Corruption Watch: February 6, 2003

European intelligence services have raised the specter of terrorist acts in Europe as a form of retaliation if the United States goes to war with Iraq. According to "The New York Times" of 29 January, a senior French antiterrorism official claimed that Islamic militants are recruiting hundreds of cadres to carry out such acts in the event of an attack on Iraq. This same official told the paper that French police prevented several major attacks in Paris in 2002. He said the main threat now comes from radical groups in Chechnya, members of which underwent training in Afghanistan.

Spanish officials saw the main threat coming from North Africa. In late January, 16 men, all Algerians, were arrested in Spain on terrorism charges. Predawn raids in Barcelona and other towns in the province of Catalonia netted explosives and bomb components, suspected toxic material, and manuals on chemical warfare. According to "The Washington Post" of 25 January: "Most of the suspects picked up in Spain on [24 January] were Algerians who had trained in camps in Afghanistan, police said. Prime Minister Jose Maria Aznar said that investigation showed them to be part of the Al-Qaeda network of Osama bin Laden." Aznar told a news conference in La Coruna: "The network had connections with terrorists recently arrested in France and the United Kingdom, and they were preparing attacks with explosives and chemical materials."

According to "The New York Times," the Italian interior minister, Giuseppe Pisanu, said on 27 January that terrorism is a major and growing threat in Italy as well, and added, "The internal and international terrorist threat would be even more worrying if there were a war in Iraq."

The Italian police arrested five Moroccans near Venice in late January, saying they had been found in possession of plastic explosives and a detailed map of London.

"The Christian Science Monitor" on 28 January quoted a terrorism expert, Oliver Roy, who said it would be alarming if the so-called Algerian connection is confirmed. "Until now, Al-Qaeda has tapped Westernized Arabs in Europe, who have no connections to active terrorist organizations in the Middle East. Should it be proven through the recent arrests that any of the Algerian suspects are linked to Algerian Islamist extremists, it would mean that Al-Qaeda has access to infrastructure and a social foundation that it has not had before."

As reported earlier, London police on 5 January found traces of the toxic ricin in north and east London during raids that led to the arrests of six Algerian men. This led police to Manchester, where on 14 January during the questioning of three Algerian suspects, one of the men broke loose and stabbed Detective Constable Stephen Oake to death. In a raid on 20 January, police used battering rams to break down the doors of the Finsbury Park mosque. Inside they arrested seven men, four of whom have since been released, and uncovered documents and computer disks that police say provided details about the terrorist network developing in Europe.

In Central Europe, Czech authorities issued an alert after receiving reports of a possible intention by Afghan terrorist commandos to infiltrate the country, CTK and AFP reported on 27 January. Czech Police President Jiri Kolar said the Central Emergency Committee, which last convened in the wake of the 11 September 2001 attacks against the United States, has been activated and is examining information received from Czech security services. "These reports are more serious than warnings previously received," Frantisek Bublan, director of the Office for Foreign Relations and Information in the military intelligence service, was quoted as saying by the daily "Mlada fronta Dnes" of 27 January. RK

Russian privatization is once again spawning fears of corruption. This time prior the reports come in the run-up to the 2003 Duma elections and the forthcoming 2004 presidential elections and amid reports of coordination from the Kremlin, Yevgenia Albats claimed in "The Washington Post" of 25 January. Citing the privatization of the last giant state oil company in Russia, Slavneft, Albats wrote: "No major corruption scheme in Russia can succeed without the help of the Kremlin. The past two years of Russia's so-called war on the oligarchs have made it clear that the Kremlin has plenty of ways and means to destroy any oligarch it wishes to, and just as many ways to enrich those who are loyal to it."

The case of Slavneft is arguably an example of an insider deal where all the evidence points to the winner having been selected before the auction began. The sale of 75 percent of Slavneft, Russia's eighth-largest oil company, was announced some time ago by the state: The starting price was approximately $1.7 billion. Some people knowledgeable in these matters, such as Russian Economic Development and Trade Minister German Gref, suggested that a "just price" would be at least $2.5 billion. But, as "The Hindu" pointed out on 2 February, "What was touted to become Russia's first open and fair auction turned out to be a carbon copy of the rigged sell-offs of the Yeltsin era."

