Corruption Watch: January 23, 2003

Western intelligence officers are warning of the possibility that terrorists armed with the toxin ricin and chemical weapons might be moving through Turkey into Western Europe, the "Financial Times" reported on 17 January. According to the report, ricin was traced to training camps in Georgia's Pankisi Gorge, where Georgian investigators found traces of the toxin in camps that had been raided by security forces.

"No direct connection has been made between the Algerians arrested in the U.K. last week [see "RFE/RL Crime and Corruption Watch," 16 January 2003] and militants known to have passed through the Georgian camps. But European investigators believe chemical weapons are the main means with which the militants intend to attack Europe. French investigators discovered evidence that tests involving cyanide and other, unspecified, chemicals may have been carried out by alleged terrorists who were arrested in Paris in December," the daily wrote.

On 19 January, Chechen radical ideologue Movladi Udugov was quoted on the Kavkaz-Tsentr news agency's website (http://www.kavkazcenter.com) as denying that Chechens were in any way involved in the ricin that was reportedly unearthed. He said a report by ITAR-TASS on 18 January enabled the Russian mass media to disseminate a false story by an anonymous Russian intelligence official who said "terrorist acts using poisonous substances, including from Chechnya, pose a threat to the international community."

According to CNN's website (http://www.cnn.com), "Ricin is a natural highly toxic compound that comes from castor beans, used to make castor oil. About one million tons of these beans are processed every year. When they are boiled down, the residue is ricin.... Ricin can kill someone within five days, but it is not always fatal. Children are more at risk than adults. If inhaled, ricin can cause death within 36 to 48 hours from failure of the respiratory and circulatory systems." RK

The U.S. Central Intelligence Agency's (CIA) website published the agency's "Unclassified Report to Congress on the Acquisition of Technology Relating to Weapons of Mass Destruction and Advanced Conventional Munitions, 1 July Through 31 December 2001" on 20 January (http://www.odci.gov/cia/publications/bian/bian_jan_2003.htm).

The report states: "Russia's cash-strapped defense, biotechnology, chemical, aerospace, and nuclear industries are eager to raise funds via exports and transfers. In addition, some Russian universities and scientific institutes have shown a willingness to earn much-needed funds by providing WMD [weapons of mass destruction-] or missile-related teaching and training for foreign students. Given the large potential proliferation impact of such exports, transfers, and training, monitoring the activities of specific entities as well as the overall effectiveness of the Russian Government's nonproliferation regime remains a high priority."

This comes as no surprise to most analysts of Russian weapons sales. The pace of such sales has been rapidly increasing. According to RIA-Novosti news agency on 30 March 2002, Deputy Prime Minister Ilya Klebanov told a meeting in Tula that Russia has moved into second place in the world in terms of arms sales. The deputy prime minister noted that Russia is selling the most up-to-date armaments -- "the days when we sold old equipment are gone never to return."

As for Russia's intentions concerning where to sell such weaponry, this was clarified more than a year previously, on 22 November 2000, by Foreign Minister Igor Ivanov. Speaking in Poland after a two-day visit, he made clear that Moscow would stand for no interference in pursuing its trade interests, dismissing a U.S. list that included Iran among states alleged to be sponsors of terrorism -- along with Cuba, Iraq, Libya, North Korea, Sudan, and Syria -- Reuters reported on 23 November 2000.

Reuters at the time reported that Defense Minister Igor Sergeev said Russia would observe international law and never supply Iran with weapons of mass destruction. "Russia bases its acts on close adherence to its international commitments, also in the case of Iran. We will continue to do so," Ivanov told reporters in response to a question about the deal. "If someone creates his own lists, it is a question of the competences of that state." Sergeev added, "We fulfill all international requirements on nonproliferation of weapons of mass destruction."

The United States is clearly concerned that Russia will supply Iran, in the first place, with nuclear technology. The CIA report states: "Despite Bushehr [Iranian nuclear reactor] being put under IAEA [International Atomic Energy Agency] safeguards, Russia's provision of expertise and manufacturing assistance has enabled Iran to develop its nuclear technology infrastructure -- which, in turn, can benefit directly Tehran's nuclear weapons R&D program. In addition, Russian entities continued associations with Iranian research centers on other nuclear fuel-cycle activities."

It should be kept in mind that, in 1995, U.S. Vice President Al Gore and then-Russian Prime Minister Viktor Chernomyrdin barred Russia from signing new contracts for Iranian purchases of conventional weapons. Existing contracts were to be completed by 1999. By November of 2000, Russia had gone back on its word. In response to U.S. allegations, Interfax news agency quoted unidentified sources that said Russia's renunciation of the deal was linked to "positive changes in Iran's internal political situation." The sources told Interfax the United States had violated the accord by publicly disclosing its terms and referred to supplies of U.S.-made arms acquired by Taliban authorities in Afghanistan, viewed by Moscow as a source of regional instability.

