Hi Tip, Russian money-laundering scheme funneled through Bank of New York; it's suspected that at least half of the IMF money to Russia was funneled out via money-laundering. Some point to Yeltsin and his family as feathering their own nests, but the most likely suspects are the Russian Mafia.
From ft.com (Financial Times website)
RUSSIA: The tricks Russians use to funnel cash abroad
Secreting of money abroad is now so rife it blurs the line between money laundering and capital flight, writes Andrew Jack in Moscow
"Sergei" is planning to sell his apartment in Moscow within the next few weeks, and he is worried about getting a good price for it. But he has no concerns at all about how to circumvent Russia's theoretically tight currency controls and get the money out of the country.
"I'll take the cash to a series of different banks to buy [rouble] travellers' cheques, make a note of the numbers, rip them up, flush them down the toilet and then call the company to say they were stolen and pick up [hard currency] replacements once I'm abroad," he says casually.
Last week, the New York Times suggested that up to $10bn in money linked to suspect Russian sources may have been laundered through the Bank of New York since the start of last year, some of it via a company called Benex. "There has been an enormous silence around these allegations," says one Moscow-based diplomat specialising in economic affairs. "That's because it's just accepted that everyone is not paying their taxes and is sending money abroad."
In fact, it is believed that only a small percentage of the $10bn allegedly funnelled through Benex was the product of criminal activities, such as prostitution and extortion. The remainder may have come from a wide range of activities that cross the gamut of legality. One Russian businessman recalls being referred to a contact by an old schoolfriend a few months ago when he wanted to swiftly transfer money out of the country without dealing with the $2,000 daily limit and cumbersome paperwork of the Central Bank.
"I was shown into a backroom in a currency exchange office in central Moscow to discuss an 'additional service'," he says.
For a small commission, his cash was channelled via a Russian bank into the Benex account at the Bank of New York, and arrived at its destination within 24 hours.
"I think many people did the same thing through a network of commission agents working for several dozen mid-sized banks, which used Benex and other companies with similar names," he says. "To hear that mafia money was allegedly involved completely surprised me."
In Russia, where even making a profit was considered a criminal offence a decade ago, the divide between legal and illegal activities can be difficult to draw.
Ingenious schemes to convert roubles into dollars and export them are widespread and used by very diverse groups of people.
Such capital flight embraces mafia villains and corrupt executives stealing money from their shareholders and partners, employees and the tax authorities alike. But it also includes more honest businessmen trying to survive amongst throttling and contradictory legislation, and even ordinary citizens trying to protect themselves from the vagaries of living in one of the most uncertain countries in the world.
The mechanisms they use highlight the blurred distinctions that exist in Russia between the public and private sectors, and the complicated trail that involves top international banks in the world's leading financial capitals alongside a web of domestic companies and trusts in offshore tax havens.
A study by the Institute of Economics of the Russian Academy of Sciences and the Centre for the Study of International Economic Relations at the University of Western Ontario, published this May, suggested that up to $70bn disappeared in 1992 and 1993 alone. Other specialists argue that total capital flight in 1994-98 amounted to more than $140bn, and currently is running at over $15bn a year.
Towards the end of the Soviet period, the organs of state actively laundered unquantifiable sums of Communist party money abroad. With the collapse of the USSR, the Russian Central Bank itself was left with a system of overseas commercial banks and offshore entities. Through the Jersey-based Fimaco, for example, it purchased government securities and discreetly carried out a series of transactions that manipulated its foreign reserves and deceived the International Monetary Fund.
However, the leakage of resources in the early 1990s came largely through the enormous difference between Russian and world market prices for commodities, which was exploited by "red directors" in charge of the country's industrial companies and enjoying new-found liberties. The break-neck liberalisation of the economy easily outstripped regulatory efforts to catch up and stem capital flows. Natural resources were exported with little of the value recouped by the state in taxes or customs duties, and the foreign currency revenues earned were rarely repatriated.
According to figures from the Moscow-based brokerage Troika Dialog, Russia's 15 largest companies - all exporters of oil, gas, iron, aluminium and nickel - last year generated $24bn in export earnings alone or 32 per cent of the country's total exports. Even as regulations have become more sophisticated, the economic weight of these groups has given them enormous political clout to limit the duties they pay to the state.
Under a classic "transfer pricing" scheme - or "tolling" as it was dubbed in relation to aluminium exports - a Russian company sells its commodities at considerably below market price to an offshore group that it controls. That intermediary then sells them on at the international price, and the foreign currency proceeds never need enter Russia at all. Kazakhstan has accused TransWorld Group, a London-based company which operated the republic's aluminium mills in the early 1990s, of transfer pricing, although the company vigorously denies it.
There is also ample scope for other forms of abuse.
Groups can carry out domestic "transfer pricing," selling their goods at below cost to a Russian intermediary company that is controlled personally by a few executives, depriving the shareholders of the original company of their profits. The goods can then be exported at a fair market price.
