The Enigmatic Nature of Russian Money Laundering

The Enigmatic Nature of Russian Money
Laundering: Implications for the West
Russian Banking Seminar
September 2010
Ethan S. Burger, Senior Lecturer
Centre for Transnational Crime Prevention
University of Wollongong – Faculty of Law
ethansb@uow.edu.au
Soviet Legality . . . Russian Law

Query: If the Russian and senior governmental officials
are involved in large-scale economic crime (including
money-laundering), why are relevant Russian
legislations/regulations so detailed? If senior Russian
officials are corrupt, how can one know whether to trust
the Russian government‟s actions or information?

Hypothesis: Russian laws/rules are enforced only
against certain categories of person under particular
circumstances, not against “reliable” senior authorities,
their favorites and persons capable of obtaining positive
outcome through corruption. Russia also benefits from
its facade of compliance with international norms in this
area.
2
Today’s Road Map
I. Introduction
II. Concepts relating to Money-Laundering
(“ML”) and Role of Changing Technology.
III. Present Political Environment.
IV. Russian and Int‟l Legal Framework.
V. Connecting the Dots.
VI. Implications.
VII. Useful Internet Links.
3
It Pays to be Sceptical (Especially about
Predictions about Russia).

How does one distinguish between
anecdotes and data?

Our understanding of illegal activity is
limited and imperfect.

There are multiple variables making
generalizations and the use of collective
nouns (e.g. “the U.S.”) suspect.

E

83.7% of all statistics in presentations are
either false or misleading.
4
Stages of Money Laundering
Stage 1 – Placement, moving the funds from
direct association with the crime (remember
not all large sums of money are obtained
illicitly);
Stage 2 – Layering, disguising the trail to foil
pursuit; and,
Stage 3 - Integration, making the money
available to the criminal once again with its
occupational and geographic origins hidden
from view.
5
Money Laundering is Facilitated by:
-
“Cooperative” and “Non-inquisitive” correspondent
banks in under-regulated jurisdictions;
-
False Documentation (Trade-based ML);
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Offshore Secrecy Jurisdictions and Tax Havens;
-
Related-Party and Sham Transactions (e.g. nonmarket pricing, over-billing and under-billing);
-
Shell and Holding Corporations;
-
Taking advantage of legal loopholes and;
-
Technological change (e.g. on-line banking, cell
phones, etc.) combined with increasing volume of
money/value transfers.
6
Is the Concept of ML an Anachronism?




ML is a process whereby the proceeds of a
crime are moved it is not an objective.
ML most often connected to the drug trade.
Post 9/11, ML gained as a law enforcement
concern, but value is transferred by
numerous means other than through banks.
While there is considerable attention paid to
hawala and its equivalent; remember that
value can be passed in goods, any money
“derivative,” and real estate interests.
7
Governments Always Operate at a
Disadvantage



Whereas business and criminal groups
are transnational, enforcement is
largely national and relevant legal
rules lag behind practices by years;
Coordination between governmental
entities, both within and between
countries can be problematic; and
Private sector and public corruption is
pervasive.
8
The Era of Безпредела
The Early 1990s

Early-mid 1990s, characterized by rampant inflation;
currency “reform”, lack of regulatory framework, the
transformation of Soviet-era banks, “captive” banks,
exploiting wage arrears, & keeping foreign banks out.

Criminals acquire most private banks and insurance
companies using them to raise funds to acquire assets
during privatization and to facilitate financial frauds.
9
The Economic Potemkin
Village

During the mid-1990s, Russia was viewed
as the best performing “emerging” market,
attracting considerable foreign investor
interest despite the reality on the ground.

In 1997, Russia experienced a huge level of
capital flight and an unexpected financial
crisis caused in part by the fall in energy
prices.
10
The Putin Era:
White, Gray and Black Banking

Some Russian banks become more sophisticated
building relations with established Western banks.

In 2008, bank specialists estimated that there were
only about 300 “real banks” out of a total of 1,200
licensed banks. Most “little more than treasuries for
big businessmen or entities engaged in criminal
activity such as money laundering” (e.g. Bank of
New York‟s local partners). Some “banks” engage in
loan-sharking.

Rapid changes in the Russian stock market and the
absence of insider trading rules often necessitates
the involvement of organized crime to launder
money or raise money for crimes.

