Embassyof the U ited States of America ;-: n ., , .r;. FerqlnKl l "i August.23,1 999 i \i{ Dr.Johan Backman (), OikeuspoliittinenTutkimuslaitos PL1200 !' 00101Helsinki

Dearl\y'r. Backman:

Greetings.I have recently arrived in Helsinkitoserve as the U.S.Embassy's Press andCultural Attach6. In this capacity, lwould like to offermyself and my staff as a resourceon topicsof mutualinterest. Ambassador Edelman and other colleagues in the Embassyhave suggested that \,.ou might be interestedin receivingtopical materialson lawenforcement issues.

Accordingly,I am enclosinga coupleof articleson transnational organized crime writtenby RaymondBonner, a staffwriter for the New YorkTimes. Bonner writes on oiEa;,i:redLrir're perietir,iiorr oi ieg|t.mate financral markets (a topic which has also beenthe subjectof recentpress rel)orts on the Swissbanking industry) and the growingillicit trade in small arms traCing. lf youare interested in corruptiontopics, I wouldlike to drawyour attention to recent articlesthat focus on multi-nationalanti-corruption efforts including a recent workshopbetween the OECD and []ussia. Thesematerials can be found at: httplqrytry.lablbQ!.a4:&$tlinlgglqi!!q or htlD://www.usia.gov/topiqalleon/bribes, amongother sites. lf youwould like a packetin print,cr wouldlike to receivefuture materials via e-mail, pleasejust call us or e-mailmy office.

Sincerely, ffiiq Zrb'6'- StacyE. White U.S.Embassy Helsinki Phone:09 175-138 e-mail: !t itc.,.!,,, h ite @' usenl bassy. ii or DIqj!]]1t!!e!rbassv.li homepage:www.usembassy.f i MurkyLife ofan tnEmationalOun Deller huprAearch.nytimes.cotr/search/daily/...ite+site+l?179+26+wAAA+Raymond%TEBonr

lnternatlonal arrqr[!*h.r @@@@@r@

July 14,1998

Murkv Life of an International Gun Dealer

RelatedArticles . U.N. Aereesto Help AlbanianCovernrnent Disarm Civilians . 21 NationsSeek to Limit Traffic in Light Weapons(July 13) . CanadaReleases lranians Susoected of ArmsSmugeling (May 16) . Albanians.Struggling to Survive.Sell Stolen Rifles (Apt1l24,1997)

Forum . Joina Discussionon GunControl

Ay RAYMOND BONNER

-- I ONDON en arhletic-lookingDane, with blond hair, blue eyes and an arrest r warrantfor amed robbery.hires a Britisharms dealer with a colorfulresume. In Latvia,they buy a Russiancargo plane and have it flown to Bulgariawhere ir is loadedwith 77 casesof weapons,including 300 assault rifles, ammunition, pistols, handerenades and rocket launchers.

Theplane then heads edst to India.When it getsover the A rvoRLDoF villageof Purulia,near Calcutta, the weapons are shoved out, ARtts driftingdown under parachuie rigging purchased in South Africa.The deal is financedout of HongKong. The intended weaponsin theski recipientis a violentreligrous sect.

Howeverfictional it mightsound, lhis wasa real-lifearms shipment, one that revealsthe circuitous measures terrorists and rebel groups employ to getweapons, andhow relativelyeasy it is for lhemto do so.It alsoillustrates the almost complerelack of intemationalcontrols on thesmall-arms trade. (In Osloon Monday,the United States and 20 othergovemments opened a meetingto discuss measuresto dealwith thespread of assaultrifles, pistols, grenades and other so-calledsmall arms.)

Generallyit is not a cfimefor a weaponsdealer to getaround the arms-control lawsof his countryby havingthe weapons shipped from anothercountry.

"It's a hugeloophole," said Geraldine O'Callaghan, an analyst at theBritish AmericanSecurity Information Council, an independentgroup that lobbies on small-amsissues. "It needsto be addressedu.gently."

ln the UnitedStates, the Clinton administration closed this loopholetwo yealsago by givingthe State Depaftment greater authority to monitorand regulate arms brokcrs.As a result,American arms dealcrs ate now subjectto thesame laws whetherthey are shipping weapons directly from theUnited States or brokering dealsabroad. The administration is pushingother countries to adoptsimilar

I of .l 7/27l99l?;lE Pl,1 MurkyLife of an lntcm.tion.tCu Dealcr hrlpi//scarch.nytimes.coft/selrclvdaily/...ne+sire+17179+26+wAAA+R!ymond%7EBon

controls.

Britainplans to addressthis, but only in part,by preventingarms dealers from sellingweapons to countrieson whichthe United Nations has arms embargoes,

While weaponsfalling from thesky is downrightbizarre, the orher elements of this taletypify a black-marketsmall-arms transaction.

"You havedeals like this beingbrokered on all continentsof theworld every da, saidDonald Manross, an Americanwho is directorof thefirearms and explosives divisionat Interpol,the internationalpolice group that is still invesrigatingthe Puruliadeal, which occuned in late 1995.

It is easierfor theblack-market trade to floudshbecause even legal transactions arehighly secrer. To protectthe commercial interests of businesses,most govemments,including the United States, do notdisclose information about licensesissued to armsexporters.

AIso,the document that governments rely on to controlthe destination of weapons, the so-calledend-user certificate, can be easily forged, and a dealerhas no legal responsibilityto checkon thevalidity of thiscenificate before shipping the w€apons.Rebel groups and tenorists use phony end-user certificates in orderto disguisewhere the weapons will wind up.

Britainhas tough export controls, but in thissale to theIndian religious sect, none ofthe armstouched British soil andno Britishdocuments were involved. Thus, while theBritish arms broker, Peter von Kalkstein-Bleach, languishes in a Calcutta jail on chargesofwaging war against India -- his planewas forced down when the dealwent sour -- he doesnot appearto haveviolated any laws in Britainwhere he wasbased. Nor is theother British arms-trading company, Border Technology and InnovationsLtd., whichananged for theweapons to bebought and shipped from Bulgaria,accused of anycrime.

