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Committee on Financial Services

United States House of Representatives

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STATEMENT OF RICHARD L. PALMER, PRESIDENT OF CACHET INTERNATIONAL, INC. ON THE INFILTRATION OF THE WESTERN FINANCIAL SYSTEM BY ELEMENTS OF RUSSIAN ORGANIZED CRIME BEFORE THE HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES ON SEPTEMBER 21, 1999

STATEMENT BY RICHARD L. PALMER

Mr. Chairman, and other honored members of the committee, I welcome the opportunity to address this committee on a subject that presents serious threats to Western nations as well as involves the use of US taxpayers' funds to continue the looting of Russia and its former republics. I feel reasonably well qualified to speak on the subject as a result of my former government service, personal research and professional duties. I have devoted much of my time, energy, and money to Central and Eastern Europe and the former Soviet Union in the last seven years, because I believed that the collapse of the Soviet system was a historic, revolutionary event and that the outcome would shape the course of history. Unfortunately, we have thus far squandered our opportunity to help shape the outcome of this event into positive directions that benefit the majority of the people in this region rather than just a few persons at the top. We have little time left to avoid the permanent denigration of the term "democracy" in this region and the return of totalitarian regimes which may not necessarily be Communist. This would lead to instability in a region that spans 10 time zones and still remains the second ranking nuclear power.

CREDENTIALS:

I believe that I should explain my background regarding the technical topics that I am addressing today. I served five and one-half years in the US Army, including decorated service as an infantry officer in Viet Nam and then as an Army Intelligence Officer in Europe. I then served 20 years with the CIA in the Operations Directorate, of which over 18 years of this time was spent overseas, much of the time in Europe. During my CIA service, I had nine years of experience in detecting international money laundering and criminal activity. I spent 11 years as Chief of Base and Chief of Station in four different locations. I began to study Russian Organized Crime in 1989, when the Berlin Wall came down, and I focused on Russian Organized Crime and corruption in my final assignment as a Chief of Station in the Former Soviet Union (FSU) from 1992 until 1994. I then worked for three years in the FSU as a business and security consultant, as well as working as the director of training within one Russian based bank. As a result, I have experience based upon direct contact with FSU security and police services, as well as members of Russian banking, business, Organized Crime and corrupt officials. I then worked in the US as a senior analyst with an international private investigation firm, where I specialized in the investigation of financial frauds and international economic crimes. I am currently the owner of the investigative firm Cachet International, Inc., which has offices in Virginia and Washington, DC. This firm specializes in domestic and international asset recovery, business intelligence and due diligence investigations - especially in the FSU. I organized and directed a seminar in Washington DC on "Recovering Assets In and From Russia" in October 1998. In addition to U.S. clients that include some Fortune 100 firms, I now also represent several Russian and Former Soviet Union (FSU) firms who seek to locate assets of debtor firms in the US as well as off-shore banking locations.

In addition, I am recognized in US Federal Court as an expert witness on Organized Crime, Official Corruption and the Banking System in Russia and the FSU In 1997 I wrote a monograph and an article in the journal Trends in Organized Crime on the looting of the Soviet state which is currently being developed into a book for publication in early 2000. I also has appeared on television network nescasts regarding Russian Organized Crime and the Russian business environment, and I am an advisor to two major US TV networks and several newspapers and news magazines. I have presented lectures on the background and history of Russian Organized Crime (ROC) at the University of New Jersey, Tufts University in Boston and the California Attorney General's International Conference on Russian Organized Crime. I am a consultant to several US police agencies concerning Russian Organized Crime.

I plan to provide examples of the infiltration of Russian Organized Crime into the Western banking system based upon my personal and professional research. In compliance with the laws for Private Investigators in Virginia as well as with my contractual obligations, I will not identify any of my clients.

KEY POINTS:

ˇ Several powerful organized criminal groups exercise control over national economy.

ˇ The corrupt government and law enforcement agencies serve as tools for Organized Crime groups; and, the Chiefs of state of those countries are unable and unwilling to fight Organized Crime and corruption.

ˇ There is still a severe shortage of democratic institutions and mechanisms, paralysis of the legal system.

ˇ The market mechanisms are suppressed by Organized Crime.

ˇ As is illustrated by the figures shown above, most informed observers agree that the criminal Mafiya groups account for only about 10 to 15 % of the makeup of Organized Crime, with Russian officials, former officials and their "newly created entrepreneurs" accounting for the other 85 to 90 %. In other words, the criminal Mafiya groups with ostentatious cars, bodyguards and flashy attire are only the most visible portion of Russian Organized Crime (ROC) and are possibly much less dangerous than the more hidden "official" members of Organized Crime - whom the West consistently attempts not to see.

OVERVIEW OF THE CURRENT PROBLEM:

In essence, most complicated financial crimes are basically very simple. (The Wall Street Journal of September 5, 1999 "A Scheme for Ducking Taxes May Be a Key In Russia Money Probe' presents an excellent, detailed look at the persons and systems involved.) For example: the background details of the current investigation regarding the alleged money laundering through the Bank of New York (BONY). Two apparent non-banking experts set up a system to simply move large amounts of money from Russia to the US and frequently on to third countries. It seems rather clear that - at a minimum - the BONY and several other Western banks skirted the legal requirements enlisting their active assistance in preventing money laundering. One crucial legal prerequisite to prove money laundering is to demonstrate that the provenance of the money being transferred or deposited was illegal. It seems that the BONY case meets this criterion and this is why:

From published accounts, it appears that Benex and similar "money transfer" firms utilized contacts (or in this case relatives) in the BONY to assist in keeping this "money transfer" operation from being "discovered". Less charitable accounts, such as of the New York Post article of August 28, 1999 "TAPE: BANK OF N.Y. BIGS KNEW OF RUSSIAN SCAM" argue that Ms. Natasha Gurfinkel Kagalovsky actually took instructions from a Vice-President of Inkombank regarding the backdating of documents to avoid attracting the attention of U.S. Treasury Agents (FinCen). If that account is proven to be true, it would indicate that even a Vice-President of Inkombank, a "priviledged" Russian bank, is so familiar with the criteria used by FinCen that he can easily "adjust" transactions so as not to alert US law enforcement to any irregularities. While no one can be certain about this accusation until it is proven in court, I would like to note that, while examining eleven cases of US and other Western firms being defrauded by Russian Organized Crime (ROC) elements, I was able to identify nine cases where US/Western executives had clearly been suborned by ROC groups to assist in looting their employers. (It is also well known that Ms. Natasha Gurfinkel Kagalovsky is the wife of Mr. Konstantin Kagalovsky, a member of the board of directors of Menatep, another "priviledged" Russian Bank, and former Russian representative to the IMF.)

Following the financial crisis in Russia in August 1998, both Inkombank and Menatep Bank were declared bankrupt and their assets were supposed to have been frozen. I represented a few of the more than two dozen Western firms that sought to trace the transfer of funds by the supposedly insolvent Inkombank and Menatep Bank to Western accounts where they could be legally attached. This is the normal part of the legal restitution of funds that Western firms lost in investments or transactions in Russia. These funds were actually easier to track outside of the US. It now appears that this is because these Russian banks were using the size, speed and efficiency of the US banking system to avoid detection. In other words, the Mafyia infiltrated Russian banks used the US banking system to prevent US and other Western businesses from obtaining legal restitution of funds lost in Russia.

The problem of obtaining legal restitution funds from Russian banks and companies has three other components:

First of all, Russia is not governed by the "rule of law" but functions under the rule of understandings. Rather, if functions under the "rule of understandings". The Russian legal system was given a major overhaul in 1964, at a time when the then Soviet government did not acknowledge that ROC existed, commercial banks and firms did not exist either, and the Communist Party had complete control of the courts, law enforcement system and all lawyers. The fact that Russian President Yeltsin recently vetoed a second attempt to pass a toothless law on money laundering shows that this is not a priority for the Russian government and that current economic interests have the final word in economic policy, despite constant assurances to the US and EU to the contrary. Therefore, the argument is normally made "the theft of these funds was not illegal in Russia." According to this, it is obvious that hardly any economic crimes - by world standards - are illegal in Russia - and those few crimes that are recognized are negotiable.

Secondly, the court system and law enforcement authorities are not independent and suffer from high levels of corruption. Until recently, some Russian newspapers published the current rates of bribes for specific acts to help subscribers avoid overpaying. Perhaps the case of several Russian officials arrested in connection with the Solntsevo Mafiya illustrate best the institutionalization of official corruption. Colonel Yevgeniy Zhigarev, a Higher Police School professor, testified that bribes from the Solntsevo crime family were distributed as follows: the prison counselor passed orders and "treasury money" to friends in law enforcement; the investigator collected information on the pertinent criminal cases, devised a plan to derail them, and by deception obtained the materials for examination and falsification. The professor found middlemen to pass bribes to investigators and judges. There was a precise fee structure: for changing the measure to secure the appearance of the accused, for dismissing the case, for lessening the sentence. Freedom was charged at $25,000 per person.

Another case illustrates the role of the Russian courts concerning a major US fast food firm which discovered its Russian partner was a member of ROC and was defrauding the US firm. After months of litigation, the US firm obtained a $ 1.2 million judgment by the International Arbitration Institute in Stockholm which was awarded to him in January 1997. Subsequently, the city court in St. Petersburg granted an order of enforcement to this foreign arbitration award. This was said to be the first such enforcement order issued in post-Soviet Russia. This decision by the International Arbitration Institute in Stockholm was even confirmed by the Russian Supreme Court in April 1998. However, despite of having a decision from the highest court in Russia, the US firm has not yet been able to enforce this decision and recover a dime because the Russian courts and law enforcement authorities have been thus far successful at ignoring the decision by the highest court in the country.

Thirdly, a fact that has the most detrimental effect on US businesspersons is the absence of a US-Russian Investment treaty. Despite the fact that the Gore-Chernomyrdin Commission allegedly labored for years to encourage investment by US businesses and resolve legal issues, this bilateral treaty has never been passed. While it is admittedly difficult to persuade the Russian Duma to pass any laws, it is striking that the European Union (EU) made the passage of a EU-Russian Investment Treaty for the protection of EU investors a requirement for large scale aid or any encouragement of EU investment. As a result, EU investors can sue for damages in European Arbitration Courts and get binding orders for restitution. By contrast, US investors are left with either using the totally ineffective Russian court system or they can hope that they included a clause in their contracts that allowed them to file suit in the international Arbitration Courts, such as in Stockholm or Paris. It is no exaggeration to say that new Russian Arbitration Court in Moscow is not very effective in protecting the interest of foreigners.

