It started with a routine request. Russian officials asked the FBI to track a $300,000 ransom payment for a kidnapping.
Now, more than a year later, federal investigators following the scent of that money have stumbled onto a trail that could lead them into the inner circle of Boris Yeltsin's Kremlin. Or not. No one knows for sure.
The Bank of New York case, which burst into the headlines in the doldrums of August, has become a sprawling story, with a large cast of characters, confusing plot lines and overlapping investigations in the United States, Britain and elsewhere. The Bank of New York probe is amplified by a separate inquiry led by Swiss prosecutors into alleged bribery of, and money laundering by, Kremlin officials. The Manhattan district attorney's office is conducting its own investigation.
Reporters searching for every scrap of news have produced a bewildering series of explanations for why as much as $7.5 billion moved through a group of accounts at the Bank of New York.
First it was Russian mob money and money laundering. Then capital flight. Tax evasion. International loans to Russia. Hidden payoffs to Russian officials. Or some combination of the above.
The case has thrown a spotlight on the less-than-pristine business practices in Russia. It also has raised questions about whether U.S. policy toward Russia has been effective, and it has caused bankers around the world to review their own security practices for signs of weaknesses or laxity.
Thus far, only a small, perhaps tenuous thread links the U.S. and Swiss investigations. Yeltsin and his two daughters had their credit-card bills paid by a Swiss engineering firm that received Kremlin contracts, according to Swiss prosecutors. One daughter is married to Leonid Dyachenko, an oil trader who maintained Bank of New York accounts in the Cayman Islands containing more than $2 million.
This report is based on documents and interviews with law enforcement, banking and government officials. At heart, the Bank of New York case and the investigation of Swiss bank accounts of Kremlin officials are detective stories. How they turn out is anyone's guess. We've only just finished Chapter 1.
The U.S. Probe
Let's start the Bank of New York story in Kew Gardens, a middle-class neighborhood in Queens far from the glamour of Manhattan's financial district. So many Russians live there that ATMs speak their native language. There, a group of Russian emigres began doing business from a cramped office in a building surrounded by pizza shops, delis, dry cleaners and newspaper vendors.
Few of the neighbors on the sixth floor of the building knew what went on in office No. 612. The businessmen spoke Russian, sometimes loudly on the telephone. Companies with names such as Benex, General Forex, Torfinex and Tofex received mail there. But when asked occasionally what they did, the businessmen gave a variety of answers, none of them very forthcoming.
As it happens, the companies used connections and personal computers to move money. Lots of money. So much that some investigators and U.S. officials believe this could be the largest money-laundering case they've ever encountered.
The operation in office No. 612 might have remained virtually unknown, apart from an elite and very wealthy group of Russians, if not for some circumstances that became entwined in August 1998.
For one, the Russian MVD, or Ministry of Internal Affairs, was working on a kidnapping that occurred in June of that year. They had tracked the ransom payment to a financial institution in San Francisco and asked if the FBI could help on subsequent transfers.
The feds discovered the money had been transferred to the Bank of New York, to accounts in the name of a company called Becs International LLC. Then it turned out that Becs was related to a bunch of other companies with accounts at the Bank of New York--companies with ties to the office in Kew Gardens.
About the same time, Republic National Bank in New York notified federal authorities of suspicious activity in an account. Huge sums were moving through the account, which is not noteworthy in itself. But investigators who checked out the firm that maintained the account found an office that bore "no resemblance to what should have been there," given that level of activity.
The company was Torfinex, yet another Kew Gardens operation.
In England, investigators were pursuing threads that appeared to link a Russian organized-crime group to the Bank of New York and some of the Kew Gardens companies. The British investigators had shared some of their information with officials in the United States.
Sensing a large money-laundering scheme at work, federal authorities subpoenaed records from the Bank of New York. They got back stacks of documents detailing about 87,000 transactions in nine or more related accounts. More than $2 billion moved through one account alone over the past year or so.
It wasn't just the amount of money that intrigues the government sleuths. They also found that all the accounts and all the companies involved were related somehow to a single man, Peter Berlin. Berlin, a Russian native who is now a U.S. citizen, started Benex International in 1993. Then, with the help of associates, including a Russian named Aleksey Volkov, he created the other companies. Those companies, in turn, opened the accounts under investigation at the Bank of New York.
