Text size

As Congress holds hearings on suspected Russian meddling in the recent U.S. presidential election and the Federal Bureau of Investigation probes for ties between Trump campaign officials and Russia, Barron’s now presents a detailed examination of what Eastern European authorities claim is questionable money leaving the Russian Federation to fund payments around the world. This journalistic investigation predated the Trump probes. In fact, it began three years ago with reports by the Eastern European-based investigative journalism group called the Organized Crime and Corruption Reporting Project.

The 2014 stories by OCCRP and the Moscow paper Novaya Gazeta described $22 billion that was wired from Russia to accounts held by offshore shell companies at a small bank in Moldova called Moldindconbank. Anti-money-laundering authorities in both countries have been probing the transfers ever since.

Now, OCCRP has obtained what it says are bank records of over 70,000 transfers, worth more than $20 billion, out of those same shell company accounts in the Moldovan bank. Most moved first to other accounts held by the shell companies at Latvia’s Trasta komercbanka, before scattering to more than 5,000 companies around the world. Barron’s and journalists from 32 countries followed the money from those two banks, and found some ended up with household corporate names such as Samsung Electronics, Stanley Black & Decker, and Ciena. The banks where the receiving companies had accounts included the Bank of China (ticker: 601988.Shanghai), Danske Bank (DANSKE), HSBC Holdings (HSBC), UBS Group (UBS), and Citigroup (C).

Payments went to many smaller companies, as well. One recipient was a company owned by an American who has pleaded guilty to smuggling military equipment to Russia through third parties. Another recipient was a company that developed a golf course for Donald Trump on the Caribbean island of Canouan.

Trasta komercbanka, in Riga, Latvia Jyrki Ojala, Yle, MOT

Tracing funds through nominee accounts is hard, even for regulators, so we can’t say that the $20 billion coming out of the Moldova bank is part of the $22 billion that flowed in from Russia. The banks and companies that spoke with us stressed that they go to great lengths to steer clear of tainted funds.

One bank that acknowledges receiving the Moldovan and Latvian payouts is Copenhagen-based Danske Bank, whose customers in its Estonian branch got $1.2 billion from 2012 to 2014. “We did not have in place sufficient control procedures in Estonia, and we were too late to identify the transactions,” said Danske’s legal chief, Flemming Pristed, in a statement. Although the bank says it doesn’t know for a fact that money laundering took place, it replaced its management team in Estonia, closed the accounts that couldn’t document a reason for banking in Estonia, and ended its relationship with Trasta komercbanka.

Remarkably, the $22 billion that flowed out of Russia to the tiny Moldovan bank would be enough to pay for about 3% of Russia’s imports. Why would companies and individuals in the world’s 13th biggest economy resort to hidden networks to move their money abroad? Tax evasion is the main reason, says Jonathan Winer, a Washington D.C. attorney who served as the Clinton administration’s senior U.S. diplomat tasked with fighting international money laundering, including in Russia. Another motive is to avoid Russian customs, where widespread corruption drives businesses to cloak their imports, costing the government $40 billion a year in lost customs duties, according to a study by Russia’s Parliament.

Here is how the scheme worked, according to the initial, award-winning series of stories published in 2014 by OCCRP and Novaya Gazeta, which dubbed the operation The Laundromat. The stories alleged that the process started with Russian companies guaranteeing-in effect co-signing-fictitious loan agreements between two shell companies. The borrower would then default, allowing the lender to sue the Russian guarantor in a Moldovan court. When a Moldovan court official certified the debt, the Russian guarantor, privy to the scheme, would send money off to accounts at Moldindconbank. Those accounts were held by companies from New Zealand, Cyprus, or the United Kingdom, where corporate filings showed no financial activity and their directors said they knew nothing of the firms’ operations when questioned by OCCRP reporters.

The 2014 stories prompted money-laundering investigations in Russia and in Moldova, which recently extradited one of the network’s alleged masterminds, from Ukraine to Moldova. The accused man says he’s being framed. Local prosecutors have charged 20 Moldovan court officials with issuing illegal decisions and with money laundering, and have said they are investigating employees of Moldindconbank and the country’s central bank. Moldindconbank has vigorously denied any impropriety.