If transfer pricing understates the true value of goods that are exported, to minimise the amount of foreign currency that should legally be re-exchanged into roubles, an alternative approach is to overstate expenses. So-called "bogus service agreements" involve an offshore company - often set up by an intermediary that takes a commission for its efforts - offering fake consulting services to its Russian "client". That allows money to be exported, while the bills "paid" by the Russian company reduce the domestic profits on which it is required to pay tax.
Andrei Liakhov with the law firm Norton Rose described an alternative approach. "A Russian company can set up a Cyprus company, sell shares to it and then pay out a very generous dividend. That provides a perfectly legal way for the Russian company to get its money out of the country, and under the terms of the treaty, dividends are not taxed in Cyprus. All you need is a creative accountant with a wild imagination, and a couple of people on the payroll of various inspection and control bodies."
A significant item in Russia's balance of payments statistics - a category which rarely even exists in other countries - is labelled "export revenue arrears and uncovered import advances". Much of this is the result of companies that enter into "contracts" and pay for goods in advance in hard currency. Then, as one accountant wryly said: "Tragically, the goods disappear or are stolen, and there is nothing you can do." The company has to write off their cash as a "bad debt" - at least for the purpose of the accounts made available to the Russian authorities.
Another approach is to ensure that all business remains offshore. A number of Russian entities - including some more or less directly linked to government departments - keep their rouble earnings to a minimum by getting clients to pay them directly into offshore accounts.
Some foreign organisations have set up a "representative" office in Moscow, which carries out work and bills its services at cost plus a minimal fee to an offshore subsidiary. This subsidiary in turn sends a much larger invoice, including the profit margin, to the client, who settles it outside Russia.
But Russian companies have taken the practice further still. Internationally-oriented businesses with foreign operations and income generated abroad have a right to keep some currency in an entity outside the country. By setting up an intermediary company which makes a "loan" to this entity, the repayments cover part or all of its income, eliminating the need ever to repatriate foreign profits into Russia.
Russian prosecutors are scrutinising an arrangement of this kind at Aeroflot, the Russian airline, and its relations with the Lausanne- based Andava. Both the Russian and Swiss companies deny any wrongdoing.
Other mechanisms for exporting currency from Russia include simple fraud, such as smuggling commodities without making any declarations to the authorities. Oleg Babinov from the Risk Advisory Group, a business intelligence consultancy, highlights the important role played by Russian banks, whose numbers grew rapidly from just a handful of state-owned institutions in the early 1980s to many hundreds that were privately-controlled a decade later.
Exploiting the rudimentary clearing system that existed, he says, they would fax or telex doctored payment instructions for inflated amounts to the Russian Central Bank for settlement. By the time the original document for a far smaller amount arrived, the higher sum had already been transferred and sent offshore. Legal weaknesses and abuses at the time limited the Central Bank's capacity to recover the funds.
Today, with over 1,400 banks registered across the country, most significant Russian exporters control their own financial institutions, which directly manage their transactions abroad. That provides considerable scope for circumventing currency export regulations and minimising duties.
A senior adviser to the Russian government put it bluntly: "In more developed countries, you rely on banks to provide information. But it is highly questionable whether that can work in Russia until you have built a banking system with greater control and integrity."
"If you have the right permission from the Central Bank, even if there's a sniff of impropriety, if all the permissions are there, there is little or nothing the authorities can do," said one Moscow accountant. "When you have a form-over-substance society focused on implementation of the strict letter of the law, it's a lot easier to play these kinds of tricks."
Given the low salaries paid to tax, customs and regulatory officials, the potential for corruption is high, whether in the preparation of currency export licences and customs clearance documents or simply turning a blind eye at the border. But even if companies are caught, there is always what one professional adviser dubbed "the banya solution," with financial or other arrangements sealed in an informal meeting in a traditional Russian bathhouse.
Yevgeny Primakov, former prime minister, claimed last year that up to 45 per cent of the country's economic activity was generated through "criminal structures". But it would be dangerous to assume that the largest proportion of capital flight was the result of illegal activity. One of the most widespread sources - both in terms of the number of individuals involved and the volumes of cash - is perfectly transparent and takes place in full daylight across Russia every day.
After years of braving swindlers and police spies in secretive transactions on street corners during Soviet times, Russians can now legally exchange money at the tens of thousands of tiny currency exchange points that operate day and night in Moscow and in cities across the country.
Researchers suggest that this form of "internal" capital flight accounted for $24bn in the peak year of 1997. The attraction of exchanging rouble savings into cash dollars for the ordinary Russian lies in the fact that the rouble exchange rate has been unpredictable and Russian banks are not trusted. The dollars were put in pickle jars or under mattresses, to be converted back to roubles as needed.
Other Russians - ordinary and less so - found ways to send money abroad using intermediaries who channelled cash through companies such as Benex, one of the businesses which held an account at the Bank of New York.
Not all money transferred into dollars or held abroad is lost to the Russian economy, however. Anonymous trust funds often registered in Cyprus and other offshore havens investing in Russia often conceal Russian citizens. Some cash does come back in different forms. But as long as the political, economic and regulatory status of the country remains so fragile, it is not surprising that much remains firmly abroad.
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