Business / Legislation

Monday, Aug. 20, 2001. Page 7

State's First Laundering Case Goes To Court

By Torrey Clark
Staff Writer

Russia's first criminal case for money laundering is currently being prosecuted in a Moscow court.

After a two-year investigation, the Interior Ministry last week charged a furniture company, Denoli, and an alcoholic beverages importer, MRK-Transit, of handing over "illegal" gains to "launderer" Eko-Bureau, which then transferred the money offshore through Moscow-based Expobank under marketing contracts through accounts opened by fly-by-night companies.

Investigators tracked $5 million that was laundered through fictitious marketing contracts and shell companies "registered in dead people's names and to lost passports," chief investigator Yevgeny Kaderov was quoted by Vedomosti newspaper as saying Friday.

Expobank vice president Andrei Yegorov said his company was not facing charges, but that it had "strengthened internal controls in terms of economic security" as a result of the case.

Yegorov said the case highlights a major dilemma for banks: "There are [unwritten] rules of business etiquette and relations with the law enforcement agencies, with whom we try to maintain good relations. Banks must balance between two positions. If we address this issue too fastidiously, we could lose clients. If we don't pay any attention to such things, we could have … problems with law enforcement agencies."

The landmark case is being prosecuted under a money-laundering article in the Criminal Code because the new law on money laundering, signed by President Vladimir Putin earlier this month, doesn't come into effect until February. The case, however, doesn't fit the traditional definition in the West of money laundering, which targets criminal activities such as extortion, drugs or prostitution. In this instance the alleged "illegal gains" were "gray" profits — money generated through normal economic activity, but with some violation of the law or hidden from the tax authorities.

"Real criminal money, if it passes through the bank system at all, doesn't follow such a primitive route that is so easy to uncover," said Mikhail Matovnikov, Deputy General Director of Interfax rating agency. "How could the investigators break such a case? Because the money was transferred through bank accounts," he said. "In this case, it will be very difficult to prove that it was money laundering and not just capital flight. To prove money laundering, [the authorities] will have to prove that the money was criminal."

A stifling bureaucracy and an onerous tax regime have driven many companies to circumvent the law by hiding profits, working without all required licenses and siphoning cash offshore.

"All banks that have any sort of profile dealing with economically viable companies [try] to help clients optimize their taxes. In some cases, it could look like money laundering," said Richard Hainsworth, president of RusRating, a bank rater.

Alexander Lebedev, president of National Reserve Bank and head of the National Investment Council, said 90 percent of an estimated $100 billion in capital flight made its way to foreign banks through tax avoidance schemes.

"Capital flight, money laundering and tax evasion, they all kind of go together here. … You could view capital flight in Russia historically as rational economical behavior. Money goes where it is safe, where it gives the best return," said Scott Antel of Arthur Andersen.


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