Against this background, it is easy to demonstrate that tax evasion, money laundering, to name a few, are not illegal in Russia. As a result, they can not be pursued by Western law enforcement officials. Therefore, Western bankers ever chasing after fat profits, see no reason to reject this lucrative business. On the other hand, let us look at the matter of tax evasion in Russia. The primary reason for the IMF loans over the last few years has been the shortage of taxes collected by the Russian government. Thus, every year the IMF needed to provide billions of dollars to make up for uncollected taxes. The tax funds that were diverted - ended up in the hands of criminals and corrupt officials. This means that Western and US taxpayers in particular, are footing the bill for tax funds that remained unpaid by Russian businessmen and a large number of Russian state enterprises. Sadly, this cycle shows no signs of slowing. It is also quite safe to assume that these IMF loans will never be repaid.

I participated in a conference with the Russian desk officer and other Russia experts from the IMF in June of 1998, at which the IMF representative tried to vehemently convince the audience that $ 4.8 additional millions in IMF funds would surely turn the precarious economic situation around in Russia, primarily because "the Russians were going to become far more effective in collecting taxes." The IMF key speaker and his peers conveniently ignored any warnings about the widespread top-to-bottom corruption in Russia and argued that the financial future of Russia was bright. Only two months later, the economic crisis of August 1998 saw the devaluation of the Russian ruble and the near collapse of the entire economic system. Apparently, IMF predictions do not seem to be based upon facts that are readily available to even non-Russian experts.

WHAT HAPPENED TO THE $ 4.8 BILLION IMF TRANSFER IN JULY-AUGUST 1998?

Worse yet, there is the matter of what happened to the $ 4.8 million in additional IMF funds that were delivered to Russian accounts on July 23, 1998. Claims that there is no evidence of the theft of these funds are grossly misleading.

First, as already mentioned, there are very few laws on the books in Russia regarding financial fraud, conflict of interest, bribery and official malfeasance. "Criminals" control the government and refuse to pass any meaningful set of criminal laws outlawing money laundering and punishing corruption.

Secondly, the Price Waterhouse audit of the Central Bank off-shore firm FIMACO, was based solely on the documents provided by the Russian Central Bank. That is the same bank that now admits that its GKO bonds (short time saving bonds) were "nothing but a pyramid scheme". It is also the same bank that originally lied about the funds passing through FIMACO.

Third, the IMF has frequently admitted that they lacked the mechanisms to monitor their funds once they have been delivered to the Russian government, respectively the Central Bank. Thus, the IMF is correct in stating that they have no evidence of stolen or misused fund, if only because the Russians did not deliver them evidence to the contrary evidence on a platter. In addition, the diversion of funds to a select few probably does not even violate the almost non-existen Russian laws governing financial fraud.

The world knows that the IMF delivered a payment of $ 4.8 billion to the Russian Central Bank on July 23, 1998. This was part of a $ 22.5 billion bailout package aimed at restoring confidence in the Russian. This has been a continuing IMF and US priority since the announcement of massive infusions of IMF capital just prior to Russian President Boris Yeltsin's re-election in 1996. What happened to these funds has been the subject of great debate. According to a variety of well informed sources in the US and Russia, it now appears that about $ 471 million or slightly less than 10 per cent of these funds were actually used to support the Russian ruble. Some 90 % or $ 4.4 billion of these $ 4.8 billion was deposited into a Russian Central Bank account on July 23, 1998. Between July 23 and August 17, 1998 (when the Russian ruble was devalued and Russian economy collapsed), $ 4.4 billion of these funds were sold from that account directly to Russian and foreign banks. This was extremely unusual in that it bypassed the trading session at the Moscow Interbank Currency Exchange (MICEX), which would have given all of the banks, trading houses and financial institutions an equal opportunity to purchase these funds. Only $ 471 million, or less than 10 per cent of these funds were used to support the ruble exchange rate on the MICEX. Another $ 100 million or less than 2 per cent went for intervention on other currency exchanges.

The bulk of the IMF money was used by eighteen large Russian and foreign banks to convert their GKO's (bonds that were used as debt instruments) into dollars just days before the Russian government defaulted on them. These bonds had yielded as much as 200 percent per annum in interest. Any educated investor would have taken this as indicator that the rate was unlikely to last over a long period of time and that only the extremely high risk of this investment tools could justify these unusually high yields. Several Western banks and investors lost amounts up to $ 2 billion dollars each when the Russian government defaulted. However, the 18 banks that did receive the IMF funds and could cash in their GKO's just days in advance of the Russian government's default included the largest and most powerful banks in Russia, also known as the "privileged" group because of their supporters in high places in the Russian government. More details on the make-up and background of these banks is contained later in this written testimony.

What my sources tell me as the most striking fact about these transactions is that the Russian Central Bank account in which the $ 4.8 billion in IMF funds were deposited and were distributed was their account in the Bank of New York. These funds were then allegedly distributed to correspondent accounts held by these 18 Russian and foreign banks within the Bank of New York. The Bank of New York then helped these "privileged" banks to transfer these funds out to other accounts. Only the most gullible would argue that these 18 banks did not receive special treatment and illegal advance warning of the upcoming default on the GKO's.

The fact that the Russian Central Bank allegedly left these $ 4.8 billion in the Bank of New York over at least 25 days means that the US bank made several million dollars in . Profits, not just on transfer fees, but also on "overnight interest". These accounts have now been further verified by the written statements and documents provided by Russian prosecutor Skuratov. (NOTE: He is still officially the prosecutor although Russian government guards will not allow him to enter his office since he accused President Yeltsin and his family of corruption).

This provides the US Treasury and Justice Departments with the opportunity to prove or disprove these allegation regarding the "misuse" of these IMF funds. As these transactions took place in the Bank of New York, which is under US jurisdiction, a review of these accounts would seem to provide a list of the "privileged" Russian and foreign banks. This may even include US banks which could be further investigated as to their roles in this matter. If, once again, the US government fails to investigate this matter, it will be following the policy that it has established over the last seven years and which is encouraging and facilitating the continued growth of Organized Crime, looting of the Russian state and at the cost and to the detriment of the impoverished Russian people.

THE ROOTS OF THE PROBLEM:

Corruption in Russia is as old as recorded history. It was certainly a major cause of the unpopularity of the last Czars and contributed to the eventual revolution. Even worse, corruption did not disappear with the advent of the Communist system but became even more entrenched as the Communist Party expanded the bureaucratic system throughout the country to seek total control of the people, create official jobs for Party members and increase its patronage system. While Western, capitalist systems continued their tradition of inheriting land, personal property and money from elders to their relatives, the Communist system replaced land, personal property and money with influence, connections, and opportunities for Party membership that included perquisites. With the dissolution of the Communist Party as the only legitimate political structure in 1990 these Soviet nomenklatura foresaw a threat to their previously privileged lifestyles.

To support this lifestyle, a vast underground economy of off-the-book factories, food co-ops, and construction companies began to flourish in the mid-1970's, in collusion with party bosses. By the late 1980's, up to 40 percent of the nation's foodstuffs passed through the black market. By the end of the Brezhnev period, the underground sector of the economy accounted for as much as 50 percent of the personal income of Soviet workers. But the nomenklatura and black-marketeers profited the most: they lived like feudal lords in ornate hilltop sanatoriums and summer villas, shopped in special stores bulging with hard to get foreign made consumer goods, and traveled abroad - considered to be the most coveted privilege in the Soviet Union.

Organized Crime in Russia is an "oligarchy" formed by the former officials of the Soviet state and the Russian Mafiya. What makes this group unique is not only the extent of their power, influence and wealth in Russia, its republics and increasingly internationally, but also that these are two distinctly different groups, operating sometimes independently, sometimes in common. The best estimate is that the criminal Russian Mafiya only makes up 10 to 15 percent of Russian Organized Crime, while the remaining 85 to 90 percent are current or former officials of the Soviet party-state. These officials continue to manage the Russian government, its industrial complex, the new "commercial" banks, and most of the new businesses. However, they are still part of Organized Crime. The current definition at Interpol's Organized Crime unit is: "Any group having a corporate structure whose primary objective is to obtain money through illegal activities, often surviving on fear and corruption." That not only describes Russia's business, banking and industrial sector, it also describes and involves its government.

Many Russian citizens feel that their country has been stolen from them. The small group of men who have corruptly seized the assets of the state flaunt their wealth as thoughtlessly as any czar. These men are the Oligarchs. They have robbed the government of its administrative skeleton - the tax revenues to maintain state services and infrastructure. The taxes from natural resources - especially gold, minerals, diamonds, and timber - once provided 75 percent of state revenues under the Soviet system. Now these resources are controlled by the tycoons, and they use their political connections to pay no taxes, sending much of their illicit profits out of the country: More than $300 billion has gone this way, according to Interpol and the Russian Interior Ministry.

Perhaps the best example of the close pre-1990 relationship between the various members of the oligarchy was given by retired police general Aleksandr Gurov,. "He noted that at the beginning of 1970's, in Georgia, a rayon party committee secretary would summon for a conference the UVD [Internal Affairs Administration] chief, the UKGB (KGB Administration) chief, and the local crime boss, and say: How could you permit such a rise in crime? Addressing this first and foremost to the crime boss, who would immediately start 'taking steps to reduce the crime rate' in this particular rayon. And this was happening not only in Georgia."(1) Gurov also stated that "I've estimated that 80 percent of the chiefs of small criminal groups today are former deputy directors, former administrators of factories and enterprises."(2)

Plans for the looting of then Soviet State were first discussed in 1984 by specific sectors of the Soviet Politburo, the top officials of the Communist government. However, one must keep in mind that this massive effort included many of the highest officials of the Soviet government, several elements of the KGB (now FSB), old and new bankers, industrialists and, of course, traditional criminals, such as the Russian Mafiya - which already had experience and significant personnel stationed throughout the West. Their primary goal was to ensure their financial and political status in the future, by taking control of the vast funds and resources of the Party and converting them into personal assets that could not be tracked or confiscated by future governments.

