Complete follow-up on BK's money-laundering
operation:
August 19, 1999
Activity at Bank Raises
Suspicions of Russian Mob Tie
By RAYMOND BONNER with TIMOTHY L. O'BRIEN
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Increase Profits (July 25)
illions 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 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.
Investigators say the transactions seem to add
up to one of the largest money laundering
operations ever uncovered in the United States,
with vast sums of money moving in and out of
the bank in a day. But they are quick to point
out that the inquiry is still in its early stages
and that they do not yet know the full scale of
the operation or where the money ended up.
Wednesday, the Bank of New York said it had
suspended two employees whose names had
surfaced in the investigation. Both are officers
in the bank's Eastern European division and
are married to Russian businessmen, one of
whom is believed by investigators to have
controlled one of the accounts.
The suspensions of the two women, Natasha
Gurfinkel Kagalovsky of New York, and Lucy
Edwards of London, followed an inquiry by The
New York Times. The employees have been
suspended pending completion of the
investigation.
"The Bank of New York has been cooperating
with the office of the United States Attorney for
the Southern District of New York in a
confidential investigation of the use of bank
facilities to transfer funds from Russia to other
countries," the bank said in a statement.
"There are no allegations of wrongdoing by the
bank," it said, adding that no customer or bank
funds had been lost.
An American government official who follows
money laundering and Russian organized
crime said, "What we have here is the
penetration of a major U.S. organization by
Russian organized crime."
American and European officials have been
concerned about the possibility that organized
crime syndicates from Russia and other
countries could infiltrate financial markets and
institutions in Europe and the United States.
Investigators here and abroad have been
examining cases where front companies have
tried to raise capital in North America for
organized crime activities in Russia through
stock offerings.
Since the collapse of the Russian financial
system last year, the flight of money out of the
country has accelerated, and investigators have
been on the lookout for activities they suspect
are "laundering" operations.
Money laundering is a legal catch phrase that
refers to the criminal practice of taking
ill-gotten gains and moving them through a
sequence of bank accounts so they ultimately
look like legitimate profits from legal
businesses. The money is then withdrawn and
used for further criminal activity.
The accounts under scrutiny at the Bank of
New York have been linked by investigators to
a man who Western law enforcement officials
say is a major figure in Russian organized
crime, Semyon Yukovich Mogilevich.
Mogilevich is involved in a wide range of
activities from arms trafficking and extortion to
prostitution, American and European law
enforcement and intelligence agencies say.
Mogilevich, 53, is considered smart, ruthless
and vastly wealthy. A recent British intelligence
report said he was worth $100 million.
The CIA and European intelligence agencies
have been intensely monitoring his activities
for five years, an American official said recently.
An FBI report on Russian organized crime said
that when the Soviet Union withdrew its forces
from East Germany, many Russian generals
sold their weapons to Mogilevich, who in turn
sold them, at much higher prices, to countries
like Iraq, Iran and Serbia.
British authorities, investigating the financial
activities of Russian organized crime, alerted
the FBI to the suspected money laundering at
the Bank of New York more than a year ago.
The FBI said Wednesday that it would have no
comment on the investigation.
An initial round of federal subpoenas issued to
the Bank of New York produced 3,500 pages of
transactions for one account in the name of a
company called Benex, said investigators. They
would say little about what information they
have about Benex, its location or its activities.
British intelligence reported that some of the
money from the Benex account went to pay
contract killers and some went to drug barons,
American officials said.
Last year, after an American journalist, Robert
Friedman, wrote a long expose of his criminal
career in the Village Voice, Mogilevich put out a
contract on the reporter's life, the Central
Intelligence Agency said.
The CIA said it had picked up the threat by
monitoring Mogilevich's phone. A European
law enforcement official said recently that the
contract was for $100,000. Friedman went into
hiding for a while and has resumed writing.
It is likely to take many months before
investigators sift through the documents and
penetrate the complex web of offshore
companies and holding companies to
determine precisely where the money came
from and where it went.
The Federal Reserve Bank of New York and the
New York state Banking Department declined
to comment on whether they had begun their
own investigations of the Bank of New York.
While sifting through boxes of documents that
turned up in the British investigation,
investigators found references to Benex, which
was linked to an American company, YBM
Magnex, which was a front for Mogilevich,
officials said.
YBM, based in Philadelphia and once traded on
the Canadian stock exchange, was an
operating company -- it made and sold
industrial magnets -- and a money laundering
vehicle for Mogilevich, American and British
officials have said.
In June YBM pleaded guilty to one count of
securities fraud in federal District Court in
Philadelphia, and the U.S. Attorney's office
there is still considering whether to indict
Mogilevich.
The YBM case was one reflection of the success
of Russian organized crime in infiltrating
Western financial markets, American and
European officials said.
But, "it's a drop in the bucket" compared to
what has happened at the Bank of New York,
said an American official.
The account at the Bank of New York was
opened by a Russian-American last year, an
investigator said. He declined to give the
person's name.
The volume of transactions through the
accounts has been extraordinary, officials said,
and often the money came in and went out
quickly. This should have made the bank
suspicious, said an investigator.
But according to investigators, but the bank
has filed only one "suspicious activity report"
with the federal authorities and that was after
the authorities began investigating.
Wednesday, the bank would not discuss the
filing of any reports with the authorities.
If unusual activity occurs in an account, banks
are required to file "suspicious activity reports,"
or SARs, into a system monitored by the U.S.
Treasury's Financial Crimes Enforcement
Network, as well as the country's five main
banking regulators. The reports are
confidential and the Treasury's network
declined to comment Wednesday on whether it
had received any such report from the Bank of
New York recently.
At one time, American authorities froze the
Benex account, which had $34 million in it, an
investigator said. But they quickly unfroze it,
when they realized that it was just the tip of a
very large operation and it would aid the
investigation to keep the account active, he
added.
The accounts had been handled by Ms.
Kagalovsky, a senior vice president of the bank
in New York, according to government officials
in New York and Washington.
Born in Russia, she emigrated to the United
States in 1979, and after earning a masters
degree at Princeton joined a management
training program at the bank, according to
articles in The American Banker and Bankers
Monthly in 1992.
In the early 1990s, after the collapse of
Communism, Ms. Kagalovsky was put in
charge of bringing in new business from
Eastern Europe and the former Soviet Union.
A few years ago, she married Konstantin
Kagalovsky, who has been an economic adviser
to the Russian government and from
1992-1995, was Russia's representative to the
International Monetary Fund.
Ms. Kagalovsky, 44, declined to answer any
questions Wednesday.
Investigators are also looking at the role played
by Lucy Edwards, a vice president of the bank
in London working on Eastern European
accounts.
Two months ago, Ms. Edwards spoke at a
two-day conference on international financial
services for Scandinavia, Eastern Europe and
Russian clients. She was the first speaker on the
second day. Her topic: "Money Laundering:
Latest Developments and Regulations."
Ms. Edwards was also born in Russia and
acquired American citizenship by marriage, an
American official said. After a divorce, she
married a Russian, Peter Berlin, and he
subsequently became an American citizen, the
official added. Investigators believe that Berlin
had authority over the Benex account at the
bank of New York.
Berlin could not be located.
Ms. Edwards' assistant in London, who gave
her name only as Rachel, said that Ms. Edwards
was traveling. She added that it was bank
policy that no one on the staff could speak to
reporters. After being told more details of the
money laundering investigation, she referred
questions to Ms. Kagalovsky.
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