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The
Minister, The Money Bags and the Money
Launderer: a cautionary tale from
Moscow
Introduction
The possessor of money that has been
criminally acquired faces a number of
risks when he seeks to launder his gains.
Chief among these is the risk that that
the money launderers will run away with
the money. The following case shows that
this risk may be smaller than may at first
appear.
The sanctions
available to organised criminals to
enforce their will are usually more direct
than those used by law enforcement.
Mexican drug gangs, for instance are
reputedly prone to resort to
disembowelling those that betray them
..pour encourager les autres.
The organised criminal
is particularly vulnerable to betrayal,
perhaps by a fellow syndicate member who
is turned by law enforcement into a
police informer. This happened many
times with the New York Mafia families.
Likewise, the person who does business
with a money launderer cannot discount the
possibility that he will be an
undercover agent for the DEA or
other agency. The corrupt bankers of BCCI
and many other ostensibly august financial
institutions have been brought to their
knees by precisely such a covert
operation.
This bank appears to
have been the last resort of the criminal
class. It cannot be possible to know the
nature of the contract, if any, between
BCCI’s criminal clients and its
chief money launderer, its head of
treasury Ziauddin Ali Akbar. Money
deposited with a bank has a promise of
investment and return, but the contract
between the laundering organisation and
the criminal client is likely to be kept
deliberately informal. Here was a den of
thieves, where undisclosed payments took
preference over contracts and brown paper
envelopes took preference over statements
of trust.
If one is engaged in a
criminal enterprise, it might be assumed
that the courts would also not be the
enforcement option of first resort when
the issue of theft or even breach of
contract arises. In the case of the law of
equity one is of course hampered by the
maxim he who comes to equity must come
with clean hands..
However, there are
cases which occasionally come to light
where courts get involved. The case
described below involves such a recourse,
with a highly detrimental outcome. It
shows that that the risk in selling money
laundering services may in fact be greater
than the risk in buying them. This is
particularly true when the client, in this
case Leonid Reiman, the Russian Minister
of Telecommunications and IT, has a
hugely powerful political patron to
shelter him.
The scheme presented
here is incomplete. This is an on-going
case, and the outcome may still differ
from anything described below. What is
absolutely clear is that the structures
described and the processes involved are
complex. They are a far cry from the
typical description of money laundering,
which involves the movement and transfer
of cash to bypass banking or other
precautions against money laundering. Here
we see corporate finance and the
laundering of securities where face values
are huge and regulation more complex.
Lawyers and corporate financiers are used
here to export illegally a nation’s
capital assets. Money laundering does not
happen in isolation; and it will be
contended here that networks and the
political context determine a successful
outcome.
Historical
Context
This case is rooted in Russia’s
recent economic experience. At the time
that this fraud occurred, freeloading was
rampant in the country’s state
sector. Former KGB men, organised
criminals and mobsters, oligarchs and
their advisers were seizing an opportunity
created through the power vacuum of the
Yelsin years.
The quantity of
Russian money demanding the services of
launderers in the 1990s was quite
extraordinary. Russia’s national
police agency, the MVD, has conservatively
estimated that $9 billion worth of illegal
money was leaving the country each year. A
study by the Institute of Economics of the
Russian Academy of Sciences and the Centre
for the Study of International Economic
Relations at the University of Western
Ontario, has suggested that up to $70
billion disappeared in 1992 and 1993
alone. Other specialists argue that total
capital flight between 1994 and 1998
amounted to more than $140 billion and
currently is running at more than $15
billion a year. Overall, some $350 billion
in capital has fled the country since the
fall of the Soviet Union, with nearly a
third of it landing in the United States.
The crash of the ruble in August 1998
accelerated the flow. As Russian companies
faced bankruptcy, their motivation to
preserve assets tended to vanish.
One instrument for the
theft of Russian assets was Benex
International. This became a an important
cause celebre whose denoument occurred in
New York. It involved organised criminals
in Russia, including the daughter of
President Yeltsin and the noted mobster
Semion Mogilevitch. They exported the
proceeds of state asset sales and
other criminally-obtained assets through a
financial intermediary called Benex. Benex
was run by Russians, Peter Berlin and Lucy
Edwards, the latter an employee of the
bank, who had access to the money transfer
resources of a global bank in Bank of New
York. Edwards reported to the bank’s
head of Eastern European activities,
Natasha Kagalovsky, who is married to
Konstanin Kagalovsky, a colleague of the
imprisoned oil industry oligarch, Mikhail
Khodorkovky. Khodorkovsky’s contacts
were instrumental in channelling illegal
monies to the illegal money transfer
agency. Benex was closed down in August
1999 and Berlin and Edwards charged in
2000.
