Corruption Watch: June 12, 2003

By Roman Kupchinsky

As the financial noose tightens around the supply of money needed by terrorists to finance their activities, such groups are being forced to seek new sources of revenue.

The Hawala system, not a source of financing but rather an informal means of transferring funds, remains largely in place; it is useless in the absence of cash. But Hawalas have other uses than simply moving money from country to country, hidden from the prying eyes of regulators and police. Informal in nature, the Hawala system deals in cash transactions and lacks the sophisticated equipment needed to detect a cleverly forged stack of $100 bills -- and thus can be used to insert fake money into the system, ultimately exchanging it for the real stuff.

When tainted Islamic charities were forced to halt the funding of terrorism and the Taliban regime was evicted from Afghanistan, it become more difficult for groups like Al-Qaeda to count on these traditional donors. This is forcing them to resort to criminal activities to raise cash. Drug smuggling is a lucrative business, and terrorists have used it in the past, according to many law-enforcement experts. Another profitable but less publicized approach is counterfeiting.

The use of counterfeit money (which almost invariably means U.S. dollars) to fund terrorism is not a novel idea. The Chechen uprising has been found to have used large sums of counterfeit dollars to buy weapons and ammunition from Russian troops for years. With the influx of Al-Qaeda members into Chechnya after the closure of bases in Afghanistan, there exists a strong possibility that they too are using this resource.

During the search of an apartment in Manchester, England, belonging to an Al-Qaeda member, British police found a manual on terrorism -- the translation of which can be viewed on the U.S. Justice Department's website (http://www.usdoj.gov/ag/manualpart1_1.pdf). The manual includes instructions on counterfeiting and forgery, security measures for undercover activities, and strategies in case of arrest and indictment.

The volume of illegally printed U.S. dollars is large enough that in 1996 the U.S. Treasury Department was forced to change the $100 bill and add a number of features to prevent counterfeiting. According to the British Parliament's Office of Science and Technology publication, "Post Note Number 77," $121 million in counterfeit U.S. banknotes was seized outside the United States, and another $20 million inside U.S. borders, in 1993. There is also evidence that large quantities of counterfeit dollars circulate in the global economy without ever returning to the United States or other places where counterfeits are likely to be identified.

On 15 August 2000, Colombian authorities, working with the U.S. Secret Service, captured 10 leaders of a major counterfeiting ring that had exported $40 million in fake bills to the United States beginning in 1998. Those arrests shut down what had been the world's largest counterfeiting operation.

This led the White House to release a statement on 30 August 2000 expressing concern over counterfeiting in Colombia: "Colombian-manufactured counterfeit dollars represents one-third of all counterfeit passed in the United States. Estimates indicate that over the past fifteen years more than $100 million in Colombian counterfeit has been passed, with $22 million seized in the United States. During the same time period, over $67 million has been seized overseas, with 90 percent of that total seized in Colombia." Counterfeit activities attributed to Colombia represented more than $196 million from 1986 through 2000, according to that report.

ITAR-TASS reported on 9 January 2002 that the volume of counterfeit U.S. dollars in that country is enormous, given that the volume of dollars circulating in Russia is second only to the figure in the United States itself. The forgeries are usually of very high quality, and most currency-exchange centers in Russia have neither the equipment nor sufficient will to detect counterfeit dollars.

In Great Britain, the National Criminal Intelligence Service (NCIS) catalogs all counterfeit notes intercepted by police and banks (other than the Bank of England); in 1994-95, police seized 11.8 million in counterfeit pounds sterling and $5.5 million in bogus dollars before the notes entered circulation, and a further 15.4 pounds in counterfeit currency was discovered in circulation.

"Post Note Number 77" reports that Germany is one of the few countries to publish the volume of counterfeit bills intercepted by its national bank: That number grew from 4,100 notes (representing 327,000 German marks) in 1990 to 23,000 (3.3 million German marks) in 1994.

The trail of bogus dollars in some cases has led to terrorist groups. On 26 July 2002, three men (including a former KGB officer) who were part of a large European network involved in counterfeiting U.S. dollars were jailed in England following a joint operation by the U.S. Secret Service and the U.K.'s National Crime Squad (NCS) to uncover the distribution network. According to a report on the BBC on 26 July 2002, the men had established contacts to a senior Irish Republican Army member who helped send the fake bills from Ireland to England.

On 21 January, pravda.ru quoted a senior officer from the Russian Interior Ministry's economic-crime division who told journalists that the ministry had shut down a counterfeiting operation in Chechnya. The official, Boris Smetannikov, said "the criminals transported the equipment designed to make counterfeit dollars on the territory of Daghestan and Ingushetia." He said half of the counterfeit U.S. banknotes seized in Russia "originate from the North Caucasus, the rest comes from abroad." Smetannikov specified that, regarding the latter category, counterfeit dollars are often printed in Iran, Iraq, and Turkey, adding that a significant portion of counterfeit money comes from Ukraine.