The CIA report to Congress maintains that Iran continues to seek and acquire conventional weapons and production technologies, primarily from Russia, China, and North Korea. It further states: "The Russian and Iranian Governments and firms have engaged in high-level discussions on a wide variety of military services and equipment -- including air defense, naval, air and ground weapons, and technologies. In October 2001, Tehran and Moscow signed a new military-technical cooperation agreement, which laid the groundwork for negotiations and created a commission for future arms sales, but did not itself include sales contracts."

Russian-Iranian arms sales were the topic of the day in the fall of 2001. Mikhail Dimitriev, chairman of the State Duma's Committee for Military-Technical Cooperation With Foreign States (KVTS), told "Izvestiya" on 25 August that the forthcoming signing with Iran of a framework agreement on military-technical cooperation was an important step for Russia. At the current rate, he said, Russia could maintain its place in the global arms market over the next 10 years by earning $3.5 billion-$4 billion annually; but with the signing of such cooperation agreements, earnings could reach $4 billion-$4.5 billion a year. Dimitriev emphasized that the agreement with Iran did not violate international treaties, nor did it pose a threat to any other country (see "RFE/RL Iran Report," 10 September 2001). RK

"Gazeta Wyborcza," Poland's largest-selling daily, revealed that Adam Michnik, the paper's editor in chief and a communist-era dissident, had been solicited for a bribe of $17.5 million in exchange for changes to a media law that would be favorable to that newspaper and its parent company, Agora SA. Michnik produced audio recordings of a meeting in July with the man who was alleged to have solicited a bribe, film producer, Lew Rywin. Rywin allegedly told him he had consulted with "people in power," the ruling Democratic Left Alliance (SLD). Rywin, 57, is a well-known film producer and media entrepreneur who co-produced director Steven Spielberg's Oscar-winning "Schindler's List" and Roman Polanski's "The Pianist," which won the top prize at the Cannes Film Festival in 2002. He owns the Heritage Films company and, until last week, was the supervisory board chief of Canal+ Polska, a television station and digital platform.

According to "Gazeta Wyborcza" of 27 December, Rywin first approached Wanda Rapaczynska, president of Agora, in July with an offer to lobby the government for a favorable media law that would allow Agora to buy private broadcaster Polsat television.

According to the "Gazeta Wyborcza" account as retold by "The Wall Street Journal Europe" on 14 January: " Mr. Rywin proposed that Agora would transfer the money into SLD coffers, the center-right 'Gazeta Wyborcza' would stop criticizing the SLD in print, and the deal would be put on paper and signed. Mr. Rywin also allegedly said that he would discuss the bribe with Prime Minister Leszek Miller on a fishing trip. In exchange, the government would amend the law to allow Agora, mainly a newspaper publisher, to buy a large commercial television station, Polsat. Agora had made its intentions clear toward Polsat and criticized the draft media law, which wouldn't allow such cross-holdings. A week later Rywin spoke with Mr. Michnik."

No bribe was ever paid, and on 22 July Michnik went to the prime minister with the tale and the recordings he made.

"RFE/RL Poland, Ukraine, Belarus Report" on 14 January reported that, following the "Gazeta Wyborcza" report on 27 December, Polish Prosecutor-General and Justice Minister Grzegorz Kurczuk ordered an investigation into the case, which has been dubbed "Rywingate" by Polish media. There are many obscure points in this case, including the question of why Miller, after being informed by Michnik of Rywin's alleged bribery attempt, did not ask the prosecutor-general to launch an investigation (as a public servant, Miller is obliged by law to do so). It is also unclear why Michnik decided to publish details of Rywingate only in late December, five months after the alleged origins of the bribery scandal. According to reports in other Polish media, including the respected weekly "Polityka," Rywin's offer to Michnik was "unofficially" known to journalists and politicians in Warsaw long before it was published on 27 December. RK

The deputy head of the Russian State Customs Committee's department for combating drug smuggling predicted in late December that the Baltic States would soon replace the Netherlands as the main supplier to Russia of synthetic drugs such as MDMA and "ecstasy," according to the Interfax news agency on 29 December.

The Baltic countries, formerly transit points for such drugs, are evolving into major producers of "club drugs" made from precursor chemicals imported from Russia. Experts estimate that the price for one tablet of MDMA or ecstasy varies from $10 to $30 within Russia's borders.

