Allegations help topple once-elite Russian bank
By James Kim
Fri., Sept. 24, 1999
USA TODAY

Inkombank, once an elite Russian bank that many hoped would lead the nation into a new era, had its license revoked by banking officials in Moscow last year.

Some felt it was simply a victim of the country's financial crisis. But Inkombank -- which was a top client of the Bank of New York (BoNY) -- also was derailed by allegations that it defrauded shareholders, aligned itself with organized crime groups, engaged in money laundering, operated illegally in New York and threatened witnesses.

As the FBI and law enforcement officials in Russia, England and Switzerland investigate whether Russian crime groups laundered billions of dollars of ill-gotten money through BoNY, Inkombank's rise and fall illustrates the often-shady nature of the Russian financial world. Officials are probing what role Russian banks, including Inkombank, might have played in the possible money-laundering scheme.

Inkombank's efforts to open an office in New York and lawsuits brought by shareholders and its former lawyer have produced thousands of pages of documents that raise questions about the institution's conduct in the USA at the time BoNY was helping Inkombank establish itself here.

BoNY has not been charged with wrongdoing and is cooperating with law enforcement officials in the money-laundering investigation. In testimony before the House Banking Committee Wednesday, CEO Thomas Renyi said, ''Neither the bank nor any of its customers have lost any money as a result of the activities in question.''

BoNY declined to discuss the specifics of its relationship with Inkombank.

BoNY's critics maintain that the bank's executives should not have been in business with Inkombank. ''While it is important to wait and see what all of the facts are, it is hard to imagine that some at the BoNY did not know'' that they were dealing with characters or entities of questionable character, says Keith Henderson of American University's Transnational Center for Crime and Corruption. And if they didn't know, they should have, he says.

Inkombank was established in 1988 as the former Soviet Union was beginning to crumble. It quickly became one of the ''brightest stars among the new privately owned Russian banks,'' according to Euromoney magazine. Vladimir Vinogradov, Inkombank's CEO, was considered one of Russia's oligarchs, individuals who ran huge business empires and had considerable control of the country's economy.

By the mid-1990s, Inkombank operated 13 branches in Moscow, 15 branches elsewhere in Russia and had offices in Geneva, Vienna, Frankfurt, Germany, and other places. By 1994, the bank's assets rose to $2.2 billion.

The bank also opened ''correspondent accounts'' at Bank of America, Republic National Bank and BoNY, according to documents filed with the Federal Reserve. Through those accounts, Inkombank transferred money for customers and itself from Russia to the USA and around the world.

In 1995, Inkombank applied to the Federal Reserve and New York state banking officials to open an office in New York City. In a letter to Federal Reserve Chairman Alan Greenspan, BoNY Senior Vice President Natasha Kagalovsky said Inkombank opened its first account with BoNY in March 1992. BoNY enacted more than 250 transactions a day for Inkombank. BoNY collected fees on the transactions.

Kagalovsky was put on paid leave by BoNY in August when the FBI's money-laundering investigation became public. She has not been accused of any wrongdoing. Her lawyer, Stanley Arkin, did not return telephone calls seeking comment for this story. In the past, he has said his client is innocent of wrongdoing. This week, Kagalovsky declined an invitation to testify before the House Banking Committee.

BoNY also served as administrator for the Russian bank as it sought and won approval from the Securities and Exchange Commission to sell American depositary receipts. That let existing Inkombank shareholders sell their shares in the USA.

In 1995, Kagalovsky and Vladimir Galitzine, the top officials in BoNY's Eastern Europe division, lobbied to set up a meeting to introduce Renyi, then president of BoNY, to Vinogradov. In a March 1995 memo to Renyi that surfaced in a shareholder lawsuit, Galitzine suggested two talking points: ''Thank them for the business'' and ''congratulate them on 1994 results.''

At the time, however, a CIA report linked Inkombank and other big Russian banks to organized crime, according to a former high-ranking law enforcement official.

In March 1995, Inkombank's CEO Vinogradov appeared before New York state regulators to answer questions on the bank's application to open a New York office. Robert McCormick, a deputy superintendent in the New York state Banking Department, raised the issue of organized crime and media reports. Vinogradov assured him Inkombank ''was one of the good guys,'' according to the banking department's summary of the meeting, which was reviewed by USA TODAY.

The Russian government says organized crime controls 40% of the country's economy and half its banking assets, according to testimony before the House Banking Committee this week.

In testimony Wednesday, Renyi said BoNY works assiduously to ascertain the local reputation of banks with which it does business. ''If, in the course of these discussions, it (possible crime links) came up, I wouldn't necessarily know about it. I feel confident that the relationship manager in Eastern Europe would have done something about it and closed the account.''

