The Washington Post Newsweek The New New
October 3, 1999, Sunday, Final Edition
No Open-and-Shut Case; Unfolding Bank of New York Probes Have Multiple Leads,
Robert O'Harrow Jr.; Sharon LaFraniere, Washington Post Staff Writers
It started with a routine request. Russian officials asked the FBI to
track a $ 300,000 ransom payment
for a kidnapping.
Now, more than a year later, federal investigators following the scent
of that money have stumbled onto
a trail that could lead them into the inner circle of Boris Yeltsin's Kremlin. Or not. No one knows for
The Bank of New York case, which burst into the headlines in the doldrums
of August, has become a
sprawling story, with a large cast of characters, confusing plot lines and overlapping investigations in the
United States, Britain and elsewhere. The Bank of New York probe is amplified by a separate inquiry
led by Swiss prosecutors into alleged bribery of, and money laundering by, Kremlin officials. The
Manhattan district attorney's office is conducting its own investigation.
Reporters searching for every scrap of news have produced a bewildering
series of explanations for
why as much as $ 7.5 billion moved through a group of accounts at the Bank of New York.
First it was Russian mob money and money laundering. Then capital flight.
Tax evasion. International
loans to Russia. Hidden payoffs to Russian officials. Or some combination of the above.
The case has thrown a spotlight on the less-than-pristine business practices
in Russia. It also has raised
questions about whether U.S. policy toward Russia has been effective, and it has caused bankers
around the world to review their own security practices for signs of weaknesses or laxity.
Thus far, only a small, perhaps tenuous thread links the U.S. and Swiss
investigations. Yeltsin and his
two daughters had their credit-card bills paid by a Swiss engineering firm that received Kremlin
contracts, according to Swiss prosecutors. One daughter is married to Leonid Dyachenko, an oil trader
who maintained Bank of New York accounts in the Cayman Islands containing more than $ 2 million.
This report is based on documents and interviews with law enforcement,
banking and government
officials. At heart, the Bank of New York case and the investigation of Swiss bank accounts of
Kremlin officials are detective stories. How they turn out is anyone's guess. We've only just finished
The U.S. Probe
Let's start the Bank of New York story in Kew Gardens, a middle-class
neighborhood in Queens far
from the glamour of Manhattan's financial district. So many Russians live there that ATMs speak their
native language. There, a group of Russian emigres began doing business from a cramped office in a
building surrounded by pizza shops, delis, dry cleaners and newspaper vendors.
Few of the neighbors on the sixth floor of the building knew what went
on in office No. 612. The
businessmen spoke Russian, sometimes loudly on the telephone. Companies with names such as Benex,
General Forex, Torfinex and Tofex received mail there. But when asked occasionally what they did, the
businessmen gave a variety of answers, none of them very forthcoming.
As it happens, the companies used connections and personal computers
to move money. Lots of
money. So much that some investigators and U.S. officials believe this could be the largest
money-laundering case they've ever encountered.
The operation in office No. 612 might have remained virtually unknown,
apart from an elite and very
wealthy group of Russians, if not for some circumstances that became entwined in August 1998.
For one, the Russian MVD, or Ministry of Internal Affairs, was working
on a kidnapping that occurred
in June of that year. They had tracked the ransom payment to a financial institution in San Francisco and
asked if the FBI could help on subsequent transfers.
The feds discovered the money had been transferred to the Bank of New
York, to accounts in the
name of a company called Becs International LLC. Then it turned out that Becs was related to a bunch
of other companies with accounts at the Bank of New York--companies with ties to the office in Kew
About the same time, Republic National Bank in New York notified federal
authorities of suspicious
activity in an account. Huge sums were moving through the account, which is not noteworthy in itself.
But investigators who checked out the firm that maintained the account found an office that bore "no
resemblance to what should have been there," given that level of activity.
The company was Torfinex, yet another Kew Gardens operation.
In England, investigators were pursuing threads that appeared to link
a Russian organized-crime group
to the Bank of New York and some of the Kew Gardens companies. The British investigators had
shared some of their information with officials in the United States.
Sensing a large money-laundering scheme at work, federal authorities
subpoenaed records from the
Bank of New York. They got back stacks of documents detailing about 87,000 transactions in nine or
more related accounts. More than $ 2 billion moved through one account alone over the past year or so.
It wasn't just the amount of money that intrigues the government sleuths.
They also found that all the
accounts and all the companies involved were related somehow to a single man, Peter Berlin. Berlin, a
Russian native who is now a U.S. citizen, started Benex International in 1993. Then, with the help of
associates, including a Russian named Aleksey Volkov, he created the other companies. Those
companies, in turn, opened the accounts under investigation at the Bank of New York.
It wasn't long before investigators learned another important fact about
Berlin. He was married to a
woman named Lucy Edwards, a vice president at the bank who helped the companies open the
accounts. The bank fired Edwards in August for allegedly falsifying bank documents and violating
internal policies. Lower-level bank officials did not follow up on suspicions about the accounts,
according to the bank's chairman, Thomas A. Renyi, because "Mr. Berlin was married to a
Edwards and Berlin, through their attorney, have denied wrongdoing.
Edwards last week filed papers at
a London industrial tribunal, claiming she was unfairly dismissed.
The bank suspended Edwards and another executive, Natasha Gurfinkel
Kagalovsky, in August after
news of the probe surfaced. Kagalovsky is married to Konstantin Kagalovsky, who represented
Russia at the International Monetary Fund from 1992 to 1995. Now an executive with Yukos, the
Russian oil company, he is also under investigation. The Kagalovskys' attorney said they deny
The Bank of New York fired one other person--Svetlana Kudryavtsev, a
low-level employee in New
York--after she refused to answer questions about the allegations, bank officials said. The officials said
she was friends with Edwards.