An asset is
created
So what of the players in the more recent
offshore drama involving Russian
telecommunications, referred to above?
Leonid Reiman is one of Russia’s
leading political figures. He had
served as general director of the St
Petersburg Telephone company in the early
1990s. He was and is reputed to be a close
friend of Vladimir Putin, who was Mayor of
St Petersburg at the time that Reiman was
also a key civic official. Reiman was
known to Putin through Putin’s wife
who had worked for the St Petersburg
Telephone company.
The privatisation of
this company followed the path of many
Russian privatisations. Individuals in
positions of power exploited weak
legislation introduced during the
laissez-faire period of former president
Boris Yeltin’s in the early 1990s.
Companies were created to absorb stakes
held by the local authorities. But with
little oversight, those stakes were moved
abroad, most often to offshore locations
where legal structures offered unusual
degrees of secrecy. In spite of concern in
some quarters that the state was losing
control of its assets, the pilfering by
powerful insiders proceeded unabated.
Reiman triggered
a process of privatising the St
Petersburg phone company, creating a
private company called Telecominvest in
1994 with the aid of his lawyer, Jeffrey
Galmond. In the course of the
privatisation, Reiman apeared to have
acquired ownership of a large portion of
the company.
His acquisition of the
stock has not been fully explained or
documented for understandable reasons. It
would be alleged in subsequent litigation
that he used his political position to
steal the stock directly from institutions
under his direct control in Russia. But
others would say he acquired it at a
market price from a third party for
personal enrichment.
Galmond piloted the
transfer of Telecominvest across many
jurisdictions and companies. The company
would be owned by Danish and Luxembourg
vehicles, while the Russian state’s
stake was reduced and Reiman’s
increased.
The company made a
particularly important stop-over in
Germany. The German conduit for the assets
was Commerzbank, a leading German
institutional and corporate bank.
Commerzbank calls itself ‘the
creative relationship bank for the
successful German Mittelstand, for major
corporates and institutions in Europe as
well as multinationals from all over the
world.’ Galmond introduced
Reiman to the bank, and the bank’s
manager agreed to make a public
statement to the effect that the
bank had entered the Russian telecoms
market on its own account.
In the course of
negotiations, it would be made clear that
secrecy in the transfer of beneficial
ownership from Reiman to Galmand was
essential. Reiman could clearly not
be seen to hold the stock himself. He
would not only have to explain how he had
bought the stock on a ministerial salary,
but also how, as minister, he could
be a neutral arbiter when he owned a
large share of the sector. The appointment
of Commerzbank as his proxy was very
attractive to the Minister and his
advisers.
Commerzbank appears to
have been untroubled by its client’s
request for a fictional ownership
structure. Revelations made long after the
events in question show that the bank knew
that a document declaring Reiman to be the
beneficial owner was in existence. This
triggered an investigation of the
bank’s role by the German
authorities. The bank’s head of
Eastern European operations took
responsibility and departed.
The asset’s
final destination was Bermuda. Galmond had
set up a mutual fund, of which he was
declared the beneficial owner. This fund
is called IPOC International Growth
Fund Ltd and it is said to have stakes in
Russia worth $1 billion. IPOC is a mutual
fund, but with a single investor-- an
unusual structure in itself. The fund was
initially run by Vidya Sharma, a convicted
fraudster, who had served time in a German
prison for fraud. Sharma was a far from
reliable employee as later litigation
would reveal he had been bribed with over
$1 million to give evidence against
IPOC.
Galmond’s colourful history was
rather more historic. His father Norbert
was born in Russia and called Porohoff but
he changed his name when he left Russia.
