Sanctioned Russian Bank Wooed D.C. With Glitzy Parties and High-Powered Lobbyists

By Carrie Levine

Less than two months before a 2016 presidential election marked by Russian interference, senior State Department official Daniel Fried received an invitation to a private gala featuring an exclusive performance by the Bolshoi Ballet and a post-event reception.

“Clearly your last meeting with Andrey Kostin made an impression!” said the email, sent by a former State Department official who now heads a trade association dedicated to business ties between the U.S. and Russia. “Please see attached a special invitation from him” for Fried and a guest to attend a VTB-sponsored gala at The John F. Kennedy Center for the Performing Arts in Washington, D.C.

Who is Kostin? The chairman of VTB, a state-owned Russian bank operating under U.S. sanctions limiting its activities since 2014. VTB’s well-connected Washington lobbyists had previously brokered a meeting between the two men to discuss the sanctions.

Fried, the State Department’s sanctions policy coordinator, declined.

“I won’t be attending,” he replied to the trade association head. “We’re not interested in advancing their corporate reputation.”

The previously unreported invitation, obtained by the Center for Public Integrity via a Freedom of Information Act lawsuit, was a striking overture in a discreet image-burnishing campaign by VTB that spanned the Obama and Trump administrations.

Foreign campaigns to influence American officials are supposed to be transparent under the Foreign Agents Registration Act, a law requiring detailed disclosure of foreign influence efforts. But few believe FARA—passed in 1938 to combat Nazi propaganda—has been working well. It is riddled with exemptions. Enforcement is weak. Criminal penalties apply only to willful violations. And lobbyists’ filings are frequently late with few consequences, making available information less valuable to the public. For years, not many cared. But now, with accusations of foreign meddling gripping the nation’s capital, FARA is drawing intense scrutiny.

VTB provides an illuminating example of what Americans learn—or don’t—under FARA. The bank’s hired lobbyists failed to disclose a series of June 2016 meetings with government officials on behalf of the sanctioned bank until months after U.S. law required them to. One firm, Sidley Austin, which boasts more than 2,000 lawyers worldwide, made the disclosure last year only after being contacted by the Center for Public Integrity about the meetings. And FARA administrators, citing a technical glitch, failed for three years to publicly release a document disclosing VTB had hired the U.S. Treasury Department’s former general counsel to advocate on its behalf.

Such disclosure holes are “a glaring example” of “a broader pattern of noncompliance with FARA and underenforcement of FARA,” said Ben Freeman, director of the Foreign Influence Transparency Initiative at the Center for International Policy, a think tank, and author of a book on foreign influence.

VTB said its work with lobbyists is “structured in a completely transparent way.” A spokeswoman for Sidley Austin said omitting the meetings was inadvertent and “promptly corrected when discovered.”

Sidley Austin’s advocacy team includes a former Democratic congressman from Virginia, Rick Boucher. Also on VTB’s payroll: lobbyist Mike Manatos of Manatos & Manatos, who raised tens of thousands of dollars for the presidential campaign of Democratic nominee Hillary Clinton.

VTB has so far paid Sidley Austin and lobbying firm Manatos & Manatos a combined $1.2 million since 2015 for lobbying on sanctions, according to disclosures filed with the Department of Justice. The U.S. Treasury Department nevertheless announced new sanctions against Kostin himself in April.

VTB’s effort—a reaction to economic sanctions imposed on the bank by U.S. officials—coincided with escalating scrutiny of Russian attempts to influence the 2016 presidential election. The election interference in part prompted some members of Congress to propose legislation last Halloween to overhaul FARA.

The Department of Justice has signaled a toughening approach to FARA, and in May, trumpeted a new guilty plea by an agent working for Pakistan. Congressional scrutiny of FARA has intensified. And last year, in what amounts to the highest-profile FARA prosecution in decades, Special Counsel Robert Mueller charged President Donald Trump’s former campaign manager, Paul Manafort, with FARA violations in connection with Manafort’s work in Ukraine.

“Individuals who avoid disclosure undermine the purpose of the law,” Sen. Chuck Grassley (R-IA) said at a Senate Judiciary hearing last year on FARA oversight and attempts to influence U.S. elections. Rep. Mike Johnson (R-LA) has called the frequency of FARA violations and lobbyists who fail to register at all one of the “worst kept secrets” in Washington.

The United States put VTB and other Russian companies under sanctions in 2014 in response to Russia’s annexation of Crimea, a peninsula claimed by Ukraine. The sanctions on Russian banks, including VTB, effectively limited access to capital and Western markets, though dealings with the bank aren’t totally barred.

The Russian government owns a controlling interest in VTB—61 percent of the voting shares. VTB has a reputation of working closely with the Kremlin, though earlier this year, in an interview with The Independent, a British newspaper, Kostin called that “bullshit.”

The Russian government gave VTB a $2.6 billion bailout in late 2014 and 2015, after Western nations hit the bank with sanctions. The bank has since rebounded, recently reporting record profits.

But in April, the U.S. Treasury Department announced a new round of Russian sanctions. Included on the list: Kostin himself.

U.S. sanctions sent VTB, like so many before it, to K Street.

