“Stop Money Laundering!” Conference - 26th February 2002, London
“Stop Money Laundering!” Conference - 26th February 2002, LondonSATCOR REPORT ON INTERNATIONAL CONFERENCE "STOP MONEY LAUNDERING"
(Money Laundering International Conference in London Uk)
The problem of dirty money laundering is many-sided: from the applicable legal terms to the definite law-enforcement practice in different countries and jurisdictions. The public organization ‘Society against Terror and Corruption’ (‘SATCOR’, Russia, Moscow) has undertaken a number of investigations, the results of which, in our opinion, make it possible for specialists and experts to see the new indications of laundering finances belonging to Russian organized crime and demand special attention from the law-enforcement authorities, law-makers and international community. Our goal was to track the sources of the phenomenon itself, the functioning of money laundering schemes, the persons participating in the process, methods of organization and ‘reproduction’ of criminal groups, formation of international communities by these groups, actively playing on the international political field.
Criminal Nature of Capital Export from RussiaIn order to save face before the Western world, today’s political elite of Russia successfully manipulates the facts and information in order to hide the real situation. This phenomenon is a consequence of the deep criminal infiltration of all structures of the Russian authorities.
Thus, Russia contrived to send to the last FATF sessions the people whose personal accounts were frozen by Luxembourg Court Decrees in 1995, as well as in Germany and the USA in 1996 – 1998. When trying to persuade the Western public that export of capital from Russia is an ordinary economic process, Aleksandr Shokhin, the Chairman of the State Duma Committee performs special activities on credit organizations and financial markets. At the same time, Shokhin’s links with a number of odious Russian personalities, whose business activity is quite dubious from the legal point of view, are very well known: i.e. his contacts with businessman Mikhail Chernoy, who was brought to trial by the Israeli prosecutors on charges of criminal and corruption activity, including the attempt of laundering the Russian mafia’s money in Israel. Incidentally, Mr. Shokhin suggests legalizing unsecured bonds for large corporations inside Russia to help (in his opinion) those corporations stop organizing illegal schemes. Simply then announce that cheating investors is legal and there will be no problem.
Shokhin, as well as some other Russian politicians whose names appeared in the «Bank of New York» scandal is trying to prove that export of capital from Russia is not dangerous: what is important is that money should ‘work’. Formally such an approach allows unlimited export of capital, irrespective of its origin. As far as Russia is concerned, this statement is simply absurd.
It is clear that every country should independently care about its investment attractibility. It is also indisputable that financial flows have to get into the most profitable economic sectors. However, export and import of criminal capital is able to unbalance even the most developed economy and to introduce harmful disproportioning in global economic relationships. Pumping up the state economy with speculative finances might destroy economic stability and, if using corresponding criminal methods, even ruin the political and legal ‘territory’ of the state. This is why we support the position which was expressed by several experts both in Russia and in the West: the schemes of export of capital in themselves have criminal potential if they do not directly pursue the goal of profitable placement of finances into the efficient economic sector.
In the mid-nineties there was a well-known scandal, where Russian oil was supplied under the Russian government quotas to Eastern Germany. The Russian budget was losing practically all profits from these oil sales, which resulted in a big hole in the budget and social instability. Russia had to use Western credit in unjustifiably large amounts. At the same time, the profits from privatization in Russia could have been at least 30 to 50 times higher but the corrupt control over privatization terms and financial flows of the state from the criminal communities prevented it. Now export of Russian oil is controlled to some extent by the state and allows the profit to be raised for the budget. Oil brings to Russia $10 billion a year; gas – $12 billion, non-ferrous metals – $3–$4 billion, export of diamonds – $2 billion. However, many industrial sectors are still controlled by criminal groups. Due to this, the budget profits from aluminium, copper and diamond exports are minimal and do not cover even the most necessary social payments in those regions where the branch enterprises are located. As a result, in these potentially rich Russian regions we can see a decrease in living standards, discrimination, and mass violation of human rights.
