MOSCOW – Outside a Moscow stadium one night in 2006, deputy central banker Andrei Kozlov was walking to his car after playing soccer when two men opened fire, pumping bullets into his head and neck and also killing his driver.
Days earlier, the man leading Russia’s fight against money laundering had shut down a scheme used to funnel $1.6 billion of dirty funds abroad, including at least $112 million via Vienna-based Raiffeisen Zentralbank Oesterreich AG, according to Russian and Austrian investigators.
It was a trickle in a flood of illegal outflows that reached $52 billion in 2012 alone, according to former central bank Chairman Sergey Ignatiev.
Such flows are now in the cross hairs of U.S. President Barack Obama’s efforts to penalize Vladimir Putin for annexing Crimea and to halt his incursions into Ukraine. Obama signed a law on aid to Ukraine this month that includes a clause that allows the U.S. to go after assets of Russian officials and their allies who are deemed complicit in “significant corruption.”
“This is a declaration of war by the Obama administration on the current governing Russian elite,” said Ariel Cohen, senior fellow at the Heritage Foundation, a Washington-based research group. “There will be a lot of people potentially targeted.”
One possible weapon in this new battle is Dmitry Firtash, 48, the billionaire Ukrainian and major Raiffeisen client who was arrested in Vienna last month on U.S. bribery charges, according to Mark Galeotti, a Russian organized crime expert at New York University who advises regulators on money laundering.
A longtime ally of ousted Ukrainian President Viktor Yanukovych, who fled to Russia in February, Firtash made his fortune as a middleman in Gazprom’s secretive gas trade with Ukraine, which is the conduit for 15 percent of Europe’s supply and is, according to Transparency International, the most corrupt country on the continent.
He would be an invaluable asset to the U.S. if he agreed to cooperate because he knows how Russian officials have shifted billions of dollars into banks abroad, Galeotti said.
Ignatiev told lawmakers last June that money laundering in Russia — ranked the most corrupt major economy by Transparency International — was so pervasive that fighting it consumed more of his time than formulating monetary policy. In his last address to parliament before stepping down after a decade in the post, he highlighted one network in which 1,173 shell companies channeled $24 billion to foreign banks.
About half of all illegal capital flight, including bribes to bureaucrats and revenue from criminal syndicates, “appears to be controlled by one well-organized group of people,” Ignatiev told the Vedomosti newspaper in a rare interview in February 2013, without elaborating. Ignatiev, 66, is now an adviser to his successor, Elvira Nabiullina.
The wording of the new U.S. law is so broad it could apply to “almost anyone” close to Putin, said Masha Lipman, an analyst at the Carnegie Moscow Center who has co-written academic articles on Putin with former U.S. Ambassador Michael McFaul.
So far, the U.S. has imposed sanctions on more than two dozen officials and billionaires who were identified by the Treasury Department as being part of Putin’s inner circle, as well as one lender, Bank Rossiya.
The U.S. and its allies are prepared to impose additional sanctions that will target people close to Putin, deputy White House National Security Adviser Tony Blinken said Sunday. Secretary of State John Kerry said last week that Russia was trying to impose its will on Ukraine by the “barrel of a gun and the force of a mob.”
Russia is already on the verge of recession, so the U.S. can inflict major damage with industrywide sanctions, according to John Herbst, a former U.S. ambassador to Ukraine.
The bribery charges against Firtash center on a $500 million Indian mining project and his alleged crimes include falsifying documents to make bribe payments via unidentified banks look legitimate.
“Firtash is just a hostage,” said Kirill Kabanov, who heads the National Anti-Corruption Committee, an independent research group in Moscow. “They want him because he theoretically knows all the schemes, how the flows are organized. They are assuming he has a lot of information.”
Firtash’s role in Russian gas exports became public in 2006, when Raiffeisen, after pressure from the U.S., revealed that it held, on behalf of Firtash and his partner, half of the Swiss company that had just emerged as Ukraine’s sole supplier. Gazprom owned the other half of the venture, Ros-UkrEnergo.
The announcement came after closed-door meetings in Washington between Raiffeisen executives and U.S. officials who were probing potential links between Ros-UkrEnergo and organized crime.
Firtash told U.S. officials in Kiev in 2008 that he needed the approval of Semion Mogilevich, an organized-crime suspect on the Federal Bureau of Investigation’s most wanted list, to get into the gas trade with Gazprom, according to a secret cable published by WikiLeaks.
