From ft.com:
ROUBLE MAZE: The quiet NY bank in a storm over Moscow funds
The US bank's role as a conduit for funds is under the spotlight, write Thomas Catán in New York and Jimmy Burns and Arkady Ostrovsky in London
Although Wall Street's high flying investment banks are just blocks away, the Bank of New York has always seemed a quiet and conservative outfit, known mainly for helping foreign companies list their shares on US exchanges.
But this month the bank has found itself at the centre of a storm amid allegations that its accounts were used to launder billions of dollars for Russian organised crime.
Federal investigators and banking regulators have launched investigations into the matter and Congress has also begun to get involved. Next month, the House banking committee will hold hearings into allegations that US and western banks, including Bank of New York, may have facilitated theft in foreign nations and aided international financial corruption. An estimated $180bn in ill-gotten gains is thought to be laundered through the US each year.
"This is going to be a very intense follow-on," Jim Leach, the Iowa Republican who is chairman of the committee, told the FT. "I'm personally as concerned with this issue as any issue I've been engaged in."
As regards the Bank of New York itself, "the question is whether they have been willingly complicit in laundering illegal funds," Mr Leach said.
At issue is whether, in their thirst to capture new and lucrative business in Russia, Bank of New York employees relaxed their controls, and whether those higher up were willing to look the other way.
So far, the bank has not been accused of any wrongdoing, and officials stress they have been co-operating with the Federal investigation for months. But the bank has declined to comment further, prompting a host of questions over when key officers became aware that huge sums of money flowing through their accounts might be tainted, and how far up the chain of command it was known.
"That's always a question when you're dealing with banks," said a US Justice Department official. "Who knew what and when did they know it?"
Founded in 1784 by Alexander Hamilton, the revolutionary war hero, the bank is one of the nation's oldest, engaging mainly in relatively humdrum businesses such as securities processing and establishing depositary receipt programmes.
Since the early 1990s, however, the bank has become an increasingly influential player in the correspondent banking business in Russia and eastern Europe, making money out of transferring funds and setting up accounts.
One banker recalls that during IMF and World Bank meetings in the early to mid-1990s, the receptions given by the Bank of New York were an invitation that no one with an interest in Russia could afford to miss.
"If you wanted to meet the key Russian players, you just had to go to those receptions," he said.
Pushing for that business was Natasha Gurfinkel Kagalovsky, a senior vice-president at the bank, known as "Miss Russia" for her vociferous advocacy of that market. Ms Kagalovsky was suspended from her job last week along with a subordinate, Lucy Edwards, a vice-president of the bank based in London, after their names surfaced in connection with the investigation.
Neither Ms Edwards nor Ms Kagalovsky has been accused of any wrongdoing.
In garnering business for the bank, Ms Kagalovsky impressed rival bankers with her professionalism and drive. "Natasha led and drove the whole thing," said one. "She was a class act. You knew when you talked to her and asked her for something that it would be done."
By the mid-1990s she was married to Konstantin Kagalovsky, a former adviser to the Russian government and representative to the International Monetary Fund, but a man of whom western banks have become increasingly suspicious in recent years. Mr Kagalovsky belonged to the circle of well-educated bureaucrats who made a seamless transition from the old Soviet regime to the new Russian capitalism, maintaining their extensive networks of influence in the process.
In a statement yesterday, Stanley Arkin, the attorney acting on behalf of Ms Kagalovsky and her husband, said they had become the "focus of highly unfair press coverage".
"Konstantin and Natasha wish to state unequivocally that they have never been involved in money laundering in any way, shape or form. Nor do they have any knowledge of such activity. We are highly confident that at the conclusion of these investigations, this will be abundantly clear," he said.
Lawyers for Ms Edwards said they were making no statement on behalf of their client.
Ms Kagalovsky is believed to have reported to Alan Griffiths, vice-chairman of the bank, who is in charge of international affairs. Mr Griffiths was unavailable for comment, and it is not clear how closely he supervised Ms Kagalovsky's activities.
Even if senior officers were unaware of any illicit activity in the Bank of New York, experts say they could face sanctions anyway. In the most recent money laundering scandal, the Justice Department brought charges against three Mexican banks after mounting a huge "sting" operation codenamed Casablanca. Two of those banks pleaded guilty and agreed to pay fines even though only relatively low-level employees were ever implicated.
"The government was never able to show that anyone at a high level knew about it," said Charles Intriago, a money laundering expert and publisher of the Miami-based Money Laundering Alert. "The people that are allegedly involved in this case are of a much higher category."
The idea that management was unaware of any illicit actions by employees is also not likely to find favour with congressional investigators next month.
In general terms, said Mr Leach, "institutions have to be held accountable for the actions of their employees".
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