The capital outflow from Russia is estimated to be $10 to $25 billion a year. Data from the Central Bank of the Russian Federation seems to be the most reliable: on average $8.7 billion. In its report on the country’s payment balance it shows that item ‘Net errors and omissions’ includes giant sums. The international statistics showed that this item reflects the finances exported by the residents of the country avoiding official channels. However, it is impossible to take into account the multiple circulations of the laundered finances and the figures of the Central Bank cannot fully reflect the real situation.
Laundering of Illegal Money and Russian Aluminium
Money of Russian organized crime are laundered in the West using different kinds of export and import operation schemes. Russian aluminium trade is an interesting and illustrative example of usage of such schemes.
The results of our investigations allow us to state that the widest possibilities for money laundering exist in the aluminium branch of the Russian economy. This conclusion is based on the investigation of criminal connections of the heads and shareholders in a number of large Russian companies, as well as on the analysis of the Russian usage of tolling for production and sale of raw aluminium and other aluminium products.
Trading companies taking part in the tolling operations are fully controlled by the owners of the companies – producers. These companies are registered in the international economic zones, where there are neither detailed audits nor any control of their financial economic activity. As a rule, they open and use the accounts in the banks of the countries where the fight against money laundering is insufficient.
Most actively tolling is used by the companies ‘Russian Aluminium’ (‘RUSAL’) and ‘Siberian Aluminium’ (‘SIBAL’), where 80% of the companies’ production is manufactured and sold by the tolling scheme. ‘SIBAL’s main shareholders, partially integrated into ‘RUSAL’ are the notorious Mikhail Chernoy, representatives of the largest Russian organized criminal group ‘Izmaylovskaya’ and members of the family of the former Russian president Boris Yeltsin. Tolling is not dangerous in itself. The danger is in the opportunity it provides for laundering criminal finances. Russian criminal groups showed a huge interest in this type of financial technique, which convinced us that these methods are used to their full extent.
Before 1996, only the so-called ‘internal tolling’ was allowed in Russia, where foreign traders bought Russian raw materials in Russia and passed them on for processing to Russian aluminium smelters, thus practically avoiding taxation and customs payments.
Russian plants had to use tolling operations starting from the early nineties due to the absence of their own circulation assets. Many observers believe that the deficit of circulation assets in the aluminium industry of Russia was artificially created as a result of a well-planned large-scale operation. In publications of the Russian and western media it is linked first of all with such names as David Ruben and the Chernoy brothers, representatives of the English trading company ‘Trans World Group’.
Fraudulent activity consisted of forcing raw aluminium prices to drop by a group of traders and at the same time in initiating increase of prices for its main industrial raw material – alumina. The former was achieved by simultaneously putting on the market the aluminium reserves accumulated at the consignment warehouses in Hamburg and in other Western countries. Russian metallurgical works had no incomes to cover even production costs; they soon were on the verge of bankruptcy. Later they were all bought out by traders from the offshore zones at extremely low prices.
The possible sources of finances for such kinds of operations were named even then. Firstly, multi-billion deals with use of the ‘Chechen Avisos’ (forged instruments which were later destroyed in bombing of the Chechen State Bank) and secondly, the theft of aluminium, such as transportation of metal by railway from Russia through the Baltic Republics. Hundreds of shipments of Russian metals intended for export from the Kaliningrad port vanished into thin air during transportation through the territory of the Baltic republics. Formally, at the moment of theft the metal remained Russian and was not considered to have crossed the Russian border. The Baltic countries would not allow Russian investigative authorities to establish the reasons of large-scale thefts due to political discrepancies and deterioration of relations between them and Russia. A similar technique but somewhat smaller in scale was used during transit of metal through Middle Asia & Kazakhstan. These republics, however, could not put any serious obstacles to the Russian prosecutors in their fight to stop the theft for a long time. Russia did not receive the due customs payments. As far as the metal ‘lost’ during transportation was concerned, it accumulated at the consignment warehouses with Russian symbols but already with completely different documents. Later this aluminium was put on the market en masse in order to force down its price (the price for A8 grade raw aluminium fell from $2,200 per ton in 1997 to $1,100 per ton in 1993 – 1994).
The third source was the money from drugs sales and trafficking (as well as other criminal sources requiring legalization) laundered in Russia during the privatization processes.
