Palms & Company Document

QUOTATION OF THE MONTH:

"Criminal Financial Dealings Dramatically Increased in Russia"

by

Dr. Pyotr Johannevich van de Waal-Palms

Russian Editor Reveals Mafia Connection

Banking appears to be one of the most dangerous occupations in Russia. Several dozen Russian bankers have been victims of Mafia-style killings in recent months. Among them were the heads of Proftekhbank, Tekhno-Bank, Pragma-Bank, Mosbisnizbank, The Bank for Development of the Wood Industry, Kuzbassprombank, Eurasia-Bank, the chief manager of Incombank's St. Petersburg affiliate, the chief manager of Agroprombank's St. Petersburg affiliate and the chief accountant of the Russian Municipal Bank. The Russian authorities have not solved any of these cases yet. The list also includes American citizens.

Scary Dimensions

This crime wave is a derivative of the dramatic increase in criminal financial dealings in Russia. Law enforcement officials report that financial fraud has reached unprecedented proportions. In 1993, Russian law enforcement agencies reported 110,000 criminal offenses in the realm of finance. In 1994 this number grew to 183,000 and in 1995 to 300,000. The amount of money mis-appropriated from Russia could be as much as $100 billion in the four year period from 1990-1994 according to specialists in this area. No less than 4 trillion rubles ($800,000,000) were misappropriated from Russian banks through faked payment documents and false guarantees from foreign banks during 1993-1994 alone.

Abandoning the "traditional" forms of white-collar crime, such as extortion or money laundering, organized criminal groups have found finance scams using bogus credit documents to be far more lucrative. The extent of this crime is difficult to comprehend. Consider the following statistics:

• Law enforcement agencies sat that nearly one third of the $11.5 billion in vouchers which have been sold at auction at the Moscow Interbank Currency Exchange have been bought with the "shadow capital" of Russian organized crime.
  
• Experts believe that by late 1994 Russia's criminal organizations controlled tens of trillion of rubles. Thus the amount of shadow capital is roughly equal to that of legal government funds in circulation for all of Russia.
  
• According to information available to the Main Economic Crime Department in the capital, every year sums totaling as much as the entire city budget - between two and three trillion rubles simply "vanish". In 1993 alone, law enforcement agencies brought several hundred criminal cases involving attempted or actual thefts of more than 700 billion rubles through banks.
  
• Counterfeiting of both foreign currency and domestic securities has also increased dramatically. More than 19 million rubles worth of fake vouchers were discovered and removed from circulation during 1993, while in 1994 some 40,000 fake securities and 1.8 billion in counterfeit rubles, produced mainly in Chechnya and Azerbaijan, were confiscated. In Moscow alone some 300 incidents of counterfeiting were reported during 1994., 20% more than in 1993. It is estimated that the number of illegal foreign currency operations has tripled since 1993. ( In January 1996 the U.S. introduced a new $100 bill. European banks are refusing to accept $100 bills).
  
• The country lost $20 million when state credits were illegally diverted for other purposes, according to estimates of the Main Economic Crimes Department of the Russian Interior Ministry.
  

The Tale of Several Scams

The scheme typically used to swindle large sums of money is the following: the criminals choose a commercial bank and submit fake payment documents for which they receive funds. These funds are quickly transferred to the accounts of bogus companies, and from there they are scattered among foreign bank accounts. The fraudulent letters of credit use din Moscow originated from more than 20 cities in Russia - many of them from Chechnya and Dagestan. The rubles received when these letters are presented are quickly converted into dollars and sent to Israel, Hungary, Great Britain, France and Monaco, ( now estimated at 7000 accounts with $250 billion dollars).

Another common scheme is the diversion of credits (using fabricated documents) and deliberate non-repayment of loans. A firm obtains credit from a commercial bank, securing the loan with a letter of guarantee from another bank. The borrowed funds pass through the account of several bogus companies and are eventually converted into foreign currency with the help of a sham contract with a Western company. The contract is later annulled "by mutual agreement of the parties" The foreign currency is transferred abroad to a firm's bank account.

The following examples of typical scams were provided by police officers:

• Using a fake letter of credit (validated in the name of CBR Moscow Division's Cash & Payment Center), 4 billion rubles were withdrawn from the account of the Cash & Payment Center and transferred to the accounts of some firms in a number of Moscow commercial banks.
  
• Huge amounts of money ( the police have managed to trace only 3.8 billion rubles) were channeled to the accounts of a bogus Moscow company with the help of forged letters of credit carrying the insignia of banks in Azerbaijan and Georgia. The money was transferred to another firm's account in one of Moscow's commercial banks. Some of it was later converted into foreign currency; some amounts were invested in real estate or was invested in the ownership of other banks.
  
• The management and the teller of the Tomsk division of Sberbank were arrested for stealing approximately 520 million rubles during a period of eight months. The theft was accomplished by using fake documents.
  
• The management of "AVA" and "Retro-Service" firms organized (using several forged letters of credit) a transfer of 3.5 billion rubles to two account sin Khimki and Ramenskoe affiliate of Unicombank. Then the money was "scattered" among the accounts of 200 commercial structures, including 113 million rubles sent to the account of the Charity Initiative Fund of the Moscow Red Cross Regional Committee. (The "AVA" firm was founder of this fund).
  
• Four forged letters of credit originating in Chechnya were used to steal 3.2 billion rubles. The money was transferred to the "Zhilremstroia" firm's account in the Moscow branch of Severny bank. As soon as the money arrived at "Zhilremstroi" it was immediately transferred to the account of other businesses, while the general director of "Zhilremstroi" went t into hiding.
  

One reason why criminals can act on such a large scale, and virtually with impunity, is the flawed system of inter-bank payments introduced by the Central Bank of Russia in 1991. Moreover, to this day the system of verifying banking documents, and more importantly letters of credit, is rather primitive. Corruption is another factor that makes it easy for large-scale financial fraud. Cynical law enforcement officials are prone to believe that the leniency in the banking security system is no accident, since some high ranking state officials have been known to benefit from the financial scams.

Gang Banks

The crime groups which commit this fraud run well-organized sophisticated operations. In late 1994 police made arrests in a case of an organized criminal group which specialized in financial schemes in Moscow, St. Petersburg and Orenburg. Its organizers were 30 to 40 year old ethnic Chechens and Ingush. The group had it own security squad, a powerful computer center equipped with the latest software and an extensive network of agents in the divisions of the Central Bank, which provided the group with banking forms and stamps and were responsible for organizing the acceptance of fake documents and the transfer of the money received with these documents. According to the police department which uncovered the criminals, more than 40 billion rubles in damage was prevented.

According to police experts, managers of commercial banks are often involved in the schemes. It is believed that the commercial banks receive up to 30% of the sums stolen with forged letters of credit. Criminal groups are using increasingly sophisticated methods to penetrate and ultimately control banks. For example they become shareholders and seek to acquire a controlling share of stock. According to some estimates, a quarter of the banks in Moscow linked to organized crime are under the control of ethnic Chechens. Interior Ministry experts argue that 95 percent of Moscow banks and their affiliates are controlled by the criminal kingpins.

Alexander Zhiln is Editor for the Moscow Newspaper Moskovskie Novosti. The original article appeared in "Prism" and in "Transition", the newsletter of the World Bank, about reforming economies.

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