Coming Clean

According to recent media reports, Russian companies allegedly controlled by Boris Berezovsky and Roman Abramovich were responsible for laundering up to $7.2 billion in Russian "funny money" mostly through German banks over the past four years. It is not yet clear whether the scheme involved "just" tax evasion or more serious criminally related money-laundering activity.

This scandal, if confirmed, involves the venerable Westdeutsche Landesbank, known as WestLB, and a slew of other German financial institutions. Outwardly, this case is reminiscent of other money-laundering schemes such as those involving the Bank of New York and Citigroup. All of them involve moving large sums of money between Caribbean offshore locations such as the British Virgin Islands or even more exotic places like Nauru and Western Samoa.

So far it seems that the Germans are attempting to play down the scandal in view of the close relationship between Chancellor Gerhard Schr?der and President Vladimir Putin and considering Putin's close ties with Abramovich and (until recently) Berezovsky. However, the European Union and Organization for Economic Cooperation and Development have put strong pressure on the Caribbean tax havens in recent months not just to crack down on offshore banking ?€” the leading industry on many islands ?€” but also to get rid of "harmful" (i.e. low or nonexistent) tax regimes that lure Westerners to save for retirement and invest tax free under the tropical sun.

In the United States, the Government Accounting Office, Congress' financial watchdog, has been investigating Citigroup and the Commercial Bank of San Francisco. The GAO has alleged that the banks allowed $800 million and $600 million, respectively, to flow through their accounts from suspicious East European and Russian sources. The funds were later wired abroad to tax havens.

Both banks are accused of violating industry standards ("know-your-customer" rules), and the GAO has raised suspicions of outright money laundering. For their part, the banks have acknowledged that "know-your-customer" rules may have been violated. However, they have not responded to money-laundering accusations because the GAO, not being a prosecutorial agency, cannot formally charge them with a crime. Only a federal prosecutor has the authority to bring indictments in money-laundering cases. The investigation may soon be handed over to the FBI however.

Money laundering and ignoring "know-your-customer" rules are different violations. Scott Horton, partner in charge of Russia and the CIS at the New York law firm of Patterson, Belknap, Webb and Tyler, said the rules are based on Federal Reserve regulations and on those of the Office of the Comptroller at the Department of Treasury. "Still, they fell short of a federal crime," said Horton.

Recent money-laundering scandals highlight lax U.S. and IMF standards in disbursing financial aid abroad.

Money laundering, on the other hand, is a crime in which proceeds from criminal activities ?€” often cash ?€” are "laundered" through the banking system until they look legal. Often these funds are proceeds from drug trafficking, illegal gambling and arms dealing. Money from the East comes in two varieties: outright "dirty" money and funds that are sent to the West in order to evade taxes.

In many jurisdictions, tax evasion in a foreign land is not a crime. However, moneys that came to the United States as a result of systematic defrauding of foreign tax authorities may qualify as money laundering, especially if the tax evasion was a criminal offense under local laws in the country of origin.

Horton, however, argues that it is crucial to keep the American financial system clean. The integrity of banking institutions is fundamental for a healthy economy and, therefore, there is a strong U.S. public interest behind efforts to fight this crime.

Several venerable banks, including the Bank of New York and Republic Bank of New York, were at the center of a much larger scandal in the fall of 1999, in which transactions in excess of $6 billion were uncovered. The transfer originated in Russia and involved some 10,000 transactions since October 1998. The federal investigation ?€” involving the FBI, the New York Federal Reserve Board, the New York Banking Commission and the British law enforcement and national security agencies ?€” is still going on. Some key former employees of the Bank of New York admitted violating banking rules and have cooperated with the prosecution.

This investigation has parallels overseas. Swiss federal authorities are investigating hundreds of millions of dollars in Swiss bank accounts, some of them allegedly embezzled funds from Russian state companies and bribes taken by Russian officials on the highest level. Moreover, the Bank of New York scandal may have involved the diversion of international financial assistance to Russia by highly placed officials in the administration of former President Boris Yeltsin. As the details of this scandal are revealed, they pose difficult questions about the policy pursued toward Russia by both the Clinton administration and the International Monetary Fund. It has cast a spotlight on the lax standards in disbursing financial aid to the opaque economies of post-communist and developing countries.

Swiss authorities have complained repeatedly that the Clinton administration did not assist their investigations of alleged Russian money laundering. Now that a new administration ?€” one that claims to be "practical" and "pragmatic" ?€” has come to power in Washington, we may hope for something better. The Bush administration and the 107th Congress must aggressively investigate this pervasive and unsavory practice, which cripples the Russian economy and defrauds the Russian people.

Ariel Cohen is a research fellow at the Heritage Foundation in Washington. He contributed this comment to The Moscow Times.