Large-scale criminal deals became the subject of hearings in the State Duma of the Russian Federation in 1996 – 1997. The Vice Prime Minister of the Russian Federation, the Minister of the Internal Affairs of Russia, Army General A.S. Kulikov took the floor and referred to the criminal cases of the forged avisos and money laundering. In order to rectify the situation, the Vice Prime Minister suggested forming a vertically integrated holding company, which would include production of all types of aluminium products. This holding was to be controlled by the state and sales would be carried out by the private structures. Soon some Russian media sources accused General Kulikov in attempting to form the ‘police state’ and then without any reasonable explanation he was dismissed President Yeltsin. All criminal cases against the Chernoy brothers, leader of the organized criminal group ‘Izmaylovskaya’ Anton Malevsky and against other ‘aluminium wars’ participants were closed.
Such large-scale and multi-plan fraudulent actions including the aluminium schemes resulted in the collapse of Russian financial system (the famous ‘Black Tuesday’ in November 1994). It was after ‘Black Tuesday’ that the groups making the above manipulations have strengthened their influence over the Russian aluminium industry, having bought out the shares and vouchers from the hungry workers of the aluminium smelters. At that time the methods of physical force, blackmail, racketeering, attempts upon the lives and assassination of those interfering with the process of the aluminium industry control take-over were used quite often.
In accordance with some estimations, the smelters were bought out at prices approximately 50 to 80 times less than their real value: according to General Kulikov, the 6 largest aluminium smelters were bought for just $62.2 million.
Scheme of Financial Operations
In today’s Russia there is an established system of production and sale of aluminium, which is still based on tolling operations but this time with a well-functioning mechanism where trading companies and banks registered in the offshore zones are being used.
The financial mechanism of tolling contracts before 1996 was simplified to its maximum; it included a principle of ‘tolling ratio’. In short, ‘tolling ratio’ is the ratio of alumina supplied by the customer to the amount of aluminium returned by the processing agent. If the physical norm of alumina necessary for smelting one metric ton of aluminium is 1,900 kilograms, then the tolling ratio in pure form can be 1:1.9, and the processing service can be paid by cash or other ways. In the past, Russian smelters would accept alumina as the service fee; from it they smelt the aluminium, which would then belong to them, and sold it to the same trader at an earlier agreed price. During this process the Russian aluminium smelter regularly paid all taxes and customs payments not only from its part of the export service, but also for the products. Despite the fact that both the customer and the producer were the links of the same chain of affiliated companies, according to the wish of the owners they could freely change the tolling ratio from 1:6 (situation where maximum profit stays at the processing smelter as if it had purchased alumina, produced the metal and sold it) to 1:1.9 (situation where the processing smelter suffers losses when making only the physical norm of the metal, paying all expenses separately). The scheme of obtaining considerable profits within Russia was preserved, for example, at the Bratsk aluminium smelter (the smelter had its own assets) up to the year 2000, when ‘Russian Aluminium’ was founded. The payments to all levels of Russian budget at Bratsk aluminium smelter (BrAZ) used to be 2.5 times higher in ratio to the total amount of the smelted metal compared to other plants.
This system evidently could not suit the new owners of the Russian Aluminium industry due to the relatively low turnover and profits coming to the offshore accounts. By 1998 in the Russian Aluminium industry a new re-distribution trend was forming: it was initiated by the powerful lobbyist influence of one group close to the former Russian president, the so-called ‘Family’. Close connections of this group with the organized criminal group ‘Izmaylovskaya’ gave it an opportunity to combine all the major components of aluminium industry in Russia, Ukraine and Armenia into a vertically integrated holding company. As a result, ‘RUSAL’ is controlled not by the state, but by the above-named group and its leaders. Management of the holding is in the hands of Oleg Deripaska; financial flows are mainly controlled by Mikhail Chernoy and Iskander Makhmudov.