Now, all of this doesn't necessarily mean anything illegal was going
on. And investigators acknowledge
they don't understand all of the implications. But what they saw was tantalizing. As one official put it,
"this is obviously a very significant case."
All through the winter and spring, investigators monitored activity
in the Bank of New York accounts.
They watched as the influx of money--as much as $ 250 million a month--shifted from account to
account. To successfully prosecute a money-laundering case, they needed evidence that the money
came from certain types of criminal activity and that the people moving the money around knew it was
It was easy to identify the banks sending over most of the money. They
were Sobinbank and
Depozitarno-Kliringovy. Finding out who deposited the money there is another matter altogether. That
task became much more difficult, investigators say, after the New York Times wrote an article in August
that publicized the investigation.
At first, reports suggested the accounts were primarily used to hide
money generated by a mob
organization led by Semyon Mogilevich, a man whom intelligence officials in Britain and the United
States have identified as one of the most notorious criminals in the world. Mogilevich has denied such
But officials soon questioned whether even the most efficient mob group
could move so much money
alone. "This is too much, perhaps exponentially too much, for just organized crime," said one man
familiar with the accounts involved.
Some also theorized that IMF aid to Russia had been siphoned off by
corrupt officials in the Kremlin.
But IMF officials have said this didn't happen--and no evidence of such transfers has surfaced so far.
Now investigators, U.S. officials and some Russian specialists believe
the money that moved through the
Bank of New York represented a variety of potentially illegal activities in Russia, such as tax
avoidance and "capital flight"--money seeking a safer investment haven than the sagging Russian
Keith Henderson, co-director of American University's Transnational
Crime and Corruption Center,
said this case "contains all the elements of a much broader, global problem" involving financial networks
that have few checks on the rapid movement of money by criminals or corrupt government officials.
One U.S. official, who spoke on the condition of anonymity, said investigators
believe the money came
from a variety of schemes to defraud the Russian government. That includes procurement deals in which
suppliers charged exorbitant prices and kicked back money to corrupt officials. The U.S. official said
executives also probably used a variety of schemes to steal from their companies and funneled the
money through Bank of New York accounts.
Some in the Clinton administration also believe that Russian banks,
some of them now insolvent, used
the Bank of New York accounts to hide millions of dollars in profits squirreled away during the summer
1998 ruble-devaluation crisis .
And while the mob connection may not be as prominent as first thought,
this official said, it almost
certainly exists. The best evidence is related to a Pennsylvania firm called YBM Magnex International
Inc., which prosecutors alleged in June was behind an elaborate stock fraud. Benex, one of the Berlin
companies, was involved in financial transactions with YBM Magnex.
Just last month, the inquiry moved in another direction when the Cayman
Islands accounts of
Dyachenko, Yeltsin's son-in-law, were discovered. Belka Trading Corp., the firm that made the
payments totaling more than $ 2 million to the accounts, says the money was for legitimate activities. No
transfers have been found between the Berlin accounts and Belka, but investigators have subpoenaed
business records and intend to keep digging.
The Swiss Probe
The story of the Swiss probe begins in a state building at 2 Nikitnikov
Pereulok in Moscow, about six
blocks from the Kremlin. It holds the office of presidential affairs, headed by Pavel Borodin, one of the
most powerful people in the Kremlin.
Borodin, a good-humored giant of a man, doles out apartments, dachas,
cars and supplies to state
officials. He is in charge of all the state's property--planes, palaces, hospitals and hotels. Part of the
funds his department needs come from its raft of commercial ventures, including, at one point, its
investments in a diamond mine in Arkhangelsk.
Borodin, in effect, answers only to Yeltsin, according to Kremlin analysts.
Various aides have tried in
vain to force him out of office, or at least to make him report to the Kremlin's chief of staff. Last year,
newspapers reported that Borodin had been fired--but the next day Yeltsin announced that he would
not accept his departure. Photos published in a 1997 book by Yeltsin's former head of security show
the president bare-chested on the banks of the Yenisey River in Siberia, with Borodin grinning beside
him, a glass in his hand.
It is an axiom in Russia that the success of a government contractor
is built on personal relationships.
Mabetex Project Engineering was particularly effective at cultivating Borodin. Its president, Behgjet
Pacolli, repeatedly treated Borodin and his employees to five-star hotel rooms in the resort town of
Lugano, Switzerland, where Mabetex has its pink-marbled headquarters. After they discussed the
progress on contract work, the Russian delegation could watch boats cruise Lugano's famous
mountain-rimmed lake, sup at lakeside terraces and enjoy corkscrew drives up hillsides dotted with
In all, Mabetex won $ 300 million in federal contracts over six years.
Equally hospitable, and successful,
was a Mabetex competitor, Mercata Trading, another Lugano-based renovation firm that is almost a
copy of Mabetex. While Mabetex was outfitting the president's living quarters, Mercata Trading was
renovating the Kremlin's Grand Palace, a $ 290 million contract.
Swiss investigators are now looking at both firms, as well as other
government contractors, to see just
how far their relationships with Borodin went. Vladimir Minayev, a top official with the Russian
prosecutor general's office, said Thursday that his office is conducting its own massive inquiry into
Mabetex, although Swiss authorities lost some confidence in their Russian counterparts earlier this year,
after Yeltsin forced out Yuri Skuratov, who headed the office. The Swiss suspect Mabetex of doling out
as much as $ 10 million in bribes to Russian officials, an accusation Pacolli vehemently denies.
Borodin has repeatedly said he never accepted any bribes.
Skuratov said Mabetex first caught the attention of German authorities,
who suspected tax evasion. The
inquiry was eventually picked up by Switzerland's general prosecutor, Carla Del Ponte, known for her
aggressive pursuit of money launderers and mob suspects.