Bleachhas pleaded not guilty in Indiato 12counts, all of whichcarry the death sentence.

If significantcuds aregoing to be madeon th€shadowy alms trade, said Manross of Intelpol,end-user certificates need to bestandardized so that it is moredifficult for th€mto be forgedand easier for a companyto checkthcir validity.

Manrossnoted that in thelast year there has been considerable discussion among a few govemmentand independent groups that study the small-arms trade about the needto crackdown on theillicit tradein smallweaDons. "Now. we haveto movc to concreteaction," he said.

Bleach'sdeal began in thesummer of 1995when he heardfrom a German commoditiestrader tha! a Danishbusinessman wanted to buy weapons.

Like manyarms traders, Bleach, now 47, hasa militarybackground, having served in theBritish army. Afterward, he wasa prisonguard in whatwas then white-ruled Rhodesia.He retumedto Britainas a privateinvestigator and later took up commoditiestrading, including arms deals. His company,Aeroserve, has a Iicense from theBritish Defense Ministry.

2of4 7/17199I l: llt Pl MurkyLife of anIntematioialGun Deale. hrtp://redrch ny ' m.5.corvsearcVdarlt/... k -nE . Jl I 79-26+wA A A + Rry mond%7EBonr

"He'sa walterMitty character, and a bit of a lady'srnan," said Christopher Hudson,who met Bleach 15 years ago in thecourse of theirpolitical activities in theTory Party.

Hudson,who is engagedin a campaignto saveBleach from hanging,likes to call Bleach"the Milk Tray man."It is a referenceto an advertisementpopular in Britain in the 1970s,where a dashingman in a blackpolo shirt jumps out of planes andhelicopters and braves shark-infested warers or otherdangers to delivera lady herCadbury's chocolates.

For the Puruliadeal, Bleach showed up in Amsterdamto meeta manwho introducedhimself as Kim Davy.Bleach also met with Davy andhis lawyerat the businesscenter ofthe IntercontinentalHotel in centralLondon.

Davy'sreal name is NielsChristian Nielsen. He wasbom in Denmarkin December 1961,accordidg to a confidentialInterpol report. He tookthe name Kim Davy from a New Zealandinfant who diedat theage of 5 weeks.He hasalso engaged in gold anddrug smuggling, money laundedng and counterfeiting $100 bills, accordingto thereport Interpol refers to asa "rednotice."

A te€totalerand vegetarian, Nielserl is a memberof theAnanda Marga, a Hindu fundamentalistgroup founded in 1955in India,according to Interpol.The polce agencysays that the sect has been responsible for "manyacts and threats of violenceagainst Indian govemment buildings and personnel," and was the intendedrecipient of th€weapons. Davy eluded the Indian police when Bleach was seizedand is still at large.Several European countries also want him for crimes rangingfrom armedrobbery to counterfeiting.

A seriesof faxesfrom Bleachto Davyand his partnersprovides rare glimpses insidethe world of small-armstrading

"I stressedfrom the v€rybeginning that in orderto be successful,it is most importantthat this resemblesa perfectly normal hansactior in everypossible way," Bleachwrote in onefive-page fax.

"No singlecontracto. should be awareof theentire route," Bleach scolded. Only thepilot shouldbe awareof theultimate destination of theweapons, he said.

For reasonsthat are not completelyclear, at thetime he wasmeeting with Davy, Bleachdecided to go to theBritish authorities.

In a letterto tlle BritishDefense Ministry, one that is againhighly revealing, Bleachsaid that if hebacked out ofthe deal,Davy "wiu simplygo elsewhere,and somebodyelse will providethe goods.

In theend, he took$30,000 from Davyand bought the Russian aircraft, Hudson said.After theoperation, Bleach planned to sellthe plane and keep the money as partof his profit,Hudson said.

To getthe a[ms, Bleach tumed to BorderTechnology, an arms-tradingcompany in Hexham,in northeastEngland, because it hadexperience in gettingweapons, said PeterScott, one of thecompany's two directors;both men are former British militaryofficers.

7t2T99 12:18Ptl MurkyLife oi an IntcrnadonalCun Dealer htlpr/s€arch.nytimes.convsearcvdaily/...ite+srte+37179+26+WA"AA+Raymond%7EBo,

BorderTechnology would not discussthe details of thetransaction but Bleachtold Hudsonthe company was paid $165,000 for thefirst shipmentof weapons,the one thatwas parachuted, netting the company a "minimumprofit" of $100,000.

Besidesthe 300Kalashnikov assault rifles there were 20,000 rounds of ammunitioo:l5 9-millimeterpistols and 4,000 rounds of ammunirion;two sniper rifles,with nightvision sights; l0 rocketlaunchers and 200 rocket grenades, and 100hand grenades.

If theyhad been shipped from Britain,Border Technology would have needed an exportlicense, which the British government might have been reluctant to issue.

So Bo.derTechnology turned to a leadingBulgarian arms maker, Arsenal Co., for thehigh-quality Kalashnikov rifles and pistols. On rheshipping documenrs Arsenaldeclared the weapons "technical equipmenf'and omitted the code that wouldhave idendfied the cargo as weapons, a seniorBulgarian defense official said.

Arsenaldid not respondto telephoneand fax rcquestsfor comment.

In a letterfrom prisonto Hudsonlast August, Bleach said that when he became suspiciousabout fte deal,he told oncof BorderTechnology's directors "the facts, andsuggested that it wouldbe a damnedgood idea to call theauthorities."

"He did norwant to know,"Bleach wrote. Bleach had already made his initial contactwiti theauthorities, and continued to talk with themafter his warninsto BorderTechnology, Hudson said-

Scott,the Border Technology director, said his company had acted on thebasis of what it considercdto b€ a "genuine"ceflificate that identified the final customeras theBangladesh Defense Minis&y and in anyevent had done nothing improper.

Thecertificate was fraudulent, said Hudson.