He initially went to Germany. He married a
Danish woman and moved to Denmark. He
subsequently engaged in many frauds in
Denmark using false identities and was
convicted. Press reports say he was an
immense braggart, claiming to be a retired
colonel from the US Special Forces, that
he had served in the Vietnam War as a
helicopter pilot and a drug-fighting
expert and that he was rewarded by several
medals. His son Jeffrey has been
understandably unwilling to discuss his
father’s professional career.
Paternity should not
be allowed to discredit the practices of a
legitimate businessman; Jeffrey Galmond
can both spot strong and influential
people and devise financial services to
satisfy their needs. He is a long-standing
friend of Leonid Reiman as well as an
associate of many other Russian
businessmen. Galmond is also linked with
the privatisation of the St
Petersburg brewery company, where local
mobsters linked to high profile Danish
interests, including the Baugur group, are
alleged to have stolen the assets.
The biter
bit
Galmond had ridden the laundering
roundabout with his IPOC fund for a number
of years, no doubt earning considerable
fees in the process, before his scheme hit
an obstacle. This was the Russian oligarch
Mikhail Fridman who decided to challenge
his claim to ownership of a stake in a
mobile phone company.
Fridman is the
majority owner of a company called Alfa
Group, which is today known as Altimo.
Alfa owns stakes in VimpelCom, in a
mobile phone operator in Ukraine and in
Russia’s fixed line operator, Golden
Telecom. Fridman made one early fortune by
selling an interest in his oil business
(originally acquired from US commodities
trader, Marc Rich) to BP Amoco for $6.75
billion. He is no stranger to controversy.
His company faces a lawsuit from the
Canadian energy company called Norex,
which alleges that Alfa issued invoices
for fabricated services that were
performed by offshore shell companies.
Alfa has also been accused of bribing
Ukrainian officials and is black-listed by
the European Bank for Reconstruction and
Development.
Alfa Group is assisted
by two controversial characters. The first
is Pyotr Aven who has allegedly been
engaged in various misdeeds, including
drug trafficking. The other is Hans
Bodmer >> who
allegedly worked with Fridman and Aven to
send instructions to IPOC to wire money
through banks in New York. Bodmer
recently pled guilty to the
criminal conspiracy to launder money and
conspiracy to violate the United States
Foreign Corrupt Practices Act in
connection with a scheme to bribe foreign
leaders.
Fridman is ably
abetted by Leonid Rozhetskin a
former investment banker who managed the
New York listing of mobile phone network
operator VimpelCom, part of the Alfa
stable of telecoms interests. Rozhetskin
is also a colourful character. He is an
American-educated lawyer, who
appeared on the cover of the Russian
edition of Forbes, under the headline ‘The
Most Dangerous shark in our waters.’
Rozhetskin’s
activities threw a spoke into Galmond’s
wheel. According to a suit brought by
IPOC vs Leonid Rozhetskin, Mikhail
Fridman, Pyotr Aven, Alfa Group
Consortium, Alfa Capital Markets Inc, Alfa
Telecom (n/k/a Altimo) and Hans
Bodmer in the United States
District Court for the Southern District
of New York, June 8 2006, Rozhetskin’s
company LV Finance was touting
around an option to buy a stake in a
nascent Russian telecoms company called
Sonic Duo. The funds were to be used as
seed capital, and Galmond made an initial
payment to LV of $15m in early 2001. He
put further money into the business over
the course of the year, bringing his
investment to $40m. The result was the
creation of a company called MegaFon which
was formed by bringing together IPOC
and a communications company called
TeliaSonera, a merger of Finnish and
Swedish interests.
It should be noted
that representatives for the defendants in
this lawsuit have denied all its
allegations.
The merging of a
number of interests, particularly the
involvement of established international
companies, persuaded Rozhetskin, according
to the suit referred to above, that
he could make rather more out of his
bright idea than he had thought initially.
He issued Galmond with repeated demands
for more money and Galmond initially paid
up. But when Rozhetskin asked Galmond
for some $60m to $70m on 23 December
2002 (as legal documents allege), Galmond
drew a line. This was a substantial jump
in the amounts demanded from Galmond, and
he refused to pay up.
Rozetskin then devised
a scheme to transfer the MegaFon asset to
Fridman over the course of just ten days.