Among others, Del Ponte questioned Philip Turover, a sharp, multilingual
businessman now living in
Zurich, who alleged a former Mabetex executive extorted funds from him in the early 1990s, when the
two of them worked to collect debts owed by Russian businesses for Banca del Gottardo in Lugano.
One of Turover's allegations was secondhand but intriguing: He said
a Banca del Gottardo executive
told him he saw Pacolli, the Mabetex president, hand Borodin wads of cash, a diamond brooch and a
Cartier watch in Borodin's Moscow office. Pacolli calls that laughable.
In the utilitarian offices of the prosecutor general in Moscow, Skuratov's
investigators were looking into
questions about Borodin quietly, hoping not to alert the Kremlin. That secrecy was blown when
Skuratov had to prepare a written justification so Del Ponte could search Mabetex's office on Jan. 22.
He wrote of suspicions about padded contracts, bribes and corruption within the Kremlin management
As is customary, Del Ponte provided Pacolli with a copy of the document.
Skuratov says Pacolli
promptly faxed it to Moscow. Nine days later, Skuratov was summoned by the head of the presidential
administration and told he was being suspended. Yeltsin's aides accused Skuratov of cavorting with
prostitutes, and state-run television broadcast a videotape of the alleged escapade. Minayev of the
prosecutor general's office said this week he is "99 percent" certain Skuratov is guilty.
In Lugano, Del Ponte turned up evidence that Pacolli transferred $ 1
million to a Budapest bank account
in late 1995 for Yeltsin's benefit. One associate of Pacolli's says the money was meant to enable Yeltsin
to finance election campaigns. Pacolli says it was to pay for advertising handled by Trinlo Investments, a
firm with addresses in the Bahamas and the British Virgin Islands. No Trinlo officers have surfaced,
despite a month of intense press attention, nor have its offices been located.
Another discovery took place at the offices of La Fen, a firm belonging
to Franco Fenini, a former
Mabetex executive whose family owns a clothing store near Lugano. Investigating magistrate Jacques
Ducry found records of three gold Eurocard credit cards in the name of Yeltsin--spelled Boris N.
Elstine--and his daughters, Tatyana Dyachenko and Yelena Okulova.
A Swiss law enforcement official said Mabetex paid tens of thousands
of dollars in credit-card expenses
for the Yeltsins; Skuratov said the Swiss gave him "a much, much bigger figure." Pacolli denies paying
any such expenses. Investigators also discovered that Mabetex had set up accounts at Banca del
Gottardo in the name of Borodin and others in his department. Pacolli says those accounts were to pay
legitimate travel expenses for Russian officials monitoring Mabetex contracts.
The Yeltsin family's credit-card bills continue to interest Swiss prosecutors,
though the prosecutors say
they could not charge a head of state with a crime. His daughters apparently do not enjoy the same
immunity, either at home or in Switzerland, and Skuratov says they have much to answer for. "Why
should the state finance their clothes purchases?" the Russian prosecutor asked.
Of even greater interest to Swiss authorities is their discovery of
Geneva bank accounts opened by
people with close ties to the Kremlin, sometimes using other people's names. By June, investigators had
identified about 10 such accounts containing roughly $ 3 million, and they are still digging. What intrigues
them is not that Kremlin aides opened accounts abroad--although that is generally prohibited under
Russian law--but how these officials amassed such wealth on salaries of, at most, $ 1,000 a month.
Some enterprises whose names have surfaced in the Borodin affair also
show up in the Bank of New
York case, said Daniel Devaud, an investigating magistrate in Geneva who is leading the Swiss inquiry.
But both he and Bernard Bertossa, chief prosecutor for the Canton of Geneva, caution against making
too much of the connection. The Borodin inquiry is expanding, Devaud said, but not because of anything
to do with the Bank of New York.
The end point of the Swiss inquiry is hard to guess. Authorities there
are dependent on the Russians to
find out whether the money in Swiss bank accounts was illegally obtained before they can prosecute any
Russian official for money laundering. But short of that, they still can seize funds, said Bertossa, the
Geneva prosecutor. If authorities suspect a bank account contains profits from a crime, then the account
holder must prove it does not, he said.
"I can ask, 'How do you explain that you have a bank account in Geneva
with sufficient funds to pay for
food for half the population of your country?' "
O'Harrow reported from New York, LaFraniere from Moscow.
Who's Who in a Case of Confusion
Here are some of the key characters in the Bank of New York case, and
an outline of some of their
connections to one another. Switzerland has been investigating the the Russian side. The United States is
heading the investigation of the Bank of New York.
* Yelena Okulova, daughter of Yeltsin
* Boris Yeltsin, president of Russia
* Philip Turover, former debt collector; witness who alleged a Mabetex bribe in the Kremlin
* Tatyana Dyachenko, daughter and adviser of Yeltsin
* Leonid Dyachenko, married to Tatyana; oil trader; maintained Cayman
Islands accounts at Bank of
* Pavel Borodin, Yeltsin aide; oversaw Kremlin renovation contracts; denies wrongdoing
* Semyon Mogilevich
Reputed Russian organized-crime figure; connected to a company that
reportedly used Benex accounts
for some transactions; says he is a legitimate businessman
* Mabetex Project Engineering
The firm, headed by Behgjet Pacolli, received $ 300 million in contracts;
Swiss investigators have
uncovered evidence that it paid tens of thousands of dollars in credit-card bills for Yeltsin and his two
daughters and provided $ 1 million to a Hungarian bank account for Yeltsin's benefit; firm denies
Bank of New York, oldest U.S. bank, founded by Alexander Hamilton
* Natasha Gurfinkel Kagalovsky, Bank of New York senior vice president
who supervised Edwards;
Status: Suspended by the bank.
