The Bank of New York said yesterday that it fired an executive who has become a central figure in a probe of allegations that organized crime groups and others in Russia used the bank in a major money-laundering operation.
The executive, Lucy Edwards, a London-based vice president who worked in the bank's East European division, was dismissed after an internal inquiry found she had falsified bank records, violated internal policies and failed to cooperate with in-house investigators, sources said.
Neither Edwards, who has not been charged with any crime, nor her attorney could be reached for comment.
It wasn't clear how her dismissal would affect a fast-developing scandal that has tarnished one of the nation's most venerable banks, spawned criminal investigations in the United States and Europe and led to allegations that have included possible diversion of loans made to Russia by the International Monetary Fund.
Separately, a spokesman for the IMF yesterday said his organization is skeptical about allegations that IMF loans to Russia had been skimmed off.
A Justice Department official also said Attorney General Janet Reno was briefed Thursday that there was no evidence of IMF money being linked to the case.
"We do not see evidence that our money has been intercepted or whatever the allegation is," IMF spokesman Thomas Dawson said. "We're having a hard time pinning down the allegations since they are rather vague, but to the extent to which we can pin them down, they don't seem to make much sense."
Dawson said that as far as he knows, authorities investigating questions of Russian money laundering have not contacted the IMF.
Nevertheless, the money-laundering allegations -- and the possibility that more than $10 billion moved through Bank of New York accounts over the past year and a half -- have thrown a spotlight on the rapid flight of capital and assets from the crumbling Russian economy. The probe also has raised questions about how carefully U.S. banks track possibly suspicious activity by their clients -- questions that will be a subject of congressional hearings in the fall.
At this point, there's little way to know the true extent of the case. Investigators are poring through volumes of financial records in an effort to sort out layers of deceptive accounting that they say characterizes money laundering.
On Monday, federal investigators in New York subpoenaed "a significant amount of documentation" from the Bank of New York, according to law enforcement officials.
Officials also seized about $20 million from two accounts at the bank that were opened by a Russian company called Benex Worldwide Ltd. Investigators say that Benex appears to have ties to Russian crime groups.
Bank of New York officials declined to discuss the seizures. In a statement, the bank said, "There are no allegations of wrongdoing by the bank. There has been no loss of customer funds or bank funds."
One of the difficult questions for investigators is how much of the activity is actually criminal -- and how much may appear suspicious but actually is typical of Russian business practices.
Since the waning days of communist rule, billions of dollars have fled the former Soviet Union, much of it plundered from Russian industries, experts say. Where the rule of law can be weak at best, official corruption, corporate theft, and organized crime sometimes converge.
Money laundering is the process by which tainted funds are made to look legitimate. The money is typically washed through a series of accounts or transactions to hide its origin. At the end of the process, the money is more freely spent or invested.
Money-launderers have established financial channels that a host of clients can use to hide funds from Russian tax collectors and move it out of the country.
"Just like a courier service -- like DHL, UPS, similar to that . . . They move something from point A to point B," said Richard Palmer, a former CIA official.
There are economic reasons why Russians would want to move money overseas -- for example, to escape the inflation and instability of the Russian financial system. Experts say large sums moving through New York bank accounts could represent "capital flight" instead of criminal activity.
For investigators assessing the movement of money through the Bank of New York, it may be all but impossible to determine whether funds were originally derived from criminal activity, experts said. Easier questions for investigators may be whether U.S. taxes were evaded, and whether firms illegally falsified transaction records, said Palmer, now a private investigator who helps U.S. firms trace assets in Russia.
Investigators say Edwards, the bank executive fired yesterday, may be crucial to understanding how so much money moved through suspicious accounts at the bank over the past 18 months. Edwards is married to a Russian native who is now an American citizen, Peter Berlin, who apparently helped set up the Benex-related accounts and who may have electronically transferred more than $4 billion, according to officials familiar with the investigation.
In June, Edwards made a presentation on the latest money-laundering techniques at a conference for financial executives in Riga, Latvia. Her speech was titled "Money Laundering: Latest Developments and Regulations."
Investigators also will want to know whether the activity in the accounts went unnoticed by more senior officials.
Edwards and another executive, Natasha Gurfinkel Kagalovsky, were suspended by the bank last week after news of the investigation surfaced. Bank officials expressed confidence in both women at the time. Kagalovsky is based in New York and headed the bank's East European division.
Kagalovsky is married to Konstantin Kagalovsky, who represented Russia at the IMF from 1992 to 1995. Now an executive with Yukos, a Russian oil company, he also is under investigation by authorities.
Stanley S. Arkin, the couple's attorney, said they denied any wrongdoing.
In an interview published yesterday in a Russian business newspaper, Kommersant, Konstantin Kagalovsky said he learned about his purported involvement in the scandal by reading the New York Times on the Internet last week, and phoned his wife in New York to tell her to look at the paper. He says that Natasha was first visited by the FBI on Wednesday evening, the day before the first article appeared.
Kagalovsky said his wife had been dealing with Russian businessmen before he met her. "Her bank was the most aggressive concerning Russia," he said. "These contacts were necessary. In general I think that it was due to Natasha that the Bank of New York was one of the first to be present on the Russian market and worked there so actively."
The case began as a result of several concurrent investigations in New York and Britain over the past five years that led investigators to Semyon Mogilevich. Law enforcement officials say Mogilevich is involved in arms dealing, extortion and a range of other criminal activities around the world, though he has denied that in the past.
Rep. Jim Leach (R-Iowa), chairman of the House Banking Committee, said he is planning to hold hearings on "Russian money laundering in the Western banking system."
Among other things, Leach's committee will examine the way authorities handled the investigation of transactions at the Bank of New York, Leach said. "It's my view that there are serious banking laws and practices at issue in the West, including the United States, but the preeminent issue is the degree of social theft in Russia."
In a statement issued yesterday, Leach said IMF loans to Russia should be stopped "unless and until firm methodologies for safeguarding funds are established."
While downplaying allegations that IMF funds were diverted, the IMF yesterday issued a blunt assessment of the way Russia's central bank channeled IMF funds through an offshore subsidiary a few years ago, saying it was "a total breach of the trust on which the relationship between the IMF and its members must rest."
"Hiding the transactions created a misleading impression of the true state of reserves . . . and may have caused the IMF to disburse funds in 1996 that would otherwise have been delayed," the IMF's John Odling-Smee wrote in an article to appear next week in an IMF internal newsletter.
The investigation of accounts at the Bank of New York is not the first sign that Russian organized crime has an American connection. In June, federal prosecutors in Philadelphia alleged that an East European organized crime figure identified as "C-1" was behind an elaborate stock fraud involving a Pennsylvania firm called YBM Magnex International Inc. YBM Magnex inflated the value of its shares with fraudulent claims "of record sales, high revenues, and substantial profits from the manufacture and distribution of industrial magnets," among other things, the Justice Department said.
Prosecutors estimated that the conspirators made millions of dollars of illegal profits by selling YBM shares at pumped-up prices.
Staff writers Michael Dobbs and Edward Walsh contributed to this report.
CAPTION: A Guide to a Probe (This graphic was not available)