By late 1986, the informal planning committee had been given the services of two KGB First Chief Directorate (FCD - foreign espionage) officers who were experienced in moving funds overseas both for the Party Central Committee, but also for other operational purposes. No written records existed of their meetings or proceedings, except for one copy to the Chairman of the KGB and one copy to the Central Committee official responsible for the Administrative Organs of the Politburo: Viktor Chebrikov. The Chairman of this planning group was CC Treasurer Nikolai Kruchina. This "planning group" determined that while the local KGB residencies via the diplomatic pouch system and simply smuggling suitcases of money over borders could be used initially, this temporary system could not be used in the long term due to the frequency and amounts of the funds that would need to be transferred, as well as the need to reduce the number of knowledgeable persons to an absolute minimum. Further, the existing system utilized the Soviet bureaucracy which required too many written records. Further, it was also decided that the overt ties to the KGB and other official agencies had to be minimized.

THE STEPS IN LOOTING THE STATE:

Therefore, the following plan was carried out to gradually build the enormous support structure that would eventually be needed and then secure their wealth. (Some of these steps took place concurrently.):

1. Initially, smuggled "suitcases" of cash and the diplomatic pouch would be used to move limited amounts of funds to help sustain the initial firms that were to be founded and foreign accounts to be opened. In addition to cash, diamonds and gold, antiques and art objects such as icons, paintings and jewelry could also be smuggled. Some of the antiques and art objects were pilfered from Russian state museums such from the Heritage collection in St. Petersburg. However, great care had to be taken to avoid being detected by local revenue services as no plausible source for the funds could be given. (This occurred between 1986 - 1989.)

2. In the second phase, Russian organizations such as Komsomol, state enterprises and factories were used to simply transfer large amounts of funds for national reasons to their related offices and firms in the Soviet republics and, where possible, to the West. These funds were to be used to found firms and banks with no obvious ties to the CPSU, thereby preparing for the next stages of this plan. In addition, funds were to be transferred to various cooperatives founded by "friends", which would not only ensure the financial success of these firms but also allow to provide a basis for transferring more money in the future. As a result, most of the initial "private cooperatives" in the USSR which enjoyed success, were actually funded with oligarchy funds. (This occurred between 1986-1989.)

3. Simultaneously, trading firms were founded to act as "intermediary" firms to sell Russian resources, such as oil, natural gas, non-ferrous metals, diamonds, chemicals and cotton. These firms received these materials at state subsidized "internal prices" and sold them at world market prices. For example, at one time, the world market prices of oil was almost ten times that of the "internal" price. Profits from these operations were deposited in tax havens such as Switzerland, Cyprus, the Caribbean, Panama, Hong Kong, Ireland and the British Channel Islands, where they would be ready to assist in forming future "non-attributable" companies as well as being available to be used as "Western investment" in Russia and the republics under the cover of being "Western Joint Ventures". It was during this period that Russian Premier Boris Putin allegedly left the KGB and became responsible for the issue of permits for the export of non-ferrous metals and other resources under the corrupt administration of former St. Petersburg Mayor Anatoliy Sobchak. (This was typical for the period between 1989-1991.)

4. In the fourth phase, from 1989-1992, larger firms and banks could be founded in Russia and the former republics, as well as in the West. When possible, the off-shore accounts which had been previously established were to be used to discreetly purchase controlling interests in existing banks and firms with good reputations. Wherever possible, "friends of the party", who were not overtly known to be connected to the Party, were used as the ostensible "investors". In the case of the Russian banks to be acquired under this system, they were given exclusive licenses for trading in precious metals as well as foreign currency exchange.

5. In the fifth stage, from 1989 -1991, "shell" corporations were founded in Western countries such as Germany and Britain, as well as Ireland and Switzerland, and the United States (especially in Delaware and California). These firms then assumed loans from off-shore banks (from funds previously raised under this program), which were used to "invest" in Russia. This system was frequently used to form "Joint Ventures" with "Western firms", that purchased key properties, factories and banks. This allowed these "investments" to be protected by the laws of the Western countries in which the "paper" firms were located, as well as by international law. Therefore, in order to provide additional protection, the "paper" firms were primarily founded in countries which provided aid and assistance to any future Russian governments; and, therefore, could not be provoked by attempts to seize these "investments". Noted below is the text of a top secret decree of August 23, 1990 under the administration of Mikhail Gorbachev that called for the creation of "an invisible economic structure" to conceal Soviet state funds and wealth. Therefore, it is interesting to note that the Russian Central Bank formed the off-shore structure FIMACO in 1990 - allegedly to hide Russian government funds from possible attempts by Westerners to attach these funds to unnamed defaults. Although it is estimated that over $ 50 billion passed through this one firm, no one can say where even the interest from these funds (circa $ 5 billion at a minimum) went. The auditing firm PriceWaterhouse, the auditing firm, relied in its examination of FIMACO solely on records provided by the Russian Central Bank and not on independent research. Similar decrees were issued by the KGB and GRU in 1989 and 1990. Shortly thereafter, the current Russian Premier Boris Putin allegedly left the KGB, then working at a position that controlled permits for oil shipments out of Russia. The Russian press and some law enforcement officials note that he developed ties to ROC during that time and was investigated - unsuccessfully - for official corruption.

6. In the sixth stage, from 1994 to the present, the criminal structure became highly developed and was capable of creating new income by using its contacts in Russia and selected republics for "profitable investments", such as purchasing materials and natural resources at rock bottom discount prices (or receiving more material than was shown on the shipping documents and contracts), as well as from legitimate investments in the West. Some of these enterprises were used to make large investments in Russia and its former republics, which by then looked like "legitimate" foreign investments to outsiders. Therefore, the purchase or controlling interest of existing Western banks and firms with good reputations became an absolute priority.

There is one consistent thread throughout these steps in looting the state. The goal was to take the money outside of Russia and keep it there, safe from any threats of retrieval attempts by subsequent Russian governments. The Western banking system has provided the network with which to move these funds. From my research, less than 5 % of these funds have returned to Russia for investment. Those funds that have been reinvested, are usually masked by "paper" firms in Western countries. Many Delaware firms that are listed as US investors in Russia and the former republics are simply Russian citizens or émigrés that purchase a low cost US firm, take a mythical "loan" from a Caribbean island account which they actually own but which never comes on-shore to the US where it would be subject to scrutiny by the IRS or Treasury Department; and then becomes US investment in the FSU. The US government is then obligated to protect these investments and, of course, these "paper" firms make frequently political donations to US politicians and political parties to obtain influence. The Russians who move their money out of Russia recognize that it is an unsafe place to keep their money. They keep it in the West. They much prefer to use the money of US investors to take the risks in Russia and in some cases, to provide additional attempts at fraud.

WHERE THE KGB AND AND THE GOVERNMENT FIT IN:

In October 1990, several KGB First Directorate (Foreign Intelligence collection ) workers were shifted to work in the Party Central Committee Property Directorate, so that a structure that was capable of coordinating the Party's economic activities could be established. The basis for this new group was an agreement between deputy General Secretary of the Central Committee, Vladimir Ivashko; the Central Committee Treasurer Nikolai Kruchina; KGB chairman Vladimir Kryuchkov; and, KGB deputy director Filipp Bobkov. (3) Bobkov later became the chief of Security for MOST Bank. Also in October of 1990, Bobkov sent a directive to selected overseas KGB residencies stating that they should immediately begin to submit proposals for the creation of covert KGB commercial firms and financial establishments. (This is approximately the time when Russian Prime Minister boris Putin "left" the KGB and began to play a role in helping to loot Russia.) In addition, the KGB office chiefs were to propose trusted "friends" with a clandestine relationship to the KGB who would be able to either found such enterprises on behalf of the KGB or allow KGB officers to enter their firms to oversee the management of funds or low cost raw materials that the KGB would provide. This latter list was to include even consideration of the "illegals" network. (4) KGB and Party money, more precisely oligarchy money, which made up almost 80 % of the amount invested in the new banks, stock exchanges, and businesses in 1990-1991. (5)

"Staff from foreign intelligence (KGB First Chief Directorate - FCD) became the creators and developers of commercial frameworks for the illegal economics of the CPSU. Colonel L. Veselovsky, of the PGU staff, was called in November 1990 from abroad. He was a specialist in international economics and was transferred to the work on management of the Central Committee of the CPSU. Veselovsky prepared documents for the small enterprise "Galactic" and other firms, where almost one billion rubles belonging to the Party had been transferred. ….. L. Veselovsky accounted meticulously for his activities to the leadership of the KGB. Consequently, the archives of the KGB are full of detailed accounts of the creation of commercial structures and their managers. …..The firing of Veselovsky two weeks before the August putsch is especially noteworthy. Veselovsky immediately left for Switzerland, where he found himself a job as consultant in four foreign firms."(6) Prior to his departure, Veselovsky is reported to have given a briefing of his planning and organizational work to four members of the Russian Politburo - one of whom is reputed to be Yevgeny Primakov.

Yevgeny Primakov was then installed as chief of the FCD on September 30, 1991 and then made chief of the SVR the successor to the FCD, in December 1991, where he remained until January 1996. The FCD and then the SVR remained active in moving Russian funds and resources out of Russia during most of this period. Therefore, it is clear that Primakov had direct knowledge of these activities. At that time, Russia's wealth already was vanishing into a black hole. Eight metric tons of platinum, 60 metric tons of gold, hoards of diamonds and an estimated $15 billion to $50 billion in cash were, according to reformist lawmakers probing KGB crimes, only a small part of state property stolen under secret Communist Party Central Committee decrees and transferred to unknown hands by the KGB's espionage branch between 1989 and 1991. Primakov held the keys to their recovery. However, when the Duma Ponomarev investigative commission repeatedly asked for information on these funds and where they had been moved, it was also Primakov who refused access to the FCD and SVR records. When the Russian investigators focused on the son of a former Soviet premier who worked at a Luxembourg bank, as well as the son of disgraced former KGB chairman Vladimir Kryuchkov who was KGB "rezident" in Switzerland, Primakov acted quickly. He blocked the investigation and persuaded Supreme Soviet Chairman Ruslan Khasbulatov to disband the Ponomarev commission. Untainted personally by corruption, Primakov decisively sabotaged the only serious attempt to undo the massive theft that depleted Russia's treasury and strengthened its kleptocratic oligarchy.Therefore, as this information was widely known from public sources, it is noteworthy that the current US Administration took Primakov seriously during meetings of the Gore-Chernomierdin Commission or when Primakov asked for US Government assistance in looking for the funds that had been looted from Russia. In his favor, he did refuse to support Yeltsin's attempts to subvert the Russian prosecutor and was forced to resign for putting Russian's interests above Yeltsin's.