It wasn't long before investigators learned another important fact about Berlin. He was married to a woman named Lucy Edwards, a vice president at the bank who helped the companies open the accounts. The bank fired Edwards in August for allegedly falsifying bank documents and violating internal policies. Lower-level bank officials did not follow up on suspicions about the accounts, according to the bank's chairman, Thomas A. Renyi, because "Mr. Berlin was married to a well-regarded officer."
Edwards and Berlin, through their attorney, have denied wrongdoing. Edwards last week filed papers at a London industrial tribunal, claiming she was unfairly dismissed.
The bank suspended Edwards and another executive, Natasha Gurfinkel Kagalovsky, in August after news of the probe surfaced. Kagalovsky is married to Konstantin Kagalovsky, who represented Russia at the International Monetary Fund from 1992 to 1995. Now an executive with Yukos, the Russian oil company, he is also under investigation. The Kagalovskys' attorney said they deny wrongdoing.
The Bank of New York fired one other person--Svetlana Kudryavtsev, a low-level employee in New York--after she refused to answer questions about the allegations, bank officials said. The officials said she was friends with Edwards.
Now, all of this doesn't necessarily mean anything illegal was going on. And investigators acknowledge they don't understand all of the implications. But what they saw was tantalizing. As one official put it, "this is obviously a very significant case."
All through the winter and spring, investigators monitored activity in the Bank of New York accounts. They watched as the influx of money--as much as $250 million a month--shifted from account to account. To successfully prosecute a money-laundering case, they needed evidence that the money came from certain types of criminal activity and that the people moving the money around knew it was tainted.
It was easy to identify the banks sending over most of the money. They were Sobinbank and Depozitarno-Kliringovy. Finding out who deposited the money there is another matter altogether. That task became much more difficult, investigators say, after the New York Times wrote an article in August that publicized the investigation.
At first, reports suggested the accounts were primarily used to hide money generated by a mob organization led by Semyon Mogilevich, a man whom intelligence officials in Britain and the United States have identified as one of the most notorious criminals in the world. Mogilevich has denied such allegations.
But officials soon questioned whether even the most efficient mob group could move so much money alone. "This is too much, perhaps exponentially too much, for just organized crime," said one man familiar with the accounts involved.
Some also theorized that IMF aid to Russia had been siphoned off by corrupt officials in the Kremlin. But IMF officials have said this didn't happen--and no evidence of such transfers has surfaced so far.
Now investigators, U.S. officials and some Russian specialists believe the money that moved through the Bank of New York represented a variety of potentially illegal activities in Russia, such as tax avoidance and "capital flight"--money seeking a safer investment haven than the sagging Russian economy.
Keith Henderson, co-director of American University's Transnational Crime and Corruption Center, said this case "contains all the elements of a much broader, global problem" involving financial networks that have few checks on the rapid movement of money by criminals or corrupt government officials.
One U.S. official, who spoke on the condition of anonymity, said investigators believe the money came from a variety of schemes to defraud the Russian government. That includes procurement deals in which suppliers charged exorbitant prices and kicked back money to corrupt officials. The U.S. official said executives also probably used a variety of schemes to steal from their companies and funneled the money through Bank of New York accounts.
Some in the Clinton administration also believe that Russian banks, some of them now insolvent, used the Bank of New York accounts to hide millions of dollars in profits squirreled away during the summer 1998 ruble-devaluation crisis .
And while the mob connection may not be as prominent as first thought, this official said, it almost certainly exists. The best evidence is related to a Pennsylvania firm called YBM Magnex International Inc., which prosecutors alleged in June was behind an elaborate stock fraud. Benex, one of the Berlin companies, was involved in financial transactions with YBM Magnex.
Just last month, the inquiry moved in another direction when the Cayman Islands accounts of Dyachenko, Yeltsin's son-in-law, were discovered. Belka Trading Corp., the firm that made the payments totaling more than $2 million to the accounts, says the money was for legitimate activities. No transfers have been found between the Berlin accounts and Belka, but investigators have subpoenaed business records and intend to keep digging.
The Swiss Probe
The story of the Swiss probe begins in a state building at 2 Nikitnikov Pereulok in Moscow, about six blocks from the Kremlin. It holds the office of presidential affairs, headed by Pavel Borodin, one of the most powerful people in the Kremlin.
