CEE and Asian Russian money laundries exposed

By bne IntelliNews July 15, 2013

Graham Stack in Kyiv -

The head of Russia's central bank said earlier this year that billions left the country illegally in 2012. However, bne can reveal that the National Bank of Belarus is claiming huge amounts of dirty money have been flowing out of Russia to be laundered in banks across Asia and CEE in a scheme existing since 2009.

Sergei Ignatiev, the former governor of the Central Bank of Russia (CBR) revealed in February - towards the end of his 12-year tenure - that $50bn had been illegally moved out of Russia in 2012. Shell companies, he said, routed the money as payment for bogus import contracts.

Indeed, half of this sum, the CBR chief said, was the work of one interconnected "platform" of companies, apparently set up by a single group of money launderers. "You get the impression that they are all controlled by one well organized group of people," Ignatiev said, in an interview with business daily Vedomosti. "With a serious concentration of efforts by law enforcement agencies, I think it is possible to find these people."

Later, addressing the State Duma, Ignatiev detailed the workings of this platform, which he said accounted for $25bn of the total illegal capital export last year. The cash was transferred to foreign bank accounts as payment on bogus imports from Belarus ($15bn) and Kazakhstan ($10bn), fellow members of the Customs Union - the funds likely the fruits of tax evasion, drugs and bribery.

In June, there were reports of a criminal investigation into All-Russian Regional Development Bank for illegal transfers of nearly $1bn in 2011-12, the payments apparently made for fictive imports from Belarus. Intriguingly, the bank is controlled by state-owned oil giant Rosneft.

According to the letter circulated by National Bank of Belarus (NBR) and seen by bne, the scam actually started as early as 2009 - a year before the Customs Union between Russia, Belarus and Kazakhstan was launched. The first countermeasures were attempted in 2010, according to the NBR, and letters issued by the Russian Central Bank in 2010 and 2011 on procedures for verifying Belarus exporters confirm concern on the Russian side at the time. However, Ignatiev's comments suggest Russian law-enforcement took little or no actual action to halt the illegal capital export, which points to the scheme being protected from somewhere on high.

Unsurprisingly, the NBR letter insists that the scheme in no way actually involved Belarus. Rather, it says, the money launderers set up Belarusian shell companies solely for the purpose of issuing waybills for goods purportedly shipped to Russia. They then present these papers on behalf of Russian shell companies to Russian banks in order to wire funds in payment.

Crucially, the Belarus firms have bank accounts not in Belarus but in jurisdictions from where the money can percolate into the international financial system. According to the NBR letter, real Belarus firms in fact require special individual permission from the NBR to open foreign bank accounts, and thus Belarus cannot be blamed for the scheme. Hence, according to the NBR's argument, it is a purely Russian affair, and none of the funds actually passed through Belarus.

Usual suspects

According to the NBR letter, the foreign banks through which the illegal funds flowed out of Russia were located in Cyprus, Latvia, Estonia, Kyrgyzstan, Hong Kong and Turkey.

That again appears to confirm the central role of Cyprus for laundering Russian money, an issue flagged by Brussels this year by its controversial bailout terms for the island's secretive and swollen banking sector. That resulted in a severe haircut for all depositors with over €100,000 in their accounts.

According to a leaked May 2013 audit of 390 customers at the six Cypriot banks by Deloitte and the European Council's anti-money laundering watchdog MONEYVAL, "systematic deficiencies in the implementation of preventive measures" and a "cumulative level of inherent risk beyond a level that is capable of being effectively mitigated" was found. While the banks had reported a mere handful of suspicious transactions between 2008 and 2012, Deloitte identified 29 in just the previous 12 months. Meanwhile, 10% of customers were "politically-exposed persons" who had not been identified as such.

Suspicion has also long hovered over Latvia's banks for much the same reasons, and it has only raised since the Cypriot meltdown in August, as fleeing cash seeks a new home. A chunk of the $480bn fraudulent tax rebate funds flagged up by deceased whistleblower Sergei Magnitsky moved through Latvia, according to an investigation by lawyers Brown Rudnick. Kyrgyz banks entered the money-laundering market around 2008, in close cahoots with their Latvian peers, according to a Global Witness investigation. However, since the 2010 revolution ousted then-president Kurmanbek Bakiyev, and led to nationalisation of the notorious Asia Universal bank, it seems to have lost its role.

Estonia is apparently the new kid on the money-laundering block, meaning there's little indication of the volume of funds moving through the Eurozone member. The most prominent case of dirty funds moving through the smallest of the Baltics was the case of an Ilyushin jet intercepted at Bangkok Airport in December 2009. The plane was found stuffed with weapons en route from North Korea to Iran, and was leased by a New Zealand shell company with an account at Estonia's Sampo Bank, according to an International Peace Information Service investigation.

In contrast to the other jurisdictions through which the dirty Russian funds have been moving, Hong Kong and Turkey have no Soviet links and may point to new channels being developed. With the problems experienced by Cyprus resulting in heightened attention in the Eurozone to the risks from member states laundering Russian money, that's not too surprising.

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