On 5 January 1991, the KGB Third Directorate (7) in Moscow sent Top Secret Message 174033 to military bases throughout the USSR, which was a classified directive from KGB chairman Vladimir Kryuchkov that called for the creation of private commercial firms to sell military technology overseas. In it, Kryuchkov, cited the "deteriorating domestic political situation and called for the creation of more apparently private, commercial firms. Kryuchkov stated that this program had three strategic aims: 1) the new companies were to serve as "reliable covers for (KGB) leaders and the most valuable (KGB) operatives, in case the domestic …. situation develops along East German lines; 2) to provide financial means for the organization of underground work if 'destructive elements' come to power; and, 3) to create conditions for the effective use of foreign and domestic agent networks during (a period of) increased political stability."(8) The fact that this message called for the raising of funds for political opposition clearly shows that Kryuchkov was not optimistic about the chances of Gorbachev's success in maintaining the Party system and that the KGB was already taking serious steps to prepare for the future in terms of ensuring protected sources of funding.

On June 11, 1991, Gorbachev signed another secret Politburo resolution which authorized the transfer of six hundred million rubles to commercial organizations and banks established by Party bodies such as the Komsomol. The resolution directed that these funds were to be used to invest in the creation of "modern forms of economic activity, such as shareholding companies and small enterprises as well as to be made available to "reliable" foreigners willing to establish joint ventures with Party enterprises.(9) Evidence presented in a 1992 trial concerning the banning of the Communist Party indicated that Gorbachev had signed another such Politburo resolution in 1991 directing that Party property throughout the USSR should be transferred to reliable "private" owners.(10) In the jargon of the Communist party, this normally meant that these would be members of the nomenklatura or their families.

CORRUPTION IN ROC: IT IS PUBLICLY KNOWN

As can be seen, there has long been a great deal of evidence of extreme corruption and criminal activity at the highest levels of the Russian government - the same leaders that we have unquestioningly supported and not forced to adapt meaningful reforms. To reinforce this point, let me provide one more significant illustration. On June 27, 1994, then CIA Director R. James Woolsey presented testimony before a House Committee that included a statement that detailed the size, nature and dangers presented by ROC. Woolsey noted that "Of the 2,000 banks in Russia today, a majority are controlled by Organized Crime , according to the Ministry of Internal Affairs. The Ministry says there are roughly 5,700 Organized Crime groups in Russia , with an additional 1,000 in the other former republics ….. According to a 1994 report prepared for Boris Yeltsin by the Analytical Center for Social and Economic Policies, 75 percent of Russia's private enterprises pay 10 percent to 20 percent of what they earn to criminal organizations.(11) More recent estimates from 1996 and 1997 are 20 to 30 percent of the profits must now be paid to the Mafiya - with these costs being passed on to the consumers……Some 40,000 state and privately run companies, including most of the country's banks, are controlled by 150 criminal syndicates.(12)

Corruption among the police is rampant. Frequently, in Russia as well as former republics like Latvia, victims of car theft are referred by the police to Organized Crime groups who often will agree to return the vehicles in exchange for paying half its original purchase price. The police often offer to help the victims to contact the Mafiya. This kind of maneuver has become standard procedure, confirm other Russians.(13) Retired Russian police general Aleksandr Gurov noted what many Russians confide in private, in that the Russian Mafiya now acts in place of several state agencies, such as the police, court systems, etc., and it is to the Mafiya that many businessmen are forced to turn to obtain payment on contracts, received paid for goods, etc. (14)

FBI Director Louis Freeh stated before the US Congress that over 200 of Russia's 6,000-odd crime gangs operate with American counterparts in 17 U.S. cities in 14 states. According to intelligence reports, members of criminal groups in Russia are sent to reinforce and consolidate links between groups in Russia and the United States. Russian Organized Crime figures are also sent to this country to perform a service such as a gangland murder or extortion.

The Moscow Criminal Police reported as early as June 1991 that one third of the criminal groups in Russia were connected to the shadow" or second economy.(15)

In April 1994, the Mafiya was estimated to have 55 percent of the financial capital and 80 percent of the privatization shares and vouchers in Russia. As a result, they were able to control the privatization process, arrange winning bids very much below market prices and arrange the outcome of the bidding in at least 70 percent of the privatization auctions.(16)

In April 1996, a senior officer of the Federal Tax Police Service was arrested for accepting a US $ 200,000 bribe from one single commercial company. This was one of the few such cases ever prosecuted.(17)

In 1996, the Russian Newspaper Trud reported that the number of reported murders in Russia rose from 15,500 in 1990 to 32,000 in 1995, adding that many of these murders are the result of disputes over the division of the spoils of the market economy. Related to these disputes, there were a reported 500 "contract" killings in 1995 of which 61 assailants were arrested. Although 73 percent of the reported murders in Russia are solved, only 40 percent are solved in Moscow.(18)

In September 1996, Komsomolskaya pravda reported that regional political leaders use Mafiya groups in inter-ethnic disputes in order to maintain their political power. The article pointed out that many small businesses were also being set up by the Mafiya and that over 300 city officials in Moscow belonged to criminal groups. In addition, the estimated Mafiya turnover in Odessa is equal to the city's official budget.(19)(20)

In a recent television interview, the Chief of the paramilitary Russian Ministry of Interior special reaction unit stated that he believed that at least 50% of the raids that his unit makes are a result of payments (bribes) to his superiors by businessmen who want to harass their competition.

How then can any senior US official then say that they don't know or have any concerns about ROC?

Tax-evasion is another major problem, about which Russian law is very vague. The first national survey showed that in 1992, up to 40% of businesses did not pay taxes at all. By very modest estimates, and bearing in mind that all figures are approximate, this amounted to a loss of at least $2 billion (US) in government income. This figure does not include spectacular profits made by various "entrepreneurs" from the sale of western humanitarian aid delivered to Russia during the winter of 1991-92. According to reports, up to 60% was resold at free market prices. Again, the money was laundered through the banks, loans were issued and, by conservative estimates, an estimated $15 billion (US) was transferred abroad in 1991-92. The fact that Russian law enforcement activities are rather uneven has a variety of causes. However, it is particularly noteworthy that even some of the most effective Russian police organizations are somewhat "tainted". For example, at the meeting in which Major General Vladimir Rushaylo, former chief of the regional Organized Crime Administration (RUOP) and later deputy Chief of the Main Administration on Organized Crime of the MVD suddenly resigned in October 1996, he stated that "the resources allocated from the budget are negligible, but for several years, it (RUOP) found sponsors among commercial structures."(21) (NOTE: Major General Vladimir Rushaylo returned as deputy Minister of Interior and was recently made Minister of Interior. He is frequently accused of being the official responsible for suppressing key information concerning alleged ROC kingpin Sergei Mikhailov during his trial by the Swiss authorities.) As it is commonly accepted that at least 80 % of the commercial structures pay protection to the Mafiya - at a minimum - it is interesting that commercial structures - which RUOP was supposed to control and investigate - were providing the budgetary means for this law enforcement group.

"According to the information from (Russian) law enforcement agencies, up to 70 % of the real estate put up for auction ends up in the hands of persons selected in advance… According to information received from sources in the Ministry of Internal Affairs (MVD)and in entrepreneurial circles, a gradual merging of three social groups is taking place in Russia at levels from the Rayon to the Oblast level, and they are laying their hands on various levers of power. This applies to the bureaucracy, above all, which has the experience of managerial work in the former system and which has united with the 'new people' who soared to the ruling heights in the late 1980's and early 1990's on the wave of the anti-Communist movement. It also applies to people in legal and shady business activity, who are closely linked to the third group - the criminal world…. In the opinion of the staff of the Russian MVD Department for Combating Economic Crime, a tendency has already become apparent to move away from individual, albeit very frequent, cases of bribing representatives of the power elite to that of close and regular cooperation among the apparatus elite, businessmen and criminal forces connected with them. The 33 % of all embezzled funds which was used to bribe 'State officials' in the 1980's has now increased to more than 50 %. Among those against whom proceedings have been initiated for corruption, 42.2 % are employees of ministries, State committees, and regional management organs. More than 50 % of all capital and 80 % of voting shares (in commercial enterprises) now go to criminal structures."(22)

ARE RUSSIAN BANKS THE ONLY THREAT?

Russian banks and firms are not the only ones that need a special level of scrutiny. Latvia, a former Russian republic, is now allegedly on the "fast track" to becoming a member of the European Union and NATO. Riga, Latvia was the scene in June 1999 of Ms. Lucy Edwards presentation on how to avoid difficulties with US money laundering laws on behalf of the Bank of New York. However, take a close look at Latvia and you will see that its banks and firms also deserve special attention.

Of interest to Russia for several centuries due to its ice free ports on the Baltic Sea, almost 48 % of Latvia's ethnic population stem from Russian ethnic origins. Lacking any natural resources, in the USSR, it was primarily a transit site with a few manufacturing industries tied to Russian raw materials. Since independence in 1991, the two main industries are acting as a "intermediate" off-shore banking center for Russia and facilitating the transit of Russian oil to the West. In June of 1997, the Russian press reported that "almost all Latvian banks are mediators in transferring Russia's money abroad" and that "a special committee, headed by PM Viktor Chernomyrdin, had been formed to stop the illegal flow of Russia's money via Latvian banks…….. The average monthly turnover of such operations in one bank reaches 10-15 million dollars."(23) Internet sites on the infamous island of Nauru now advertise Latvia as an off-shore banking center. At the same time, the United Nations report on human development listed Latvia as 93rd in the world, between Ecuador and Iran, and much lower than Estonia, Lithuania and Russia.(24)

In late 1996, the European Union issued a report stating that there was large scale corruption at all levels in Latvia, particularly in the Ministry of Interior for the taking of bribes. (25)The report added that "In the opinion of European Union experts, one-third of the turnover of goods and services in Latvia is controlled by criminal groups, and 50 percent of the profits obtained by criminal means goes towards bribing officials."(26) The report went on that "Specific facts on the presence of corruption in the country were presented to the Latvian authorities by the European Union commission which had conducted an independent investigation. EU experts came to the unanimous conclusion that corruption exists in all branches of Latvian power. In their opinion, the transition to a free market economy in Latvia led to its criminalization. Organized criminal groups participate in every lawful and unlawful deal. In 1993, they controlled one-third of the turnover of goods and services. The commission expressed the supposition that approximately 50 percent of the profits obtained from criminal activity go towards bribing officials. An especially critical situation has been formulated in the activity of the customs service, the state income service, and Minfin [Ministry of Finance], which are influenced by government officials of all ranks who have no official powers and authority to do so. For example, the investigative agencies of the customs service do not have access to customs warehouses belonging to high-level individuals. Customs officials are bribed, and the most stubborn ones are dismissed from work. In order to get an assignment as a customs officer at a profitable border station, one must give a bribe in the amount of $5,000. For duty-free passage of large shipments of goods across the border, one must pay no less than $7,000. Analyzing the situation with organized crime in Latvia, the EU experts came to the conclusion that all of it is tied with Russia. But most of all, they were amazed by the fact that even businesses in which only citizens of Latvia may engage according to Latvian laws, for example pharmacology and detective activity, were associated with Russian criminals. Seemingly in confirmation of the commission's conclusions, the German journal Impulse published a rating of corruption in the countries of Eastern Europe. According to its estimates, in Latvia, for example, businessmen are forced to resort to the aid of bribes for promoting their businesses more than in the neighboring Estonia and Lithuania. Although, the journal admits, Latvia is still a far cry from Russia. There the envelopes are thicker, and there are more addressees."(27)