As the sale went forward, bidders mysteriously began to drop out. The Chinese firm CNPC was, sources were quoted as saying, ready to pay more than $4 billion. "The Washington Post" article claimed: "On the day before the auction, and after the company's CEO had spent several hours talking with top Russian economic authorities, CNPC withdrew. The winner became clear: It was a firm called Investoil that represented two bitter rivals, the Sibneft oil company -- owned by Kremlin insider Roman Abramovich -- and the oil company TNK, which participated in the deal in exchange for obtaining control it had long sought over some of Sibneft's assets. The winning bid was $1.86 billion -- less than half what the government could have gotten."

Another Russian bidder, Rosneft, was prohibited from participating in the auction. Rosneft President Sergei Bogdanchikov announced at a 25 December press conference that the state-owned company was readying a lawsuit against the Russian Federal Property Fund over its exclusion from the 18 December Slavneft auction, "Kommersant" reported on 26 December.

Last-minute court decisions barred two Rosneft-affiliated entities from participating in the sale. Bogdanchikov claimed that Rosneft had been willing to pay up to $3.1 billion for Slavneft through Promproekt, a company created especially to circumvent the ban on participation by state-owned companies in privatization auctions.

The reason that Sibneft won the auction, according to Albats, is that Sibneft used to have de facto control of the country's biggest television network, state-owned RTR, which reaches about 97 percent of Russian households across 11 time zones. According to the author: "Abramovich, one of the main financiers of Putin's presidential campaigns, yielded his interests in [RTR] to the Kremlin a while back. In return, according to sources, he was assured that he would be the winner in the Slavneft auction."

Russian "Yezhenedelnii zhurnal" reported in January that: "Although President Putin and his administration have vowed to remove the oligarchs from active engagement in national politics, officials apparently have not abandoned the practice of soliciting money from them for political campaigns." RK

Speaking to reporters in Moscow on 23 January, Walter Schmoelzing, a representative of the leading European insurance companies operating in Russia, said that as many as half of the 1.5 million cars illegally imported into Russia in recent years were stolen in Europe, mainly in Germany, Ekho Moskvy and "Komsomolskaya pravda" reported on 23 and 24 January, respectively. However, only a few hundred of the vehicles have been recovered because the stolen cars have since been registered in Russia, making it difficult to take them away from their new owners. Schmoelzing said the situation is further complicated by the fact that many state officials, including high-ranking Interior Ministry officials, are using stolen cars. "Komsomolskaya pravda" noted that no Interior Ministry representatives attended Schmoelzing's press conference. (Victor Yasmann)

Early in the year 2000, the Social Democratic government of Milos Zeman announced plans to build an 82-kilometer highway section of the D47 highway, linking the town of Lipnik with the Polish border. With a recommendation from the prime minister's adviser in the city of Ostrava, Jaromir Kuca, the contract was awarded to an Israeli firm called Housing and Construction (H&C). The contract was signed without soliciting competing bids in 2001, and the cost was agreed to be 125 billion Czech crowns ($3.75 billion). When asked why the government chose a company that had never built a highway or invested in the construction of one, Transportation Minister Jaromir Schling stated that there was not enough time to hold a tender, that it was an urgent matter, and that construction had to begin immediately. Later, Minister Schling defended his decision to award the contract to H&C without looking at other offers by claiming, "We didn't know how to draw up a request for the construction of a private highway."

The Czech weekly "Respekt" in mid-2002 (No. 26) exposed the scandal. "Respekt" pointed out that the European Investment Bank (EIB) had warned the Zeman government that it was about to overpay by some 55 billion Czech crowns ($1.9 billion) for the project. The justice minister, Jaroslav Bures, announced that the contract appeared to contravene Czech law in many areas. In response to this criticism, Minister Schling announced, "Everything is in order; we couldn't have found a better alternative."