If we can make it here

Despite Vinogradov's assurances, Inkombank's application to open a New York office was held up by an investigation by the Criminal Investigation Bureau of the New York state Banking Department. Investigators had questions about a firm, called Avalon Capital, which was formed by Alexei Kouznetsov, a top officer of Inkombank.

The head of Avalon was Janna Boulakh, from Belarus. She was dubbed a ''special representative of the bank,'' according to a memo from Inkombank Vice President Vladimir Preobrajensky to Boulakh in February 1994.

Boulakh said in an interview that Avalon was merely a travel agency and had nothing to do with banking. As for documents obtained by investigators, she says they must be forgeries.

New York investigators were intrigued by an August 1994 memo to Boulakh from Kouznetsov. It said that ''prior to our representative office approval by the U.S. banking authorities next year, all operations will be conducted through Avalon Capital and Tetra Finance.'' Tetra was formed as a Liechtenstein-based company that listed Boulakh as its top officer.

Investigators focused on two areas of possible wrongdoing:

* Money laundering. Kouznetsov's memo also said he would soon start using offshore companies to transfer money, referring to it as ''spinning it around through correspondent banks in the U.S. -- BoNY and Bank of America.'' The Kouznetsov memo instructed: ''During 12 months, we must squeeze through Avalon about $10 million to $15 million dollars, which will go through Tetra to our offshore accounts.'' The memo also described a scheme by which the money would be disguised as a form of stock purchase. ''The originals of the documents will be kept in New York in case of the Central Bank audit.'' Investigators were concerned that Avalon and Tetra could be part of a money-laundering scheme.

* Unauthorized banking. Investigators found evidence they said suggested that Inkombank was offering banking activities, including accepting deposits, without regulators' authorization to do so. Kouznetsov's memo instructed: ''Deposits for trust management in New York may be accepted but only from the people we know personally; otherwise, we will have troubles with banking authorities.''

In March 1998, Vinogradov appeared again before officials of the New York state Banking Department and the Federal Reserve. According to a person at the meeting, Vinogradov said that if there was any unauthorized activity, it was carried out by an executive who had left Inkombank.

In September 1998, the bank withdrew its application to open a New York office, the Federal Reserve says. And New York regulators stopped their investigation.

Shareholder trouble

In 1993, Inkombank needed to raise capital. So it bartered private stock in Inkombank to a shareholder group of Russians and Russian-Americans. The stock, valued at $40 million, was held by three shell companies: Morgenthow & Latham, Oriental XL Funds and New York International Insurance Group.

Shareholders alleged that they didn't receive promised fees and dividend payments and began to suspect the bank of financial wrongdoing, according to court records. Vinogradov asked the bank's New York lawyer Emanuel Zeltser and shareholder lawyer Alexander Fishkin to investigate shareholders' claims of financial wrongdoing, according to Zeltser's account in court records. In October 1994, on behalf of aggrieved shareholders, Fishkin wrote a letter threatening a lawsuit to Inkombank's U.S. lawyer, Arthur Christy of Christy & Veiner (now Salans Hertzfeld Heilbronn Christy & Veiner).

A few days later, an Inkombank executive sent a fax in Russian to ''Michael Shick, director of Morgenthow & Latham.'' The fax said: ''I think your lawyer is boiling in vain. I believe that none of us need it.'' The fax, submitted as evidence in the shareholder lawsuit, invited Shick to Moscow to meet bank officials and ''come to intelligent resolution of our controversies.'' Shick, a Russian immigrant who became a U.S. citizen, accepted the invitation, but never returned to the USA. He was found dead in the Moscow River, with a bullet in his head. The U.S. State Department classifies the case as an unsolved murder. Russian officials have never charged anyone in the incident. No law enforcement agency has suggested that Inkombank was involved with Shick's death.

In February 1995, Zeltser sued Inkombank in a New York federal court, charging it with stealing from shareholders. He says in court papers that the bank fired him after he and Fishkin claimed their investigation found evidence of fraud and theft. The bank denied the charges and countersued, alleging that Zeltser stole from the bank. Shareholders also sued Inkombank.

In February, Judge Kevin Duffy of the Southern District of New York moved the cases to the suspense docket, which means they are effectively in abeyance. The judge gave no reason for his decision. Some participants think it was related to Inkombank's insolvency.

Bitter battle

The legal battle was bitter from the outset. Inkombank's law firm, Christy & Veiner, challenged Zeltser's law credentials and tried to have him disciplined. The disciplinary committee of the New York state courts never ruled, and Zeltser remains a member of the New York bar.