During the period of the Post-Communist oligarchy, selling low priced non-ferrous metals (among other things) to the West for high profits, Latvia became one of the major exporters of non-ferrous metals in the world - even though it has no such metal resources of its own. The deputy head of the Russian Ministry of Interior organized crime division, Boris Baturin, stated in July 1992 that "Our operative information indicates that the smuggling of raw materials (from the Baltics) is being reinforced at the highest level in Moscow. We know there is a well-organized Baltic crime syndicate run by former Party nomenklatura and former KGB and police officials, which uses its connections inside the Russian leadership to monopolize export operations".(28) In January 1997, Latvian Prime Minister Skele resigned for a short time because the Parliament did not want to accept his proposed Minister of Finance due to concerns about corruption and conflict of interest.(29) The proposed Minister was eventually accepted. In May 1997, Prime Minister Skele threatened to resign again if the Parliament continued to leak allegations of his involvement in the disappearance of G-24 funds, stated that "it is not acceptable that any doubt is cast upon the premier's office".(30) In 1997, one third of the Latvian Parliament, the majority of the Cabinet and the President of the country were found to be openly violating the new government regulations on anti-corruption passed in the Fall of 1996. When confronted on this issue, many simply refused to comply. However, when their cases were reviewed by the Prosecutor's office, most cases were found to be only "technical" violations.(31)

According to the former Minister of Interior until 1996, Janis Adamsons, "the authorities, including the parliamentarians and the government, are so criminalized that the personality of not only a minister but even the head of government has no significance under these conditions." Adamsons lost his position after only one year, primarily due to a controversy over the Ministry's investigations concerning Latvian Prime Minister Andris Skele, on whom Adamsons' department had accumulated dozens of volumes of operative information. These files dealt with the privatization of the food processing sector, to which Skele, as the former deputy minister of agriculture, had direct relations, as well as with the expenditure of $55 million in foreign credits which were distributed by a private firm created under that very same Ministry of Agriculture. On the eve of Skele's confirmation to the office of prime minister, Adamsons spoke out in the Parliament voicing his doubts regarding the proposed candidacy. The investigation materials of the Interior Ministry were then handed over to the State Prosecutor. Adamsons received a reply several months later, after Andris Skele had already assumed the office of prime minister, while Adamsons himself had vacated his. In a letter to the ex-minister, the State Prosecutor stated: "Considering the fact that your report was based on suppositions, the information mentioned in it is not the truth." The materials of the operative investigation were buried.(32)

In January 1997, Skele himself was forced to temporarily resign because of a scandal surrounding the dubious reputation of his proposed minister of finance, Vasiliy Melnik. The press attributed involvement in the trading of contraband alcohol to Melnik, as well as participation in unlawful privatization. Once again, the State Prosecutor did not find anything punishable in the businessman's actions, but the government fell nevertheless. "…on the eve of the prime minister's resignation, the country's President, Guntis Ulmanis, admitted that he surmised that corruption does exist, but that, unfortunately, he does not have any specific facts. Ten days later, after personal reproaches of Andris Skele for amorality and lack of principle, in the course of compilation of the government, the President assigned the task of formulating the new cabinet to...that very same Skele."(33)

ATTEMPTS TO MINIMIZE THE RUSSIAN PROBLEM:

Most people tend to view problems in terms of their own experience and history, which often promotes false comparisons. These are two common fallacious arguments.

Image: Russia today is just like Al Capone's reign of terror in Chicago during the late 1920's and early 1930's.

Fact: For the US to be like Russia is today, it would be necessary to have massive corruption by the majority of the members at Congress as well as by the Departments of Justice and Treasury, and agents of the FBI, CIA, DIA, IRS, Marshal Service, Border Patrol, state and local police officers, the Federal Reserve Bank, Supreme Court justices, U.S. District court judges, support of the varied Organized Crime families, the leadership of the Fortune 500 companies, at least half of the banks in the US, and the New York Stock Exchange. This cabal would then have to seize the gold at Fort Knox and the federal assets deposited in the entire banking system. It would have to take control of the key industries such as oil, natural gas, mining, precious and semi-precious metals, forestry, cotton, construction, insurance, and banking industries - and then claim these items to be their private property. The legal system would have to nullify most of the key provisions against corruption, conflict of interest, criminal conspiracy, money laundering, economic fraud and weaken tax evasion laws. This unholy alliance would then have to spend about 50 % of its billions in profits to bribe officials that remained in government and be the primary supporters of all of the political candidates.(34) Then, most of the stolen funds, excess profits and bribes would have to be sent to off-shore banks for safekeeping. Finally, while claiming that the country was literally bankrupt and needed vast infusions of foreign aid to survive, this conspiratorial group would invest billions in spreading illegal activities to developed foreign countries which provided them with foreign. In the best case of this comparison, the U.S. President would not only be aware of all of these activities but would also support them - including the involvement of his own daughters and all of his close political and financial supporters. Further, he would direct a campaign to smear and remove the Attorney General for investigating the office of the PresidentObviously, this scenario dwarfs what went on in Chicago during Prohibition. Far from assisting the mobsters, the federal government fought Al Capone, ultimately sending him to prison for income tax evasion.

Image: Conventional wisdom holds that corruption and the power of Organized Crime will diminish as capitalism and free enterprise improve economic conditions, and democratic reforms will gradually reshape the government and infrastructure of Russia, causing criminal enterprises to spontaneously "legitimize" their operations.

Fact: This view is totally misplaced. The expected improvements in the economy, infrastructure and government of Russia may well not take place for the next five to ten years and will not occur at a pace required to overcome the corruption and criminality now rampant. First, as much of the money flowing into Russia due to criminal activity and foreign aid is sent to off-shore banks for investments and to pay for the corruption of public officials in Russia and other countries as well, it is not likely to aid the Russian economy. Secondly, there is no way to reign in this oligarchy of criminals, government officials and the former cream of the Communist Party. There is no incentive to change. Most Russian businessmen claim that a deal with less than 100 % profit is not worth doing. Organized Crime groups count on profits over 300 %. Why should they settle for less, much less allow competition? Third, if a new company is formed that shows signs of being successful, Organized Crime groups immediately vie to see who will take it over first. Finally, as bank interests rates have dropped to "only 20 %" per annum (from over 100 % in 1994), Organized Crime demands 20-30 % of a company's turnover for "protection". Bribes are almost universally required for the performance of the most mundane state administrative task, such as licenses, permits, duties, etc. The state has imposed taxes of up to 70 % on profits, and operating costs are exorbitant due to high inflation and rising costs of goods and services. Even then, the most honest businessmen are forced to have dealings with Organized Crime in order to collect business debts and enforce contracts, because the police and courts are unwilling or unable to do so. Many Russian businessmen will remind visitors that it is cheaper to pay to have your creditor killed than to repay a debt.

The general current view of the United States and other Western countries involved in supporting democracy and market reform in Russia appears to be based on the assumption that the Russian government is doing its best to simultaneously create a free market, introduce democratic reforms, conduct a fair and rapid privatization of state properties and persuasively convince a skeptical Russian public that all of this is their best interests. Within this view, the Russians are genuinely struggling to fight Organized Crime and continue to conduct a series of anti-Mafiya and anti-corruption campaigns which will lead to the eventual destruction of the mob. In actual fact, rather than protecting the masses from Organized Crime, the top party elite themselves adopted the methods of Organized Crime to insert themselves into commercial ventures. To do this, they heavily relied upon the KGB, whose predecessor the Cheka during 1920s eradicated private business, free market activity, by confiscating the citizens' private property, arresting and murdering tens of thousands of individuals for conducting any form of trade or barter. Further, the Cheka was responsible for collecting and cataloguing the spoils from these activities for the use of the Communist Party and also for tracking down exported hard currency that was in foreign banks outside Russia. Later, the KGB increasingly served the systematically corrupt Communist Party nomenklatura.(35) by becoming a critical component in creating their commercial and criminal ventures.

The problems of Organized Crime and official corruption are not new in Russia. The evidence shows that the top echelon are, in fact, at the heart of the problem and actually helped create the existing dire situation. The country's corrupt bureaucracy, continued lack of adequate laws, history of disregard for the law and regulatory systems, and the close association between the, illegally enriched bureaucrats and Organized Crime groups were fertile ground for the current wave of criminal activity in Russia and around the world.

BACKGROUND ON THE RUSSIAN BANKING SYSTEM

INTRODUCTION

The Russian banking system today is an adjunct to Russian Organized Crime, itself the successor to the former Soviet nomenklatura who took control of major hard currency holdings and resources of the Communist Party and the Soviet state. Thee criminal syndicates, in which the foreign intelligence service played a significant role, control the exports of raw materials and have used the profits to build business and banking conglomerates. In many cases illegal cash transfers have been laundered through two or three levels of Russian-controlled companies and banks. Now these syndicates are buying interests in Western banks and businesses.

To appreciate the process that led to the looting of the Soviet state, it is first necessary to understand the major participants, as well as how they developed a system of formal and informal interdependence. However, it is also critical to understand that there were two general criminal groups, usually working independently but occasionally joining forces. They were and continue to be sometimes competitors or even enemies, and sometimes partners of convenience. They both meet the definition of Organized Crime groups. The current definition at Interpol's Organized Crime unit is: "Any group having a corporate structure whose primary objective is to obtain money through illegal activities, often surviving on fear and corruption."

The Nomenklatura

The first group, the nomenklatura, includes the former officials of the USSR (although many continue to work for the Russian government) and is made up of the apparatchiki (bureaucrats), managers, senior officials of the government, as well as the KGB and Russia's "Military Industrial Complex" (MIC). The second group is that of the Mafiya. When Russians talk of Organized Crime or criminal looting, they are frequently referring to both of these groups. While each group poses a serious danger to the state of Russia, its development, and is spreading corruption on an international level, their methodology and resources are frequently different.

