A kingpin of Russian organized crime is believed to have cycled billions of dollars in illicit funds through the Bank of New York in a massive money laundering scheme, according to U.S. officials.
Semion Mogilevich, dubbed the "brainy don," is the leader of a ruthless Russian mob family known as the Red Mafia that is said to be behind the transfer of money through the bank, according to government sources. His global crime cartel traffics in military weapons, drugs, prostitutes and schemes to dump toxic waste from America in Russia, according to published reports.
The FBI and the U.S. attorney for the southern district of New York are leading one of the largest money laundering investigations ever. Some experts estimate that hundreds of billions of dollars have been looted from the Russian economy in recent years and funneled through U.S. banks.
"The money was flowing fast and furious out of Russia through the Bank of New York, and there are a lot of indications it was dirty money to start with," a senior federal law enforcement official said.
Officials involved in the investigation, including the Treasury Department and the Federal Reserve, declined to comment on the case, which was disclosed in today's New York Times.
Government sources did say that the Bank of New York, which has $67 billion in assets, contacted federal authorities about suspicious activities in various accounts, but only after the bank's records were subpoenaed by the U.S. attorney. No arrests have been made.
The bank confirmed today that it has been cooperating with the U.S. attorney's office in the investigation. "There are no allegations of wrongdoing by the bank," a spokesman said. "There has been no loss of customer funds or the bank's own funds."
The investigation is in its early stages and may take many months to complete, government sources said.
Money laundering is concealing the source of funds obtained from an illegal activity, such as drug sales or extortion, by moving the money through various bank accounts, often through wire transfers. This makes it difficult to determine whether the money came from legitimate activities.
As much as $500 billion in illicit funds are laundered through banks every year, and between $100 billion and $300 billion of that goes through U.S. banks, according to government estimates.
Federal money laundering regulations require banks to report cash transactions of more than $10,000, or any "suspicious activity" such as multiple transactions just under $10,000 or unusually frequent transactions, to the Treasury Department.
The department's Financial Crimes Enforcement Network, which handles such reports, declined to comment yesterday on whether it had received any suspicious activity reports from the Bank of New York.
Two employees of the bank who have been mentioned in the investigation are now on leave pending the completion of the investigation, the bank's spokesman said.
The two are Natasha Gurfinkel Kagalovsky, a senior vice president of the bank's Russian division in New York, and Lucy Edwards, a vice president of the bank in London who works on Eastern European accounts.
Kagalovsky was born in Russia and has been in the United States for about 20 years. She is married to Konstantin Kagalovsky, who was Russia's representative to the International Monetary Fund from 1992 to 1995.
Edwards was also born in Russia and is currently married to a Russian, although she previously married an American and became a U.S. citizen. Her current husband also worked at one time for the Bank of New York, sources said.
"Shame on the Bank of New York if they let the money go back and forth and didn't pick up on it," said one government official. Still, he said, it might not be illegal.
To prove criminal wrongdoing, prosecutors would have to show that the institution knew the funds were illicit but did nothing. In addition, only certain "specified unlawful activities" outside the United States come under the money laundering law, including bank fraud, wire fraud and other individual crimes. If the money came from prostitution, for example, it might not be covered.
Federal officials said they suspect that the money that flowed through Bank of New York accounts--perhaps as much as $10 billion--streamed in from various activities and companies headed by Mogilevich to the bank and then went, at least partially, to companies such as YBM Magnex, a Philadelphia company. YBM, which was publicly traded on the Toronto stock exchange, told American investors it owned a factory in Hungary that made high-tech magnets.
"Not enough due diligence was done" on YBM, said Sam Porteous, director of the Canadian office of Kroll Associates, a private investigative agency. "If anyone had seen the Hungarian plant, they would have known they couldn't be making what they said they were."
YBM collapsed last year, and the company recently pleaded guilty in Philadelphia to charges of securities fraud. Government sources said they suspect that YBM was essentially a money laundering front for Mogilevich.
Last year, a congressional report criticized Citibank, the nation's second-largest retail bank, for ignoring its own know-your-customer procedures from 1992 to 1994. The bank secretly transferred as much as $100 million in alleged drug money for the brother of a former Mexican president.
Authorities are still investigating that case and the Senate may hold hearings on it this fall.
Staff writer Roberto Suro and researcher Richard Drezen contributed to this report.