Major changes in commodities is often attributable to
Russian gaming in the futures market – again
another opportunity for criminal banks.
11
Important Laws & Other Normative Acts



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Federal Law “On Banks and Banking Activities,” December 2,
1990 (as amended);
Federal Law “On Counteraction of Legitimization (Laundering)
of Proceeds of Crime and Financing of Terrorism, August 7,
2001 (amended July 2010 to add “know your customer” rules);
Presidential Edict No. 1263 "On the Authorized Agency for
Combating Legalization (Laundering) of Proceeds from Crime
and Financing of Terrorism," (establishing Federal Monitoring
Service);
Russian Government Decree 307 “On Approval of regulations
on the Federal Financial Monitoring Service,” June 23, 2004
(as amended); and
Federal Law “On Currency Regulation and Currency Control,”
December 10, 2003 (major revision of original law).
12
Int’l Legal Framework
Council of Europe (“COE”) Convention on
Laundering, Search, Seizure and Confiscation of the
Proceeds from Crime (1990);
 U.N. Convention on Transnational Crime (2000);
and
 U.N. Convention against Corruption (2003).
+++++++++++++++++++++++++++++++++++++++++
 Also, Russia is a member of the COE Committee of
Experts on the Evaluation of Anti-Money Laundering
Measures and the Financing of Terrorism
"MONEYVAL," Eurasian Group on combating
money laundering and financing of terrorism (EAG),
Egmont Group, and FATF.

13
Some Key Players






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Basel Committee;
Egmont Group (Financial Intel Units);
Financial Activities Task Force (FATF);
International Institutions (EBRD, IFC,
IMF, UN, World Bank, etc.);
Interpol;
NGOs (e.g. Transparency Int’l); and
Regional Anti-Money Laundering
Groups.
14
Declaration by a Group of Russian
Banks
“The Russian Federation [has] joined the international
systems of measures aimed at prevention of
legalization of criminal incomes and [terrorist]
financing and is an active participant of the [FATF]
and the Egmont Group. The Russian legislation on
money laundering and [terrorist] financing
incorporations major recommendations elaborated
by the world community.”
Sberbank, VTB Bank, VNESHECONOBANK, ALFA
Bank, Bank of Moscow, Bank Zenit, International
Moscow Bank, and Reiffeisenbank Austria
(Moscow).
15
An Assessment from the IMF
“The banking system is still under strain and credit is likely to
recover only gradually. Until recently, bank lending remained
subdued, amid weak demand for credit and the continuing
efforts by banks to restructure their balance sheets. There
are signs, however, that the accumulation of overdue loans is
now decelerating, and that banks are scaling back efforts to
boost provisions and capital. In this context, credit growth
picked up modestly in March and April, reflecting an
improvement in credit demand and moderating credit supply
constraints. The authorities have been exiting from
extraordinary banking sector support extended during the
crisis.”
16
World Bank Analysis
“After a surge in the first quarter, capital flows remained
steady in April 2010, but faltered in May [due to] the European
debt crisis. . . . Bond financing increased to USD 26 billion in
April, which in part reflects Russia„s return to the international
bond market (its first in more than a decade). The Russian
[gov‟t] issued USD 5.5 billion in 5-year and 10-year bonds, the
largest sovereign deal in emerging markets [] history. Bank
flows are well below the level in pre-crisis years.”
“Capital flows remain volatile both in the banking and
nonbanking sector, mostly reflecting the movement in oil
prices and remaining uncertainty regarding the recovery of
global demand. . . . In the first quarter, net capital flows to the
banking sectors eased to only USD 0.8 billion, down from
almost USD 9 billion in the fourth quarter of 2009. ”
17
Is the Focus on Banks Valid?

The first stage of ML need not involve transferring
money directly to banks.

Money can be laundered through any mechanism
willing to accept cash.

In 2001, the Int‟l Finance Corporation found that
over 75% of Russian enterprising holding leasing
licenses (e.g. for automobiles and expensive
equipment) were not leasing out property.

Hotels are an excellent vehicle for laundering
money – after all, how does one confirm occupancy
rates?
18
Largest Sources of Laundered Funds
1. Economic crime (commodity and stock market
manipulation; insider trading, “legitimate business
activity” by state officials through shills, and major
“corporate takeovers, and frauds);
2. Corruption by officials & persons in private sector
(benefiting from expropriations, receipt of bribes
and kickbacks in connection with granting of
lucrative state contracts or traditional contracts,
non-enforcement of relevant laws, illegal
privatizations or unlawful sale of state property);
and
3. Other Sources (illegal export of weapons and
narcotics).
19
The Strange Case of Gunvor

Gunvor, a Swiss-based company,
has a near-monopoly on the
transportation of oil and oil
products from Russia.