About $5 billion of the payments from Russia to Moldova from 2012 to 2014 were wired from the Russian Land Bank, whose board of directors included Vladimir Putin’s cousin Igor, according to a Moldovan law-enforcement report. Igor Putin told Forbes-Russia that he quit when he grew uncomfortable with the bank’s activities. Russia’s central bank has since revoked the bank’s license for breaking money-laundering rules, and the bank is now defunct. The bank’s controlling shareholder says he has not done anything wrong. Although Russia’s Federal Financial Monitoring Service has said it was investigating the Moldovan scheme, other Russian officials may have different aims. On March 9, Moldova protested that its visiting investigators had been interrogated by Russian security services and detained 35 times at Moscow airports, in what Moldova claims is retaliation for its diligent pursuit of information.

Moldovan investigators alleged that the money moved in lump sums as large as $800 million from sources like the Russian Land Bank to Moldindconbank, which had just $700 million in deposits at the end of 2013. Billions of dollars then went onward to Trasta komercbanka in Latvia, a country whose European Union membership made it easier to spread the money around the world. European banking regulators revoked its license in March 2016 for failure to comply with anti-money-laundering rules. Though the Latvian bank has contested its license revocation in European Union courts, it is now in liquidation.

Until now, it was a mystery where money went from the Moldovan and Latvian bank accounts. But an international team of more than 60 journalists have studied records that OCCRP says are from 21 accounts at Moldindconbank and Trasta komercbanka, showing more than 70,000 transfers worth over $20 billion from 2011 to 2014. The accounts were held by the same shell companies (most now dissolved) that had received the Russian inflows under investigation in Moldova—though, to be sure, we don’t know if the Russian inflows were the source of the outflows shown in the records. What’s more, there can be legitimate reasons for the use of such shell companies.

The payments went everywhere in the world, from Los Angeles to Beijing. Recipients ranged from a manufacturer of snow-making equipment to promoters of heavy-metal music. Receiving payment from a shell company account in Latvia or Moldova doesn’t mean that any of these vendors did anything wrong or illegal.

• Among the better-known companies receiving payments from the Moldovan and Latvian banks were Samsung, which received almost $24 million; Stanley Black & Decker, which got $3.1 million; and Ciena, which got $2.2 million. They all got paid from accounts held in the name of U.K. companies that included Alaro Business and Seabon—two of the companies that are subjects of Moldova’s money-laundering probe, according to government documents viewed by Barron’s. Seabon was the busiest node appearing in the bank records obtained by OCCRP, which showed it handling more than $5 billion in total. Yet its last balance sheet filed with U.K. regulators reported December 2013 assets of one British pound. Both Seabon and Alaro were dissolved last year.

Black & Decker checked its records after we asked about payments the toolmaker got from several Moldindconbank accounts. “We determined the referenced business transactions were proper,” said a company statement. “All the payments received were related to these goods being shipped to our customers.”

Ciena experiences “a range of business practices” within its customer base, said its general counsel David Rothenstein. “We take all necessary steps to ensure that we are in compliance with applicable laws and regulations, including with respect to our accounts receivable.”

Samsung declined comment.

• The bank records obtained by OCCRP show payments that went to many small businesses. The largest one-time payment shown going to a U.S. recipient was $499,974 received in June 2012 by Total Golf Construction, a Florida-based company that has built golf courses in Dubai, Azerbaijan, and the Caribbean island of Canouan, where the company renovated the Trump International Golf Course. Total Golf’s Vice President Jeff Brewster said he didn’t recall receiving the payment shown in the records for an account in the name of Kenovetco at Trasta komercbanka. “We do a lot of business in that part of the world,” he said. “If we get paid and the payment matches our invoice, I don’t look to see how it comes in.”