The FBI considers Mogilevich, 68, a Ukrainian-born Russian citizen based in Moscow, to be the leader of a multinational criminal network. He was indicted in the U.S. in 2003 on charges of money laundering and fraud related to the 1998 collapse of a Toronto-listed company based in Pennsylvania.
Firtash may know whether Ukrainian officials and managers at Gazprom and its affiliate, Moscow-based Gazprombank, had “personal economic interests” in RosUkrEnergo transactions, former Gazprom Deputy CEO Alexander Ryazanov said in an interview last month.
Firtash continued to benefit from his ties with Gazprom and Gazprombank even after the Ukrainian gas deal ended in 2009, according to two people familiar with his finances.
Ostchem Holding AG, the Austrian company that unites Firtash’s Ukrainian fertilizer producers, buys gas from Gazprom at a discounted price of about $270 per 1,000 cu. meters, or 30 percent less than Gazprom’s customers in Europe paid on average last year, according to the people.
Ostchem imported about 13 billion cu. meters of the fuel in 2013, said Natalia Ivanchenko, a spokeswoman for the company, declining to say at what price. At $270 per 1,000 cu. meters, that would come to about $3.5 billion.
Firtash has borrowed about $2.8 billion from Gazprombank over the past few years, secured by his Ukrainian assets, which include a titanium deposit in Crimea, the people said.
Gazprombank declined to comment on its ties to Firtash. First Vice President Ekaterina Trofimova said the lender conducts business “in strict accordance with international laws” and sees no “reasonable grounds” for sanctions.
Even so, Russia’s third-largest lender is preparing for possible U.S. penalties, according to two people with knowledge of the deliberations who asked not to be identified because the information is confidential.
Galeotti, the organized crime expert, said in one way or another, most major U.S. and European banks are complicit in handling dirty money from Russia and other sanctioned countries.
“There are those who say, ‘as long as nothing obvious is flagged up, it’s OK,’ and there are those who implicitly assist their customers to ensure that nothing gets flagged up,” Galeotti said.
HSBC Holdings PLC in December 2012 agreed to pay $1.92 billion to settle U.S. probes of laundering funds of sanctioned nations. ING Groep NV in June 2012 agreed to pay $619 million to settle U.S. charges it falsified financial records to bypass sanctions on countries including Cuba and Iran.
The U.S. has acted to punish Russians accused of corruption before, as in the case of Sergei Magnitsky, a legal adviser to London-based Hermitage Capital Management Ltd. who died in a Moscow prison in 2009.
In 2012, Obama signed the Magnitsky Act, which led to sanctions on 18 Russian officials and an undisclosed number of others for what Congress determined to be involvement in Magnitsky’s death and the fraudulent $230 million tax rebate scheme he uncovered.
Hermitage, once the largest foreign owner of Russian stocks, says it has traced the flows of $134 million of those funds and successfully petitioned U.S. courts to force lenders to turn over records of the transfers. As a result, authorities have seized $24 million of New York real estate and have frozen more than $10 million in Swiss accounts, according to Hermitage chief Bill Browder, who’s been barred from Russia since 2005.
As the money crossed national borders, most of it was converted into dollars, which had to pass, if only for a split second, through a correspondent bank in New York, according to Hermitage. The central role of the U.S. and European banking systems in the global economy provides a tool to go after the corrupt Russian officials behind the laundering, Browder said by phone.
Tracing dirty money
“The thing about dirty money is that it’s completely traceable, it leaves a permanent mark,” Browder said. “The moment it leaves the ruble system and goes into the international banking system, it leaves a trace forever.”
That was how Kozlov and his team of regulators managed to shut down the laundering operation that went through a small bank called Diskont just before he was gunned down.
Ignatiev, Kozlov’s boss at the central bank at the time, said in his testimony to police, a transcript of which was seen by Bloomberg, that he believed the murder was ordered by the same people who were behind the Diskont scheme.
Investigators dropped that line of inquiry, turning their attention instead to Alexei Frenkel, whose VIP Bank had lost its license three months earlier. In 2008, Frenkel, who still maintains his innocence, was convicted of ordering the hit and sentenced to 19 years in prison.
The verdict was condemned by a group of human rights activists led by Lyudmilla Alexeyeva of the Moscow Helsinki Group and Lev Ponomarev of For Human Rights, who monitored the trial and concluded that Frenkel was framed by officials “at a fairly high level” to protect the real culprits.