Meanwhile, witnesses against Inkombank complained of incidents they say were designed to influence their testimony. The owners of a small secretarial services firm, Elena Pelaez and Alla Waters, both Russian immigrants, were among those who complained of alleged harassment, according to affidavits in the shareholder lawsuit. Their firm offered secretarial, travel and translation services to primarily Russian clients. Zeltser was a big client. For a while, the firm shared an office with him at the Penn Hotel in New York City.

In late 1993, Pelaez says Inkombank officials asked her and Janna Boulakh, who worked briefly for the firm, to form another company that would provide services to Inkombank. Christy & Veiner drafted preliminary documents to set up the company.

In return for the service-firm deal, Pelaez said in a lawsuit she was asked by an Inkombank executive to copy and steal documents from Zeltser. She claims that when she refused to do so, she was told she would no longer be part of the new company. In 1995, she brought a malpractice lawsuit against Christy & Veiner. The law firm denied any wrongdoing. As with the other litigation, the case is on the suspense docket.

Pelaez says in a court affidavit that Inkombank executives called her several months later. She was scheduled to be deposed in the lawsuit and, according to her affidavit, they wanted her to testify that she heard Zeltser discussing ways to embezzle money. ''The defendants threatened me that if I did not cooperate with them in this way, I might be physically injured or killed. The threats included having my home burned, my car bombed and the like,'' according to the affidavit.

After her three-day deposition in January 1996, she received a call from an Inkombank employee, who offered her $50,000 to $100,000 to recant, she alleged in the affidavit. She again refused.

Waters, who also testified against Inkombank, says in an affidavit that the same employee asked to meet with her at the Sheraton Hotel New York in July 1998. She showed up wearing a wireless microphone. When she refused to recant her testimony, he warned, ''You know they'll send some psycho here, and that's it. No more Alla, or worse, for the rest of your life, you will be an invalid,'' according to a transcript of the tape of the conversation, which is in the court's file.

Inkombank's lawyer, Arthur Christy, says he doubts the allegations made by Pelaez and Waters. ''Other than that, I cannot comment,'' he says.

 

TEXT OF INFO BOX BEGINS HERE

Chronology of Inkombank, Bank of New York events


Inkombank boss Vladimir Vinogradov

1988: Inkombank founded.

March 1992: Inkombank opens its first account with Bank of New York.

April 1994: CIA report says Inkombank is among big Russian banks with links to organized crime.

February 1995: Inkombank's former lawyer Emanuel Zeltser sues Inkombank in federal court.

March 1995: Inkombank countersues, charging Zeltser with stealing from Inkombank.

March-June 1995: Inkombank applies to New York State Banking Department and Federal Reserve Board to open a nonbanking office in New York.

March 1995: CEO Vladimir Vinogradov tells New York banking officials that Inkombank has no ties to organized crime.

April 1996: BoNY's Natasha Kagalovsky calls Inkombank ''our largest and most active relationship'' in a letter to Federal Reserve Chairman Alan Greenspan.

June 1996: Russia's central bank criticizes Inkombank's finances.

October 1998: Vinogradov resigns. Central Bank of Russia revokes Inkombank's bank license.

February: Federal judge suspends action on Inkombank-related lawsuits.

August: BoNY puts Kagalovsky on paid leave due to news reports that the FBI is investigating possible money laundering by Russian organized crime through BoNY. She has not been accused of any wrongdoing.

Wednesday: BoNY CEO Thomas Renyi tells Congress he had no knowledge of any client involvement with organized crime. BoNY hasn't been charged with any wrongdoing.

 

© Copyright 1999 USA TODAY

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RUSSIAN MOB

vs.   A.R.L.I.

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"Russian organized crime can use its resources to corrupt institutions here in the United States. The recent case involving the Bank of New York may prove to be one such example.

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"Organized crime shaped the post communist Russian banking industry and now manages it."

Yeltsyn.jpg (5091 bytes)

"Russia is the biggest mafia state in the world, the super power of crime that is devouring the state from top to bottom."

weldon.jpg (5664 bytes)

"While the U.S. and the West were bailing out Russia's economy with money from the IMF and the World Bank, 700 Russian officials were reaping the financial benefits of insider trading..."


Dick Armey
House Majority Leader

"A substantial portion of the American taxpayer money to the IMF may now be financing the lavish lifestyles of Russian oligarchs"

Zealously courted by prodigiously compensated endorsers Russian mob-bankers have been successful in subverting and delaying for years investigations and judicial proceedings relating to their machinations in the US, casting aspersions on “unfriendly” witnesses by  strategic phone calls. 


ARLI ON CAPITOL HILL

Congressional testimony of A.R.L.I. Director, Emanuel Zeltser (September 11, 2000 hearing  on Russian Organized Crime and Money Laundering)

 

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