Borodin, a good-humored giant of a man, doles out apartments, dachas, cars and supplies to state officials. He is in charge of all the state's property--planes, palaces, hospitals and hotels. Part of the funds his department needs come from its raft of commercial ventures, including, at one point, its investments in a diamond mine in Arkhangelsk.
Borodin, in effect, answers only to Yeltsin, according to Kremlin analysts. Various aides have tried in vain to force him out of office, or at least to make him report to the Kremlin's chief of staff. Last year, newspapers reported that Borodin had been fired--but the next day Yeltsin announced that he would not accept his departure. Photos published in a 1997 book by Yeltsin's former head of security show the president bare-chested on the banks of the Yenisey River in Siberia, with Borodin grinning beside him, a glass in his hand.
It is an axiom in Russia that the success of a government contractor is built on personal relationships. Mabetex Project Engineering was particularly effective at cultivating Borodin. Its president, Behgjet Pacolli, repeatedly treated Borodin and his employees to five-star hotel rooms in the resort town of Lugano, Switzerland, where Mabetex has its pink-marbled headquarters. After they discussed the progress on contract work, the Russian delegation could watch boats cruise Lugano's famous mountain-rimmed lake, sup at lakeside terraces and enjoy corkscrew drives up hillsides dotted with red-tile-roofed villas.
In all, Mabetex won $300 million in federal contracts over six years. Equally hospitable, and successful, was a Mabetex competitor, Mercata Trading, another Lugano-based renovation firm that is almost a copy of Mabetex. While Mabetex was outfitting the president's living quarters, Mercata Trading was renovating the Kremlin's Grand Palace, a $290 million contract.
Swiss investigators are now looking at both firms, as well as other government contractors, to see just how far their relationships with Borodin went. Vladimir Minayev, a top official with the Russian prosecutor general's office, said Thursday that his office is conducting its own massive inquiry into Mabetex, although Swiss authorities lost some confidence in their Russian counterparts earlier this year, after Yeltsin forced out Yuri Skuratov, who headed the office. The Swiss suspect Mabetex of doling out as much as $10 million in bribes to Russian officials, an accusation Pacolli vehemently denies.
Borodin has repeatedly said he never accepted any bribes.
Skuratov said Mabetex first caught the attention of German authorities, who suspected tax evasion. The inquiry was eventually picked up by Switzerland's general prosecutor, Carla Del Ponte, known for her aggressive pursuit of money launderers and mob suspects.
Among others, Del Ponte questioned Philip Turover, a sharp, multilingual businessman now living in Zurich, who alleged a former Mabetex executive extorted funds from him in the early 1990s, when the two of them worked to collect debts owed by Russian businesses for Banca del Gottardo in Lugano.
One of Turover's allegations was secondhand but intriguing: He said a Banca del Gottardo executive told him he saw Pacolli, the Mabetex president, hand Borodin wads of cash, a diamond brooch and a Cartier watch in Borodin's Moscow office. Pacolli calls that laughable.
In the utilitarian offices of the prosecutor general in Moscow, Skuratov's investigators were looking into questions about Borodin quietly, hoping not to alert the Kremlin. That secrecy was blown when Skuratov had to prepare a written justification so Del Ponte could search Mabetex's office on Jan. 22. He wrote of suspicions about padded contracts, bribes and corruption within the Kremlin management office.
As is customary, Del Ponte provided Pacolli with a copy of the document. Skuratov says Pacolli promptly faxed it to Moscow. Nine days later, Skuratov was summoned by the head of the presidential administration and told he was being suspended. Yeltsin's aides accused Skuratov of cavorting with prostitutes, and state-run television broadcast a videotape of the alleged escapade. Minayev of the prosecutor general's office said this week he is "99 percent" certain Skuratov is guilty.
In Lugano, Del Ponte turned up evidence that Pacolli transferred $1 million to a Budapest bank account in late 1995 for Yeltsin's benefit. One associate of Pacolli's says the money was meant to enable Yeltsin to finance election campaigns. Pacolli says it was to pay for advertising handled by Trinlo Investments, a firm with addresses in the Bahamas and the British Virgin Islands. No Trinlo officers have surfaced, despite a month of intense press attention, nor have its offices been located.
Another discovery took place at the offices of La Fen, a firm belonging to Franco Fenini, a former Mabetex executive whose family owns a clothing store near Lugano. Investigating magistrate Jacques Ducry found records of three gold Eurocard credit cards in the name of Yeltsin--spelled Boris N. Elstine--and his daughters, Tatyana Dyachenko and Yelena Okulova.