Allegations of governments themselves counterfeiting U.S. banknotes have surfaced in the past. In 1992, a U.S. House of Representatives task force released a report alleging that Iran and Syria formed a conspiracy to counterfeit U.S. dollars in order to strengthen Iran's economy and weaken the United States. Speaking at a press conference on 1 July 1992, Representative Bill McCollum stated: "The fact of the matter is that the Iranian government, in cooperation with Syria, has undertaken a massive counterfeiting campaign in order to alleviate their financial difficulties and pursue economic warfare against the West."

The Federation of American Scientists website (http://www.fas.org/news/iran/1992/920701-233652.htm) says the report "Narco-Terrorism and the Syrian Connection," authored by Yossef Bodansky and Vaughn S. Forrest, includes the following: "It is estimated that the potential is there for billions of dollars in counterfeit currency to soon be in circulation, mainly outside the U.S. banking system.... Although the exact figure cannot be determined, the implications for the dollar's role as the international medium of exchange could be serious.

"The report alleges that as Iran's counterfeiting campaign was expanded, [Tehran] began to look to Syria and its terrorist and drug connections for outlets to circulate its counterfeit dollars.

"It asserts that Syria's top intelligence officials supply counterfeiters with official government passes to travel freely throughout Syrian territory, where they pass the phony bills through drug money-laundering banks in the Middle East."

A Treasury Department spokesman at the time declined to comment on the report, saying there was an ongoing investigation of the matter.

How difficult is it to produce the $100 dollar bills that are so popular in the Middle East and Eastern Europe? According to testimony before the U.S. House of Representatives Subcommittee on Domestic Monetary Policy, Technology and Economic Growth on 24 July 2001 by Daniel Snow, the special agent in charge of the counterfeiting division of the U.S. Secret Service: "Domestically passed counterfeit U.S. currency that has been manufactured utilizing digital technology rose from $174,924 in [fiscal year] 1995 to $18,460,249 in [fiscal year] 2000." The bills found by the British NCS detectives in the case cited earlier were so good that they fooled many banks.

RTR and other Russian news agencies reported on 26 December that the Russian police raided 30 offices and apartments in Moscow, confiscating tens of millions in counterfeit dollars. A number of suspects were arrested. An Interior Ministry spokesman said the bogus dollars were of very high quality and had all the built-in security measures of the real thing, making them virtually impossible to detect using normal anticounterfeiting equipment.

Special agent Snow told the House subcommittee that 94 percent of domestic printing operations are digitally based. The simplicity of the process is what has made it so popular.

If a cell of Al-Qaeda operatives can learn to fly a modern Boeing aircraft into the World Trade Center, it can no doubt learn to digitally counterfeit U.S. dollars.

A suicide bomber attacked a bus near a Russian military air base near Chechnya on 5 June, killing herself and at least 16 others. Citing regional prosecutor Aleksandr Begulov, Russian state television said the woman had detonated a bomb filled with metal balls. According to "The Wall Street Journal Europe" of 6 June, the passengers on the bus were military and civilian personnel from the city of Mozdok.

"Unfortunately this is not [an isolated] case," "The Wall Street Journal Europe" quoted Russian Prosecutor-General Vladimir Ustinov as telling President Vladimir Putin. "This was brought to us from other countries. Earlier in the Chechen conflict, there were no suicide attackers."

Was Russian President Vladimir Putin involved in a money-laundering scandal while working in St. Petersburg? Reports of his alleged involvement with a company called SPAG surfaced as far back as May 2000, when the French daily "Le Monde" reprinted an article about his alleged involvement from a Russian website. Writing about this news, UPI reported the following on 31 May 2000: "'Le Monde' said that Putin and Economic Strategy Minister German Gref both had a hazy 'adviser' status until March of this year with the St. Petersburg-based Immobilien und Beteiligugngs AG, or SPAG, a German company founded in 1992 in collaboration with St. Petersburg's City Hall. "Rudolf Ritter, one of SPAG's founders, was arrested in Vaduz, Liechtenstein, May 13 on charges of money laundering and connections with organized crime. 'Le Monde' said that a report last year by the German secret service BND alleged Russian criminal groups had transferred money to SPAG via a Romanian bank to buy real estate in Russia.

"In response to an inquiry from 'Le Monde,' the Putin administration denied that Putin had ever worked for SPAG: 'The president has never worked there as a consultant. He has never received any salary there,' 'Le Monde' quoted the president's press service as saying."

However, recent raids by police on 28 companies in Germany suspected of money laundering have renewed interest in the case. According to "The Moscow Times" of 19 May, German prosecutors believe millions of euros' worth of notes were laundered through the efforts of SPAG in St. Petersburg. Writing about the continuing scandal, "The Moscow Times" of 19 May reported that the Hessen, Germany-based company, SPAG, was among 28 firms and homes raided by police in Hessen, Hamburg, and Munich in May.