* Lucy Edwards, Bank of New York vice president who gave referrals on
accounts to her husband;
Status: Fired by the bank
These three accounts received the bulk of the $ 7.5 billion that passed through the bank:
* Becs International LLC
* Benex International Co.
* Torfinex Corp.
* Aleksey Volkov
Director of Torfinex; shared office with Benex in Queens, N.Y.; reportedly
helped set up accounts with
Berlin; in Russia and cannot be reached
* Konstantin Kagalovsky, married to Natasha; former Russian representative
to the International
* Peter Berlin, married to Edwards; set up Becs, Torfinex and Benex
accounts after referral from
Edwards; denies wrongdoing
October 4, 1999, Atlantic Edition
Where Did Russias Money Go?
This story was reported by Yevgenia Albats, Owen Matthews and Bill Powell
and Mark Hosenball in Washington. It was written by Bill Powell.
In the Yeltsin years, many ordinary folk and outside investors lost
all they had. The tale of the how a
country was fleeced.
Gela Grinyova is one of the unfortunate Russians who made the
mistake of once having faith in her
country's banking system. By the summer of 1998, the 32-year-old graphic artist and her husband had
about $11,000 in a bank called SBS Agro, the largest private retail bank in Russia. Then came the
crash of August 1998, when Russia defaulted on its debts and devalued its ruble. Its banking system,
including SBS Agro, was crushed by accumulated debt. Having been reassured just a day prior to the
crash that their savings were safe, the Grinyova family, like tens of thousands of other Russians, lost
everything. When Grinyova went to the SBS branch to try to get some of her money back, a clerk was
dismissive. Come back in five years, she was told.
The Grinyova story seems far removed from the so-called Russian money-laundering
investigation--centered, for now, on nine accounts at the Bank of New York--was the focus of
hearings that opened last week in the U.S. Congress. Money laundering is a loaded phrase; it conjures
up images of gangsters, drug smuggling, casino owners and prostitution. And the international
investigation now underway has its share of straight-out-of-Central-Casting figures. Semyon Mogilevich,
a reputed Russian organized crime figure, remains a primary focus of the investigation. So, too, do his
alleged links with Benex, a company--run by the husband of a Bank of New York executive--that
specialized in arranging clandestine import deals for Russian companies.
NEWSWEEK has learned that two major investigations in the United States
relating to Russian money
laundering are now reaching critical stages. In one case, the district attorney in New York's Manhattan
Borough is trying to extradite two lawyers from Britain in connection with a suspected scheme to
launder money for the Benex group through transactions involving obscure companies traded on
America's penny stock market. Separately, the U.S. Customs Service is looking into a mysterious
Russian emigre based in Philadelphia who over the last two years has run an estimated $500 million
through accounts in 15 to 20 banks located in the Northeastern United States. Officials say there is
evidence that at least some of the money comes from quasi-governmental organizations in Russia.
But as the Bank of New York inquiry proceeds, what will likely become
clear is that the investigation is
not just--or even mainly--about organized crime. Nor is it, as Russia's oligarchs and the current
government have argued, simply a story about capital flight, or about legitimate businessmen trying to
cope with a ridiculously complicated tax system (though all of that is partly true). Under scrutiny now is
nothing less than the fleecing of Russia, the many ways in which its citizens as well as many foreigners
who have invested in the country have been burned during the last years of the Yeltsin era. The methods
by which the fleecing took place are myriad and complex. But as the investigation moves forward, the
key mechanisms are likely to become clear:
The tax scams: Benex (and other companies like it) routinely arranged
schemes by which Russian
businesses were able to pay for imports offshore in hard currency. By reporting a lower, phony price in
Russia, companies were able to avoid confiscatory tax and custom duties. Benex was well known
among Russian businesses and financial authorities, and openly advertised its ability to move dollars in
and out of the country for a service charge. The schemes were endless, Russian businessmen say, and,
according to authorities, many of them were completely fraudulent. Central Bank chief Viktor
Gerashchenko told NEWSWEEK in a recent interview that the scams often included the purchase of
the passports of dead people, in order to draw up phony import contracts that allowed dollars to move
offshore--with no goods ever going to Russia in return.
The sole purpose for many of the phony deals was to get money offshore.
Every company has a secret
department that deals solely with getting cash in and out of the country, says one businessman who says
he routinely used Benex's services. These deals cost the Russian budget billions of rubles in an era when
Russian soldiers, teachers and doctors are routinely going unpaid. For years, in fact, the International
Monetary Fund has hounded Moscow to improve its tax collection. That some members of the Russian
government--though not the Tax Police--now dismiss the schemes as business as usual is extraordinary.
The banks: A big part of the Bank of New York affair, investigators
believe, almost certainly has its
roots in the crash of August 1998. Nearly all of Russia's banks at that point were insolvent. Today, a
year later, what were once the country's largest banks--they were also those most politically connected
to the Yeltsin government--owe $800 million to private account holders like the Grinyova family. They
further owe foreign creditors billions.
But those same banks managed to move billions of dollars abroad in the
months following the crash.
According to sources familiar with the investigation, $4.2 billion poured through Benex into a single
account at the Bank of New York from October 1998 to late February 1999. Another $1 billion more
flowed from February to July--monitored by law-enforcement authorities. That money came from
different sources; among them, investigators believe, were assets Russia's insolvent banks were able to
move abroad in order to hide the cash from creditors. In my mind it's outright theft, says Max Gutbrod,
an attorney at Baker McKenzie in Moscow who represents creditors at Bank Menatep, a now
bankrupt bank once owned by oligarch Mikhail Khodorkovsky.
