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Russian Capitalism and Money-Laundering

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Russian Capitalism and Money-Laundering GLOBAL PROGRAMME AGAINST MONEY LAUNDERING Russian Capitalism and Money-Laundering UN United Nations Office for Drug Control ODCCP and Crime Prevention GLOBAL PROGRAMME AGAINST MONEY LAUNDERING Russian Capitalism and Money-Laundering UNITED NATIONS New York, 2001 The views expressed herein are those of the author and do not necessarily reflect the views of the Secretariat of the United Nations. The presentation of material and designations employed herein do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area, or of its authorities, or the delimitation of any frontiers or boundaries. Mention of firm names and commercial products does not imply the endorsement of the United Nations. The material published herein is the property of the United Nations and enjoys copyright protection, in accordance with the provisions of the Universal Copyright Convention Protocol 2, concerning the application of that Convention to the works of certain international organizations. Requests for permission to reprint signed material should be addressed to the Secretary of the Publications Board, United Nations, New York, N.Y. 10017, United States of America. UNITED NATIONS PUBLICATION Sales No. E.01.XI.6 ISBN 92-1-148134-1 Initiated in 1997, the Global Programme against Money Laundering of the Office for Drug Control and Crime Prevention carries out the United Nations action against laundering of the proceeds of crime. The Programme conducts research, provides technical assistance and stewards the relevant mandates and policy objectives of the United Nations. Dolgor Solongo, the author of the study, is a staff member of the Global Programme against Money Laundering, Office for Drug Control and Crime Prevention. She can be contacted by fax, at 43-1-26060-6878, and by e-mail, at [email protected]. The author expresses her appreciation to Pino Arlacchi, Executive Director of the Office for Drug Control and Crime Prevention, as well as to Elisabeth Joyce and Francisco Thoumi, Global Programme against Money Laundering, for critical reading of the manuscript and helpful suggestions. © Copyright United Nations—All rights reserved—Printed in Austria. Contents Chapter Paragraphs Page I. Introduction .................................................................... 1 II. Capital flight and money-laundering................................................ 2 III. Dollarization of the Russian economy .............................................. 5 IV. Privatization or Prihvatization..................................................... 6 V. Shadow economy, tax evasion and lawlessness ....................................... 9 VI. Financial liberalization and the banking system....................................... 11 VII. Crime and business in the Russian Federation ........................................ 13 VIII. Legalization and/or amnesty argument .............................................. 15 A. Developments in the Russian Federation as a rationale for the argument .............. 15 B. International reasons for the argument .......................................... 16 IX. Countering money-laundering ..................................................... 18 X. Concluding remarks ............................................................. 21 Bibliography................................................................................ 24 Table. Estimated capital flight from the Russian Federation, 1994-1997 ............................... 3 Figures I. Foreign direct investment and capital flight in the Russian Federation, 1994-1998 .......... 3 II. Is capitalism good or bad for the Russian Federation? 6 III. Should the reforms in the Russian Federation be continued or discontinued? 6 iii Russian capitalism and money-laundering Chapter I Introduction The period of transition from socialism to might be partly explained by the criminal (hence, well- capitalism in the Russian Federation has appeared to disguised) nature of these operations or their relatively present limitless opportunities for international money- low significance in today’s Russian Federation. Reports laundering. Financial markets are being liberalized and are numerous, however, of the profits of crime, parti- the economy is becoming privatized and deregulated in cularly of economic crime in the Russian Federation the absence of corresponding legal frameworks and which possibly need laundering. The Russian Federation institutional capacities to oversee developments. As a law enforcement agencies estimated that by the end of result, the country offers an easy entry point 1998, organized crime controlled about half of (“placement”) for illicit cash into the financial system commercial banks, 60 per cent of public and 40 per cent from where it can easily move within the international of private businesses.5 The Russian Federation represents financial system.1 In the last few years, the media and a golden opportunity for those seeking to acquire huge both national and international official sources have assets rapidly by criminal actions while remaining increasingly reported about the Russian Federation- undetected or under arrangements the criminality of related money-laundering as a threat to international which is hard or even impossible to prove. Therefore, the financial security. Indeed, the alleged amounts laundered Russian Federation is likely to be a centre of money- (10 billion United States dollars ($) in the Bank of laundering operations not only because of the easy New York case alone)2 and the type of institutions placement opportunity it affords, but also because of the involved illustrate the vulnerability of the international availability of illicit proceeds generated in the country financial system and the power of criminals to manipulate that require laundering. and infiltrate it. This paper examines aspects of the economic No accurate figures exist to indicate the overall reforms and development trends in the Russian level of money-laundering in the Russian Federation Federation that can reasonably be said to have fostered because it involves activities which are hard to observe or money-laundering. Problems and difficulties associated detect. However, the amount of capital flight from the with the far-reaching reforms of the transition period Russian Federation which is likely to be related to make the country vulnerable to money-laundering. These money-laundering is estimated at $133 billion during the changes include fast-moving privatization, banking and period 1992-1997.3 This estimate is a symptom of finance sector reforms, as well as political and significant underlying factors. Two inherent features of administrative transformations. The efforts to counter it contemporary capitalism in the Russian Federation— through various means (legislation, regulation, investi- crime and the “shadow” economy—could be linked to the gation, prosecution and others) are themselves subject to bulk of illicit proceeds which require laundering for and closely interconnected with the overall process of safekeeping or further investment. It is usually agreed that political and economic transformation. As such, they need opportunities for international money-laundering—for to be undertaken in conjunction with the broader international illicit wealth to be laundered through the measures designed to streamline economic reforms and Russian Federation—exist in the country. They were develop functioning markets, create an appropriate legal particularly abundant during the early phases of framework, improve public institutions and promote good privatization in the Russian Federation, when State governance. properties were sold for bearer securities. However, there are few reports of this inflow of criminal proceeds.4 This 1 Russian capitalism and money-laundering Chapter II Capital flight and money-laundering Money-laundering involves a broad range of errors and omissions. In order to estimate the amount of activities and financial instruments which are not directly money-laundering, the Centre for Strategic and Global observable. Hence, comprehensive and meaningful esti- Studies, a research institute of the Russian Federation mates of its size are difficult to compile. As everywhere, Academy of Sciences, assessed and measured indirect no precise official or unofficial estimates exist in the indicators, such as the estimated share of the shadow Russian Federation with regard to the quantity of assets economy in gross domestic product (GDP), similar laundered. In the Russian Federation, the estimates of indicators for the national income and the share of cash capital flight frequently serve as a basis for money- and barter transaction in the economy, the official data for laundering estimates because a significant part of the capital outflows from the Russian Federation, the capital flight is presumed to be laundered illicit proceeds. amounts of banknote trade by Russian commercial banks, The magnitude of capital flight itself causes suspicions dynamics of visible cash dollar imports as well as shuttle about money-laundering. trade9 by Russians. Facing a lack of reliable data, the Centre, forced to discontinue its efforts in 1997, In the 1990s, the magnitude of capital flight from suggested anything between $7 billion to $100 billion as the Russian Federation was significant. This was the amount of money laundered.10 Such a huge range is acknowledged by many sources,
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