A Swiss law enforcement official said Mabetex paid tens of thousands of dollars in credit-card expenses for the Yeltsins; Skuratov said the Swiss gave him "a much, much bigger figure." Pacolli denies paying any such expenses. Investigators also discovered that Mabetex had set up accounts at Banca del Gottardo in the name of Borodin and others in his department. Pacolli says those accounts were to pay legitimate travel expenses for Russian officials monitoring Mabetex contracts.
The Yeltsin family's credit-card bills continue to interest Swiss prosecutors, though the prosecutors say they could not charge a head of state with a crime. His daughters apparently do not enjoy the same immunity, either at home or in Switzerland, and Skuratov says they have much to answer for. "Why should the state finance their clothes purchases?" the Russian prosecutor asked.
Of even greater interest to Swiss authorities is their discovery of Geneva bank accounts opened by people with close ties to the Kremlin, sometimes using other people's names. By June, investigators had identified about 10 such accounts containing roughly $3 million, and they are still digging. What intrigues them is not that Kremlin aides opened accounts abroad--although that is generally prohibited under Russian law--but how these officials amassed such wealth on salaries of, at most, $1,000 a month.
Some enterprises whose names have surfaced in the Borodin affair also show up in the Bank of New York case, said Daniel Devaud, an investigating magistrate in Geneva who is leading the Swiss inquiry. But both he and Bernard Bertossa, chief prosecutor for the Canton of Geneva, caution against making too much of the connection. The Borodin inquiry is expanding, Devaud said, but not because of anything to do with the Bank of New York.
The end point of the Swiss inquiry is hard to guess. Authorities there are dependent on the Russians to find out whether the money in Swiss bank accounts was illegally obtained before they can prosecute any Russian official for money laundering. But short of that, they still can seize funds, said Bertossa, the Geneva prosecutor. If authorities suspect a bank account contains profits from a crime, then the account holder must prove it does not, he said.
"I can ask, 'How do you explain that you have a bank account in Geneva with sufficient funds to pay for food for half the population of your country?' "
O'Harrow reported from New York, LaFraniere from Moscow.
Who's Who in a Case of Confusion
Here are some of the key characters in the Bank of New York case, and an outline of some of their connections to one another. Switzerland has been investigating the the Russian side. The United States is heading the investigation of the Bank of New York.
* Yelena Okulova, daughter of Yeltsin
* Boris Yeltsin, president of Russia
* Philip Turover, former debt collector; witness who alleged a Mabetex bribe in the Kremlin
* Tatyana Dyachenko, daughter and adviser of Yeltsin
* Leonid Dyachenko, married to Tatyana; oil trader; maintained Cayman Islands accounts at Bank of New York
* Pavel Borodin, Yeltsin aide; oversaw Kremlin renovation contracts; denies wrongdoing
* Semyon Mogilevich
Reputed Russian organized-crime figure; connected to a company that reportedly used Benex accounts for some transactions; says he is a legitimate businessman
* Mabetex Project Engineering
The firm, headed by Behgjet Pacolli, received $300 million in contracts; Swiss investigators have uncovered evidence that it paid tens of thousands of dollars in credit-card bills for Yeltsin and his two daughters and provided $1 million to a Hungarian bank account for Yeltsin's benefit; firm denies wrongdoing
Bank of New York, oldest U.S. bank, founded by Alexander Hamilton
* Natasha Gurfinkel Kagalovsky, Bank of New York senior vice president who supervised Edwards; denies wrongdoing
Status: Suspended by the bank.
* Lucy Edwards, Bank of New York vice president who gave referrals on accounts to her husband; denies wrongdoing.
Status: Fired by the bank
These three accounts received the bulk of the $7.5 billion that passed through the bank:
* Becs International LLC
* Benex International Co.
* Torfinex Corp.
* Aleksey Volkov
Director of Torfinex; shared office with Benex in Queens, N.Y.; reportedly helped set up accounts with Berlin; in Russia and cannot be reached
* Konstantin Kagalovsky, married to Natasha; former Russian representative to the International Monetary Fund
* Peter Berlin, married to Edwards; set up Becs, Torfinex and Benex accounts after referral from Edwards; denies wrongdoing