The "nomenklatura" were the ruling class in the USSR. Upon the collapse of the USSR, they totaled about 1.5 million from a then total population of about 240 million. Their power came from being on a secret list of the most worthy Party members, which was prepared periodically by the Central Committee of the Communist Part of the Soviet Union (CPSU). The first name on this list was traditionally that of the General Secretary of the CPSU. The nomenklatura enjoyed a privileged life, had a monopoly on top positions in the state structures, such as ministers, deputy ministers, CPSU Party leadership positions at the regional and republic level, all senior government positions, military officers as well as key industrialists and managers, particularly in the Military Industrial Complex (MIC). Similar to the aristocrats in England, France and Russia in past times, the nomenklatura, as a rule, did not mix with outsiders or marry outsiders. They lived in special compounds, had special holiday retreats, and their children attended special schools. In addition, they had special privileges in the form of subsidized stores, state transportation at their disposal and reserved places for their children at the university.

They also formed the top echelons of the so-called "apparat" (bureaucracy) and were the top "apparatchiki" (bureaucrats). They enjoyed almost a total monopoly on power and information. In short, they had the most to lose with the fall of Communism.

Concealment of State-Party Assets

The first formal planning sessions by an elite group of the Soviet Politburo and senior members of the nomenklatura to place the funds, properties and resources of the Communist Party of the Soviet Union (CPSU) beyond the reach of any subsequent "democratic" regimes began in 1984, the year of Yuri Andropov's death and the beginning of Konstantine Chernenko's thirteen-month reign. Within two years, the elite economic planners had requisitioned the services of specialists in the First Chief Directorate from the (KGB). They were experienced in moving money abroad for the CPSU's International Department and for KGB operations. The movement of money abroad was a closely held secret. Only a handful of officials were informed on a need-to-know basis, among them the CPSU Politburo's administrative chief Viktor Chebrikov and Central Committee treasurer Nikolai Kruchina. The financial planners group determined that the local KGB residencies overseas would not be able to be the principal movers of hard currency abroad over a protracted period. The volume of money involved was simply too large for the diplomatic pouch and such crude techniques as lugging suitcases stuffed with cash, gold, raw and cut diamonds, jewelry or art across the border. However, KGB channels and techniques did account for a portion of the initial movement of funds that helped establish the first of these covertly held commercial endeavors.

As the 1980s drew to a close, it became clear that General Secretary Mikhail Gorbachev was rapidly losing control of his attempts to make incremental adjustments to the government and economy while retaining the preeminent position of the Communist Party. At this point, the elite economic group began to put into effect contingency plans to move assets to safety abroad. Soviet state enterprises transferred assets to subsidiary enterprises newly established in foreign countries from Cyprus to the Caribbean. Subsidiary enterprises included export-import offices, banks and trading companies established to market Soviet products. Some had no obvious ties to the Soviet government, but were instead formed by individuals who had obtained 'loans" from the associated banks. The result was that most of the ostensibly private cooperatives formed in the Soviet Union in the late 1980s and hailed as success stories of "perestroika" (restructuring) were formed with state funds and were fronts or covers for state interests.

Trading companies established to market an assortment of state resources took on a larger role. These firms obtained products from petroleum to cotton and diamonds at the state-subsidized price and sold them abroad at market prices for hard currency. The profits were enormous and were not sent back to Moscow, but were placed in all the world's tax havens such as from Switzerland to Hong Kong and from Cyprus to the Cayman Islands. There, the profits could be "laundered" by being put to use in forming a new generation of companies in which the Soviet Party and state origins were even harder to discern. Some of the money did come back to the USSR, sometimes in joint ventures with Soviet entities, but was represented as Western direct investment. This practice gained momentum in the period from 1989 through the dissolution of the Soviet Union in December 1991.

In June of 1990, the first of many private banks were established with Party funds. (Some quasi-independent banks had been established using State funds in 1988, as part of early experiments to see how effective these banks would be in removing funds from the USSR.) Some thirty-one million rubles (about $1.2 million at commercial 1990 rates) were placed as start-up capital for an operation envisioned as leading to large-scale credit and investment transfers in Russia and abroad. Officials reported that they planned to transfer an additional five hundred million rubles (about $20 million) from the Party's reserves to the account by that autumn because of what was seen as the deterioration of the economic and political situation in the country.

A Politburo resolution entitled "On Emergency Measures to Organize Commercial and Foreign Economic Activity of the Party," dated August 23, 1990, directed the creation of several new "commercial organizations." These were to include a consulting firm to provide foreign brokerage services and a bank for administering the Party's hard-currency holdings, as well as its investment in international firms controlled by Communist parties abroad. The resolution also directed that structures created under this directive were to have minimal visible ties to the Communist Party. "Anonymous organizations [will] mask direct links to the Party when launching commercial and foreign economic Party activity." These structures were to be called "Friends of the Party" or "Companies of Friends." Taking advantage of the nominal requirements of less than $20,000 to found banks, members of the Russian Mafiya groups also began to form new banks.

Organized Crime in Russia is an "oligarchy" formed by the former officials of the Soviet state and the Russian Mafiya. What makes this group unique is not only the extent of their power, influence and wealth in Russia, its republics and increasingly internationally, but also that these are two distinctly different groups, sometimes operating independently, sometimes in common. The best estimate is that the Russian Mafiya only makes up 10 to 15 percent of Russian Organized Crime hard core members, while the remaining 85 to 90 percent are current or former officials of the Soviet party-state.

The party-state nominees (individuals not publicly known to be allied with the Communist Party) used funds from the sale of raw materials held in accounts in foreign banking havens to buy the new Russian banks. Some were given extraordinarily profitable monopolies and quasi-monopolies, such as the right to exchange foreign money or to trade in commodities. This growing commercial and banking network was used to set up another level of firms in Western countries, especially the United States, England and Germany, countries whose governments were committed to providing aid to the "reform" government of the Soviet Union and later the Yeltsin government. These new firms then obtained loans from the banks for still more "joint ventures" to purchase important factories, banks and properties.

As a result of these banks and a variety of other structures used to illegally and covertly transfer assets, funds and undervalued assets totaling between $300 and $500 billion were moved outside of Russia and the former republics into the West. To date, less one half a percent, or about $2.5 billion, has been moved back into Russia as investments. Thus, the primary goal has been to invest Western funds in save and stable Western economies, while maintaining their stolen funds in offshore tax havens.

For the past several years, Russian enterprises, formed with the assets of the party-state and controlled by the organized criminal groups that participated in the looting of state assets, have been buying controlling interests in banks and commercial entities in the West.

In 1994, then-Director of Central Intelligence James Woolsey stated that "of the 2,000 banks in Russia today, a majority are controlled by Organized Crime, according to the Ministry of Internal Affairs." In August 1995, the Ministry of Internal Affairs (MVD) All-Russia Scientific Research Institute estimated that criminal groups controlled more than 400 banks and 47 currency exchanges. An even more pessimistic assessment was given by Professor Lydia Krasfavina, head of the Institute for Banking and Financial Managers, who estimated that 70 to 80 percent of private banks in Russia are controlled by Organized Crime. Illicit banking practices are widespread.

According to a 1997 report by the Washington-based Center for Strategic and International Studies (CSIS) that drew heavily on FBI data, 71 percent of Russian banks violated Russian Federation banking legislation in 1995. The report also claims that one half of Russia's 256 largest banks have ties to Russian Organized Crime because they present lucrative targets for extortion and money laundering. Those figures are actually severely understated. There are literally no Russian banks without ties to Organized Crime; otherwise they would never have accumulated the necessary funds and would not continue to exist. Incredibly enough, most definitions of Russian Organized Crime fail to include the overwhelming number of current and former Russian officials involved and focus strictly on the Russian Mafiya.

The "instantly privatized" banking industry initially had over 800 banks and then grew to over 2,500 by 1995. That number has been steadily declining. By 1995, there were banks in Russia that were paying interest rates of 1,000 to 1,500 percent per annum. However, by the spring of 1995, some banks, the MMKB, began to collapse; and the overall number of banks began to dwindle. In the aftermath of the1995 banking crisis, liquidity in the Russian banking sector grew tight. There was a general flight to quality among both borrowers and depositors, exacerbating liquidity problems for many second-tier institutions. Liquidity difficulties at larger banks often were triggered by asset quality problems (like Autovozbank and Credobank) or over extension of the balance sheet (like in the case of Unikombank). Yet in the case of larger banks, the Central Bank illustrated its willingness and ability to intervene, lending support to important banks such as to Tveruniversalbank.

By early 1996, Russian banking had rapidly decreased in numbers to about 2,132 banks which were active domestically. About half of Russia's banks were financially distressed and were not expected to be able to meet more stringent reserve and regulatory requirements introduced by the Central Bank. By late 1997, some 1,700 banks continued to struggle for existence. A small, influential group of about fifty banks, several of which got their start with state or Communist Party funds during the Soviet period, have made large profits in recent years due to their connections to political and economic big-wigs. These banks became part of what are known as Financial-Industrial Groups (FIGs), in other words holding companies with large industrial enterprises. 1996 was a watershed for Russian banks. This was the year that FIGs exponentially increased their strength and discovered their ability to "guide" the political structures via direct and indirect campaign funding. Powerful banks play key roles in all the major groups of FIGs, including even that of former Russian National Security Council leader Boris Berezovsky's LogoVAZ group. With the exception of Inkombank, these institutions bankrolled President Boris Yeltsin's 1996 reelection campaign. Since that time, its moguls have fallen out with one another. Power struggles continue as these groups strive to increase their control over key sections such as energy and minerals, to name a few.

Bank leaders have held key posts in the government and played a major role in reflecting Boris Yeltsin in 1996. The government sometimes depends on large banks to make up budget shortfalls through the purchase of short-term securities and (sometimes) paying taxes. The government has "authorized" more than 50 banks to handle state funds. The city of Moscow, for example, has spread the funds from city agencies around several financial institutions. Some banks are authorized institutions for a wide variety of national, regional and city governments, as well as jurisdictions in the former Soviet republics. "Authorized banks" and their managers have often generated huge profits by delaying budget transfers in order to invest in the high-yield government securities market. (Firms usually must transfer customs payments in advance of actual delivery of goods, which leaves the money sit in the accounts for several weeks.)