• Some recipients already were in the sights of U.S. authorities for other reasons. The Kenovetco bank records showed a June 2012 payment of some $250,000 that went to the Wells Fargo bank account of a California-based company called Trident International. The Latvian bank Trasta komercbanka’s records said the payment was for the sale of “components for industrial production of electronic measuring devices.” The same Wells Fargo account appeared in the March 2015 indictment of Trident and its 67-year old owner Pavel S. Flider, as a U.S. federal grand jury charged them with money laundering and the smuggling of export-restricted electronics to dozens of Russian military contractors.

In a search-warrant application before Flider’s arrest in 2015, federal investigators said that Flider had made nearly $70 million since the 1990s by shipping restricted electronics to the makers of Russian fighter jets, avionics, radar, and electronic counterintelligence systems. Investigators said Flider’s export declarations falsely labeled many of his military-grade computer chips as “power supplies.” U.S. Commerce Department agent Richard J. Fitzpatrick III told a federal magistrate that in interviews at Flider’s home in Marin County near San Francisco, Flider had insisted that his only customers were in Finland and Estonia, where the components went into railroad-safety systems. But the agent said that cooperating investigators in those countries found that Flider’s shipments were all forwarded to Russian military companies. FBI agent David Koblitz told the court that intercepts of Flider’s emails showed him in steady communication with several dozen Russian manufacturers like VO Mashpriborintorg, which the U.S. agents described as a procurement front company for Russian intelligence and security services. VO Mashpriborintorg did not respond to Barron’s queries.

Despite evidence that the “vast majority” of Flider’s customers were Russian military contractors, the FBI’s Koblitz told the court that none of the millions of dollars flowing into Trident’s bank account came directly from Russia. From 2009 through 2014, said Koblitz, 99% of the funds received into Trident’s Wells Fargo account were wire transfers totaling $50 million from 13 different companies domiciled in multiple countries. Another Trident account got wire transfers worth $20.7 million from 59 different companies. The use of so many different companies to send payments to an exporter, said the agent, was characteristic of attempts by a smuggler “to disguise the true location of its end-users, in this case, Russia.”

In August of 2016, Flider and his company Trident pleaded guilty to the smuggling charges and he awaits sentencing on Aug. 22 of this year.

Kenovetco was a Cyprus corporation registered in 2010 by a local accounting firm, Alliott Partellas Kiliaris, which advertises its service of providing nominee shareholders and directors. Accountant Antonis Partellas told Barron’s that the beneficial owner of Kenovetco was “a Russian individual,” for whom the accountants provided Kenovetco’s director, secretary, and address. In 2013, said Partellas, his firm resigned those positions and asked regulators to strike off the company.

• Another U.S. beneficiary of the Moldovan payments was Parason, whose Bank of America account got $8.3 million over the course of 2014, “for electronic components and computing systems,” according to the Moldovan bank’s records. Parason is a Delaware corporation, so its shareholders, directors, and officers aren’t of public record. But its address in the Moldindconbank records obtained by OCCRP is the office address shown in public records for a Russian-American accountant named Ilya G. Bykov who has helped Russian celebrity clients buy Manhattan real estate at fancy places like the Plaza Hotel and the Time Warner Building. New York City’s real estate records show that legal documents empowering Bykov to enter into real estate contracts on behalf of the Russian oligarch and newspaper owner Alexandre Lebedev; a top lieutenant of metals billionaire and Brooklyn Nets owner Mikhail Prokhorov; the billionaire music producer Igor Kroutoi; and Irina Shaykhlislamova, better known as the supermodel Irina Shayk. Parason’s shared address with Bykov could be a coincidence. The accountant hasn’t responded to our queries.

Many of the shell-company payments went to legitimate businesses that told reporters they had sold real goods or services to customers in Russia. We’re not suggesting that any of the payouts received from these accounts came from the Russian injections now under investigation or even from Russia. Tracing funds through nominee accounts is designed to be difficult and in any event, it’s not illegal to get paid from a source you may not understand.

