Corruption Watch: June 27, 2002

On 21 May, Russia's NTV reported that an article in Geneva's "Le Temps" newspaper indicated that the Russian Audit Chamber has turned to Swiss authorities to help track down international funds that went missing on the eve of the country's 1998 economic meltdown. Audit Chamber employees recently arrived in Switzerland and asked law enforcement there to aid in a search for $4.8 billion lent to Russia by the International Monetary Fund in mid-August of that year, the channel's "Segodnya" news program reported.

It is thus clear that the scandal connected with the disappearance of those IMF funds is not over.

"On 22 April, the head of the State Audit Chamber once again confessed he did not know the current whereabouts of almost $5 billion which Russia received as a loan back in 1998. According to [Chamber head Sergei Stepashin], the money actually 'dissolved' at the very moment it was sent to support a number of major banks, including SBS-Agro," "Novaya gazeta" wrote on 27 May. The paper went on to say: "There is only one explanation: the dollars really 'dissolved,' as Stepashin said. However, speaking more precisely, the loan from the IMF was simply stolen.

"It is no exaggeration: The tremendous sum of money the state received could not have been stolen by any Mafia men, but only by top-ranking officials."

On 19 March 1999, U.S. Treasury Secretary Robert Rubin had told "The New York Times" in an interview that the $4.8 loan the IMF allocated to Russia on 14 August 1998 was "probably spent improperly. To be more precise, it was misappropriated by Yeltsin's [circle]."

The newspaper elaborated on the treasury secretary's statement: On the same day, 14 August, that sum was transferred from account No. 9091 at the New York Federal Reserve Bank to Kreditanstalt-Bankverein in Lugano, Switzerland, and debited to the Ost-Vest Handelsbank, Frankfurt-am-Maine, Germany.

Russia's "Novaya gazeta" reported on 27 May that Ost-Vest Handelsbank in Frankfurt is a foreign branch of the Central Bank of Russia. Some $2.35 billion was immediately transferred from Frankfurt to the Bank of Sidney, from which "$235 million was transferred to the account of an Australian company," according to the paper. What remained in Sidney? Some $2.115 million -- which was rapidly converted into pounds sterling and transferred to the National Westminster Bank in London," according to "Novaya gazeta" and a reliable source in Moscow who told "RFE/RL Crime and Corruption Watch" that some of the money was transferred to the accounts of Crown Investments, a cover for the Russian Alpha Capital group based in Liechtenstein. The rest of the money, "Novaya gazeta" wrote, "was divided as follows: $1.4 billion was transferred back to the Bank of New York; $780 million was transferred to Switzerland, to Credit Suisse, and the remaining $270 million was transferred to the Lausanne branch of Kreditanstalt-Bankverein."

On 11 June 1998, two months before this money was sent, the U.S. House of Representatives' Republican leadership had advised President Bill Clinton that the House wanted more information in order to consider the administration's $18 billion funding request for the IMF. The letter, signed by Speaker Newt Gingrich, Majority Leader Dick Armey, Majority Whip Tom DeLay, Conference Chairman John Boehner, and Policy Committee Chairman Christopher Cox, requested that the IMF's operating budget and IMF staff reviews of its policies be made public.

"The recent reports of misappropriation of IMF funds in Russia, including the statements of a Russian official, also demonstrate the need for more careful examination of IMF programs. The plain fact is that no one in Congress has any way of knowing whether IMF funds in Indonesia, Russia, or other nations have been improperly used. Congress has a fiduciary responsibility to U.S. taxpayers to ensure that appropriated U.S. government funds are not squandered or misappropriated. The notion that there is no cost to the appropriation of $18 billion of U.S. government funds is invalid and does not absolve Congress of its fiscal responsibility in this area." (The full text of that letter can be found at http://freedom.house.gov.)

The White House did not respond to the request, and on 14 August an additional $4.8 billion was transferred to Russia. But instead of transferring the money to the Russian Finance Ministry -- as had been done in the past -- this time it went to the Central Bank, where it immediately became intertwined with other foreign-currency reserves and all track of it was lost. The IMF subsequently insisted that the money was not stolen but used properly to bolster the Russian ruble. On 1 September 1999, IMF Managing Director Michel Camdessus wrote in "France-Soir": "That there has been capital flight on this scale [from Russia] does not surprise us, but [sic] there is no proven link between this money and the loans released by the IMF."

On 19 August 1999, the Bank of New York (BONY) money-laundering scandal surfaced when "The New York Times" broke the story: "Millions of dollars have been channeled through the Bank of New York in the last year in what is believed to be a major money laundering operation by Russian organized crime, law enforcement officials say.

"From October through March 1999 some $4.2 billion, in more than 10,000 transactions, passed through one account, investigators said.

"But because the account has remained open to help a continuing investigation by the Federal authorities, investigators estimate that as much as $10 billion may have flowed through the bank in that account and related ones since early last year."

The BONY linkage to the IMF was established at that time in "The New York Times" story: "The accounts have been handled by Natasha Gurfinkel Kagalovsky, a senior vice president of the bank in New York, Government officials stated in New York and Washington.

"Born in Russia, she emigrated to the United States in 1979, and after earning a master's degree at Princeton joined a management training program at the bank, according to articles in 'Bankers Monthly' magazine and the newspaper 'The American Banker' in 1992 and 1993 respectively."

After the disintegration of the USSR, Natasha Kagalovsky was put in charge of bringing in new business from Eastern Europe and the former Soviet Union. Later she married Konstantin Kagalovsky, who had been an economic adviser to the Russian government and from 1992 to 1995 was Russia's representative to the International Monetary Fund.