During negotiations with H&C on the deal, the government used the services of the consulting firm Mott MacDonald. When the consultants reported to the government in May 2002 that the deal appeared highly disadvantageous, Schling fired the consultants. The reason given for this by Schling adviser Jan Prokes was, "They [the consultants] weren't able to find a common language with H&C and created difficulties."

As the pressure mounted to annul the contract, Minister Schling announced in mid-2002 that the highway would now be built by the firm Housing and Construction CZ, which was a consortium of the Israeli company Shiran Group, Austrian Strabag, and British Brown and Root Halliburton. "Respekt" reported that the main role in the consortium was played by the Shiran Group. The president of Shiran, Shimon Jakobson, along with fellow Israeli Oded Harel and a number of Russian citizens, sit on the statutory bodies of Czech firms involved in everything from tourism to real estate and financial advising. Jakobson and Harel were both investigated in the late 1990s by Czech police for alleged contacts to the Russian mafia. The majority of the firms in which they play statutory roles are owned by unknown Cyprus-based firms. The police investigation also uncovered that many reputed Russian mobsters stayed at the U Sixtu and Schweiger hotels in Prague owned by Jakobson.

One of the objections in the EIB report about inflated and dubious costs of the project was a point whereby the Czech government obligated itself to pay H&C a profit of 4 billion crowns ($142 million) in addition to apparently exaggerated cost estimates submitted by H&C. As "Respekt" pointed out, in most such cases, the company building the highway is allowed to collect tolls from motorists that use the road. In the case of highway 47, however, H&C would receive 4 billion crowns "even if not a single car uses the D47."

In November, the new coalition government headed by Social Democratic Prime Minister Vladimir Spidla announced that it was reconsidering the plan and admitted that corruption might have been a factor in the deal. By December, police launched an investigation into the deal. In January, just-retired Czech Army Chief of Staff Jiri Sedivy became the chairman of Housing and Construction's supervisory board and was tasked with lobbying the new government on the company's behalf. When asked about his new position with the company, Sedivy told the "Prague Post," "I've looked over the company's data and [considered] their business intentions here, and I haven't come across any suspicious practices."

The police investigation is to be completed in March, and the Spidla government will then decide about the project and H&C's involvement in it. RK

The long-awaited trial of Dmytro Streshinsky and his alleged accomplices, a group accused of arms trafficking to Croatia after the outbreak of war in the former Yugoslavia in 1992-94, began in Torino, Italy in January. Named in the indictment along with Streshinsky are the current national security adviser to Ukrainian President Leonid Kuchma, former Ukrainian Security Service (SBU) head Yevhen Marchuk; Oleksandr Zhukov, a former Ukrainian citizen from Odesa and the head of Sintez Oil company; and two Russian businessmen, Leonid Lebedev and Mark Garber, founders of the Russian oil company Sintez Oil, the parent company of the Zhukov-owned branch in Odesa. Also indicted were a former Croatian citizen and a Greek national.

According to the indictment, Marchuk -- at that time the head of the SBU -- organized a conspiracy to illegally smuggle arms to Croatia. He allegedly recruited Streshinsky to join in this conspiracy while he provided protection to the actual dealers and was paid from the profits of the sale. Marchuk insists that he is innocent and has provided a copy of a letter he sent to the then-president of Ukraine, Leonid Kravchuk, in which he reports on the attempts by Streshinsky to illegally purchase arms and the actions of the SBU to prevent this. (For the full text of that letter, see "RFE/RL Crime, Corruption, and Terrorism Watch," 10 January 2002.)

On 8 March 1994, the cargo ship "Jadran Express" was detained by the Italian police off the coast of Italy with contraband weaponry reportedly destined for Croatia. According to Marchuk, this was part of a joint operation conducted by the SBU, the Italian police, and other law-enforcement services to end this trade. Streshinsky was apprehended by German police in the fall of 2000 and soon afterwards was turned over to Italian authorities on arms-smuggling charges. During the ensuing interrogations, Streshinsky named Marchuk as the organizer of the criminal grouping.