"The companies are suspected of laundering 'tens of millions of euros' for 'one of the biggest and most powerful' Russian organized crime groups," German prosecutors said in a statement quoted by "The Moscow Times." "Prosecutors believe the crime group is based in St. Petersburg and involved in 'numerous crimes, including vehicle smuggling, human trafficking, alcohol smuggling, extortion and confidence trickstering,' the statement said. No arrests have been made."

Putin was named as a member of SPAG's advisory board when the company was founded in 1992, according to German registration documents obtained by "Newsweek" magazine two years ago. Back then, Putin was a deputy to St. Petersburg Mayor Anatolii Sobchak and in charge of attracting foreign investment. Putin left St. Petersburg to work for the Kremlin property office, headed at the time by Pavel Borodin, who was later fined by Switzerland for his involvement in a money-laundering scheme. Borodin paid the fine but maintained his innocence.

The German and Austrian investigation of SPAG, according to the Swiss website facts.ch, implicated Rudolf Ritter, one of the company's founders and directors, purportedly as an agent of the Ochoa brothers' Colombian drug cartel and of Russian organized crime. Ritter is also the brother of Liechtenstein's finance minister. RK

THE RISE AND FALL OF A CZECH MEDIA MOGUL

By Tereza Nemcova

Vladimir Zelezny, a Czech senator charged with damaging the interests of a creditor and tax evasion, was once widely considered to be the most popular, and the most feared, personality in Czech political and media circles. As head of the largest Czech private television station, TV Nova, he exerted considerable influence on the political scene.

Jiri Pehe, director of New York University in Prague and former director of ex-President Vaclav Havel's political department, stated in a Radio Prague interview on 13 April 2001 that it would be extremely difficult for any judge or prosecutor to separate the political implications of Zelezny's case from its juridical aspects. He was also convinced that no matter how judges or prosecutors proceeded in this case, they would be viewed as under political pressure simply because Zelezny is not just a media magnate, but also a political figure.

In order to understand the controversy around Zelezny, it is important to recognize that the Czech public has been subjected to two views of the man and his saga. Zelezny himself has promoted the first view through the publication of his memoirs in a book titled "Stvanice." In it, Zelezny claims that during the August 1968 Warsaw Pact invasion of Czechoslovakia, he actively participated in clandestine broadcasts of Czechoslovak Television. Zelezny also says that in the mid-1980s he contributed to "samizdat" publications and that, in 1990, he became spokesman for the Czechoslovak Civic Forum (OF). In 1993, Zelezny became general manager of CET 21, preparing a project on the basis of which that company won a television-broadcasting license in the Czech Republic. He was subsequently named general manager of CNTS, TV Nova's service provider. On 19 April 1999, he was dismissed from his post as general manager of CNTS by CNTS's owners, Ronald Lauder's Central European Media Enterprises (CME).

The other view is that held by a number of Czech intellectuals -- many of whom question the truthfulness of some aspects of Zelezny's curriculum vitae as presented in "Stvanice."

In January, Zelezny was stripped of his parliamentary immunity by the Czech Senate in a vote in which 61 of the 80 senators present backed the prosecutor's request.

The primary investor into TV Nova was Bermuda-based CME, founded and owned by prominent U.S. businessman Ronald Lauder. However, as time passed and TV Nova gained popularity among Czech viewers, Zelezny wielded increasing power over a growing television empire. When CME moved to fire him from TV Nova in 1999, Zelezny turned the tables -- dropping his American partners and taking CET 21's broadcast license with him. Zelezny has claimed that he acted in accordance with an August 1999 decision of the Czech Radio and Television Broadcasting Council.

The TV Nova case led to a number of international court cases. First, in February 2001, the Paris-based International Court of Arbitration ordered Zelezny to pay 1 billion CZK (nearly $38 million at the current exchange rate) in damages to CME; that obligation was subsequently (September 2002) covered by TV Nova's new owners, led by Czech financial group PPF Holding. Lauder meanwhile filed suit in London in March 2001 against the Czech state based on the claim that authorities failed sufficiently to fulfill their commitments under an investment-protection treaty. On 14 March, a Stockholm appellate court ordered the Czech Republic to pay CME some $353 million in compensation. This sum was said to reflect CME's actual investment into TV Nova. "The New York Times" reported on 16 May that Fred Klinkhammer, chief executive of CME, said in a telephone interview that his company "had been a victim of collusion between Zelezny and the regulatory council."

According to the Stockholm tribunal, the Czech Radio and Television Broadcasting Council acted with disregard for an international treaty on the protection of foreign investments. The council's controversial deputy chairman, Petr Stepanek, has repeatedly insisted that the council did not violate the law. But Czech citizens will nevertheless have to start paying off the $353 million debt. When interviewed by the Czech daily "Mlada fronta Dnes" regarding his own responsibility in the affair, Zelezny said the Czech state's debt does not involve him.

A Swedish court handed down the final verdict on 15 May, denying the Czech Republic's appeal against the payment order. On 16 May, Zelezny was dismissed from his position as TV Nova director, with the shareholders saying he has been rendered "superfluous due to reorganization."

Tereza Nemcova works for RFE/RL in Prague.