U9!!9 I SjlgBlg I Sitc S€arch I Esglls l4I9!iE! | Ma*etplace

OuickNews lPage One Plus I IntemationalI NationayN.Y. I Busincss I Tcchnotory lSqielqg I S!ed! | weather I Edirorial I QEE4,A!! | AutomobiiesI Bgqk! | DiversionsI Job Markct I RealEstare ltqrg!

HelplFeedbackI Classin€ds Sewices I New YorkTodav

Copvrisht 1998The N€w York Time! Companv

7/t7l99 12.t8 Pi\ New YoRK TIMES - DoMloded Augusr2l, 199 http/oc.cia-gov^loricvAug%2022,%20...oa.y l^b&iog_rDvarigation_Find!"ht

NEW YORK TIMES - Downlordd August21, 1999 RussianMoney-Laundering Investigation Finds J'amiliar Swiss Banker In The Middle

By TMOTHY L. O'BRIENwith RAYMoND BONNER

At the interection of illicit Russianmoney and the Bank of New York is Bruce Rappapo4 a Swiss bankerwho hashad brusheswith govemmentalinvestigators in the pastatrd who haslong had atr importantconnection to the baDk.

Togetherwith the Bank of New York, Rappaportowns a bankin Swi rlaDdthat helpedprovide the American baik with imponantbusiness contacts in Russi4 accordingto WeslernbaDkers familiar with the operation.

Ard millions of dollars that werechanneled through the Swissbank, known as Bank of New York-Inter Madtime, are linled to what Federalinvestigators describe as possibly one of the biggest moneylaunderingschemes in the United States,according to a personclose to the investigation.

The Bank of New York, which for yeals aggrcssivelysought business in Russia,is cunently engulfed in a FederalmoneyJauDdering investigatioD tbat l€d to the suspensioDlast week of two seniorofficeN who oyeFaw the bank's Russiaobusiness. Federal investigators are also looking into the activities of their husbands,both of whom are involved in businessesthat haveties to either Rappaportor his Swiss bank.

The moneymoving throughthe Baok of New York-Inter Maritime raisesthe questionof why the Ba* of New York, a conservativeinstitution that is one of the nation's oldestbanks, worked closely with a man who hasfrequendy drawn the attentionof govemmentregulators and law-enforcement officials worldwide.

Mostrecently, Rappaport's bank was sued by theJustice Department in 1997,to recoverproce€ds that the Govemmentasserted were from drug salesthat hadb€en deposited in the Bank of New York-Inter Maritime on fhe Caribbeanisland of Antigua by a klown money-laundercr.A Federaljudge dismissed the caselast year, though,citing lack ofjurisdiction. The Govemmentis appealingthe decision.

A Boston lawyer representingBank of New York-Inter Maritime, William ShawMcDermott, did not respotrdto requeststo interview Rappapofior talk aboutthe JusticeDepartment suit. Efforts to coDtact Rappaportwere unsuccessful. The Bank of New York, which is cooperatingwith the Federal moneylaunderinginvestigation, declined to commentabout Rappaport.

The interestof investigatorsis heightened,one official said,because Rappaport, who is 76 yearsold andlives io Switzerland,was recently appointed Antigua's Ambassadorto Russia.Antigua, this official noted,has been a major centerof Russianmoney-laundering for manyyear$. Rappaport has long had closebusiness, bMking andpolitical ties to Antigua, wherethe Govemmentonce granted him a near-monopolyon the fuel-oil market.

MoneyJaunderingis a legal catch-phnsethat refersto the c.iminal practiceof taking ill-gotten gains andmoving them tirough a sequenceof baDkaccounts so that they ultimately look like legitimate profits from legal businesses.The moneyis then withdrawnand used for further criminal activity.

Rappapolt,who hasneve! been convicted of any wrongdoing,is well known in Russianbanking circles. He helpedsolicit busi[essduring the boomtimes in Moscow.In fact, for a brief time, Bank of New York lnter-Maritime wasused in l994 by the Bank of New York to colduct businessitr Russia.

The world of intemationalbanking is often built on personalrelationships. In that world, an ability to

'of 3 eD3B99:12 AM NEW YORK TIMES - DownloadcdArgusl2l, 199 htF://m.Bia.tov^lorievAug*2o22,%20...oney-kuDde.irg ltrvcati8ation-Finds.h

deal easily acrossborders and within business,political andfinancial circles is highly valuableto big banks.To gain accessto celtaill foroign markes, the Bank of New York hasrelied on peoplelike Rappaport.

Bom in Haifa" now Israel,Rappaport has used his basein Genevato pursueinvestmetrts and business in a wide rangeof places,including Oma& Liberia, Nigeri4 Haiti, Thailand,Indonesia, Belgium and the United States.Rappaport opened Inter-Maritime in Genevain 1966.

By the 1980's,he was one of the Batrk of New York's largestindividual shareholders,controlling millions of dollars in stock amountingto a nearly 8 percentstake in the company

Although virtually all of that stockhas been sold, back in the 80's, Rappaport'shefty stakegave him entle to the bank's seniormanagement, including the chief executiveat that time, CarterBacot. Bacot, whom the Bank of New York declinedto makeavailable for commeat,is said by a former Bank of New York seniorexecutive to haveapproved the bank'sdEcision to buy a large stakeitr Rappaport's bankknown then aslnter Maritime.

By 1992,the Bank of New York reportedlyowned about 28 percentof what becamehown as Bank of Ncw York-Inter Maritime.

In the Federalmoneylaundering investigation of the bankthat surfacedlast week one of the accounts authoritiesare looking at is Benex,which movedfunds through the Bank of New York as well asthe Bankof New York-InterMaritime.

The sole director of BenexWorldwide, a British affiliate, accordingto corporaterecords in London, is PeterBerlin, He is the Russian-bomhusbaod of one of the seniorofficers at the Bank of New York, Lucy Edwards,who was suspendedlast weekby the baok.Ms. Edwards,41, oversawRussian accounts in the Bank of New York's L,ondonoffice.

Berlin is believedby AmericaDinvestigators to havehad authodtyover the Benexaccount at the Balk of New York.