At present in Russia the following scheme of tolling operations is used. A trader from offshore zone provides the processing smelter with the necessary amount of alumina (sometimes together with other materials - coke, pitch, fluorine salts) and later pays the smelter just the cost of export services (see table 1). Russian metallurgical works receives only a minimal part of the profits, which does not even cover its direct expenses. So in order to replenish its current assets, the smelter accepts any payments, including energy bills and performs barter operations with oil & coal-mining products. The clearly criminal character of such deals in Russia is well known. There were cases where both state and municipal budgets of some cities lost $5 to $6 million each due to illegal schemes with promissory notes. This is the first sign of laundering unlawfully obtained criminal finances from Russia by using offshore accounts (its mechanism is described below).
The analysis of information relating to export contracts of the smelters incorporated into ‘RUSAL’ and ‘Siberian Aluminium’ shows the following discrepancies.
Firstly, there is a considerable discrepancy in alumina input ratio: from 1,960 to 1,921 kg. per ton of aluminium. Interestingly, sometimes a higher graded alumina is used at a more modern smelter, but the ratio allowed by the contract at this smelter becomes higher, which is impossible.
Secondly, the cost of processing one ton of alumina varies from contract to contract: from $330 to $650 per ton of aluminium. It is possible that some contracts are agreed at dumping processing prices in order to gain a larger profit, which is accumulated on the offshore accounts.
Finally, in such contracts the guarantee for alumina is clearly overpriced, even taking into account the possible commercial risks: $293 against $195 per ton - nearly twice the amount. Although these contracts have minor differences, they are still cause for concern: according to the contracts the price may be established at the border or at the railway station of the processing plant, which makes all kinds of manipulations possible. In some contracts this part contains mistakes and uncertainties. The delivery charges to the most remote point in Russia can be as low as $40 per ton, so in any case it is impossible to explain such a considerable variation in the guarantee prices. Thus, the smelter which (in its owners’ opinion) received an ‘additional’ profit from alumina processing can be refused any further processing and have to pay the customer-trader a fine and a double price for the alumina. The profit will automatically disappear offshore.
Analysis of payment structure makes us believe that Russian aluminium smelters are unable to legitimately cover their production costs. Evidence of this comes from governmental meetings in 2000– 2001. This was happening despite very low energy prices and wages at aluminium smelters (see Table 1).
Analysis of data from several tolling contracts shows that practically all profit from aluminium sales (35%–40% - every third dollar) currently stays in offshore companies.
The profits of offshore companies, which can launder money this way, are estimated at $1.4 – $1.8 billion.
Table 1. Comparative Indices of Aluminium Production in Russia and in the West
(Forbes)
Western producers
Russian producers
Average price of one metric ton of aluminium in 2000
$1.549
$1.549
Alumina and other materials
$740
$869
Electricity
$274
$156
Labour
$157
$49
Other expenses
$66
$90
Total
$1.237
$1.164
Pure profit from one metric ton
$312
$385
We believe that the current state of affairs is as follows: the structure of ‘RUSAL’ includes 4 aluminium smelters with the total production capacity of approximately 2,400,000 tons of aluminium per year, including:
· Bratsk Aluminium Smelter (BrAZ) ~ 900,000 tons;
· Krasnoyarsk Aluminium Smelter (KrAZ) ~ 850,000 tons;
· Sayansk Aluminium Smelter (SaAZ) ~ 385,000 tons;
· Novokuznetsk Aluminium Smelter (NkAZ) ~ 270,000 tons.
A considerable part (88%) of aluminium is produced within tolling scheme (raw materials provided for processing). Thus, during the 1st quarter of 2001 the above smelters produced 507,000 tons of aluminium, of which tolling produced 449,000 tons.
Below is the analysis of contract information showing raw materials processing (tolling) between Sayansk Aluminium Smelter (an average plant within ‘RUSAL’) and the offshore company ‘RUAL Trade Limited’ (Gibraltar).