If mysterious payments aren’t necessarily a big deal to most exporters, they are a big problem for banks. All banks are required to know the real owners of their accounts and to report suspicious activities to regulators. Even if funds are just falsely labeled, says attorney Winer, that misrepresentation can constitute bank fraud in the U.S. If the money is not mislabeled and is illicit, then the bank can be found guilty of money laundering, of course. Schemes as vast as the Moldovan network are hard to police. Barron’s asked about the anti-money-laundering programs at banks like HSBC Holdings and the Bank of China, which the records obtained by the OCCRP show to have handled some of the largest amounts from the two Moldovan and Latvian banks. Those big banks said laws prevent them from discussing specific customers or transactions, but they insisted that they don’t tolerate money laundering or financial crime and have controls in place to prevent and deter those activities.

It’s notable that while America may loom large in world trade, U.S. firms accounted for only a few hundred of the payments shown in the records-totaling less than $40 million. Veteran money-laundering regulators say that Russian money movers have shifted from the U.S. to other regions, since federal prosecutors convicted Bank of New York Mellon executives of helping launder $7 billion for Russian clients in the 1990s.

The only U.S.-based bank holding company that Moldindconbank records show getting much from the Moldovan bank was Citigroup; the majority of the $37 million that Citi’s Dutch branch handled went to one customer, Samsung. Citi wouldn’t comment on specific transactions, but said it continually enhances its anti-money-laundering program. “Among our most serious obligations as a bank is to achieve the strongest possible system for anti-money-laundering and sanctions compliance,” said spokesman Mark Costiglio, “to protect the financial system from being used as a tool by criminals and terrorists.”

Far larger portions of the $20 billion, documented in the Eastern European bank payouts, ended up in accounts at other global bank holding companies. Danske Bank, as noted, handled the equivalent of $1.2 billion; the Bank of China, in Hong Kong and the mainland, $700 million; HSBC, $545 million; UBS, $160 million; and the Royal Bank of Scotland, $145 million.

Financial rules around the world don’t require banks to determine that particular funds have been laundered--which would require investigating the money’s origin--but only to report to authorities that a transaction has suspicious characteristics. Among those red flags, says money-laundering expert Winer, is an inappropriate volume arriving from a shell-company account at a small bank. A compliance officer tries to protect his bank by knowing its customers and ensuring that any “correspondent” banks with which it does business also know their customers.

Money launderers will always be trying to gain entree to the world’s big banks. Protecting the perimeter of a sprawling organization is “risk-based,” as they say: You may not identify the first dirty dollars in a series until it has reached a certain scale. Winer says he’d be surprised if any major international bank had encountered and not investigated a pattern of activity like the Moldovan fund flows. He has seen such patterns prompt big banks to cut off relations with a Baltic institution.

As noted, most banks won’t talk about what they did in a specific instance. But they all say they do the right thing in general. UBS says it regularly reports suspicious activities to authorities and notes that it helped launch the bank industry group that develops guidance on managing financial crime. An RBS spokesman said, “We are committed to combatting financial crime and money laundering in line with our regulations and have controls and safeguards in place to identify, assess, monitor, and mitigate these risks.”

In its statement, the Bank of China (Hong Kong) said it has appropriate controls in place to prevent and deter money laundering and adopts “zero-tolerance” for money laundering and other financial crimes. “For any identified suspicious transactions,” said the bank, “we will undertake appropriate risk mitigating measures, including promptly reporting to relevant authorities, ongoing close monitoring and where necessary and appropriate, exiting the customer relationship.”

HSBC also said it has systems in place to identify suspicious activity and report it to the appropriate authorities. “This case highlights the need for greater information sharing between the public and private sectors, each of whom holds important information the other does not,” said the bank. “Since HSBC was not at the center of this alleged scheme, the bank was in the position of monitoring individual transactions in isolation from one another, without the benefit of information about their interconnectedness or the existence of a larger scheme.”

To keep up with Russian schemes like the one run through the two Eastern European banks, both the financial institutions and governments will have to up their games.

Comments? E-mail us at editors@barrons.com

Follow @blalpert

Like Barron’s on Facebook

Follow Barron’s on Twitter