VTB’s press office, in a statement responding to questions from the Center for Public Integrity, said working with lobbyists is “a general business practice among major international companies.”

“Our engagement with the lobbyists is structured in a completely transparent way” under “standard contracts that fully adhere to all the legal guidelines applicable to such agreements,” the VTB statement said. “Our focus is to educate U.S. policymakers and lawmakers about VTB, its scope of business and operations. We made a conscious decision not to ‘lobby’ for anything and our objective is to better inform decision makers in the U.S.”

Upon VTB engaging Manatos & Manatos, the firm listed VTB’s New York City office address and registered effective April 2015 under the Lobbying Disclosure Act—a domestic lobbying disclosure regime that requires far less disclosure than FARA. Manatos & Manatos said it would lobby on government actions “that affect the imposition of U.S. sanctions on Russian-affiliated banks.”

Manatos & Manatos didn’t respond to requests for comment. “I’ll have to check and get back to you. Thank you,” Manatos said when a Center for Public Integrity reporter called, before hanging up. He did not call back or respond to subsequent emails.

Manatos & Manatos subsequently registered under FARA on behalf of VTB in May 2016.

Sidley Austin registered under FARA from the beginning of its work with VTB. Lobbyists registering under FARA must file a series of documents within 10 days of agreeing to represent a new foreign principal, according to the law and Department of Justice regulations.

For example, Boucher, who now heads the government strategies practice at Sidley Austin, and Michael Borden, a government strategies partner who was previously a senior counsel to the House Financial Services Committee, properly filed paperwork in June 2015 showing they would be representing VTB.

The firm also filed a disclosure at the same time for lawyer George Madison, the former general counsel of the U.S. Treasury Department. But Sidley’s filing on behalf of Madison wasn’t made public by the FARA office until April 2018, when the firm wrote to the Department of Justice to flag the mistake, according to documents Sidley Austin provided to the Center for Public Integrity. Department of Justice spokesman Ian Prior said that because of a technical error with the department’s filing system, the form “never reached the FARA Unit for processing” and the situation “has been remedied.”

Manatos & Manatos filed disclosures with the Department of Justice covering June 2016 to November 2016 and replied “no” to a question asking whether the firm had engaged in political activity. The firm did disclose it had “helped arrange for meetings with select U.S. policymakers.” It didn’t identify them.

But in June 2017, six months after the initial disclosure was filed, Manatos & Manatos moved to correct the record. The firm filed a new report disclosing all the contacts and meetings constituting political activity, providing copies of emails and thank you notes from Kostin.

Sidley Austin, for its part, amended its report in August 2017 to disclose its “political activity” in June 2016.

“The following should be added,” the firm wrote, adding that Borden had actually met with “staff members from the Senate Foreign Relations Committee, the House Foreign Affairs Committee, State Department Coordinator for Sanctions Policy Dan Fried, Rep. Eliot Engel and Rep. Jeb Hensarling to discuss the impact of U.S. sanctions on Russia institutions.”

Sidley Austin’s Mullins confirmed the amended report was prompted by a call from the Center for Public Integrity last summer.

Mullins said the retroactive filing was one of “two minor oversights” in the firm’s FARA filings. The other: the firm said it would also amend its disclosures, in response to questions from the Center for Public Integrity, to reflect a $2,700 campaign contribution Madison made in 2016 to Clinton. Lobbyists are required to publicly disclose campaign contributions on FARA filings.

By September 2016, Russian interference was a major issue in the presidential election.

At the same time, VTB was preparing to host the October gala at the Kennedy Center in Washington, D.C., “on the margins” of World Bank and International Monetary Fund meetings in the city.

And Daniel Russell, the former State Department official who now heads the U.S.-Russia Business Council, which includes VTB among its members, was wooing Fried to the gala.

Fried said he’s known Russell for years, but there was no chance he was going to accept the invite.

He called it a “reasonable supposition” to assume he was on the guest list because of his official position. “I was not interested. Like, seriously?” Fried said.

Fried said that sort of approach is designed to find officials who “looked like they could be courted or flattered or something. I don’t believe anyone in the U.S. government is susceptible to that kind of thing, but the Russians were going to keep pushing.”

Fried wasn’t the only invitee. At least one other State Department official received an invitation.

The U.S.-Russia Business Council is registered to lobby on its own behalf, regarding sanctions, under laws governing domestic lobbyists, not FARA.

FARA—for all its exemptions and loopholes—contains extremely broad triggers, the law firm Covington & Burling wrote in a client advisory.

The Center for Public Integrity asked Russell whether the U.S.-Russia Business Council had sought legal advice regarding any obligation to register under FARA in connection with the invitations, since they involved contacting government officials at Kostin’s request.

Russell did not specifically address the question of legal advice. But in an emailed response, he stressed the trade association’s long history of supporting educational and cultural events in Russia and the U.S.

“The performance was sponsored by VTB, which made available invitations for the U.S.-Russia Business Council,” he said. “The Council forwarded invitations to private and public sector individuals of its choice; the cover message for the invitations stated that VTB was the sponsor and that RSVPs should be directed to VTB directly.”