Zhukov was arrested on Sardinia in April 2001 and was released from prison in mid-2002 on the condition that he not leave Italy. Lebedev and Garber are both in Moscow, and the Russian government will not allow them to be extradited for trial. Lebedev was in fact elected a member of a local regional council in 2002. Marchuk has not indicated whether he will stand trial in Torino, but thus far he has not appeared. RK

CAPITAL FLIGHT

By Roman Kupchinsky

Beginning in 1992 and continuing through 1999, the years of the Yeltsin presidency, an average of $50 million left Russia every day to be secretly deposited into accounts throughout the world. Some of this money went to the United States, some to Western Europe. Much of it left Moscow or St. Petersburg for the tiny island of Nauru, in the Pacific Ocean or to banks on Cyprus before being wired to accounts in Israel, England, Spain, Antigua, or another destination where it was then converted into real estate or invested into the local economy. That capital flight during the eight-year period represents some $150 billion that left Russia, most of it never to return. As these huge sums were being sent out of the country, many of the men doing the sending were meeting with Western bankers and financiers to arrange for loans for their companies or to have them underwrite bond issues that they claimed they needed in order to build their businesses.

Concurrently, the government of Russia was looking for International Monetary Fund (IMF) money and World Bank loans ostensibly to shore up its currency or to fund projects needed for renovating the country's infrastructure. Some critics complained that Russia was becoming a financial "black hole." There was even talk in the U.S. Congress of stopping all loans to Russia.

The schemes used to take such money out were as unlimited as human imagination. Overbilling for imported goods was a practically foolproof method: "Company X" in St. Petersburg would place an order for $20 million worth of widgets from "Company Y" in Egypt. The real cost of the widgets was $10 million, of course. But "Company Y" would then deliver the widgets to an affiliate of "Company X" in Cyprus and bill them $20 million. The money would be transferred from St. Petersburg into the account of the affiliate in Cyprus to pay the bill. The Egyptian company would then get $12 million ($10 million for the widgets and $2 million as carrying charges), and the remaining $8 million would then go into hidden accounts of "Company X" managers in some bank in Antigua, for instance. The money was not stolen or earned from illegal sales of drugs or weapons to some outlaw regime, but from genuine transactions. But the managers of "Company X" did not want to pay Russian taxes and did not trust their government (for perhaps sound reasons) and parked the cash offshore. Some subsequently used this cash to buy expensive houses for themselves and their relatives in Spain or in the South of France -- and everyone in the food chain was happy, aside from those millions of Russians who could not afford to conduct such transactions and who, for example, had to support retired parents sporadically receiving their state pension payments of $18 per month.

The flip side of this scam was exporting goods (natural gas is a prime example) from Russia and having the payments made to affiliated companies offshore. Once the money was deposited into the bank accounts of the affiliates, it never would reach Russia.

But while money was flowing out of Russia to offshore havens, Russia's hard-currency needs were increasing. The United States, seeking some leverage over events in Russia, mainly its insistence on speeding up economic reforms, has borne the brunt of aid designs for Russia. Such aid was given in the form of technical and financial assistance administered through the U.S. Agency for International Development (US AID) or other bilateral programs, or through the IMF, where U.S. contributions are high and its vote carries corresponding gravity (17.56 percent).

But despite the efforts of the government, other U.S. entities were either knowingly or unwittingly helping Russian companies and individuals park their cash offshore. The Bank of New York (BONY) scandal is a prime example. Between October 1998 and March 1999, around $4.2 billion was processed at BONY through accounts controlled by a company used by Russian businessmen to launder funds from illegal sources. Investigators eventually discovered that $10 billion-$15 billion passed from Russia through BONY. Not all of this was money gained from illegal transactions, of course, much of it was found to be capital flight. Once the money entered the BONY system, it continued on to a myriad of accounts in banks both in the United States and abroad.