The IMF controversy: One of the central political controversies about
the Bank of New York scandal
is whether the International Monetary Fund's July 1998 $4.8 billion loan was siphoned off illegally. It's
the wrong question. The scandal is not what was illegal. Almost certainly, nothing was. The scandal is
what happened legally. The bulk of the IMF's loan--$3.8 billion--went to the Central Bank's reserve
account, held at the Republic National Bank of New York. The point was to increase the amount of
dollars the Central Bank had to support the ruble. A recent review by the accounting firm
PricewaterhouseCoopers shows that the money did in fact show up in the Central Bank's account, as
the IMF said it did. The IMF can therefore say, as its managing director Michel Camdessus did again
last Friday, that there is no evidence that the money was used improperly. The Central Bank in turn sold
more than $9 billion in hard currency in return for rubles. About 20 of Russia's largest banks were net
purchasers of $4.1 billion of those reserves.
The more important question for the IMF--and for the Clinton administration,
which pressured the fund
into making the loan--is clear: Why did it feel a $4.8 billion bailout would avoid a ruble collapse? How
much money did it think Russia's banks would pay to their foreign creditors using the hard currency the
banks had purchased? And didn't it know that a large chunk of the hard currency would simply get
stashed in the bank's overseas dollar accounts?
The IMF gave $1 billion of the tranche to the Finance Ministry, which
used it to pay off some of
Russia's bond debt. Mikhail Zadornov, then the Finance minister, told NEWSWEEK in a recent
interview that he urged the IMF to give his ministry more, arguing that debt repayment would stabilize
Russia's markets--and its currency. The IMF refused, saying that the $1 billion allotment was already
an exception to policy.
The rest is history. The Central Bank blew a total of more than $9 billion
in a fruitless attempt to prop up
the ruble. Russia's major banks were able to pay six rubles for every dollar; by mid-August, the price
was nearly 20 rubles. Those banks paid only $1.2 billion on their debt to foreigners. And according to
Moscow economist Andrei Illarionov, $2.9 billion of the net hard-currency purchases are effectively
unaccounted for. Some of it almost certainly remains in offshore accounts. And some may have gone to
help capitalize new bridge banks that SBS Agro, Uneximbank and Bank Menatep have since set up.
Many creditors owed money by the three believe that the new bridge banks now house performing
assets that were shifted from the old insolvent banks. If true, those assets are now effectively--and
illegally--shielded from stiffed lenders and depositors. (The banks have denied the allegations.) Nothing
the IMF did was illegal or improper. But the policy stunk, says Vladimir Konovalov, chief strategist at
Credit Suisse First Boston in Moscow.
The story doesn't end there. On Aug. 20, after $9.1 billion in reserves
had been wasted and Russia
devalued, the top Russian bankers gathered at Russia's White House and insisted that the government
back off from threats that it was going to bankrupt them. Instead, they argued, they should get special
credits. Boris Berezovsky, a part owner of SBS Agro, told then Prime Minister Sergei Kiriyenko that
the oligarchs would exert extreme pressure to get their way. Our position was clear, says Kiriyenko.
Insolvent banks should be legally bankrupt. Giving them credits would just help them withdraw more
and more money from the country.
And that's exactly what happened. The Kiriyenko government was dismissed.
Over the next three
months, under new Prime Minister Yevgeny Primakov and new Central Bank chief Gerashchenko, the
government gave 19 billion rubles--about $1 billion at the prevailing exchange rate--in cheap loans to a
handful of insolvent but politically powerful Russian banks. Smolensky's SBS Agro got the biggest
chunk of the special ruble loans. According to documents obtained by NEWSWEEK, he twice put up
as collateral the same shares in his bank--as well as property that the bank does not own. How did he
get away with it? According to Gerashchenko, Smolensky was very smart. SBS had the accounts of the
key governmental agencies in Russia, including law-enforcement agencies, the presidential
administration and the Duma. Arkady Kulik, whose father was then deputy minister in charge of
agricultural policy, was--and remains--deputy chairman of the bank. We gave money to SBS realizing
the importance of this bank, said Gerashchenko. One current senior government official says the Central
Bank had little choice: They are dead afraid of Smolensky.
What happened to the 19 billion rubles paid out to the banks from September
remains something of a mystery. Former Finance minister Zadornov, who recently resigned as special
representative to the IMF and World Bank, believes that 2 billion to 3 billion rubles went to support
Russian agriculture. But he concedes that he cannot offer a full accounting of where the rest of the
money went. Neither can the Central Bank, which has led to suspicions in Moscow that some of this
money also ended up converted into dollars and sent offshore.
How ostensibly bankrupt banks may have managed to shuffle money offshore--and
where that money
might have gone--will be extraordinarily difficult to figure out. But the Bank of New York investigation
shows that it takes two to tango. Western banks, and not by any means just the Bank of New York,
know well that the amount of money pouring out of Russia over the past two years was
extraordinary--by some estimates $36 billion overall. The idea that it was mostly simple flight capital is
willfully naive. The reason the money-laundering investigation has got as far as it has, in fact, is because
Western law-enforcement agencies simply got fed up--as a senior law- enforcement official put it.
Russians like Gela Grinyova are too educated in the ways of Russian capitalism to think that they will
ever see their money again. But a fair accounting is the least they deserve.
This story was reported by Yevgenia Albats, Owen Matthews and Bill Powell
in Moscow, and Mark
Hosenball in Washington. It was written by Bill Powell.
October 4, 1999, U.S. Edition
The Incredible Fleecing of Russia
By Bill Powell and Mark Hosenball; With Carlo Bonini and Giuseppe
D'Avanzo in Milan
and Yevgenia Albats and Owen Matthews in Moscow
As investigators probe the country's financial collapse, the story becomes only more complex
In July 1998 the International Monetary Fund was preparing
a new tranche of financial aid to Russia.
