Allegations help topple once-elite
By James Kim
Fri., Sept. 24, 1999
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
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
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
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
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
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.
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
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
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