In March 2000, Vladimir Putin was elected president of Russia and many people expected that capital flight would slow, if not end. The theory was that Putin's election would at last inspire confidence in the Russian economy and government and companies would not have to stash their money in accounts in Antigua but could reinvest it into the Russian economy. This optimism did not last long. The 11 September 2001 attacks in the United States shook many investors in the West. And the resulting war in Afghanistan and the marked increase of hostilities in Chechnya soon had Russian companies rushing back to banks to unload their cash into safer havens. In 2002, some $25 billion left Russia -- the largest surge coming in the fourth quarter of the year, when an estimated $5 billion left the country, according to "The Moscow Times" of 15 January. Some of that was undoubtedly the result of increased world oil prices, which tend to increase such capital flight. But it was also a clear sign that few Russian companies were enamored with Putin and his policies, and that Putin's popularity might be more the result of good public relations than solid fiscal policies or reformist tendencies.

While corporate capital flight remained more or less constant in 2001 and 2002, Russian companies stepped up their borrowing in the West. Thus, in 2001, Russian companies borrowed some $800 million, while by 2002 this figure had jumped to $7.5 billion, according to "The Moscow Times: of 15 January.

In other postcommunist states such as the Czech Republic, Bulgaria, Hungary, Poland, Slovakia -- or Turkey, another emerging market -- the reverse is true. In 1999, an estimated $32 billion flowed into their economies, and in 2000 the figure was slightly higher. Most economists brandish this as proof that reforms in these countries are progressing and attracting investment capital.

In Ukraine, capital flight has been steady at about $3 billion per year. But considering that there are few foreign investments into the country due to at least perceptions of large-scale and high-level corruption, the results of capital flight are magnified. One of them, the placing of Ukraine on the Financial Action Task Force (FATF) list of money-laundering havens, can have serious consequences. One of the main reasons for the long delays in bringing Ukrainian banking legislation into line with Western standards is the reluctance of parliament to pass laws that would limit many key members of that body from sending their own assets abroad, something that many lawmakers are suspected of doing. One legislator, Oleksandr Volkov, is himself wanted by Belgian police on charges of money laundering. Volkov denies the charges but refuses to stand trial in Belgium. Another key member of parliament and a leader of the opposition, Yuliya Tymoshenko, is under investigation by the Ukrainian Prosecutor-General's Office for money laundering. She denies the charges and claims they are politically motivated. A former prime minister, Pavlo Lazarenko, is currently awaiting trial in San Francisco on charges of money laundering.

One of the obstacles to accurately calculating capital flight is that there is no clear mechanism for determining what can be considered capital flight -- as opposed to capital outflow or money laundering. Money laundering is used to describe a certain set of actions taken to hide income from illicit dealings and eventually "legalize" it. Capital outflow is the normal legal movement of money across national borders. Capital flight is an abnormal flow of money being hidden from taxation, financial uncertainty, or high risk, and it often happens to be money misappropriated from companies by senior executives. Capital flight is also defined as the once-common Russian practice of buying dollars as a hedge against inflation or as a savings vehicle. Many Russians would buy dollars for rubles during periods of high inflation or uncertainty and then exchange them back into rubles if the exchange rate made it worth their while or if they simply needed the rubles. This process is also known as "dollarization."

The impact of capital flight on Russian society is enormous. It has lowered the tax base, thus forcing the government to keep abnormally high tax rates in order to have a more or less balanced budget that can provide for the basic needs of the population without resorting to new and inflationary issues of rubles. It has also kept social programs at a bare minimum and blocked badly needed infrastructure renovation. High tax rates have discouraged small and medium-sized businesses from expanding or beginning. Other consequence of capital flight include a growing internal debt burden, which, coupled with the foreign debt, has created a situation in which 40 percent of the Russian budget in 1999 was designated for interest payments on foreign and domestic debt, according to a Congressional Research Service Report for Congress titled "Russian Capital Flight, Economic Reforms and U.S. Interests: An Analysis" and updated on 10 March 2000.