It amounted to $4.8 billion, and in a departure from its usual practice, the IMF planned to send $1
billion directly to the Russian Finance Ministry for use in the country's budget. The rest would be added
to Russia's hard-currency reserves, where it would be available to privately owned banks trading
rubles for dollars in an effort to defend the ruble's value. The Russian Finance minister at the time,
Mikhail Zadornov, had what he thought was a better idea. Recently he told NEWSWEEK that he
asked the IMF to give more of the money directly to his ministry. Zadornov thought that debt repayment
was the best way to stabilize Russia's precarious financial situation. The IMF refused, and the $3.8
billion was added to the hard-currency reserves of Russia's Central Bank. The rest is history.
The next month, Russia defaulted on much of its foreign debt, and the
ruble collapsed. The IMF insists
that its money was handled properly, and it appears to be right. But some portion of the IMF loan is
effectively unaccounted for (chart), since Russia's banks moved billions of dollars abroad in the months
after the crash. According to sources familiar with the investigation, $4.2 billion alone poured through
Benex, a company that specializes in funneling Russian money offshore, into the Bank of New York.
Meanwhile President Boris Yeltsin and his family are being dragged deeper into the unfolding financial
scandal. In the end, probes in the United States and Switzerland are likely to show that Russia has
been comprehensively fleeced. At the heart of the scandal is a tale of the many ways in which Russia's
citizens--and foreign investors--have been burned during Yeltsin's final years.
Already the investigation of alleged Russian money laundering through
the Bank of New York and
other American and European banks has turned into a political issue in the United States. As Congress
began hearings on the matter last week, Republicans blamed the Clinton administration for allowing the
Russians to waste--or loot--billions of dollars in aid. Rep. Dick Armey, the House majority leader,
called the administration's handling of Russia the biggest foreign-policy failure since Vietnam.
NEWSWEEK has learned that two major U.S. investigations related to Russian
money laundering are
now reaching critical stages. In one, the Manhattan district attorney in New York City is trying to
extradite two lawyers from Britain in connection with a suspected scheme to launder money for Benex.
In a separate case, the U.S. Customs Service is monitoring the activities of a mysterious Russian emigre
based in Philadelphia (officials won't divulge his name). Over the past two years, sources say, the
Russian has moved an estimated $500 million through accounts in 15 to 20 banks in the Northeast. The
money comes from Russia, spends a day or two in American banks and then is transferred to tax
havens offshore. Sources told NEWSWEEK that some of the funds handled by the Russian may have
been diverted from the Kremlin's coffers.
The Yeltsin family is connected to the scandal partly through a Swiss
construction company called
Mabetex, which is owned by businessman Behgjet Pacolli, an Albanian Kosovar. Swiss investigators
are looking into charges that Mabetex paid $10 million in bribes in exchange for $300 million in
contracts to renovate the Kremlin and other official buildings in Moscow. Last January Swiss authorities
raided Mabetex's headquarters in Lugano and found records documenting credit-card purchases in the
names of Boris Yeltsin, his daughter and close adviser Tatyana Dyachenko, and her older sister, Yelena
Okulova. The bills for the American Express card in Yeltsin's name were small, but the Eurocards
purportedly held by the daughters ran up charges of nearly $600,000 in 1993 and 1994. The bills
allegedly were paid by Pacolli. He has denied doing so, but concedes he did pay credit-card charges for
some Kremlin officials. The Kremlin calls the entire Mabetex story fictitious.
Investigators also discovered a mysterious account called Dean at Switzerland's
Banca del Gottardo.
According to documents obtained by the Italian newspaper Corriere della Sera, the Dean account was
held in the names of three people: Pavel Borodin, the official in charge of Kremlin renovations; Borodin's
daughter, and Behgjet Pacolli. (Borodin denies that he ever had foreign bank accounts.) Documents
obtained by NEWSWEEK show that on Dec. 5, 1995, $1 million went into the Dean account from
Pacolli's personal account. That day, $1 million was transferred to an account at the Central European
Bank in Budapest.
On the day of the raid on Mabetex, Swiss prosecutor Carla del Ponte
asked Pacolli where the money
went from there. To the electoral campaign, he replied. Whose campaign? President Yeltsin's, sources
quoted Pacolli as saying. Since then he has denied publicly that he paid anything to Yeltsin, his family or
Borodin. Pacolli now claims the $1 million was paid to a Hungarian company called Trinlo for public
relations services to Mabetex. Yet no such company is registered in Hungary. The Kremlin denies that
Yeltsin or his daughters have foreign bank accounts. But U.S. investigators have learned that Tatyana's
husband, Leonid Dyachenko, had $2.7 million in an account with the Bank of New York branch in the
Cayman Islands, plus another account of undetermined size with Chase Manhattan.
There is no sign that any laws were broken in the disposition of the
vast sums received from the IMF.
The purpose of the July 1998 loan was to increase the amount of dollars Russia's Central Bank had on
hand to support the ruble and pay creditors. A recent review by the accounting firm
PricewaterhouseCoopers shows that the $3.8 billion went, as planned, to the Central Bank, which later
sold $4.1 billion of hard currency to about 20 of Russia's major private banks, though most of them
were virtually insolvent by then. Apparently the IMF--and the Clinton administration, which pressured
the IMF into making the loan to Russia--were naive enough to think that it would stave off devaluation
of the ruble. With the West sending good money after bad, Russia's wealth was simply frittered away.
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The New York Times
October 3, 1999, Sunday, Late Edition - Final
Banking 101: the Smaller The Fry, the Hotter the Pan
By TIMOTHY L. O'BRIEN
LAST weekend, I deposited a fat six-figure sum into my
checking account. The windfall, alas, was
from the sale of my home, not from my weekly paycheck at The New York Times, where for the past
several weeks I have been writing about a major money laundering investigation.
It was the single biggest bank deposit I have ever made and the sleuths
at Chase Manhattan took notice
right away. Their system rejected my deposit.
