ORGANIZED CRIME AND RUSSIAN BANKING: THE FINANCIAL CRIME OF THE CENTURY

Organized Crime and Russian Banking: The Financial Crime of the Century

by Aleksandr Zhilin

Banking appears to be one of the most dangerous occupationsin Russia. Several dozen Russian bankers have been victims ofmafia-style killings in recent months. Among them were the headsof Proftekhbank, Tekhno-Bank, Pragma-Bank, Mosbiznesbank, theBank for Development of the Wood Industry, Kuzbassprombank, Eurasia-Bank,chief manager of Incombank’s St. Petersburg affiliate, chief managerof Agroprombank’s St. Petersburg affiliate and chief accountantof the Russian Municipal Bank.

Moreover, the Russian authorities have not solved any of thesecases yet.

This crime wave is a derivative of the dramatic increase in criminalfinancial dealings in Russia. Law enforcement officials reportthat financial fraud has reached unprecedented proportions. In1993, Russian law enforcement agencies reported 110,000 criminaloffenses in the realm of finance. In 1994, this number grew to183,000, and this year, to 300,000.

The amount of money stolen from Russia could be as much as $100billion in the four year period from 1990-94, according to specialistsin this area. No less than 4 trillion rubles (several hundredmillions dollars) were stolen from Russian banks through faked payment documents and false guarantees from foreign banks during1993-94 alone.

Abandoning the "traditional" forms of white-collarcrime, such as extortion or money laundering, organized criminalgroups have found finance scams using bogus credit documents tobe far more lucrative.

The extent of this crime is almost incomprehensible. Considerthe following statistics:

* Law enforcement agencies say that nearly one-third of the $11.5billion in vouchers which have been sold at auction at the MoscowInterbank Currency Exchange have been bought with the "shadowcapital" of Russian organized crime.

* Experts believe that by late 1994 Russia’s criminal organizationscontrolled tens of trillions of rubles. Thus the amount of "shadowcapital" in circulation in the country is roughly equal tothat of legal government funds.

* According to information available to the Main Economic CrimeDepartment, in the capital, every year sums totaling as muchas the entire city budget–between two and three trillion rubles–simply "vanish." In 1993 alone, law enforcement agenciesbrought several hundred criminal cases involving attempted oractual thefts of more than 700 billion rubles through banks.

* Counterfeiting of both foreign currency and domestic securitieshas also increased dramatically. More than 19 million rublesworth of fake vouchers were discovered and removed from circulationduring 1993, while in 1994 some 40,000 fake securities and 1.8billion in counterfeit rubles, produced mainly in Chechnya andAzerbaijan, were confiscated. In Moscow alone some 300 incidentsof counterfeiting were reported during 1994, 20 percent more thanin 1993. In 1994, the Russian police confiscated more than 9.5billion counterfeit rubles. It is estimated that the number ofillegal foreign currency operations has tripled since 1993.

* The country lost $20 million when state credits were illegallydiverted to other purposes, according to estimates of the MainEconomic Crime Department of the Russian Interior Ministry.

The Scams

The scheme typically used to swindle large sums of money is thefollowing: the criminals choose a commercial bank, submits fakepayment documents for which it receives funds. These funds arequickly transferred to the accounts of bogus companies, and fromthere it is scattered among foreign bank accounts.

The fraudulent letters of credit used in Moscow originated frommore than 20 cities of Russia– many of them from Chechnya andDagestan. The rubles received when these letters are presentedare quickly converted into dollars and sent to Israel, Hungary,Great Britain, France and Monaco.

Another common scheme is the diversion of credits (using fabricateddocuments) and deliberate non-repayment of loans. A firm winscredit from a commercial bank, securing the loan with a letterof guarantee from another bank. The borrowed funds

pass through the accounts of several bogus companies and is eventuallyconverted into foreign currency with the help of a sham contractwith a Western company. The contract is later annulled "bymutual agreement of the parties." The foreign currency istransferred abroad to firm’s bank account, and the creditor bankis left holding the bag.

This scheme came to light after the death the chairman of theboard of Tekhnobank, V. Rovensky. It is widely believed thatMr. Rovensky was the first person in Russia to carry out a schemeof this sort and, according to some estimates, managed to senda total of $140 million to foreign bank accounts.