An initial roundof Federalsubpoenas issued to theBank ofNew York produced3,500 pages of transactionsfor oneaccount in BeDex'sname, investigators said.

Ms. Edwardsreported to NatashaGurfinkel Kagalovsky,who is basedin New York and supervisedall of the bank's EastemEuropean business

Ms. Kagalovsky,44, wasalso suspendedbecause of the money-launderinginvestigation, and her office, like Ms. Edwards's,was searchedand sealed by law-enforcemetrtofficials last week-The Bank of New York hasrepeatedly declined to makeeither of the women,who havenot beenaccused of any wrolgdoing, availablefor comment.

Ms. Kagalovsky'shusband, Konstantin Kagalovsky, is a former seniorexecutive at BaDkMenatep, one of Russia'slargest banks, And Menatep,according to Westemlaw-efforcemeot officials, has also had dealingswith Rappapon.

Menatep,now virtually insolveol is part of an industrialempire overseen by Mikhail Khodorkovsky, one of Russia'sprom-inent financien, or so-called"oligarchs." Bank of New York had an active relationshipwith Menatepand helpedfte banklist its stockfor trading in the United States.

Fedemlinvestigators are trying to determinewhether some of the motreythat may havebeEn laundered throughthe Bank of New York camefrom Menatep.Menatep, aDd related companies in Russi4 are suspectedby Westeminvestors and Russianregulatory authorities of havitrglooted money ftom the country, assertionsthat Khodorkovskyalld his representativeshave firmly denied.

2of3 E/231999tl2 AM y,I\ zt:6 6de'.n EJOI

.Eecs e se.r lt leql $oleFBaJ snouE^ rrro4 suorlesnca" pIuE pesdeJloajrlq .u (I|I lueq etLL t luetrla^Jo,{rnJequry ou pBq puE {re,r euo ^luo JoJ lueq auq-uo er[ Jo roperlp e sBpeues eq 1er11pws seq,{1s,ro1ropoq;1 zn8quy ul peseq ryBq Fur4ul uBlwg uoruquradomg eql Jo ropaqp e s?pe os fueuq f{s^otlopoq, .166I uJ

nlspq!{roprapF E|:ts@Dme-I-f..@-1z%Zz\Z%6ny!awts/m!?$n.o#dlq .lz 661 lsranv Fapeoloao( _ SEtrut XXOI /$aN *-"o:*.*orddlaugur2i.l99 hE!rToc,unarov/3lori6/A!*2021i4' i& sek racld-6.knr rlrnEed

NEWYORK TIMES - Dorydcd a@21,r99 British RaidsScek Money-I^aundering Evidence

By ANDREW ROSSsORKIll

LONDON -- Thc National CriIDeSqurd basriided tbc hore aDdof6cc of e Buk of New Yort officcr hqr as part of an ilvestigation of what is belicvedto be a major nrcy-lrundefing opcration by Russianorganized crime.

Thc sp€cial crime unit sald it brd scarEhcdthr rprlMt of Lucy Edrds, a Rusian-bqn vice prEsid€ntat thc baDk,atrd b€r husbsr4 Pctcr Bcrlil. Berlio is a busiErortr who brd authuity over somc of the accountsat thc brol th8t arl the f@us of the investig.tioo"

Itrvcstigatorsalso searchedthc Balk of New Yo*'s l,ondotrof6c€- At its New Yott headquadss, 8 batrk spokesmancoDfirEcd thc searchof fbEof6c€s and saidthe instihrtioDwae coopratiug with thc authorities.Ttre bank decliDedto eleborrte.It alsowould not discusswt *bErit3 officcs ir New Yort had becn searcbed.

Itrvestigatorssay lhey bclievethat thc coupl€could be involved in m of thc largestnmcy-hun Lring opcratioosever conductedin th€ Unitld Stat$, wilh $4.2 bilion passiry through oE acrount slone ftoD October though Mrrch.

It was tbe British autbolitiss who al€rtedtbe FcderalBucau of Inycstigtti@ to whd they susllcct€d waa a motrey-lautrd€tingoperatiotr at thc bank,

A spokesworoanfor the NatiotralCriEe Squadrcfused to erplain what rnvcstigarorshad bcen looking for during rhe sedch of the apartmcn!ncsr Mrryl€bone,an afflu€ot I onrl^n rEighhorhoo4 on Wcdncsdaynight. The searchlsstod sevcral hours.

Ms. Edwards,41. who was suspendedfrom hsr job on Wedesdan may bevc lcft the country vith her husban4 ftiends of the couplc said"Neitbcr lvl,e.Edwards nor Bcrlin hasbccn acclscd of any wrongdoing,and oeitherhas bcen &t8in€d or arrEsG4said the spo&cswmrn for tbe Natiosl Crimc Souad.

8/,3r9*.t6 Ltt NEW YORK TIMES : Do*rroadcd Augtlt 19, 199 bQ://a.aia.sov/stftis/_rodry/$Dn&.rtLBrDlLnlir.l_Sulpidms_Of-RBi.t

iltlmfil-H^4-t,ltt Activity At Bqnk RsisesSuspicions Of Russian Mob fie

By RAYMOND BONNER with TMOTIIY L. O'BRIEN

Billions of dollars havebcen channeled though the Bank of New York itr the last year in what is believed to be a major mooeyI'pndedtrg opention by Russianorganized crime, law enforEement officials say.

From Octoberthrough March some$4.2 bilLioo,itr more tban 10,(m b-aosaEtiotrs,passed though one account,investigators said.

But becausethe accounthas remained opetr to help a cotrtinuinginvestigatio[ by the federal authorities,investigators estimate that asmuch as$ 10billion Day haveflowed tbrough the bark in that accouotand relatedones sitrce early last year.

Investigatorssay the taa$actionss€€m to addup to otreof the larg€stmotrcy lauaderingopcrations ever uDcoveredin the Udted Stat€s,with vast sumsof moneymoving in and out of the balk in a day. But they are quick to poi[t out tbat the inquiry is still in its early stagesand that they do not yet know the full scaleof the oFration or wherethe moneyended up.