On Wednesday, a very nice, very harried, branch manager called to tell
me the deposit was too large
for my account. Moreover, the account was only in my name and the checks were made out to me and
my wife. Set up a new account or take your money elsewhere, advised the manager.
Banks are supposed to do this. After all, how do the folks at Chase
know where I got all that money
from? Still, I was amused. How did billions of dollars from Russia -- billions -- zip through a handful of
accounts at the Bank of New York for almost two years without anyone taking notice?
Paper checks deposited in a local branch are pretty easy for banks to
track. But much of the money
flowing around the world these days flits across borders electronically in the blink of an eye. And that
can be much harder for banks to monitor.
Bank of New York, which is now entangled in the biggest money laundering
investigation in history,
processes billions of dollars of transactions a day. Understandably, a lot of money could sneak by
unnoticed when there's that much passing through. But at least $3 billion slipped through just nine
accounts at the Bank of New York between 1996 and 1998, right before the Federal Bureau of
Investigation marched in to examine all that activity.
Think of it this way: A python swallows a frog and nobody notices the
frog is missing. Then the python
swallows a rabbit: Not a lot of guess-work here because you can see where the poor rabbit is -- it's
stuck right in the middle of the python.
When an obscure operation called the Benex Corporation deposited billions
of dollars of Russian funds
into accounts at the Bank of New York it looked like the python swallowed a pig -- yet despite the
tremendous bulge in Benex's accounts, nobody at the bank examined it closely.
In contrast, alarm bells started ringing about Benex and related accounts
at Republic Bank in August
1998, just one month after the bank installed a new system to monitor wire transfers. The heavy traffic in
the accounts concerned Republic, which alerted Federal officials immediately.
In the new era of looser financial regulation, banks are expected to
be the first line of defense against
criminals. Essentially, this requires them to be vigilant and know the backgrounds of their customers. If
something about an account makes them suspicious, banks are required to notify regulators right away.
Bank of New York's chief executive, Thomas A. Renyi, acknowledged in
testimony that the bank failed to supervise the Benex accounts effectively. That lapse will be a matter for
regulators to address. Beyond that, however, it is not clear whether the bank did anything illegal.
The exact sources of some $7.5 billion that moved through Benex accounts
at the Bank of New York
between 1996 and 1999 are still unknown and the bank has not been charged with wrongdoing. Other
than Mr. Renyi's testimony, the bank has largely declined to comment except to say it is cooperating
with the Federal investigation.
Moreover, the mass of investigators swarming around the case face enormous
hurdles unraveling the
traffic through the Benex accounts and proving that sources of the funds were tainted.
Money laundering refers to the criminal practice of taking ill-gotten
gains, or "dirty" money, and filtering
them through a sequence of bank accounts so they are "cleaned" to look like legitimate profits from legal
activities. Exposing this process, however, is daunting.
"It's difficult to prosecute money laundering because disproportionate
activity in an account doesn't
mean you have money laundering," said Mark D. Seltzer, an attorney with Goulston & Storrs in Boston,
and a former Federal prosecutor. "You have to prove that the source of the money that created this
activity in your accounts was ill-gotten gains from specific criminal activities."
One of the most high-profile financial fraud prosecutions in recent
years, the 1991 case against the Bank
of Credit and Commerce International that was spearheaded by Manhattan District Attorney Robert M.
Morgenthau, did not result in convictions of two of the most notable defendants in the case, the
Washington power broker Clark M. Clifford and his protege, Robert A. Altman.
B UT many in the legal community view Mr. Morgenthau's prosecution of
B.C.C.I. as a landmark
success because it unraveled an illegal financial scheme clearly operating beyond the pale and helped
force the payment of more than $1.5 billion in fines.
"If you just look at the criminal prosecution, it obviously wasn't successful,"
said Robert E. Powis, a
former deputy assistant secretary for enforcement at the U.S. Treasury. "But they helped shut the
apparatus down and they did get heavy fines disgorged and that's another measure of success."
But B.C.C.I. was a rogue bank. At worst, based on what has surfaced
so far, the Bank of New York
may have had a troubled operation inside its walls, but no one in the banking community has ever
considered it to be a rogue bank. The comparison with B.C.C.I., then, lies elsewhere.
"The relevance of the B.C.C.I. matter is that it demonstrated the difficulties
of prosecuting these kinds of
cases," said Harry W. Albright Jr., the court-appointed trustee of First American, a bank once
controlled by B.C.C.I. "It is very difficult to unravel banking cases these days because of their
international scope. There is no quick fix because the cases require cooperation across borders."
In other words, the ultimate answers to the questions swirling around
the Bank of New York can only
be found in Russia. And getting real cooperation from the Russians in the Bank of New York case
may be the biggest hurdle American investigators face.
October 4, 1999, Atlantic Edition
A Scheme of Beauty
By Bill Powell; With Yevgenia Albats in Moscow and Carlo Bonini
and Giuseppe D'Avanzo
Did the pricetag for the restoration of the Kremlin and other buildings
include kickbacks to the Yeltsin
Felipe Turover is not the kind of guy a prosecutor usually
wants as a star witness. Handsome, slick,
the bearer of two passports (Israel and Spain) and rumored to have been linked to the KGB, the
Russian emigre was a freelance debt collector, trying to track down money the Soviet Union owed to
Westerners. But it was Turover who, nursing a grudge against a former friend, knocked on the door of
the Swiss General Federal Prosecutor Carla del Ponte more than a year ago and said, in effect: have I
got a story for you.
As first reported in Italy's daily Corriere della Sera, Turover told
Del Ponte about Mabetex, a Swiss
construction company based in Lugano. Turover said Mabetex had paid bribes to high-ranking Kremlin
officials in return for a huge contract to restore the Kremlin itself and other Moscow sites. Mabetex,
owned by an Albanian Kosovar businessman named Behgjet Pacolli, won the contract in 1994-1995.