Obtaining status as a favored, authorized bank is highly dependent on the political connections of the individual bank's management and is most likely fostered corruption. In 1996, for example, the watchdog State Control Chamber found that $4.4 billion in state funds intended - though never legally budgeted - for restoration in Chechnya and funneled through favored commercial banks wound up in the pockets of government officials. In order to eliminate these problems Yeltsin has called on the Central Bank to set criteria for the selection of authorized banks for federal money to ensure that, with few exceptions such as the Defense Ministry, they are selected through open competition.

However, these banks - who "found" millions of dollars of resources and turned dozens of members of the former Party nomenklatura into instant millionaires, used their new wealth and old connections to acquire more holdings in large industrial enterprises - the FIGs.

In the fall of 1996, Berezovsky bragged that he and six fellow tycoons, who also are FIG leaders and sometimes are called the "Big Seven," controlled half of Russia's economy.

Some FIGs were created from above by the fusion of several large industrial enterprises. A second group of FIGs was created at the initiative of industrial giants such as Gazprom, LUKoil and VAZ to service their own financial needs. The third group comprised those FIGs that grew from the large banks that were the direct descendants of the previous state banks.

THE LEADING FIGS (BEFORE THE FINANCIAL CRASH OF AUGUST 1998)

ˇ Promstroibank (Industrial Construction Bank), owned by about 20 juridical persons - corporate entities and individuals. Represents state interests.

ˇ Vneshtorgbank (Foreign Trade Bank). Represents state interests.

ˇ Menatep Empire, owned by about 60 juridical persons. A semi-private, highly privileged financial group.

ˇ ONEXIMBank-MFK (United Export-Import Bank/ Financial Corporation): owned by about 30 juridical persons. A semi-private privileged financial group).

ˇ Rossiisky Kredit ([Russian Credit) empire: owned by about 30 juridical person. A semi-private, privileged financial group.

ˇ Inkombank (Bank of Foreign Commerce) empire: owned by about 30 juridical persons. A semi-private, privileged financial group.

ˇ The MOST banking empire: owned by about 42 juridical persons. A semi-private, privileged financial group.

ˇ Yuksi empire: In January of 1996, Mikhail Khodorkovsky, a high-profile banker who headed the AO Yukos oil company, and Boris Berczovsky, the dollar-billionaire believed to control the Sibneft oil company, announced the merger of their oil companies. The new company, AO Yuksi, is the world's largest public company by proven reserves [16.1 billion barrels] and the third biggest company by oil production, behind only Royal/Dutch Shell and Exxon. On the weekend of March 21-22, Yuksi announced a five-year contract with the U.S.-based Schlumberger Ltd., an oil service provider, to manage certain of Yuksi's vast yet antiquated oil fields. A day later, Yuksi's Khodorkovsky announced the sale, for more than half a billion dollars, of a five-percent stake in Yukos to France's Elf Aquitaine. Facilitated by Goldman, Sachs & Co and Salomon Inc., the deal with the French company would have provided the money and the Americans the technology and know-how for secondary and even tertiary extraction of crude petroleum from Yuksi's wells. Elf and Yuksi were considering a joint bid for the largest remaining oil-producing Russian state concern, NK Rosneft, a 75 percent stake in which is being offered for $1.2 billion. Finally, at the last moment, this merger did not take place.

ˇ SBS-Agro [formerly Stolichny] with Aleksandr Smolensky, president; chairman of the board of directors, Agroprombank.

ˇ Alfa Group: Not to be confused with the SPETZNAZ commandos who killed the president of Afghanistan and seized Kabul's airport in December 1969, the Alfa Group grew out of Courier, a trading company founded in 1987 by graduates of the Moscow Steel and Alloys Institute. It later thrived on foreign trade activities and connections to the Ministry of Foreign Economic Relations as well as the former KGB. Alfa Group is owned by Mikhail Fridman and Pyetr Aven, who was a minister in Gaydar's government. In 1995, Alfa Group appointed as its chairman, L. Vid, who formerly was deputy head of Gosplan, and chaired Premier Chernomyrdin's Russia Is Our Home party. Its current political patrons include Anatoly Chubais and Yegor Gaydar.

The elite banks and their FIGs are also the key financial players in the constantly shifting, informal networks of alliances -- sometimes called clans -- that dominate Russian politics. In addition to authorized banks and their industrial groups, these networks include political leaders, media holdings and armed security forces. These clans are in constant struggle with one another for political and economic advantage. Some banks, however, spread their political and financial support among several major leaders.

As a result, Russia has developed an economy distinguished by the following features:

ˇ First, it is based upon large FIGs, with financial capital prevailing over industrial capita!;

ˇ Second, it has at its foundation the class of "authorized" or major property owners, to which the State has entrusted the development of the market; and

ˇ Third, in the absence of equal opportunity, it functions as a money maker for a thin strata of chosen entities and people.

The elite or "authorized" banks and their FIGs are also the key financial players in the constantly shifting, informal networks of alliances sometimes called clans, that dominate Russian politics. In addition to authorized banks and their industrial groups, these networks include political leaders, media holdings and armed security forces. These clans are in constant struggle with one another for political and economic advantage. Further, the large scale efforts of the FIGs to acquire major media outlets have given the "Big Seven" control of the majority of the newspapers and radio and TV stations in Russia. Thus, they can exert direct influence not only on the political structures but also upon the entire population. Most banks, however, spread their political and financial support among several major leaders.

For example over the years, Berezovsky has been close to political backers of a remarkably wide variety of political stripes, including Alfa Group's Pyotr Aven, Yegor Gaydar, General Aleksandr Korzhakov and Oleg Soskovets. He drifted toward Viktor Chernomyrdin in the months before his dismissal in November 1997. There is evidence that Berezovsky also provides financial support to Sergey Kurgiriyan's anti- Semitic, ultra-nationalist Experimental Creative Center, a Moscow-based think-tank with ties to the anti-Yeltsin opposition. Now Berezovsky is also very close to Tatyana Dyachenko,. Yeltsin's daughter and his de facto campaign manager.

KEY POINTS

In the lower ranks, many banks were and will continue to be absorbed into larger institutions, while others may face mergers. With so many players in the market, no bank is likely to play a dominant role, though foreign transactions are concentrated among a few, for Russian standards, relatively sophisticated institutions. Moscow-based banks dominate more than 70 percent of the market. Possibly the top fifty local banks will maintain significant international profiles over the longer term as the World Bank and EBRD Financial Institutions Development Project works at creating "international standard banks." Foreign banks have yet to set up business in Russia and challenge the hegemony of Russian banks. However, this is not likely to happen soon.

The Central Bank's power to set interest rates and establish reserve requirements can make life quite difficult for a major bank, but on many issues the individual banks get what they want by relying on personal connections to the establishment. The Association of Russian Banks, the sector-wide banking organization, lobbies the government on narrow, professional questions. However, their ability to finance and publicize political candidates will continue to obviate the need for the leading major banks to respond to serious regulatory initiatives from the government. In fact, several prominent personalities in these FIGs - among them former Premier Viktor Chernomyrdin, former First Deputy Premier Boris Nemtsov and Moscow Mayor Yury Luzhkov - currently are jockeying for high political office that includes possibly replacing Yeltsin in the year 2001 or even sooner.

The argument that some of the larger banks no longer engage in criminal activity is false. They have simply evolved into a higher, more sophisticated level of criminal activity that includes wholesale corruption of public officials and influence peddling. Russia's banker criminals now control the government.

The major Russian banks need to remain deeply involved in politics and corruption in order to retain their "authorized bank" status, which is necessary to survive and remain competitive. Since the Banks cannot risk the loss of this special status, they have become even more directly involved in politics. That also means that any attempts to reform the banking system and inject Western banking controls will be futile. Attempts to reform the legal and law-enforcement sectors will be unlikely to overcome such strong resistance.

Russian Organized Crime has supplanted the state. It offers basic services such as security, debt collection and even its own "court system" for handling civil law claims. Organized Crime controls the vast majority of the Russian banks; and in turn, the Russian banks largely control the Russian government and legal system. The Russian banking system has and will remain integrally intertwined with the Russian government until one or the other falls. Corporate, criminal and political Russia have developed into one single entity.

BANKING INSTABILITY

Two points best illustrate the fragility of the banking system and the economy in Russia.

During the final two days of the 1996 election campaign, when Yelstin's victory was uncertain, there were 32 corporate jets standing by at airports in the Moscow area and every seat on Western airlines departing Moscow and St. Petersburg were booked "as a precaution." Should there ever be a dramatic political change in Russia, the ensuing panic may make it come to resemble Tehran in 1979.

Less than $2.5 billion of the $300 to $500 billion Dollar siphoned out of Russia from 1991 to 1997 has returned to be invested in Russia. Rather, the emphasis has been on attracting foreign investment - which, against all odds, still continues at a fairly significant rate. If investments in Russia were indeed secure, why would the Russians continue to insist on the influx of foreign investment funds?

Some economists have argued that the situation in Russia will soon "normalize" and the political and economic elites who comprise about 85 percent of Organized Crime in Russia will allow the development of a free market economy, political and economic reforms, an independent and effective judicial system and law enforcement structures. Leaving aside the fact that the Russians have no traditions to draw on as a guide for structures or models, this begs the fact that the political and economic structures now in power can not allow these changes lest they want to lose their power. Any democratic changes in the current system of oligarchy would jeopardize their new-found power and wealth.

CONCLUSION

Even the most honest businessmen are forced to have contact with Organized Crime in order to collect business debts and enforce contracts. The Russian criminal justice system is by any democratic international standards utterly inadequate. The police and courts are not only unable but frequently unwilling to enforce contracts and collect debts. Many Russian businessmen continue to remind visitors that it is cheaper to pay to have your creditor killed than to repay a debt.

- end -

Three Appendices are attached.



APPENDIX A

COPIES OF PERSONAL DOCUMENTS AND SWISS BANK ACCOUNT INFORMATION FOR PAVEL BORODIN, OF CHIEF OF RUSSIAN PRESIDENT YELTSIN'S PROPERTY MANAGEMENT OFFICE



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

APPENDIX B

COPY OF DIRECTIVE BY PAVEL BORODIN, OF CHIEF OF RUSSIAN PRESIDENT YELTSIN'S PROPERTY MANAGEMENT PROVIDING APARTMENT WORTH $500,000 TO NEW FEDERAL PROSECUTOR REPLACING SKURATOV







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

APPENDIX C

TRANSLATION OF 1990 DECREE BY COMMUNIST PARTY CENTRAL COMMITTEE UNDER GORBACHEV THAT WAS ISSUED AT THE TIME THAT THE RUSSIAN CENTRAL BANK FOUNDED FIMACO


"The General Division of the Central Committee of the CPSU

August 23, 1990

Re: Urgent measures on the organization of commercial and foreign economic activities of the party (memo)

. . . A special place in the CPSU's new circumstances is taken up by the question of establishing a connection between its enterprises, its economic organizations, and its finances to foreign economic activity. This is vital not only for the development of an autonomous channel for the obtaining of currency into the party's cash box, but also for the financing of interparty connections.