Wednesday,tie Bank of New Yo* said it had suspendedtwo employeeswhose names had surfaceditr the invastigation.Both are officers in the balk's EastemBuropean division and arc married m Russian-- businessmen,one of whom is believedby investigatorsto havecoouo .d oo" o'iE"-G-G.

The suqrnsions of the two wonen, NatashaGufmkel Kagalovskyof New York, and Lucy Edwards of l-ondon, followed an itrquiry by The Now Yo* Times.The employeeshave been suspended pending completion of the investigation.

"The BaDkof New York hasb€€n cooperating with the office of tbe Udted S -r"s Attomcy for the SouthemDistrict of New York ia a confidentialinvestigarion of tie use...... -...... _of bark facilities--_-- to tEnsfer ruDosrrom Russrato oupr counmes.rtLr" o-r ,ro rn u-ata,meoi-

"Therc arc no allegationsof wrongdoingby the batrk" it said,adding that no customeror batrk funds had beetrlost.

Ar Am9rican goveqmeDt!fficialwho follows moneylauDd,e4 g and Russiat organizedcrime said "What we have hereis{thc petretation of a maior U.S. orgadlatiotr:ry_4\SfgqCgSgC_ [ a'l American atrdEuropean of6cials havebeen concemed about the possibility that organizedcrime sytrdicat€slfromRussia\atrd other countdescould iqfiltrate financial marketsatrd itrstitutions in Europe and the Udted States.

Investiga:o$ herc ard ahoad h&yebeetr exemining cases wherc front com{radesbave tried to raise capital in North America for organizedcrime activitiesin Russiathrcugh stock offerings.

Sincethe collapseof the Russiatrfinatrcial systeh last year, the flight of moncy out of the coutrtry has accelerated,and investigatorshave be€tr on the lookout for activitiesthey suspectarc ,'laundering', operations.

Money launderingis a legal catchphrase that lEfersto the criminal p.acticeof r"t('ng ill-gottcuglligs and moving them through a sequercrof bauk accountsso they ultimat ly Uf rue ielid.'iffiG-

I of4 a$rD rt2 AM NEW YORK TIMES : Dowtrload.d Augult 19, 199 hlp.//oc.uia-eoy^toricv_lod.y,/3|l'!E.-At-ErDk&ilci_Supiciulo{-nlld&hl

ftomlegal businases. The noney is thenwithdrawn and used for firthercriminal activity.

The accountsunder scruthy at the Bank of New Yo* havebeen linkFd by investigatorsto a man -Westem who law edorcement ofricials say is a major figure in Russiaoorgaoizcd criEe, ScmyonYukovich Mogilevich. Mogilevich is involved in a wide rangeof activitiesftom aros trafEcking and extortion to prcstitution, Amedcan and F,uropemlaw edorcemeotatrd futelligerc€ agenciessay.

Mogilevich, 53, is coDsidqedsDart, ruthlessand vasdy wealthy. A rEc€ntBdtish inteuigenc€rcport said he was worth $100 millioo.

The CIA and Euopean intelligenceagencies have been intensely moditorhg his activities for five yea$, an Amedcatl official saidrecendy.

An FBI rcport on Russianorgadzed crime said tbal wheDthe SovietUnion withdrEw its forces from East Germany,matry Russiangenerals sold thet weaponsto Mogilevich, who in tum sold them, at much higher prices, to couotrieslike kaq, Iran atrdSerbia.

British authodties,inyestigating the fiMocial activitiesof Russial orgardz€dcdm€, alertedthe FBI to the suspectedmorey launderingai the Batrk of New York morethan a year ago.The FBI said Wednesdaythat it would haveno comm€nton the investigatiotr.

Ao initial round of federal subpo€nasissued lo the Bank of New York producrd 3,500pages of ftansactiotrsfor one accountin the nameof a companycalled Benex, said investigalors. They would say litde aboutwhat bformatiotr they haveabout Beoex, its locationor its activities.

British intelligeDcereportcd that somoof the moDsyfrom the Betrexacrount went to pay clntract killers aDdsome went to drug barcns,American ofncials said.

Last year, after arrAmgrican joumalist, RobertFriednan, wrote a long exposeof his criminal careerin the Village Voice, Mogilcvich put out a contact otr the rEporter'slife, the Ce lal Inblligence Agctcy said.

The CIA said it hadpicked up the threatby monitoringMogilevich's phone.A Europeanlaw eDforc€mentofficial said recenily that the cootractwas for $100,000.Friedman went into hiding for a while and hasresumed writing.

It is likely to take mrny monthsbeforc hv€stigatorssifl throughthe docurn€ntsatrd penetate the complex web of offshorecompanies ard holding companiesto det€rmineptEcisely wheE the money cameftom and whereit went.

The FederalReserve BaDk of New York atrdthe New York stateBanking Departmentdeclircd to commentod whetherthey had begu their own investigationsof the Bant of New York-

While sifting tbrough boxesof documetrtslhat hrmedup ir the British irvestigation, investigators found refercncesto Benex,which was lhked to an Americanconpatry, YBM Magnex, which was a ftont for Mogilevich, ofFcials said.

YBM, basedh Philadelphiaard oncehad€d oD the Caoadianstock €xchaDge, was an operdting company- it madeand sold industrialmagnets - and a moneylaundering vchicle for Mogilevich, American and British offrcials havesaid

I.trJune YBM pleadedguilty to ooe countof secudtiesfi:aud in fed€ralDistrict Court in Philadetrhi4 and the U.S. Attomey's office thereis still consideiingwhether to iDdictMogilevich.

2of4 aLY999tL2 |\M NEw YORXTIMES - Downlo.dcdAusud 19,199 hnpr/oc.uiasov/srnid/-todry/emdr..a.LB.Dl-Ibi&!-suAi.joo!_Ot-Rurdrb'

TheYBM casewas one reflcction of thesuccess of Russianorganizcd crine in infilratingWestem financialEarkets, Am€ric{tr aad European officials said.

Bur, "it's a drcp itr the buckef' compared to what has happencd at thc Baok ofNcw Yotk, said an American official.