The circumstances are now the subject of an ongoing Russian-Swiss investigation that threatens to make
Boris Yeltsin's last year in office a nightmare.
Construction projects have always been the mother's milk of corrupt
politicians. But the unfolding
Mabetex scandal is no routine kickback story. U.S. investigators probing alleged money laundering at
the Bank of New York are now looking into whether the bank was used to help wash funds connected
to the Mabetex affair. Sources close to that inquiry revealed last week that Yeltsin's son-in-law--the
husband of Tatyana Dyachenko, the president's closest adviser--had a $2.7 million account at BONY's
Cayman Islands branch. So far the son-in-law has offered no public comment, but at congressional
hearings last week BONY chairman Thomas Renyi confirmed the existence of the account. Investigators
are now exploring whether the funds are related to Mabetex. The Swiss, meanwhile, having already
frozen the bank accounts of 24 Russians, are now expanding their focus. The probers think they may
have to bring money-laundering charges against some of their own banks in connection with the affair.
Unfortunately for the Kremlin, Swiss investigators say nearly everything
Turover has told them checks
out. Back on Jan. 22, they raided Mabetex's plush six-story headquarters, searched it for six hours and
seized an enormous number of documents. Investigators say that among the startling finds were records
documenting credit-card purchases in the names of Boris Yeltsin himself, via American Express, and his
two daughters: Tatyana and her older sister, Yelena Okulova, using Eurocards. The records the Swiss
seized showed that the AmEx bills were small. But the Eurocards showed charges of nearly $600,000 in
1993 and 1994.
Turover, now living in Zurich, told the Swiss that Mabetex gave Kremlin
officials the cards, and that the
bills were sent to a small clothing store just outside Lugano called La Fen. The store, he said, was
owned by the wife of a former Turover business associate named Franco Fenini, who worked for the
Banca del Gottardo in Tessin, Switzerland. Turover had worked for the bank as a consultant since the
early 1990s, tracing Soviet-era debts owed to Western creditors, and he became friends with Fenini.
Last year the two had a bitter falling-out, and their dispute lies at the heart of the emerging scandal.
Turover's anger at Fenini, investigators say, motivated him to reveal what he knows about the Mabetex
According to Turover, Pacolli used Banca del Gottardo to make several
payments to Kremlin officials.
The Mabetex chief supposedly used his personal account at the bank (as well as one at another Swiss
bank) to pay off the credit-card bills of the Yeltsin family, together with those of several other Kremlin
officials. Pacolli has denied paying the Yeltsin clan's bills, but concedes he did pay the credit-card debts
run up by other Kremlin officials, still unidentified.
But there was more. Investigators learned of the existence of an account
at the bank called Dean.
According to documents first obtained by Corriere della Sera, the Dean account was in fact held in the
name of three people: Pavel Borodin, the man who oversaw the Kremlin's property-management
department--and who signed the renovation contracts; his daughter Yekaterina Silelskaya, whose
husband is an owner of a company called Mercata Ltd., which also won contracts to help restore
Kremlin property, and Behgjet Pacolli himself. Investigators were particularly interested in five separate
transactions on the account in mid- to late 1995. The first, on June 12, shows a $100,000 transfer to an
account at the Bank of New York held in the name of a company called Albion Trade. Albion Trade,
Swiss investigators tell NEWSWEEK, is a front company whose beneficiary is Pavel Borodin. (Borodin
has consistently denied holding any foreign bank accounts, and he says someone forged his signature on
the Dean account.) In September and October, the Dean account received a total of $1.8 million, part
of it from Pacolli's personal account at the Nassau branch of Banca del Gottardo, and part from another
account at the bank.
But the most controversial--and potentially explosive--transfers occurred
on Dec. 5, 1995. Documents
obtained by NEWSWEEK show that on that date, $1 million went into the Dean account from Pacolli's
personal account. That same day, $1 million was transferred out and went to an account at the Central
European Bank of Budapest. On Jan. 22, 1999, the day of the Mabetex raid, investigators claim Carla
del Ponte sat in Pacolli's office in Lugano and asked him directly about the Hungarian transaction: What
is this million for? The electoral campaign, Pacolli replied. What campaign? The president's, said Pacolli.
What president? The Mabetex chief answered: President Yeltsin.
Since then, Pacolli has said in press interviews that at first he thought
the whole investigation into his
Kremlin connections was a joke. But according to witnesses, when confronted by del Ponte nine
months ago, he wasn't laughing. He was, sources say, plainly frightened. Since then he has publicly
denied that Mabetex paid off Yeltsin, his family, Borodin or anyone else. He now says that the $1
million went to pay a Hungarian company called Trinlo for advertising services provided to Mabetex.
But Hungarian Justice Ministry sources say there is no company called Trinlo registered in Hungary.
After an exhaustive search by investigators, only one company by that name pops up anywhere: it's
called Trinlo Investment Holding, and it is an offshore company located in the British Virgin Islands.
While publicly--and heatedly--denying that there is anything to the
scandal, the Kremlin is now engaged
in behind-the-scenes dicussions on damage control. NEWSWEEK has learned that Yeltsin's inner circle
has talked among themselves about whether sacrificing Borodin would satisfy Russian prosecutors
pursuing the case. But for now, sources say, the Kremlin has decided against such a strategy, and the
reason is straightforward: it is unlikely that anyone will prove conclusively whether Pacolli ever passed
money along to the Yeltsin clan; but Borodin presumably knows an awful lot; and for now, the Kremlin
sees no reason to provoke him. Felipe Turover has already shown what can happen when someone gets
With Yevgenia Albats in Moscow and Carlo Bonini and Giuseppe D'Avanzo in Milan
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