Federal funding shortfall to IRS threatens US sanctions enforcement on Russian oligarchs

By Sam Fossum, CNN

A funding shortfall in the latest Ukraine aid package could affect the Internal Revenue Service criminal investigations unit that tracks the luxury yachts, apartments and other hidden assets of Russia’s elite, raising the possibility that the US enforcement of sanctions might have some gaps or pull resources from other priorities.

The Biden administration’s efforts to secure emergency funding for the Treasury Department’s sanctions efforts were met in full — except for one. Republicans balked at the request to infuse the IRS investigations unit (IRS-CI) with $30 million, according to people involved in the negotiations. The objection was tied to concern over the agency, which sits under the Treasury umbrella, diverting focus from its core mission.

But it underscored long-standing wariness from GOP lawmakers about boosting the agency’s enforcement funding, and general Republican opposition to significant funding boosts for the IRS.

That hasn’t stopped the agency’s efforts to plead their case, with officials lobbying lawmakers for more resources in recent weeks and circulating a report on Capitol Hill underscoring what they say is an acute need for additional funding in order to carry out their new sanctions responsibilities, according to two congressional aides with knowledge of the matter.

While the IRS investigations unit spends the vast majority of its time and resources on tax-related investigations, its agents also pursue pure narcotics and high-level money laundering, terrorist financing and national security related matters. Its 2,100 agents are known within the federal enforcement apparatus as specialists when it comes to tracking and investigating complicated money flows.

But whenever new priorities are identified for the agency, like the growing focus on digital assets or sanctioned Russian oligarchs, the agency must reallocate agents and resources from elsewhere, which could slow or hinder other investigations, according to the agency’s chief, Jim Lee.

“Something will suffer,” he told CNN.

In a statement to CNN, an IRS spokesperson argued that the investigations unit and the IRS writ large need more “stable, long-term funding.”

“Underfunding leaves the IRS with impossible decisions across the agency that lead us to rob one essential function to fund another,” the spokesperson said.

While current IRS officials stressed that the IRS-Criminal Investigations unit will continue to fulfill its mandate, they say the rejected funding request could pose potential problems for the agency in the short-term, and that in the long run the agency’s overall funding needs to be increased from its current $636 million dollar budget as they adjust to a changing financial landscape, particularly in the digital space.

Lee told CNN that the unfulfilled $30 million request “just scratched the surface” of what the agency believes it needs. The Associated Press was first to report on Congress’ decision not to include the White House’s $30 million request.

“We need sustained funding over 10 years to really be strategic about how we address the threats that are out there today,” he said.

What the funding would have paid for

The $30 million the administration sought to bolster the IRS’ investigations unit would have increased the number of licenses for a records database that helps agents trace assets around the world from five to 60, fund the training and hiring of more agents to focus on sanctions work and provide more funds for third-party resources and contractors that supplement agents’ investigative work, an IRS official told CNN.

These additional tools would provide the agency further support for tracking the true ownership of assets held by Russian elites who are likely to use everything at their disposal to evade US sanctions and hide their wealth, whether it’s through digital assets like cryptocurrencies, shell companies or other complex corporate structures.

“With all of these, their primary purpose is to continue their way of life, their luxury lifestyle. I mean, whether that’s, you know, purchasing the yachts, the expensive cars, the million-dollar homes, the billions that they have in assets. It’s our job to kind of stay in front of that and unravel those complex activities,” Jarod Koopman, executive director of Cyber and Forensic Services at IRS-CI, told CNN.

The Criminal Investigations unit has faced funding shortfalls for years, according to the IRS, and since 2010 the number of employees working for the unit has fallen by 25%.

But despite its shrinking size, the agency’s responsibilities have continued to grow beyond holding American tax cheats or financial criminals accountable. Agents for the unit have undertaken illicit money laundering investigations against Russian oligarchs since 2017, and more recently they have substantially grown the number of investigations into cryptocurrency transactions or other digital assets involving Russian-based entities through a project called “Sanctions Evaders.”

“How seriously are we really taking the sanctions problem if you’re not properly funding the one agency that can really provide the muscle and horsepower and the experience in financial crimes and following complex money flows?” Don Fort, a former chief of the IRS criminal investigations unit who worked for the agency for nearly 30 years, told CNN.