The following examples of typical scams were provided to usby police officers:

— Using a fake letter of credit (validated in the name of theCBR Moscow Division’s Cash & Payment Center), 4 billion rubleswere withdrawn from the account in the Cash & Payment Centerand transferred to the accounts of some firms in a number of Moscowcommercial banks.

— Huge amounts of money (the police have managed to trace only3.8 billion rubles) were channeled to the accounts of a bogusMoscow company with the help of forged letters of credit carryingthe insignia of banks in Azerbaijan and Georgia. The money wastransferred to another firm’s account in one of Moscow’s commercialbanks. Some of it was later into foreign currency; some amountswere invested in real estate or was invested into the ownershipcapital of other banks.

— The management and the teller of the Tomsk division of theSavings Bank were arrested for stealing approximately 520 millionrubles during a period of 8 months. The theft was accomplishedby using fake documents.

— The managers of the "AVA" and "Retro-Service"firms organized (using several forged letters of credit) a transferof 3.5 billion rubles to two accounts in the Khimki and Ramenskoeaffiliates of Unikombank. Then the money was "scattered"among the accounts of 200 commercial structures, including 113million rubles sent to the accounts of the Charity InitiativeFund of the Moscow Red Cross Regional Committee. (The "AVA"firm was founder of this fund).

— Four forged letters of credit originating in Chechnya wereused to steal 3.2 billion rubles. The money was transferred tothe "Zhilremstroi" firm’s account in the Moscow branchof Severny bank. As soon as the money arrived at "Zhilremstroi"it was immediately transferred to the accounts of other commercialstructures, while the general director of "Zhilremstroi"went into hiding.

One reason why criminals can act on such a large scale, andvirtually with impunity, is the flawed system of interbank paymentsintroduced by the Central Bank of Russia in 1991. Moreover, tothis day the system of verifying banking documents, and more importantlyletters of credit, is rather primitive. Corruption is anotherfactor that makes it easy for large-scale financial fraud. Cynicallaw enforcement officials are prone to believe that the leniencyin the banking security system is no accident, since some high-rankingstate officials have been known to benefit from the financialscams.

The Players

The crime groups which commit this fraud run well-organized,sophisticated operations. Evidence of the size of the structurebehind this type of crime came in late 1994, when police madearrests in the case of an organized criminal group which specializedin financial schemes in Moscow, St. Petersburg and Orenburg. Itsorganizers were thirty- to forty-year-old ethnic Chechens andIngush. The group had its own security squad, a powerful computercenter equipped with the latest software and an extensive networkof agents in the divisions of the Central Bank, which providedthe group with banking forms and stamps and were responsible fororganizing the acceptance of fake documents and the transfer ofthe money received with these documents. According to the policedepartment which uncovered the criminals, more than 40 billionrubles in damage was prevented.

Financial fraud has fused businessmen, politicians and organizedcrime groups. Nothing illustrates the intertwining of these sectorsbetter than the guest list at the fortieth birthday party ofthe "unofficial King of Tver" Kostenko, (whose nicknameis "Lom," or "the Crowbar" — a common underworldnickname). The chief of administration of the Tver oblast, thedirector of the "Agropromstroi" company, the co-founderof Rosselkhozbank’s Tver division and representatives from thelocal legislative assembly were all in attendance.

The Role of the Banks

According to police experts, the managers of commercial banksare often involved in the schemes. It is believed that the commercialbanks receive up to 30 percent of the sums stolen with forgedletters of credit.

Criminal groups are using increasingly sophisticated methodsto penetrate and ultimately control banks. Before making theirmoves the criminal groups study the bank thoroughly. First theycollect information about the bank’s security system and its vulnerablespots, its chief managers and personnel, their habits, scheduleof office hours, connections, addresses, etc. Obviously, to collectthis information criminals must first install their "agent"into the bank. They do this by working with current bank personnelor by getting their own men hired at the banks, often as securityguards.