Russell also said the trade association “conducts policy advocacy activities solely on behalf of U.S. companies.”

Russell did not respond to follow-up questions about the emails and VTB did not directly respond to a question from the Center for Public Integrity asking whether Russell and the trade association extended the gala invitations to Fried and others at Kostin’s request.

The event was a showcase for the sanctioned bank. Kostin spoke, and VTB’s logo was projected onto the curtain of the highest-profile theater venue in the nation’s capital.

Among the guests who eventually turned up for the 2016 gala and reception: Alex Ovechkin, the Washington Capitals hockey star from Russia whose relationship with the Kremlin has drawn attention.

Fried said he doesn’t believe anyone from the State Department would have seriously considered attending. A brief report in Politico said congressional aides were there, but didn’t name them.

Michael Carpenter, a former U.S. National Security Council director for Russia who has also worked in the White House, the Pentagon and the State Department, said he met with companies regarding sanctions while a government official, but such “soft lobbying” on behalf of Russian interests “makes me nauseous.”

“If I did receive an invitation like that I would have never gone,” Carpenter, who is now senior director of the Penn Biden Center for Diplomacy and Global Engagement, said of the gala.

The invitations to American officials on behalf of VTB show the weakness of the law governing foreign lobbyists, he said.

Under FARA, “the information is poorly disseminated and the enforcement of failure to register or failure to disclose is very lax,” Carpenter said.

Indeed, a 2016 audit of enforcement and administration of FARA by the U.S. Department of Justice’s Office of the Inspector General found high percentages of late disclosure filings. Officials with the Department of Justice’s National Security Division, who are responsible for enforcing the law, need to improve “controls and oversight of FARA registrations” and better enforce “the complete and timely submission of required documentation,” the auditors wrote.

The Department of Justice did not make someone available for an interview about FARA enforcement for this story. But in testimony before the Senate Judiciary Committee in July 2017, Department of Justice Deputy Assistant Attorney General Adam Hickey said “the high burden of proving willfulness, difficulties in proving ‘direction or control’ by a foreign principal, and exemptions available under the statute make criminal prosecution for FARA violations challenging.”

In early October 2016, Kostin was back in town, hosting the Bolshoi gala—and meeting officials at the State Department.

This time, the requests came from Sidley Austin’s Borden, who had emailed the State Department officials in September and October to set up meetings for Kostin.

State Department talking points prepared for Sandra Oudkirk, the director of the office of sanctions policy and implementation at the State Department—labeled “sensitive but unclassified”—once again stress the need for implementation of the Minsk agreements. “There are no changes on the horizon for our sanctions policy,” read the talking points, which were created for a meeting with Kostin, possibly the meeting that took place on Oct. 6, 2016.

Later in October, Kostin was back in Russia, sitting on a stage next to Russian President Vladimir Putin, the keynote speaker at an annual investment forum hosted by VTB.

Identifying himself as a former congressman and a partner at Sidley Austin, Boucher stood up in the front row and asked a question, according to a transcript of the event translated into English and posted on the Kremlin’s website.

“I’m concerned about the apparently deteriorating quality of the relationship between the United States and Russia,” Boucher began, calling it a “leading issue in our presidential campaign.” He went on to ask about implementation of the Minsk accords.

“We are not the ones who are sabotaging the Minsk Agreements,” Putin said, pointing to actions others, such as Ukrainian officials, would have to take.

“And now I will answer the main question. What should be done to normalise the situation?” he said. “The parties should acts as partners and take into account each other’s interests. We are ready for this.”

After the election, as reporters and investigators increasingly focused on any interaction between Trump and Russia, the New York Times reported that in a 2015 email, Trump associate Felix Sater said Kostin and VTB had agreed to finance a Trump project in Moscow. The project was never built. Kostin told the New York Times that the bank had no dealings with Sater and had never agreed to finance the project, calling it “wrong information” and “fake news.”

Around the same time, FARA filings and State Department emails released to the Center for Public Integrity show Kostin, Swigart, Boucher, Borden, Madison and Manatos had another meeting at the State Department, again with Oudkirk.

Then, in April, the Treasury Department released new sanctions on a list of Russian officials in response to Russian government actions in Ukraine and Syria, as well as “attempting to subvert Western democracies, and malicious cyber activities.”

Kostin’s name was on the list.

The sanctions against him mean no American can engage in financial dealings with him or provide services to him.

U.S. lobbyists may continue to represent the bank, though not under Kostin’s direction, said Erich Ferrari, a lawyer specializing in sanctions.

“VTB Group continues to work with the lobbyists solely to meet our business objectives in the region,” VTB’s statement to the Center for Public Integrity said.

Sidley Austin’s Mullins said the firm “immediately took steps to comply with its legal obligations once Mr. Kostin was added to the sanctions list.” Manatos did not respond to a query about that firm’s response to the new sanctions against Kostin.

As for Kostin himself, in an interview with CNN Money shortly after the sanctions were announced, he was asked whether there was a chance other countries would also target him. Kostin said he isn’t doing anything wrong.

“It’s not up to me,” he said, “to influence this process.”