Prime Minister Putin is believed to
own a significant share of Gunvor.

The Russian authorities have used
similar tactics to those used
against Yukos against Gunvor‟s
competitors.
20
Gazprom: The Cash Cow of the
Russian Powers that Be?

Gazprom is Russia's largest company, statecontrolled and the world‟s largest gas producer. Its
Chairmen of the Board have included: Viktor
Chernomyrdin and Dmitrii Medvedev.

The Russian government conducts its foreign
policy in a manner to benefit Gazprom and in turn
particular individuals.

Many of its transactions are outright shams or
structured to profit political figures and their
favorites.
See Roman Kupchinsky, Gazprom‟s European Web,
Jamestown Foundation Monograph, February 2009.
21
Gazprom’s International Web

Use of non-transparent “trading” and “financial leasing”
companies organized in Austria, Cyprus, Lichtenstein,
Switzerland, Ukraine, the UK and many off-shore jurisdictions.

Involvement of middlemen linked to organized crime (e.g.,
Massimo Ciancimio, Dmitro Firtash, Igor Fisherman [ties to
Semion Mogilevich], shady business people (e.g. Dariga
Nazerbayeva, Bruno Graneli, Howard Wilson) and politicians
(e.g. Silvio Berlusconi, Leonid Kuchma, Romano Prodi,
Vladimir Putin, Gerhard Schröder) from Russia, Ukraine,
Kazakhstan Hungary, Israel, Italy and Germany.

Dealings with RosUkrEnergo, ARosgas, Centrex, CEEGAG,
Itera. ETG, MDM, Raiffeisen Investments, EniNeftegaz (buyer
of Yukos‟ assets then sold to Gazpromneft), Gazprombank,
Gazpromexport, etc., involving billions of dollars.

How closely is the law enforcement and intelligence
communities monitoring this situation? Gazprom spreads its
tentacles and the LNG market may be next.
22
Reiffeisen Bank & Diskont Scandal

In 2006, Diskont Bank had its license revoked by the
Russian Central Bank. Shortly thereafter, the 1st
RCB Deputy Chairman Andei Kozlov is murdered.

This gives rise to an investigation which implicates
Raiffeisen Zentralbank in a major money laundering
scandal involving over 50 banks, including
Gazprombank, Sberbank, VEB, and Alfa Bank.

Some prominent Russian banks are involved.
Apparently, the there was a kick-back scheme
involving the building of a gas pipeline, the cost of
which doubled in a very short time. Does this explain
the high cost of major projects by the Russian state
or entities controlled by it?
23
The Financial Crisis and the Bailing
out of Russian Banks



Recall that in 2008, the Russian economic slowdown
preceded the “global financial crisis.
Initially, the Russian Duma authorized the Central Bank of
Russia to give the equivalent of $50 billion to the state-owned
Vnesheconombank (VEB) in Moscow, which in turn was
authorized to lend to private companies and banks.
According to the New York Times, the Russian Central Bank
estimated in 2009, the countries debt exceeded $128 billion.
The Russian Government did not want Russian assets to fall
into the hands of foreign entities, but used this opportunity to
re-establish state control over the economy and some of the
so-called “Oligarchs,” many of whom controlled banks.
24
Condition of the Russian Economy &
Russian Regulatory Enforcement Varies
- Rebounding Russian Consumer Confidence? -- According to RCB
data the number of Russians taking out ruble-denominated
mortgages in the first half of the year was up significantly over the
prior year.
- Not all Russian Financial Institutions are Struggling --Renaissance
Capital (RC) making investments assets and providing consulting
services in Nigeria, acquires brokerage in Nigeria, and expanding
into its international activities into counties such as Mongolia, Serbia,
and South Korea recall ONEXIM Group holds a 50% stake in RC.
- But -- July 2010, Mezhprombank defaults on a €200m Eurobond (first
bank default since 1999). Politically-connected Federation Council
Member Sergei Pugachiov (known as Putin‟s Banker) owned it.
- Perhaps not Russian AML is not all corrupt and dysfunctional -- in
August 2010, RIA-NOVOSTI reported that MVD uncovered a
“criminal group”, which included several high-level bankers,
suspected of laundering $65 million.
25
Russia’s 5 Richest Men
Name
Rank Born Billions
Vladimir Lisin
32
Mikhail Prokhorov 39
Mikhail Frydman
42
Roman Abramovich 50
Oleg Deripaska
57
„56
„65
„64
„66
„68
$15.8
$13.4
$12.7
$11.2
$10.7
Initial Activity
Steel
Investments
Oil
Steel
Aluminum
All of the above individuals are “self-made” and
compared with billionaires from other countries rather
young. How reliable can such data be? Companies
controlled by them are active throughout the world and
they personally own significant assets abroad.
See Forbes 2010.
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Largest Russian Companies
(FT 500 List)
http://media.ft.com/cms/66ce3362-68b9-11df-96f1-00144feab49a.pdf (July 2010)