Criminals show great arrogance and assertiveness in their effortsto gain control of banks. Once controlled, the banks are usedfor a variety of purposes. some banks are used directly, thatis, for staging financial scams. Others are used for obtainingloans and other banking services, and still others are simplysubject to an elementary racket (demands for regular paymentsor a share in the bank’s profit).

The criminals tailor their approach to the nature of the bankit has targeted. The banking and financial institutions whichwere established in Soviet days are rarely subject to crude, overtextortion, for example. As a rule, the mafia leaders demand regular"tribute" from these banks in exchange for protectionfrom "rival bandit groups." This involves assigningan armed "squad" to guard the facility. Moreover, thecriminal group undertakes to have "all problems settled"for the bank with the police, tax inspectorate and other relevantstate services.

Criminals use various methods to "tame" bankers. Increasingly,the most common method is simply to shoot them, which exerts psychologicalpressure on other bankers. Another method practiced by criminalsin order to "tame" bankers is kidnapping (of the bankerhimself or those closest to him) for ransom. For example, in June1993 the chief accountant of the Russian Municipal Bank was abducted.For his life the criminals demanded that the Bank "forget"the debt (for unpaid loans) of one firm and pay a "fine"of 200 million rubles. And although the hostage was freed, hewas killed shortly thereafter, in August 1993.

Sometimes threats alone are enough to intimidate bankers intosubmission.

It has become a frequent occurrence for bankers to receive ananonymous letter or phone call warning him about a bomb plantedsomewhere. Criminals know very well that warnings of this sortcan virtually paralyze the work of a bank and undermine the moralclimate among the employees, and that disclosure of such threatscould lead to the loss of clients.

If threats alone fail to get results from a banker, then thethreat is carried out, not only directly, but indirectly (by robbinghis apartment, stealing his car, staging an explosion or settinga fire at his office, etc.)

In Moscow alone, an average of 40 acts of terrorism involvingexplosions are committed each month. In 1993, according to policerecords, 237 contract murders were committed in Russia, approximatelyone half of which were committed in Moscow.

Police officers note that it is virtually impossible, to guaranteethe security of any head of a commercial bank if he works withcriminal structures. According to police information, Pragma-Bank head I. Medkov was involved in an embezzlement (accomplishedwith the help of standing orders) and was killed by his own "confederates,"who wished to get rid of an inconvenient witness. The police linkthe killing of Agroprombank’s St. Petersburg affiliate managerN. Likhachev, with his involvement in an illegal crediting scheme– he was killed for refusing to give away a larger sum of money.

The fact is that a bank is a vitally important element in the"shadow" business infrastructure. In addition to theabove described "violent" methods the criminals employpurely economic takeover schemes as well, i.e., they become shareholdersand seek to acquire a controlling share of stock. Such a takeoveris accomplished either by buying out other shareholders or byrecommending the management of a bank to include additional shareholdersfrom firms that still look "clean" but in fact belongto criminal entities.

According to information available to the Interior Ministry’sMain Economic Crime Department, criminal groups control more than350 banks. The criminal groups composed of the "natives ofthe Caucasus" act as founders (or directly manage) some 700commercial structures in Moscow which, in turn, often emerge aslarge shareholders of the banks. According to some estimates,a quarter of the banks in the capital linked to organized crimeare under the control of ethnic Chechens.

There are indications that former criminals (those with a recordof heavy crimes) or their peers often seek out key posts in domesticcommercial banks. For example, V. Tolmachev (a man with a prisonrecord) was the head of "GISO" commercial firm, thefounder of a number of banks through which the Ekaterinburg criminalgroup’s money was transferred; he was killed the day before hewas to be elected chairman of the "Kuntsevo-Bank" inMoscow.

The information about the commercial banks available to the policeand private detective agencies suggests that the process of criminalizationof the Russian banking domain is already close to completion.Interior Ministry experts argue that according to verified reportsalone 95 percent of Moscow banks and their affiliates are completelycontrolled by the criminal kingpins. It is thus increasingly difficultfor the law enforcement agencies to combat economic crime in thecountry. Specialists predict that by August 1996, organized crimewill establish global financial control over the country.

Aleksandr Zhilin is the National Security Issues Editor ofMoskovskie novosti.