IPOC’s indictment referred to above
states that ‘a complex web of
transactions took place in a bald attempt
to steal IPOC’s funds and conceal
their theft. The effect of this daisy
chain of companies and transactions
was to transfer assets to Alfa Group,
while also improperly retaining IPOCs
funds. The co-conspirators went to great
lengths to conceal their wrong-doing…
using nine different companies to buy and
sell Rozhetskin’s stake, all in ten
days.’
Legal
actions
IPOC went to war through the courts,
apparently oblivious to the risk they were
running that their own laundering scheme
might be revealed. Many questions present
themselves as to the decision to take this
course of action. Did Galmond consult the
minister before going to court? If he did
not, should he have? How closely did the
Minister manage Galmond, and to what
extent did Galmond exploit the Minister’s
vulnerability to exposure? These questions
underpin the complex relationship between
criminal client and professional
launderer.
The federal
racketeering lawsuit referred to above,
alleges that ‘Both companies (ie
Rozhetskin’s company LV Finance and
Alfa) were aware of IPOC’s prior
ownership rights, but rode roughshod over
the agreement and fraudulently colluded to
sell the same stake twice’. The
lawsuit accused Fridman of colluding with
Rozhetskin to steal IPOC’s
interest through money laundering
and bribery.
Fridman retaliated by
striking at the heart of the secret
agreement between Reiman and Galmond. His
representatives claimed that Reiman was
IPOC’s ultimate owner and that
Galmond had sourced money illegally to
make down-payments on the stake in
MegaFon.
Alfa has put huge
resources into exposing the agreement
between Galmond and Reiman. For example,
it has hired a private detective company
Diligence, whose UK operation is headed by
Michael Howard, the former leader of the
Conservative Party, to investigate the
relationship between Reiman and Galmond.
The accountants KPMG. This firm had
been hired by the Government of
Bermuda to investigate the Russian
connection. Bermuda had become sensitive
to the controversy emanating from IPOC’s
Russian stake and wanted to understand its
background. It is now alleged that the
private investigators posed as MI5 and CIA
agents to obtain information about IPOC.
It subsequently was claimed that a KPMG
partner had been duped into giving the
information about Galmond and the Minister
by this relatively banale ruse.
Galmond’s
scheme unwinds
The investigation has uncovered a string
of damaging documents. An accountants
analysis of documents relating to the
financial arrangement between Galmond and
the Minister concluded that Galmond’s
claim to be the beneficial owner of IPOC
was not watertight. Indeed the accountants
report says that Reiman could have become
a beneficiary of IPOC ‘under certain
circumstances’.
The document surfaced
in the course of a hearing before the UK
Privy Council, brought into the matter
following hearings in a Bermudan court,
and Galmond said, weakly, that he had not
known such a document would be presented
to court. He apologised to Reiman that his
name had surfaced. Galmond said that he
was concerned that information might be
used against Reiman and that the Minister
might file a law suit against him.
Documents also show
that Galmond’s Denmark-based firm
had sent a letter to a Liechtenstein bank
in June 2002 describing Reiman as ‘the
ultimate beneficial owner of IPOC’
as well as ‘the economic beneficiary’
of some Galmond-controlled companies.
Galmond said the statements had been made
by his staff in error. Liechtenstein
police seized the document, seeing in it
the solution to the IPOC mystery.
Reiman was also shown
to be the beneficial owner of a trust
called Meridium, set up in 1996. The trust
had not featured in any of Galmond’s
five depositions and affidavits, so its
disclosure needed some explanation.
Galmond was able to say no more than that
it had not seemed very important as it had
not paid Reiman any money.
Further documents
showed Commerzbank’s complicity in
the affair. One disclosed that Galmond had
brought Reiman to a meeting with
Commerzbank's chief executive, where the
Russian discussed investing in telecom
assets. Commerzbank began subsequently to
claim to be the owner of Russian telecom
assets that were secretly controlled by
Galmond and his associates.
Commerzbank has denied
doing anything improper, but David
Hauenstein, a IPOC director, has
testified that he was present at a meeting
attended by representatives of Commerzbank
where it was claimed that the bank "had
carried out due diligence on Leonid Reiman
as the economic beneficiary." If this is
true, the bank, at the very least, must
have known of Reiman’s
involvement.