The accountat the Batrk of New York was opencdby a Russiaa-Amrican last year, an investigator said He d€clincd to give tbc lr6on's naoc.

The volumc of tsa$actioDsthrough the accounlshas bcen extsaordimry, officirls sai4 and oftcn the moneycame in and went out quickly. This shouldbave nade the baak suspicious,said &r ilvestigator.

But accordiogto inve,stigators,but the bark hasfilcd or y one "suE iciou5 activity rrport" with the federal authoritiesatrd that w.s afrsr the authoriticsbcgan inve,stig.tirg.

Wednesday,the bark would rlot discussthe filitrg of any reportsqrith the authorities.

ff unusualactivity occun in an account,banks arc rcquiredto file "suspiciousactivity r!pofs," or SARS,hto a systemmonitorcd by the U.S. Treasury'sFinancial CriDrs Edorcement Nctworlq as wcU as the coutrty's 6ve Eaitr baokingrcgulatoN. Thc Eports arc codhdcntialatrd the Treasury'srctwo* dectned to commeDtlvednesday on whetherit hadteceived rny sucl rc?ort ftom the Bark of New York recandy.

At otretime, American authoriticsfroze the Benexac{outrl which had $34 millioo in it aD investigatorsaid. But they quickly uaftoze it, whetrthey realizedthat it wasjust the tip of a very large operationand it would aid the hvestigatiotrto kcepthe accou active,he added,

The acroutrtshad b€eohandled by Ms. Kagatovslry,a seniorvice prcsidcntof tbe baol h New York, ac.c.ordhgto govemmetrtoffici8ls in New Yo* andWashingtoft

Born in Russi4 sheemigrated io thc Udted Statssb I 979, and aftercarniag a mrsters dcgrEeat hinceton joined a maaagemcntts8ining progran al the baDh accordingto articles in Tbe American Balker and BankcrsMonthly in 1992.

In thc carly l990s, after the collapseof ComsunisE, Ms. Kagalovskywas put itr chaige of bringing ia new businessftom EastemEuropa and the formar SovietUnion.

A few yea$ ago, shemarricd KongtantinKagalovsky, who hasbeeMn economicadvis€r !o the Russiatrgovernment atrd from 192-1995, was Russia'sreprese ativc to the htemational Monetary Fund.

Ms. Kagalovsky,,14, declined to alswer any questionsWednesday.

hvestigators ar€ also looking at the role playedby Lucy Edwards,a vice presidentof the batrk in I-oudon n'orking on EastcmEuropan accounts.

Two months ago, Mi Edweds E okEat a two-day coofercnceolr iDtcmrtiotr l finrtrcial ssrvicesfor Scandinavia,Eastrm Europesnd Russiatrclietrts. Shc wasthe first sFstcr on the secondday. Her topic: "Money l,aundering:Latest Developments and REtulatiolrs."

Ms. Edwardswas also bom in Russiaand ar4uiEd dafficatr siriz€iehiF by marriagc,an American official said, Aftcr a divorcs, shemanied a Russian,Peler Berlin, andh€ subsequendybecame an Americau citizcn, the official addcd.InvestigarorE bclicve that Be in h.d 8uthority over the Bcrex accoutrtat thc batrk of New Yorl..

lof4 ALY999tl2 LM ttv TI:6 6t5tB t tot

'flsaop8v; 'sW ol suons€nbperJgJer eqs toqr8!*.Atrr 8-wJ.punEI,(euoucgt Jo sltsFp ercE plol Sq3(l 'slrtrc&r '8u.tle rsgv or lE.ds pFrocSrgls eqt uo euoou tBqt frlod ltr8q se.f,{ lEqt peppEeqs 'q^[ 'uopuql 's]"4 sErtrfprE,spg rsq! pl8s leqrsu ss ,(fuoeEEn Jeq e ?3 oq,$ uJtuslslsse .spr"^rpg I

?sl"Jol eqrou plnot qPeg

qt!tE8-!o-tuopFtrs-.-Fd-fcd-ry1@E/,(tpq-/ra.E 3/^otu!sn t/r&q ilt5l'61lit|l|oylcFolrAoq_ianu,f,uo,{aN Russio OangstcrsErPlonCapilrism lo Inc.clscProlits hltp://seaich.trydna.corl/scarch/daily/...i8+sne+17456+24+wAAA+Rayoond%7EBon.

lnternatlonal 6.xtiUr*gT4 @@@@@E!@

July 25, 1999

RussianGangsters Exploit Capitalism to IncreaseProfits

Ay RAY&IONDBOMER

ASHINGTON-- A few yearsago, British intelligenceand law enforcement agencies beganinvestigating the money-laundefingactivities of Russianorganized crime in Britain.At thecenter of theirconcerns was Semyon Yukovich Mogilevich, a mandescribed by Britishauthorities in oneclassified reportas "oneof theworld's top criminals,who hasa personalwealth of $ 100million."

His moneycame from "large-scaleextortion, prostitution,arms dealing and drug trafficking," and it waslaundered through a Londonbank with thehelp of a lawyerthere, the report said.

The Britishshut down that operation in 1995, promptingMogilevich to beginlaundering his illicit profitsinto a newventurer an Americancompany listedon the Canadianstock exchange that sold its stockto investorsthroughout North America.

Currentand former American officials say Mogilevich is theharbinger of a disturbingnew trend: the Russian mobstermasquerading as crack capitalist.

It is alsoa new twist in how intemationalcriminals turn theirillegally obtained cash into legitimateassets.

Historically,drug barons and those who amass mountainsof cashhave laundered their money through privatecompanies, which are subject to lessstringent reportlngrequlrements.

But in thebull marketof the 1990's,authorities say, publiccompanies offer criminals the chance to make evenmore money by anificiallypumping up thesrock priceand bilking investors.

Mogilevich'smove into theNorth American equity marketsbegan with a companyhe setup in suburban Philadelphiacalled YBM Magnex.