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Gazprom, Global Rank 33, energy.
Rosneft,Global Rank 62, energy,
Sberbank, Global Rank 86, banking.
Lukoil, Global Rank 140, energy.
Surgetneftegaz, Global Rank 174, energy.
Norilsk Nickel, Global Rank 207, metals.
VYB Bank, Global Rank 263, banking
Novolipetsk, Global Rank 383, metals.
Novotek, Global Rank 394, energy.
Mobile Telesystems, Global Rank 470, telecom.
Vimpelcom, Global Rank 493, telecom.
ISSUES: Nationality of entity vs. beneficial owners;
Shills and subsidiaries.
Ties to banks?
27
Problem in Combating Russian
Money Laundering

Governments, despite their rhetoric, assign a low priority
to combating foreign corruption and money laundering.

Many Russian individuals and entities have considerable
skill in the mechanics of money laundering process.

Russian officials are often the beneficiaries of money
laundering and thus Russian regulators and international
organizations have their hands tied.

They can rely on the cooperation or acquiesce of foreign
financial institutions (and their personnel) as well as offshore banking/tax havens.
28
Debt for Thought

Russian banks and enterprises still owe a
considerable amount of money to Western
banks and corporations.

While going after assets of such companies in
Russia is unlikely to be productive, Russian law
makes parent companies liable for the debts of
their subsidiaries.

Conceivably, parent companies and the
individuals that control them have assets
abroad that may be attractive to gain control
over – for example, Russian individuals and
corporations may hold stock in Western
corporations as well as real estate and rights to
natural resources.
29
Too Big to Fail? Too Big to Succeed?

Instability (i.e. political change in Russia is often
viewed with trepidation by the West).

Russia continues the Soviet geopolitical strategy of
making the EU dependent on Russian energy while
its companies seek to gain financial control abroad
to strengthen its share of market in metals, gold,
etc.

Russia buys some EU politicians such as Gerhardt
Shröeder, Berlesconi, etc. Enter into transactions
with France, Germany and Italy to gain political
leverage and more.
30
Russian Gov’t Sites

Russian Central Bank -- http://www.cbr.ru/daily.aspx and
http://www.cbr.ru/eng/;

Russian Federal Service for Financial Monitoring -http://www.fedsfm.ru/ and http://archive.fedsfm.ru/eng/;

Russian General Procuracy -- http://www.genproc.gov.ru/ and
http://eng.genproc.gov.ru/;

Russian Government -- http://government.ru/# and
http://government.ru/eng/#

Russian Ministry of Finance -- http://www.minfin.ru/ru/ and
http://www.minfin.ru/en/;

Russian Presidential Website -- http://kremlin.ru/ and
http://eng.kremlin.ru/
31
Other Interesting ML Sites

Eurasian Group -- http://www.eurasiangroup.org/

Global Financial Integrity -- http://www.gfip.org/;

Financial Action Task Force -- http://www.fatfgafi.org/pages/0,2987,en_32250379_32235720_1_1_1_1_1,0
0.html;

IMF on ML -- http://www.imf.org/external/np/leg/amlcft/eng/;

World Bank on ML -http://web.worldbank.org/WBSITE/EXTERNAL/WBI/WBIPRO
GRAMS/PSGLP/0,,contentMDK:20292990~menuPK:461615~
pagePK:64156158~piPK:64152884~theSitePK:461606,00.ht
ml
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