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By Mark Hosenball
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It is the law-enforcement equivalent of Myst, the famously opaque computer game. It is nearly impossible to sort successfully through a well-planned, well-executed international money-laundering scheme if the players don't know which paths to follow, which clues to heed and which to ignore. Having an experienced guide playing along can make all the difference. Last week, in pursuit of what appears to have been a massive operation to launder money out of Russia from 1996 to 1998, U.S. investigators recruited the guide they need.
A pair of guides, in fact. Lucy Edwards and Peter Berlin are a husband-and-wife team, Russian ??migr??s who, federal prosecutors say, were key players in a scheme that ultimately funneled more than $7 billion through the Bank of New York in a little over two years. Edwards worked at the bank's Eastern European division, while Berlin set up three fund-transfer companies, called Benex, BECS and Lowland. Together, he and his wife made billions disappear--and admitted pocketing nearly $2 million for themselves in doing so. Last week in New York they pleaded guilty to money laundering and a series of lesser charges. The couple had been cooperating with the investigation since September--and will continue to do so. Berlin and Edwards hope for reduced sentences; the government hopes, with the couple's help, to find out who else was involved--in the United States, in Russia and wherever else the complicated trail leads.
The unfolding investigation has provoked anger and dread in Moscow. Some investigators familiar with the case believe Edwards and Berlin could provide damaging information about several high-powered Russian banking and political figures. Massive corruption has been one of the Yeltsin era's most debilitating problems. The ongoing BONY case guarantees that more sordid details will emerge, and that's not good news for Russia.
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The case, since it broke last August, has already helped sour U.S.-Russian relations. It has raised doubts about Washington's support for continued financial assistance to Russia from international lending agencies. Some Russians dismiss the scandal. Initially Moscow's media derided the investigation as a political attack on Al Gore, an architect of the Clinton administration's see-no-evil Russia policy. Many Russian businessmen insisted that BONY merely provided a temporary home for legitimately earned money before the tax or customs authorities in Moscow could get at it. Yes, it may have been tax evasion, some argued, but the alternative--given the country's complicated and confiscatory tax system--was to go broke.
But the Berlin-Edwards plea makes it clear that the case isn't as mundane as that. Sources familiar with the case say that one notorious Russian organized-crime group--allegedly run by Semyon Mogilevich, a Russian now living in Budapest--laundered at least $500 million using the Edwards-Berlin operation. Berlin has admitted meeting with Mogilevich at least twice. And though Russian entrepreneurs may view it as business as usual, avoidance of customs duties on imported goods does warrant money-laundering charges: Russian firms, the U.S. Feds say, funneled billions through Benex and BONY that should have been in the Kremlin's budget. One knowledgeable source also believes evidence will "probably" emerge of outright embezzlement of Russian government funds.
As described in the court proceedings, the system Edwards and Berlin set up was relatively simple. It transferred money from Moscow to the United States and then to offshore banking havens. In 1996 Berlin set up Benex and BECS, which in turn opened accounts at the Bank of New York. Berlin's companies were essentially fronts for an obscure Moscow bank called the Depository Clearing Bank, known by its Russian initials as DKB. Edwards then arranged for BONY to make available to her husband a special software system--which the bank usually allowed only its best corporate customers to use.
Called micro/CA$H-Register, it permits account holders to make international wire transfers from their BONY accounts without having to do any paperwork. Benex and BECS in turn set up an office in Queens, N.Y., equipped with a computer in which the CA$H-Register software was installed. In effect, Berlin's Queens operation became a New York-based branch of DKB--even though the bank had no license to operate in the United States. BONY denies any wrongdoing.
Trying to find out where all the money came from, investigators are now focusing on DKB and at least three other Moscow banks to which it is linked. Banking sources in Moscow say DKB--which had its banking license revoked last November--was run by two men, Kirill Gusev and Ivan Bronov, both apparently in their late 20s. According to the sources, DKB owned a relatively small-- and now bankrupt--Moscow bank called Flamingo. DKB, in turn, was controlled by two others banks: MDM and Sobinbank. Moscow authorities raided Sobinbank and Flamingo late last year after the BONY scandal broke and seized piles of documents. U.S. authorities say the Russians have not yet shared much of that evidence.
Skeptics think they know why. Sobinbank and MDM both have links to Russia's so-called oligarchs--the influential group of bankers who funded Boris Yeltsin's 1996 re-election campaign. The chairman of MDM is Aleksandr Mamut, a member of the Kremlin's inner circle under Yeltsin. Both Sobinbank and Flamingo, meanwhile, were at least partly owned by a company called SBS Agro--controlled by Aleksandr Smolensky and Boris Berezovsky, two of Moscow's most powerful oligarchs. In the past, Smolensky and Berezovsky have denied money-laundering allegations, and Mamut has said he has nothing to do with Benex.
How much more can investigators learn about where all the laundered money came from? In part that depends on what else Berlin and Edwards have to say--and whether their information will lead investigators to other, more senior figures within the Bank of New York. Last August the bank allegedly forced out an executive named Natasha Gurfinkel Kagalovsky, formerly the head of its East European division. Gurfinkel insists that she has done nothing wrong, and may sue BONY for forcing her out. In the meantime, NEWSWEEK has learned that her lawyer, Stanley Arkin, has hired a private investigator named Jack Palladino. His previous claim to fame was working for the Clinton campaign in 1992 to keep a lid on "bimbo eruptions." Both Arkin and Palladino play hardball.
But the case's ultimate fate may lie where it started--in Moscow. Acting President Vladimir Putin, who will almost certainly be elected to the office in his own right next month, has said that restoring law and order is a priority. Shedding some light on where those Russian billions came from--by allowing his law-enforcement agencies to share what they know--would be one way to reinforce that message. In the next few weeks, U.S. investigators will continue to listen to Berlin and Edwards--hoping all the while that Putin is as curious about where Russia's money went as they are.
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