'112i199 I of7 t1l7 P) Ru$ianCsgslers Exploit Capitllism to lncreaseP.ofils hrtp:/ emh.nyiimes.corvsearch,/daily/.-.ite+site+37456+24+wAAA+RaynoDd%?EBotr

Its primarybusiness was the manufacture of industrial magnetsat a factory in Hungaryand later at a factory thecompary bought in Kentucky.YBM anracteda blue-ribbonboard, its bookswere audited by two prominerftAmerican accountilg firms, it issuedglossy annualrepo.ts and it hadits own Website.

All of this turnedout to be sophisticatedcover for whatwas also a vastmoneylaundering operation, Americanintelligence and law enforcementofficials say.They addthat it is far from a uniquecase and that Russianorgaoized crime, which has acquired devastatingpower in muchof EasternEurope and the fo.mer SovietUnion in the lastdecade. has made inreadsin America'shighly regulated financial marKets. ''This is thefirst publicdemonstration of the manipulationand infiltration of worldfinancial marketsby Russianorganized crime," said a senior Administrationofhcial whose responsibilities include followingRussian organized crime groups.

Lastmonth, in a negotiatedagreement, YBM pleaded guilty to securitiesfraud in theFederal District Court in Philadelphia.The criminal invesligation is continuing,and officials said it is focusingon therole thatMogilevich and two associatesplayed in setting up andrunning the company-

Like a handfulof otherRussian crime figxres, Mogilevichis barredfrom enteringthe United States. But he hasIs.aeli citizenship, as do severatothe. prominentRussians involved in crime,American diplomatiand intelligence officials said.

While Americanofficials believe they have shut down Mogilevich,or at leastcurtailed his activiiies- "in a box,"as a seniorintelligence official put it - theyfear thatthere arc similarschemes waiting to beexposed.

"Thisis just onecase, but therea.e others like it throughoutthe world,"said Jim E. Moody,a retired F.B.L agentwho headedthe organized crime section for manyyears and was one ofthe first ag€ntsto begin workingwith theRussian police after the collapse of the SovietUnion.

In thethree yea$ betweenthe British action and the Americanauthoriti€s' penetration of YBM's corporate facade,the companyhad raised $l 14million (Canadian)on Canada'scapiral markets. Helped by glowingclaims about sales and profits, YBM's stock

2of7 712T99l2:11Pt\ Rusie CangsieisExploit Capitalism to InceaseP.ofiLs http://sq.ch.nytimes.con/search/daily/...iie+sire+37456+2+fwAAA+Raynood%TEBorr

soared,and Mogilevich and some ofhis associates soldtheir shares for millionsof dollarsin profits.

The shareswere traded in Canada,aftracting some Americaninvestors, while thecompany awaited approvalfor listingon theNasdaq exchange in the UnitedStates.

"Theycloaked themselves in an air of legitimacythat wasbeyond belief," said a formerF.B.I. official whose job includedwatching Mogilevich.

Thecompany had sales but it alsoexaggerated them. It hadcustome$, but it alsomaintained fictitious customerlists.

It paidsuppliers, but somewere companies controlled by associatesof Mogilevich.Some YBM officersand directoNwere complicit with Mogilevich,but others thoughtthey werc engaged in a legitimatebusiness, lnvesngatorssay.

With theinvestigation continuing, and a rnvestors class-actionsuit pending -- asyet with no replyfrom the defendants- thereis a generalreluctance to discusswhat atftactedanybody to YBM

"It wouldbe lunacyfor me to sayanything," said one former companyofficial.

Lawyersfor theplaintiffs in theclass action said they wouldnot permittheir clients to talk abouttheir investmentsbecause they feared retaliation by Mogilevich.

A publicpofuait of Mogilevich'scriminal empire first appearedin May 1998in TheVillage Voice in an articleby RobenFriedman, who had access to classifiedF.B.I. andIsraeli intelligence reports. After thearticle appeared, Mogilevich put out a contracton Friedman'slife, a threatthat was picked up duringa telephoneintercept by theCentral Intelligence Agency, law enforcementand intelligence officials said.

Mogilevichstaned as a small-timethief and counterfeiterin the 1970's,ofhcials say, then made millionsin the 1980'sfrom Jewsleaving the Soviet Union.He tooktheir art,jewelry and other valuables, promisingto sell themand send the money. He kept mostof theproceeds, officials say.

Not long afterthe Berlin wall camedown and the SovietUnion collapsed, making Lravel easier. Mogilevichset up operationsin Budapest,where he

3 of? ,-1?1/99l2tl,1 P\ Rlssi.nCmgsle6 Exploir Capitalismto Increase Profits h!tp:/ earch.nytimes.cor/search/daily/...ite+site+37456+24+wAAA+Raymond%TEBonr

rana prostitutionring out of a toplessbar called the Blackand White Club, European and American officialssay.

Mogilevich,who is believedto spendmost of his time thesedays in Budapestand Moscow, could ngt be located.But a smallHungarian newspaper reported lastmonth that it hadinterviewed him (thenewspaper did not saywhere or how)and that he haddenied any criminalactivity.

"I considermyself a law-respectingcitizen who works in earnestand pays taxes regularly," Mogilevich told thenewspaper, Napi Magyarorszag.

Thoughraised in a Cornrnunistsociety, Mogilevich, now 53,quickly adapled the waysof fastbusiness dealing.In puttingtogether YBM, he usedoffshore localeswhere secrecy prevails over disclosure, sophisticatedfinancial transactions and wire transfers to movemoney quickly and beyond the prying eyes of regularors.

Thefollowing account ofhow Mogilevichand his associatespenetrated North American capital markets is piecedtogether from theinfo.mation and plea agreementin thecriminal case in Philadelphia;the complaintin theclass-action suit, which the investo$ filed in theFederal District Court in Philadelphia;an auditof YBM'S booksin December1998 by a Philadelphiaaccounting firm. Miller Coffey Tate. which thecompany hired when Canadian securities regulatorsraised questions; and YBM's annualreports, publicstatements and filings with regulatoryagencies in Canada.

In the begilningthere was a company,Arigon, which Mogilevichset up in theChannel Islands in 1991.This washis originalconduit for launderingmoney, the British reportsaid.