Table 2. Initial Data for Analysis
Amount of alumina necessary for production of 1 ton of aluminium
1.92 tons
Contract price of 1 ton of alumina
$195
Transportation rate of 1 ton of alumina
$40
Amount of oil coke necessary for making 1 ton of aluminium
0.445 tons
Contract price of 1 ton of oil coke
$127
Transportation rate of 1 ton of oil coke
$30
Contract cost of raw materials processing for the production of 1 ton of aluminium
$330
Transportation rate of 1 ton of aluminium to a port/border
$60
Cost of 1 ton of alumina necessary for production of 1 ton of aluminium:
($195 + $40) ő 1.92 = $451
Cost of 1 ton of oil coke necessary for production of 1 ton of aluminium:
($127 + $30) ő 0.445 = $70
Total expenses of ‘RUAL Trade Limited’ for production of 1 ton of aluminium:
$451 +$70 + $330 + $60 = $911
Average price for aluminium calculated from monthly quotations for aluminium at the London Metal Exchange (LME) for the first 6 months in 2001 comes to $1,537:
· January – $1,615;
· February – $1,603;
· March – $1,508;
· April – $1,496;
· May – $1,538;
· June – $1,465.
The premium per 1 ton of aluminium according to its grade is $15. Thus, the price of 1 ton of aluminium at the port of dispatch will be $1,552.
Profit of the offshore company from sale of 1 ton of aluminium smelt by the above contract is: $1,552 - $911 = $641.
As per the contractual provisions ‘RUAL Trade Limited’ has to receive 204,100,000 tons of aluminium. Thus, the profit for the offshore company as a result of the above named contract will come to:
$641 ő 204,100,000 = $130,828,100.
Provided that other smelters within ‘RUSAL’ operate on similar conditions, the annual profit of the offshore companies from tolling operations is:
2,420,000 ő 88% ő $641 = $1,365,000,000.
Please note that this is an average estimation of the scale of capital export in general. It does not include data about turnover and profits from production and sale of alumina, aluminium-rolled products and other types of produce of the company.
It is important that during its corporate PR programs ‘RUSAL’ clearly overprices the manufacturing cost shown in the contracts when showing the production indices for publications in the Western press (see Forbes data, Table 1). This is done in order to hide the undercharges existing in the contracts. This shows the possibility to cover price differences through turnover of illegal profits (as in Tables 1 and 2. The comparative analysis is given in Table 3).
Table 3. Comparison of Aluminium Production Indices between Forbes Data and the Data from the Real Contracts of ‘RUSAL’.
Forbes data
Data from ‘RUSAL’s contracts
Average price of 1 metric ton of aluminium in 2000-2001
$1,549
$1,552
Alumina and other materials
$869
$521*)
$521 ő 1.05 = $547
Processing and delivery cost
$295
$390**)
$390 : 1.35 = $289
Total
$1,164
$547 + $289 = $836
Pure profit from 1 metric ton
$385
$716***)
Note:
*) – without taking into account fluorine salts (about 5%)
**) – including 30%-40% profitability for processing
***) – total profit of all participants in production and sale of aluminium.We believe, therefore, that penetration of the illegal profits of the Russian organized crime interested in laundering large sums of money through the offshore bank accounts into Russian aluminium production system is practically inevitable. Lobbying of the ‘RUSAL’s interests goes without saying: for example, Oleg Deripaska tried to reduce the railway transportation rates for his smelters through increasing rates for the population, even though such attempts assume some corruptive connections.
‘SIBAL’ and ‘RUSAL’ that control all stages of the tolling scheme have an ideal mechanism for laundering Russian criminal money in the offshore accounts. Russian criminal groups can transfer any money convertible into bills, financial or other instruments (liquid for the above-named companies in Russia) into the offshore accounts within these limits ($1.4 - $1.8 billion). What is the reason for supplies of petroleum pitch by tolling from outside Russia, when the same product could be obtained within Russia for the bills of the energy companies almost three times cheaper and this could benefit ‘Sibneft’ system, which is part of ‘RUSAL’? Through this process the super-profitable discount from the bills turnover (up to 90 % depending on the authenticity of the source of such bills), as well as the margin for money laundering (up to 75 % depending on the authenticity of the sources of the finances) stays in hands of the organizer of the scheme, who controls the financial flow and provides additional profit.
Having received money from the customer for laundering inside Russia, the scheme organizer legalizes them on his offshore accounts with an earlier agreed discount. It is not difficult to pass this money on to the customer: any false contract can be used on which the offshore administration will turn its blind eye (see scheme No. 1).