Kagalovsky was also a vice president of Bank Menatep (part of the Alpha Group), which was alleged to have engaged in money laundering to effect asset-stripping from Russian companies it controlled (see "RFE/RL Crime and Corruption Watch," 23 May 2002).

On 8 October 1999, "The New York Times" reported that the head of the Russian State Tax Service at the time, Aleksandr Pochinok, said the Russian investigation into the BONY scandal had uncovered a huge number of transactions that went through the Bank of New York account established by the Benex International Company, which the Federal Bureau of Investigation said handled nearly $5 billion of the $7 billion in Russian funds.

"A great number of banks had relations with the Bank of New York," Pochinok was quoted as saying by the paper. "The majority of these are normal interbank relations. Unfortunately, among these operations there are some that were used to evade taxes."

"An enormous number of deals were made through Benex," he said, according to "The New York Times." "And I have not uncovered all of them." Pochinok added that Benex appeared to be well known to Russian businessmen: "As far as I can tell, everyone knew that this firm could be used to send money."

Many of the suspicious transactions uncovered by Russian investigators do not involve money laundering by criminal groups, but efforts to avoid Russian tariffs and taxes. "The New York Times" reported on 1 September 1999: "For several years, authorities in the United States and Britain have been investigating allegations of money laundering and other criminal activity by Russian organized-crime groups. The investigation involving the Bank of New York gained momentum after authorities saw evidence that growing amounts of money were moving through suspicious accounts."

According to "The New York Times," investigators in the U.S. suspected that Benex had ties to Semyon Mogilevich, a Russian native who has been accused of involvement in arms dealing, extortion, and other criminal activities and who was the focus of earlier international investigations that helped lead investigators to the Bank of New York.

Mogilevich, who has denied such allegations, had ties to a Pennsylvania firm called YBM Magnex International, which prosecutors alleged in June was behind an elaborate stock fraud. "The New York Times" quoted an "informed" U.S. official in its report: "Benex was involved in financial transactions with YBM Magnex, the official said, and also tried to arrange U.S. visas for several figures associated with Mogilevich."

Jumping into the continuing fray over BONY, "The Wall Street Journal" on 8 October 1999 wrote: "In light of the probe into allegedly illegal transfers at the Bank of New York, law-enforcement authorities are now investigating the transfers through Barclays accounts held by Benex International Co. and BECS International LLC.

"Earlier this week, the U.S. Attorney's Office in Manhattan charged Benex, BECS and a third firm, Torfinex Corp., along with three Russian emigres, with conspiracy to illegally transmit and receive money.

"The three individuals are Peter Berlin, a principal of Benex; his wife, Lucy Edwards, a fired executive of Bank of New York; and Aleksey Volkov, who ran Torfinex. Messrs. Volkov and Berlin and the companies they controlled were also charged with two additional counts, illegal money transmitting and receiving deposits illegally." All the charges were connected to the BONY investigation.

On 14 August 2000, Reuters reported that a Swiss magistrate, Laurent Kasper-Ansermet, said he had raided two banks that same day as part of a probe into whether a $4.8 billion tranche of IMF credit for Russia was diverted via secret Swiss bank accounts. Kasper-Ansermet also told the news agency that he was going to the United States to seek U.S. cooperation in his probe into possible Swiss links to a massive Russian money-laundering case involving the Bank of New York. As part of his investigation, Kasper-Ansermet sent a letter to banks in the Italian-speaking canton of Ticino in July, asking for information and documents on whether they had handled diverted IMF cash. Kasper-Ansermet, who had already frozen just under $20 million at a dozen Swiss banks as part of his investigation into the Bank of New York affair, said he had some evidence on possible Swiss connections to the multibillion-dollar scam.

He declined to say whether he would meet officials from the IMF, which rejected charges that its cash was misspent and said the funds were used to defend the ruble.

In January 2001, Switzerland formally asked the United States for judicial assistance with its own probe into the Bank of New York case, the biggest to involve money laundering in U.S. history. But Kasper-Ansermet said repeated formal Swiss requests to U.S. investigators to hand over documents went unanswered.

The probe seemed to be running out of steam until the Russian website pravda.ru reported on 11 June that an Operation Spider Web had resulted in the arrest of 50 people (mostly in Italy); criminal proceedings were launched against 150 others.

Pravda.ru claimed: "They all are accused of money laundering and drugs and arms trafficking. Russian special services took part in the operation as well, but the undertaking itself was actually initiated by the Italian police in cooperation with special services of France, Germany, Switzerland, Canada, and the American FBI."

On 13 June, "The New York Times" reported: "As a tangential part of a money laundering investigation of the Bank of New York, police officials in several European countries this week detained more than 50 people suspected of involvement in a network that funneled millions of dollars from Russia through Western banks and companies. Orders were issued to freeze roughly 300 bank accounts in Europe and North America.

"The raids appeared to confirm concerns in several West European countries that large-scale laundering of money obtained illegally in Russia continues through seemingly legitimate businesses."

According to the paper: "Investigators also cited telephone intercepts and commercial records as evidence linking suspect West European businesses with money from criminal activity in Russia. The operation, the investigators said, may have laundered billions of dollars, but they did not specify exact amounts. Prostitution, drug sales, tax evasion and protection rackets were some of the sources of the funds in Russia, they said."

The IMF funds are still unaccounted for, of course. But the newfound enthusiasm of Russian investigators to find the missing $4.8 billion is a positive signal.