For this purpose there must be a strict observance of discreet confidentiality and the use of anonymous facades to disguise the direct issue of money to the CPSU. The final objective is to build a structure of "invisible" party economics that will be on a par with the "commercialization" of party economics; a very narrow circle of people have been allowed access to this structure. This was determined by the General Secretary of the Central Committee of the CPSU or by his deputy. All this is confirmed by the experiences of many parties, working for decades within a framework of multiparty cooperation and market economics.

It is considered that the following measures should be undertaken in an urgent manner in order to guarantee the conditions for the development of commercial and foreign economic activity of the party along with its central organs:

. . . --To analyze in depth its real legal basis--the laws of the USSR and its republics--in order to determine the optimal legal grounds for a transition toward a commercial and foreign economic activity by the Party. In addition, to actively establish links (through deputy communists) to prepare new legislative rulings in the Supreme Soviet of the USSR and of certain republics with the aim of safeguarding the protection of the Party's economic interests;

--To prepare a program on the formation of new "transitional" economic structures (foundations, associations, etc.) which will act as formation centers of the "invisible" party economics.

--To immediately start preparing motions to use anonymous forms to disguise the yields for the CPSU in the process of developing the commercial and foreign economic activity of the Party. To analyze, specifically, the question of the possibilities of annexing international consortiums through presently existent and functioning relevant enterprises through a consolidation of capital, etc.

-- To consider the questions regarding forming a bank controlled by the Central Committee of the CPSU possessing rights to conduct currency operations; and of the participation of the Party through its currency resources in the capital of those firms operating on an international level which would, in their turn, be controlled by the economic organization of friends. To insure foreign economic activity, it is also advisable to urgently begin a new savings account in the CPSU that would come from party dues from foreign institutions.

--To carry out consultations with the Gossnab (State National Bank) of the USSR on the question of using national property for the foreign economic work of the Party; the property left after the Soviet armies left Czechoslovakia, Hungary and the German Democratic Republic.

Comrade V. A. Ivashko"

___________________
1. Moscovskiy Komsomolets, "Interview with Police Major General (Ret.) Aleksandr Gurov by Mark Deych; place and date not given: "Aleksandr Gurov: 'Mafia Money Should Work for the State'", 10 November 96 p 2, in Russian, translated by FBIS in Daily Report FBIS-SOV-96-237-S.

2. Stephen Handelman, "Comrade Criminal: Russia's New Mafiya", by, (New Haven: New Haven Press, 1995), p. 57, in a conversation with Handelman.

3. Personal conversations in 1995-1996 with "Ivan", a former Russian KGB officer who participated in this program.

4. Personal conversations in 1995-1996 with "Ivan", a former Russian KGB officer who participated in this program.

5. Personal conversations in 1995-1996 with "Ivan", a former Russian KGB officer who participated in this program. The CC agreement was confirmed independently by "Igor", the former member of the CPSU CC Administrative Department who participated in this program during conversations in 1995 and 1996.

6. Kpemlevskij Zagovor: Versija Sledstvija (The Kremlin Conspiracy: An Account of the Investigation), ("Ogonjok": OGIZ: Moscow, 1992), edited by Ya. Kikitina, Appendix 2, "Funds for the Phantom of Communism", pp. 280-301. KGB First Main Directorate Colonel Leonid Veselovsky, had gained experience in working with KGB owned and operated foreign front companies in the 1970's and 1980's which would later provide him with the expertise that the Central Committee needed in 1991 to help conceal its assets in joint ventures.. Following his work with the CC International Department as a participant in the hurried attempts to conceal its assets in joint ventures; he then became a consultant to the international Swiss-based firm Seabeco AG (controlled by Soviet émigré Boris Birstein). He then gained international prominence in 1993 a former KGB officer who first surfaced prominently in international for his business dealings business dealings in 1993 when he was named by the Russian Procuracy as a target of investigations into vanished Communist Party funds and into the nature of his subsequent, highly profitable financial dealings - particularly with the firm Seabeco..

7. The Third Main Directorate was responsible for military counter-intelligence, primarily in monitoring the activities of the Russian military.

8. Mark Deych, Literaturnaya Gazeta, June 25, 1992.

9. This resolution was found in the Central Archives of the Communist party in Moscow and published in the magazine Ogonyok, November 12, 1991.

10. Reported in "What the Papers Say", July 7, 1992.

11. "The High Price of Freeing Markets," The Economist, February 19, 1994, p. 57.

12. Sunday Times London, April 10, 1994. Also See "The Russian Mafia" (Washington D.C.: U.S. Department of Energy, Office of Intelligence and National Security, Office of Threat Assessment, 1993); Stephen Handelman, "The Russian 'Mafiya'," Foreign Affairs 73 (March/April 1994), p. 83; Claire Sterling, Thieves' World, The Threat of the New Global Network of Organized Crime (New York; Simon & Schuster, 1994), pp. 34, 90; Mark Elliott, "Economic Crime and the Necessity of Morality," a chapter in William Clark, ed., Economic Crime and Market Reform in the Former Soviet States (Boulder, Col.: Westview Press, forthcoming).

13. Personal conversations in 1995-1996 with victims of car theft in Latvia and Russia as well as several Latvian police officials.

14. "Russian MVD Fights Shadow Economy and Organized Crime", as heard on Radio Rossii on 13 June 1991 in an interview with Chief of the Detective Division of the Mocow Criminal Police, translated in RFE Weekly News on 18 June 1991 by Victor Yassman

15. .National Drug Intelligence Center, October 1993, cited in the report "Russian Organized Crime', from the Office of the Attorney General of the State of California, Daniel E. Lungren, (State of California: California, 1996), March 1996, page 5.

16. "Mafia Accumulating Property", translated from Russian language broadcast of radio station "Ekho Moskvy" on 22 April 1994, in RFE Weekly News on 26 April 1994. Quoted researchers from the Russian Academy of Sciences.

17. "Tax Police Colonel in Corruption Scandal", translated from Russian language broadcast of NTV on 9 April 1996, in RFE Weekly News on 26 April 1994

18. Trud, 18 May 1996, as reported in RFE Weekly News, "Murder Wave", 22 May 1996, by Peter Rutland.

19. Komsomolskaya pravda, 24 September 1996, in RFE Weekly News of 25 September 1996 by Victor Yassmann.

20.

21. Kommersant Daily, October 22, 1996, "Vladimir Rushaylo Took the Floor" by Dimitry Pavlov, Maksim Varyyvdin and Mikhail Mikhaylin.

22. Moscow "Izvestiya", Russian language, July 20, 1994, "Who Wields Power in Russia?".

23. Baltic News Service, 1 July 1997, quoting the Latvian newspaper "Diena", on a report from "Expert" magazine in Russia.

24. Baltic News Service, 12 June 1997, "Baltics Lagging in Human Development, U.N. Report Indicates".

25. Baltic News Service, "Latvia Concerned About EU Report on Corruption", 3 January 1997, in English, quoting Latvian Minister of Interior Dainis Turlais who complained that the report gave no details and that other countries had corruption as well.

26. Moscow Literaturnaya Gazeta in Russian, "RUSSIA, LATVIA: Organized Crime in Latvia Tied to Russia : International Mafia: The Baltic Corridor",5 Mar 97, No 9, p 13 by Tatyana Fast in an interview of former Latvian Minister of Interior Janis Adamsons.

27. Moscow Literaturnaya Gazeta in Russian, "RUSSIA, LATVIA: Organized Crime in Latvia Tied to Russia : International Mafia: The Baltic Corridor",5 Mar 97, No 9, p 13 by Tatyana Fast in an interview of former Latvian Minister of Interior Janis Adamsons.

28. Komsomolskaysa pravda, "Baltic Smuggling Has Ties to Kremlin", in Russian, 4 July 1992, p. 2.

29. Baltic News Service, "Premier Sends Letter to President Explaining Resignation", of 20 January 1997, cited in FBIS-SOV-97-014 of 20 January 1991.

30. Baltic News Service (BNS), "Latvian PM May Consider Resignation", Daily Report, 21 May 1997. Born 1958, Skele graduated from Latvian Agricultural Academy as mechanical engineer in 1981. By 1991, he was also the deputy director for production of the scientific production company STARS. In 1990, he was appointed first deputy Minister of Agriculture and from May until September 1993, he was also the acting Minister of Agriculture. While in this position, he also founded a series of companies which now control the majority of food processing factories in the country and is also involved in alcoholic beverages and cigarettes, farm property, and food markets. Further, a company formed with contacts to the Ministry of Agriculture went bankrupt with losses of US $ 10,000,000 of G-24 funds and bank accounts in Luxembourg for the government officials. He also acted as the Director of the Latvian Privatization Agency, Chairman of the state Unibank and chairman of the Latvian Shipping Company. These positions followed his work on these firms at the Privatization Agency. He is now a shareholder in these banks and has arranged EBRD funding for these banks as well. He is now one of the wealthiest men in the country.

31. BNS, 16 May 1997, "President Discusses Corruption Charges".

32. Moscow Literaturnaya Gazeta in Russian, "RUSSIA, LATVIA: Organized Crime in Latvia Tied to Russia : International Mafia: The Baltic Corridor",5 Mar 97, No 9, p 13 by Tatyana Fast in an interview of former Latvian Minister of Interior Janis Adamsons.

33. Moscow Literaturnaya Gazeta in Russian, "RUSSIA, LATVIA: Organized Crime in Latvia Tied to Russia : International Mafia: The Baltic Corridor",5 Mar 97, No 9, p 13 by Tatyana Fast in an interview of former Latvian Minister of Interior Janis Adamsons.

34. Gertz, Bill, "The Washington Times", "Most of Russian's Biggest Banks Linked to Mob: CIA Report Says Illegal Activities Spread to District", 5 December 1994, p. A1. Look for article by sheriff **

35. Simis, Konstantin, "The Corrupt Society" (New York: Simon and Schuster, 1982), pp. 83-86.



 

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