The unravelling
process jumped forward in May 2006 when a
Swiss arbitration tribunal found that a
high-ranking Russian official with
responsibility for telecommunications was
the sole beneficial owner of the fund,
which gained the assets after the 1990s
privatisations. According to one report, ‘The
Arbitration court suspects that in Russia
there exists a group of corrupted state
officials working in the telecoms sector,
who are acting in the interests of IPOC
fund.’ The document further said
that Russian state-owned companies had ‘funneled
to dummy companies, secret trustee
agreements and investment relations. After
bringing these assets into allegedly
public funds, they were apparently used to
take additional stakes in Russian
companies’.
Another blow was
struck at the laundering scheme in
February 2007, when Bermuda announced it
was taking steps to liquidate the IPOC
International Growth Fund with the eight
affiliates, which were used to hold the
IPOC assets. Bermuda’s Ministry of
Finance said that the action was
being taken ‘to address
seeming breaches of our law and regulatory
infractions.’
The wider picture
shows a tax haven, used extensively by
hedge funds and captive insurance
companies, seeking to limit the fall-out
from a case that was raising awkward
issues about its governance. The tax haven
exists to serve the interest of on-shore
tax payers and corrupt political officials
but mainstream governments are demanding
more stringent management. The better
havens realise that their role as
launderers to the rich of the developed
world is contingent on a low and unsullied
profile. Greater scrutiny into the
use of secretive trusts for the protection
of stolen or dubiously acquired assets is
now inevitable.
Denoument in
the Kremlin?
The assets of IPOC fund have been subject
to multiple rounds of legal and regulatory
investigation. But their rightful
ownership is no clearer now than it was at
the start. Galmond’s right to the
MegaFon asset has been undermined by the
analysis of numerous documents showing
that the lawyer accepted that the Minister
was the beneficial owner. Fridman’s
right has been undermined by the apparent
fraud perpetrated by Fridman’s
associate Rozhetskin on Galmond, who in
any event had only a dubious right to make
the option arrangement. Reiman’s
right to the assets has never been tested
(given that he has never claimed to own
them), but his need for a launderer would
suggest he did not believe he had obtained
them straightforwardly.
The failure of these
rights leads one to the conclusion that
either the asset has no legitimate owner
or alternatively that the only owner with
a good claim is the Russian state itself.
So is it possible that President Putin
himself might yet step in as a Deus ex
Machina to assert the right of the
Russian state.
A number of factors
cloud such an outcome. Nationalisation of
the asset would upset his Minister who is
the President’s friend and loyal
ally. It would also make an enemy out of
Fridman, the country’s largest
owner of telecommunications assets
and one who is sometimes seen as close to
controlling a monopoly position in
telecommunications. But Putin has shown
himself capable of re-nationalising assets
in the energy sector and this route cannot
be ruled out in the telecommunications
sector.
Putin may of course
not want to get involved at all and simply
wait to see how the matter pans out
in the Bermudan courts. His final
option is one of maximal involvement.
Could he impose a solution, based on real
politic rather than ownership rights. If
wanted to placate both the Minister and
the Money bags, he could insist that the
asset be broken up and the equity split
between the two parties.
But what of the lawyer
who engineered the original laundering
scheme to export the asset? Galmond
provided the introduction to the German
bank, Commerzbank, and then the Bermudan
legal structures to allow his client to
export the asset. He might expect loyalty
from his powerful political client, whom
he will have made hugely rich. Reiman’s
stance towards Galmond is particular
sensitive as he will face intense pressure
from Putin to find a Russian solution by
bringing the asset back home, or at least
do some sort of deal with Fridman.
A role for Galmond in
this home-coming looks unlikely. He seized
his original opportunity during an earlier
political era when Russia’s economic
culture may, politely, be called ‘laissez
faire’. Putin’s assertion of ‘national
interest’ is likely to put a kibosh
on the sort of financial structuring at
which Galmond, the money launderer and
financial fixer is so skilled.
The experience of
Reiman and Galmond his launderer teaches
us that fluctuations in political power
pose a risk for those engaged in
manipulating criminal markets. The money
launderer, it seems, is no more than a
provider of services to the possessor of
the gains of criminal activity. The
criminal client has the power conferred by
ownership. The money launderer is beholden
to his client, who pays his fees. He is
the pawn in a much larger game over which
he has no control.
© Dirty Money Digest 2007
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