But Russia is not the only country worried about ecstasy, or its increasing penetration of the domestic market for illegal drugs.

According to Swedish authorities, that country has long been concerned over an increase in illicit drug smuggling from the Baltics and Russia. There is growing concern that Eastern and Central Europe are producing increasing amounts of synthetic drugs for the Swedish market. The Netherlands remains the source of approximately half of all amphetamines seized, but substantial amounts of amphetamines originate in Poland, the Czech Republic, and Hungary, according to the U.S. State Department's "International Narcotics Control Strategy Report" of March 1998.

Police, customs agents, and the Social Affairs Ministry in Sweden regard ecstasy as the biggest current threat, since it is being marketed in aggressive ways to new groups -- i.e., to young middle-class users with no criminal records. A vast majority of ecstasy seized originates in the Netherlands -- so far, about 21,000 tablets have been seized in 1997.

A Danish police report for the European Union released in 2001 and titled "Status Report On Organized Crime In Denmark In 2000" states that "amphetamine is produced primarily in Holland and in Belgium as well as in the East European countries. Several large amphetamine laboratories have been discovered in Lithuania, and the number of quantity and seizures made in Norway, Sweden and Finland of amphetamine originating from the Baltics has increased." (http://www.politi.dk/PUBL/Organiseret_kriminalitet_2000/Org.krim.2000_uk.pdf)

UKRAINE REMAINS ON MONEY-LAUNDERING BLACKLIST

By Taras Kuzio

Ukraine in 1993 acceded to the 1990 international Convention on Laundering, Search, Seizure and Confiscation of Proceeds from Crime. Ukraine in September 2001 was placed on a "blacklist" compiled by the Financial Action Task Force (FATF), which was established in 1989. Those placed on the blacklist include countries deemed by the FATF to be countries that "do not cooperate" in combating money laundering.

Ukraine's legislative record against money laundering, corruption, and the shadow economy is �- on its face -� very good. But, as with Ukraine's decade-long "struggle" against corruption, its campaign against money laundering and the shadow economy remains virtual (see "RFE/RL Crime, Corruption and Terrorism Watch," 6 September 2002).

In March 2001, a presidential decree outlined extensive "Measures to Eliminate the Shadow Economy." In August of the same year, the Ukrainian cabinet issued a statement outlining measures to combat money laundering that was followed by a presidential decree in December on "measures to avoid the legalization of criminally derived proceeds." A law with similar recommendations and title was finally adopted by parliament on 28 November 2002 and signed into law on December 9. The FATF believes the law is inadequate in a number of key respects, however, and a spokeswoman said on 22 January that the United States and Canada have introduced sanctions in response to the flawed legislation (see "RFE/RL Newsline," 23 January 2003).

Unfortunately, much of the impetus for this legislative activity has come from abroad. The same can be said of criminal cases launched against high-ranking corrupt officials or oligarchs. Combating phenomena such as money laundering is not a priority for Ukraine's leaders, critics say, despite the lip service they devote to such aims. "It is doubtful that commercial banks have given the state complete information, as bankers are often indirect participants in shadow schemes," the "Den" newspaper reported on 11 April 2002.

Why is Ukraine's struggle against money laundering and the shadow economy virtual? As with many international and domestic legislative acts signed by Ukraine and other CIS states, such measures have had not been effectively implemented. The neo-Soviet political culture that pervades state institutions and the post-Soviet ruling elite sees no contradiction between adopting and signing legislative acts and then undertaking or allowing domestic activities that fly in the face of such laws.

Another problem that reduces the effectiveness of the struggle against dirty money and the shadow economy is the selective use of such legislation against political opponents. In October 2001, the Estonian police provided evidence of the transfer of millions of dollars to foreign accounts by Prime Minister Pavlo Lazarenko in 1996-97; Lazarenko is now on trial in the United States. Yet Prime Minister Lazarenko received two state medals for his services to the Ukrainian economy from President Leonid Kuchma and, despite being deprived of his parliamentary immunity, was allowed to leave Ukraine.

Instead of seeking to identify the circumstances of Lazarenko's money laundering within the Ukrainian political-economic system itself, Kyiv has rather sought to place the blame on the Baltic states as allegedly major conduits for money-laundering operations.

In October 2001, the Latvian Foreign Ministry reminded Ukraine that it had submitted a proposal to Kyiv to sign an agreement to struggle against economic and financial violations and the return of illegally transferred capital. Ukraine never agreed to the initiative.