Due to the natural conditions (resources?) (a lot of energy in Russia, bauxite in Guinea and Chile and aluminium are sold through the London Metal Exchange (LME) and Hamburg warehouses etc.) this scheme is unique by its scale and opportunities.
The following businesses participate in ‘RUSAL’s and ‘SIBAL’s operations:
- Banks: RAIFFEISEN ZENTRALBANK AG (Vienna, Austria), FIRST UNION BANK INTERNATIONAL (New York Branch, USA), CITIBANK (New York, USA), BUSINESS MEDITERRANEAN BANK LTD (Vanuatu), BANQUE NATIONALE DE PARIS (New York, USA), UNITED EUROPEAN BANK (Geneva, Switzerland), LATVIAN TRADE BANK (Riga, Latvia), ABN-AMRO BANK (New York, USA), FIRST UNION NATIONAL BANK (former CORE STATES BANK, New York, USA), BANK OF NEW YORK (New York, USA), MOSKOVSKIY DELOVOY MIR (‘MOSCOW BUSINESS WORLD’) (Moscow, Russia);
- Trader companies, usually registered in the name of the same persons of Russian origin ‘RUAL TRADE LIMITED (Gibraltar), RUNICOM TRADE LIMITED (Gibraltar), METCARE MANAGEMENT S.A. (Republic of Panama), UNIMETAL LIMITED S.A. (Republic of Panama), as well as hundreds of other companies used in different schemes, including the schemes for laundering money in Germany, Switzerland, Liechtenstein, Cyprus, etc.
No other financial money laundering schemes in Russia and possibly in the whole world are able to transfer criminal money through borders with minimal risks of losses, which could come from the activity of law-enforcement bodies.
These finances partially return to Russia not as large-scale investments in real economic sectors but as further corruptive pressure on the political and state authorities in order to save the existing mechanisms for obtaining unlawful money and their laundering. In Europe and America criminal resources are inevitably involve Russian criminal circles.
Propaganda and Russian Money Laundering
Lately the number of image promotion articles in the western media has grown (in Russian terms this means written to client’s order). These publications are trying to persuade their reader that there is a considerable growth in the Russian economy and that economic indices of the largest Russian companies are improving.
In our opinion such statements are very far from reality. Specialists are well aware that currently the budget independence of Russia mainly relies on the fluctuations of the world oil prices. The price being $20 per barrel, Russian government sees no motivation to make serious reforms in economy. However, any discussions about economic improvement in Russia without structural reforms are a self-delusion.
The same contradictions strike the eye when looking into the current situation in aluminium industry. Both the Russian and Western media are withholding the fact that the cost efficiency of the aluminium industry relies fully on the very low cost of the labour force kept at this level by social inequality.
Even specialized articles in the press ignore the subject of no real investments in the Russian aluminium industry. Just the opposite, ‘RUSAL’ is often praised as the main re-investor in Russia. In reality tough and sometimes incorrect exploitation ruins the main funds of the plants.
Some situations are clearly ironic. For example, a respectable Swiss newspaper «Neue Zuricher Zeitung» recently published an article (probably by the request of the corporation’s management) about a large-scale ecological program implemented at the smelters of ‘RUSAL’. However, according to our data, ‘RUSAL’s management only carries out routine restoration (which has not been completed yet) of the physical wear of the gas cleaning system. Technological catastrophes, which happen due to under-financing of the safety systems at aluminium smelters, are not revealed to the public. In the regions under ‘RUSAL’s control staff discrimination and use of physical force against journalists who attempt to inform the public about ecological breaches and social tension are hushed up.
As a result, one gets a distorted picture of the reality, where the large-scale export and money laundering operations are hidden.
Conclusion
SATCOR is confident that the fight against money laundering, which feed corruption and serve as a source of funding terrorist organizations, can only be successful through the joint efforts of law-enforcement authorities of the interested states and international community.
Taking into consideration some Russian aspects of this international problem SATCOR calls the participants of the conference to assist in establishing special control which should be maintained by specialized organizations devoted to struggle against money laundering and control the activities of some Russian legal and natural persons outside Russia.