ports and thus circumvent sanctions. Georgian authorities expressed their dissatisfaction with the scarce support received from the EU and the US on this concern, a view consistent with their wider frustration on support received for implementing trade-related sanctions.
+ +Impact of Russian Inflows (of People and Money) into Georgia
+ +A final point emerged from the workshop on the unique challenge of geography and the resulting incoming flows of Russian citizens and investment. Participants noted that Georgia gets economic benefits from the increasing numbers of Russian citizens coming into the country and opening businesses. Tourism from Russian nationals has increased, and new Russian-owned businesses have opened in the country, notably in the IT industry. But participants also agreed that this presents security risks for Georgia. Real estate market prices in Georgia have doubled and participants described the IT industry as posing particular risks in terms of sanctions, given that these services are banned in the EU and US but can now operate from Georgia.
+ +Furthermore, while these booming economic sectors generate wealth in the country, participants were concerned about the negative impact their sudden departure would have on Georgia’s economy should they leave immediately the war is over. Moreover, participants added that these new businesses are competing with existing Georgian businesses, with resulting impacts on business opportunities and/or recruitment. One interesting observation related to Russian tourism is that Russian nationals are setting up tourist guides that Georgian authorities fear may be spreading pro-Russian propaganda as part of their service.
+ +Russia is a visibly divisive topic in Georgia, which, participants assert, is fuelled by mis/disinformation. Pro-Russian media pushes a narrative on the ineffectiveness of sanctions on the Russian economy and their negative impact on the sanctioning country’s population, while opposing media focuses on the scandal, noted earlier in this report, around the former prosecutor. Georgian media also focuses on how Georgia is economically dependent on trade with Russia and the aforementioned Russian inflows. These dependencies are made more acute by the lack of EU trade growth. Participants disagreed with these views and added that economic ties with Russia are not critical to Georgia’s economic security, having survived a direct war with Russia, although participants did share their concerns over Russia’s influence on Georgia’s critical infrastructure.
+ +Recommendations
+ +The Georgian government chose not to implement sanctions against Russia and the lack of a relevant national law has provided an opportunity for it to make some questionable decisions (such as the case of Partskhaladze and the NBG). However, the insights provided by both public and private sector participants at the recent workshops reflect the solid efforts of the Georgian authorities to prevent circumvention and evasion from happening through its jurisdiction. In doing so, Georgian authorities face similar challenges to those found across EU member states. Participants agreed on the following list of recommendations to improve Georgia’s ability to support relevant elements of the international sanctions regime against Russia by tackling circumvention:
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Establish a dedicated government sanctions unit. While several departments and agencies consider sanctions, Georgia’s response would benefit from greater coordination that could be achieved by establishing a national sanctions coordination unit that can draw on relevant expertise from across the public and private sectors. This unit could also highlight where new legislation is needed to ensure the integrity of EU sanctions implementation.
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Promote trade transparency. Integrity and transparency are essential in trade. This must be supported by the quality and accessibility of data regarding beneficial ownership, as well as the availability of information-sharing channels to ensure a robust framework and facilitate investigations to enforce it.
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Continue providing international support to Georgia. Georgian authorities appear committed to preventing the circumvention of international sanctions but, as in all jurisdictions implementing sanctions, the country requires substantial technical assistance support from international partners. The EU and its allies must ensure they provide sufficient and timely support to Georgia’s anti-circumvention efforts.
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Simplify bureaucratic impediments for Georgia’s trade with the EU. Georgian economic operators should see the EU as an accessible market. Entering and initiating trade with the EU should not be a complicated process. Facilitating smooth trade between the two jurisdictions will see Georgia’s trade shift from Russia towards the EU. As a share, trade with Russia is currently increasing and trade with the EU is decreasing.
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Invest in EU/US–Georgia trade relations. If Georgia is expected to further decouple from Russia, the EU and the US should encourage their businesses to invest in Georgia and expand trade links with the country. Participants explained that Georgian businesses understand that Russia is not a reliable partner, but if they are to reduce trade with Russia, they need to identify a sustainable alternative.
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The workshop discussions highlighted the challenges Georgia faces from both a trade and security perspective when considering the implementation of sanctions on Russia. While there is support for sanctions across the public and private sectors, Georgia clearly needs greater support in managing the related trade and security risks. The EU and allies must show that they understand Georgia’s security predicament. Russia’s intention to hold a referendum to annex the occupied territories in Georgia – as it did in Ukraine – can be reactivated any time, creating a sense of vulnerability in Georgia. Georgia is a strategic partner for the West in the region and thus its national interests, particularly related to trade, should be taken into consideration to foster heightened commitment to the implementation of sanctions on Russia.
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Tom Keatinge is the founding Director of the Centre for Financial Crime and Security Studies (CFCS) at RUSI, where his research focuses on matters at the intersection of finance and security. He is also currently a specialist adviser on illicit finance to the UK Parliament’s Foreign Affairs Committee ongoing enquiry.
+ +Gonzalo Saiz is a Research Analyst at the Centre for Financial Crime & Security Studies at RUSI, focusing on sanctions and counter threat finance. He is part of Project CRAAFT (Collaboration, Research and Analysis Against Financing of Terrorism) and Euro SIFMANet (European Sanctions and Illicit Finance Monitoring and Analysis Network).
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+▲ 黎妻 李韻琴
+▲ 張劍虹
+▲ 林文宗（左）、陳沛敏（右）
+▲ 2019年6月15日，林鄭月娥宣布暫緩《逃犯條例》修訂草案。
+▲ 佩洛西（左）、林榮基（右）
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+▲ 林文宗（左）、陳沛敏（右）
+▲ 資深大律師 彭耀鴻（右）、大律師 Marc Corlett（左）
+▲ 周天行
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