Fort said that the lack of funding over the years “unfortunately” means the agency has “been forced to become very resourceful” and that it would be hard to precisely measure the impact of not receiving the $30 million funding request, but added that this is a disappointing development and he believes the funds would have significantly aided the US Government’s efforts to enforce sanctions.

“It’s hard to quantify exactly, but they will look no doubt to see what other opportunities exist,” he told CNN. “They’re resilient.”

In the Ukraine Supplemental Act, signed into law by President Joe Biden earlier this month, other Treasury Department divisions received $61 million to reinforce their efforts to implement sanctions against Russia, including $25 million for the Office of Terrorism and Financial Intelligence, $19 million for the Financial Crimes Enforcement Network (FinCEN), and $17 million for other departmental offices.

Most of the US sanctions against Russian state and private institutions, oligarchs and Putin’s supporters are imposed by the Treasury Department and its regulatory and enforcement arms, like the Office of Foreign Assets Control (OFAC) and FinCEN, which are part of the Office of Terrorism and Intelligence, as well as IRS-CI. But the IRS investigations arm’s expertise in complicated money laundering and tax evasion schemes sets it apart from other law enforcement and regulatory agencies across the government, all of which are working closely together to enforce sanctions against Russia’s elites as part of the recently announced Kleptocapture Task Force.

The road ahead: Sanctions enforcement

As pressure mounts from American lawmakers and the Ukrainians for the US to further isolate the Kremlin and its cronies, US officials have stressed the importance of enforcing the raft of sanctions that have been rapidly imposed since Russia invaded Ukraine. The US and its allies have frozen a large swath of the Russian central bank’s foreign currency reserves, cut off certain Russian firms from US technology like semiconductors, and disconnected certain Russian banks from the global bank messaging system, known as SWIFT.

“In the period ahead, Russia’s main focus from an economic perspective is going to be to figure out how they can get around, over or under the sanctions that have been imposed. And blocking off those pathways is going to be vital to producing the kinds of cost imposition effects and vital to shaping the thinking in the Kremlin,” said White House national security adviser Jake Sullivan on Friday.

Stuart Levey, who served as under secretary for terrorism and financial intelligence at the US Treasury under Presidents George W. Bush and Barack Obama, said that tracking the assets of wealthy Russians sanctioned by the US and its allies is going to be a global effort that poses “very complex” financial investigative challenges.

“One can already see from what’s in the public domain that these are very sophisticated financial actors who have had access to financial advice and it will require equally sophisticated forensic work to unwind and identify the sort of assets that we’re talking about here,” he told CNN.

US ramps up sanctions

The US on Thursday announced a slew of new sanctions against hundreds of members of the Russian State Duma, dozens of Russian defense companies, the CEO of Sberbank — Russia’s largest financial institution — and other Putin allies.

The new sanctions target 328 members of the 450-seat Russian State Duma, the lower level of the two-tiered Russian Parliament, cut off 48 Russian defense and materiel companies from Western technology and financing. Herman Gref — the head of Sberbank. who has worked with Putin since the 1990s when both men were in the mayor’s office of St. Petersburg — was also sanctioned.

Long-time Putin associate Gennady Timchenko — his companies, family members and yacht — have also been sanctioned, as well as 17 board members of Russian financial institution Sovcombank, according to the White House.

“They personally gain from the Kremlin’s policies, and they should share in the pain,” Biden wrote on Twitter shortly after the US Treasury officially announced the new measures.

Treasury sanctioned 12 members of the Duma earlier this month for their calls to recognize the Russian-backed separatist regions in Eastern Ukraine, which precipitated Russia’s invasion. Thursday’s measures will also sanction the State Duma as an institution, according to the Treasury.

“The Russian State Duma continues to support Putin’s invasion, stifle the free flow of information, and infringe on the basic rights of the citizens of Russia. We call on those closest to Putin to cease and condemn this cold-blooded war,” Treasury Secretary Janet Yellen said in a written statement.

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CNN’s Phil Mattingly contributed to this report.