Oneof his paltnersat Arigonwas his mistress,who wasthe mother of a sonby him andthe wife of the Londonlawyer who wasreportedly i[ leaguewith Mogilevich,according to thereport. (Readers of John L.€Can€'s latest novel, "Single & Single,"will find similarities betweel variouselements and chanctets andMogilevich's escapades.)

Eventually, througha seriesof complextransactions and takeovers,Arigon acquiredcontrol of YBM Magnex. To fina.DceYBM'S firct public offering, in Canada,Mogilevich sent $2.4 million from Arigon's bankaccounts in the ChannelIslands.

4ot7 712719912:t1PN Ru$ian Cmgsred E"{ploit Capiralism |o lnc.e*e P.ofils hup://*dch-.ytimes.coB/search/daily/...ite+site+37456+24+wAAA+Raynod%7EBotr

YBM washeaded by oneof Mogilevich'strusted associates,Jacob Bogatin, Bogatin, who hasa doctoratein powdermetallurgy from VolgogradState University,came to theUnited States in the 1980'sand evenhrallybecame a citizen.From 1996to 1998,he waspresident and chief executive of YBM.

Bogatin'slawy€r in Philadelphia,Eric Sitarchuk, declinedto commentabout his client,who law eflforcementofficials said is oneof thesubjects ofthe continuinginvesiigation by theUnited States Attomey in Philadelphia.

Thecompany's glowing claims propelled YBM's stock from a few centsat the time of the first offering in 1994to $5 (Canadian)in early 1996,to morethan $20 two yearslater.

In its 1996annual report, for example,the company boastedof "recordsales and earnings," with salesup 79 percentover the previous year- [t alsoclaimed that revenuesfrom buyingand selling crude oil increased from $13.6million (Canadian)to $20.4milion.

YBM's bookswere audited for 1996by Parente, Randolph,Orlando, Carey & Associatesin Philadelphia.The firm reportedthat the financial statements"present fairly in all materialrespects" the company'sfi nancialposition.

In thesummer of 1997,when YBM waspreparing for anotherpublic offering, Onta o secudtiesregulators askedDeloitte & Toucheto conducta "highrisk" audit.In the securitiesworld, this meansthat the authoritieswere suspicious and wanted the accounting firm to apply exha scrutiny and diligence.

Deloitte& Touchegave YBM a cleanbill of health.

OneCanadian analyst who issueda "buy" recornmendationnoted that the compallyhad emerged from theDeloitte audit "with flying colors."And in November1997 YBM completeda publicoffering of 3.2 million shares,at $ 16.50(Canadiar) each, bringing in a totalof nearly$53 million.

Both accountingfirms aredefendants in the class-actionlawsuit by investorsin YBM.

Parente,Randolph did not respondto severalphone callsasking for comment.

A spokeswomanfor Deloitte& Touche,Ellen fungel,

5 of 7 1n1Bg12:11 Pl Ru$iln Cdgnes E\ploit Capil.lismto IncreaseProfils http:/Aearch.nyrim.sjodsedcVdajly/.ne+sitc+17156+24+wAAA+Raymond%7EBor!

saidthat the company had canied out theaudit "in accordancewith applicableprofessional standards" andthat it would"vigorously defend" itself against the suits.She added that in June199E, the company resignedas YBM's auditorsafter it becameconcemed about"quesrionable transactions. "

But the auditorshad already missed a few things.

"MoneyLaundering and Unusual Transactions" is the headingon a l4-pagesection of a so-pagereport by Miller, Tate,the accountingfirm thatYBM tumedto hopingonce again to geta cleanbill of healthafter Canadianofficials raised question. At thecenter of thesetransactions was a companycalled United Trade, whichwas incorporated in theCayman Islands and wasrun by lgor Fisherman,who wasalso the chief operatingofficer of YBM.

Fisherman,who hasa master'sdegree in mathematics from Ufa StateUniversity in Russia,immigrated to the UnitedStates in the late 1980'sand later became an Americancitizen. He is alsoa subjectof theongoing investigation,officials said. Fisherman's lawyer, Peter Vaira,declined to comment.

On oneoccasion, $3.2 million wastransferred from a bankin Lithuaniato a UnitedTrade account in Hungary.It wasthen quickly transfened to Chemical Bank in Buffalofor thebenefit of six ostensibly differentcompanies. At thesame time, United Trade sentmoney to ChemicalBank for a Buffalolawyer, PaulF. Fallon.

Th€setransactions have "several of theindicia of moneylaundering,' Miller, Tate said in itsreport. noting,for example,that the companies involved in the transactions,those in Lithuania,Hungary and the UnitedStates, all hadthe same address -- rharof Fallon'soffice in Buffalo.

Fallondenied in a telephoneinterview that he had engagedin anyimproper activity. He saidthat Fishermanwas a client,and that he hadincorporated all of the variouscompani€s involved in theseries of wire transfers.He declinedto saywhat business activiticsthes€ companies engaged in,

As for the oil sales,which YBM saidhad done so much for its profits, Miller, Taie found that the companynever had had any oil to sell.

6 ol7 7n1D9t2:17 Pln \a LI:Z\,66tLUL ,y\

^uEouoJ suII IroI aeN.qI666l tqdlt^ouJ I?FqtTro-^T.NI s.iEes- | F4jIssiS l t-iiF4IdFF F^EjJtElEisTFs[ | F .rBIIqoltstrolsr4'O- tsI66 tsElqourotrnv I sw- | trFO I FFilEi I ieqnamI Siddsr ..E FS I x8bioq-r I aleiiiins-| T'ttFio=FEF I Fllo-trd5itrIlm[i-EOiADd- tax6NtTliid 5-I65FN- ts-iiffiv | ffiEdii tiF:EsSEiStFFEFm I awos-

roogg4%puoufsI+Wvartz+9StaE+4ts+.rr-/IlFp/lrE?s/uro! seuq,{u.q.ravl:ilrrq $rjord.srrul or usltstrdEJ rqdrg sr.rsSEECsnsnx