The fact that Lazarenko reportedly laundered some $12 million before leaving Ukraine in 1999 through the Slovyanskyy Bank, whose vice president at the time was the now-deceased Borys Feldman, was well known to Ukrainian law-enforcement officials. Yet they stopped neither that transfer nor the dealings that Yuliya Tymoshenko had with Somalli Enterprises, an offshore company created in Cyprus by Unified Energy Systems of Ukraine, which she used to run. Money was being laundered by Somalli to pay Lazarenko, according to the U.S. indictment against Lazarenko. Yet Tymoshenko was accused of wrongdoing only years later, once she came into political conflict with Kuchma.

Politically motivated and selective prosecution of anti-money-laundering and corruption legislation is quite common. The case of radical anti-Kuchma oppositionist Tymoshenko is well known -- as is that of the destruction of the Slovyanskyy and Grado banks and the imprisonment of banker Feldman. "Den" on 11 April 2002 pointed out that "large political projects" (i.e., elections) cannot be undertaken without the use of funds from offshore zones and dummy companies. The oligarchic Social Democratic-united party demanded $50 million from Russian businessman Konstantin Grigorishin for the 2002 elections. When he refused, his businesses in Ukraine were destroyed. Our Ukraine deputy Viktor Pynzenyk calculated that $500 million-$600 million in funds from the shadow economy was spent in the 2002 elections. Even larger shadow economy funds will be likely spent in next years presidential elections.

Interagency rivalries and the use of information for political blackmail also hamper anti-money-laundering activities. The State Tax Administration always opposed the creation of an independent financial-intelligence agency, as required by the FATF. Yet the Tax Administration head at the time, Mykola Azarov, was a member of the same pro-Kuchma For a United Ukraine electoral bloc as Prime Minister Anatoliy Kinakh, who supported its creation. Anticorruption and organized-crime departments have long existed within both the Ukrainian Security Service and the Interior Ministry -- although their effectiveness is suspect, as they have themselves often been implicated in illegal activities. After much opposition, the agency demanded by the FATF was established within the National Security and Defense Council.

During the 1990s, Ukraine, like most CIS states, organized a massive transfer of property from state to private hands. Most of the proceeds from this privatization process ended up in the shadow economy. Only in December 2001 did Kuchma introduce measures to halt "shadow privatizations" in which oligarchic groups maneuvered energy firms -- such as the Donbas and Luhansk oblast energy companies -- into incurring large debts in order to purchase them later with dubious funds at rock-bottom prices once they went into bankruptcy.

In presidential elections in the summer of 1994, Leonid Kuchma pledged to reduce the size of the shadow economy. Nine years later, it remains the same size. Obviously, some institutions and influential political-economic forces benefit from such a large shadow economy. As Kuchma admitted in a speech to the STA in December, "You understand the shadow sector is very large in Ukraine."

In a joint conference in June 2002 by the Interior Ministry and the STA, it was admitted that the shadow economy accounts for half of Ukraine's gross domestic product. Some 356 offshore companies, the majority of which are not registered in Ukraine, own stakes ranging from 10 percent to 98 percent in fuel-energy, metallurgical, and mining enterprises (i.e., Ukraine's most lucrative sectors). Seventy-eight percent of the ore-mining sector is in the hands of offshore companies.

"Tremendous financial resources remain outside the budget," acting Prime Minister Kinakh said in November. Under Viktor Yushchenko's government (December 1999-April 2001), much of those funds was brought back onto the budget and used to pay wage and pension arrears. Tymoshenko's expertise was useful in understanding the complicated financial machinations surrounding corruption in the fuel-energy sector.

The Yushchenko-Tymoshenko government harmed too many vested interests, and the government was voted out by pro-Kuchma oligarchs and the Communists. Corruption today in the fuel-energy sector, where barter accounts for 92 percent of transactions, has returned to the levels under Lazarenko -- including with the involvement of high-level oligarchs such as Kuchma's son-in-law, Viktor Pinchuk.

Money laundering is intricately tied to the shadow economy, as it operates through transborder transactions and offshore zones. At one stage in the 1990s, the offshore zone of Cyprus ranked third in foreign investment to Ukraine. Dummy companies are set up in offshore zones to which capital is transferred by Ukrainian businesses and banks (3,500 dummy companies were suspended last year alone). It is precisely due to the transnational aspects of money laundering from Ukraine that the United States imposed sanctions against it in December under the U.S. PATRIOT Act.

Ukraine's political-economic system is not conducive to combating problems like money laundering. The lack of transparency and Western-style "rules of the game" in the economy and budgetary spheres are all factors inhibiting Western investment while encouraging a deepening of corrupt practices within which Russian and CIS investors might best operate.

Dr. Taras Kuzio is a resident fellow at the Centre for Russian and East European Studies and adjunct professor, Department of Political Science, University of Toronto.