Where Did Russia?S Money Go?

Gela Grinyova is one of the unfortunate Russians who made the mistake of once having faith in her country's banking system. By the summer of 1998, the 32-year-old graphic artist and her husband had about $11,000 in a bank called SBS Agro, the largest private retail bank in Russia. Then came the crash of August 1998, when Russia defaulted on its debts and devalued its ruble. Its banking system, including SBS Agro, was crushed by accumulated debt. Having been reassured just a day prior to the crash that their savings were safe, the Grinyova family, like tens of thousands of other Russians, lost everything. When Grinyova went to the SBS branch to try to get some of her money back, a clerk was dismissive. "Come back in five years," she was told.

The Grinyova story seems far removed from the so-called Russian money-laundering scandal. That investigation--centered, for now, on nine accounts at the Bank of New York--was the focus of hearings that opened last week in the U.S. Congress. "Money laundering" is a loaded phrase; it conjures up images of gangsters, drug smuggling, casino owners and prostitution. And the international investigation now underway has its share of straight-out-of-Central-Casting figures. Semyon Mogilevich, a reputed Russian organized crime figure, remains a primary focus of the investigation. So, too, do his alleged links with Benex, a company--run by the husband of a Bank of New York executive--that specialized in arranging clandestine import deals for Russian companies.

NEWSWEEK has learned that two major investigations in the United States relating to Russian money laundering are now reaching critical stages. In one case, the district attorney in New York's Manhattan Borough is trying to extradite two lawyers from Britain in connection with a suspected scheme to launder money for the Benex group through transactions involving obscure companies traded on America's penny stock market. Separately, the U.S. Customs Service is looking into a mysterious Russian emigre based in Philadelphia who over the last two years has run an estimated $500 million through accounts in 15 to 20 banks located in the Northeastern United States. Officials say there is evidence that at least some of the money comes from "quasi-governmental" organizations in Russia.

But as the Bank of New York inquiry proceeds, what will likely become clear is that the investigation is not just--or even mainly--about organized crime. Nor is it, as Russia's oligarchs and the current government have argued, simply a story about capital flight, or about legitimate businessmen trying to cope with a ridiculously complicated tax system (though all of that is partly true). Under scrutiny now is nothing less than the fleecing of Russia, the many ways in which its citizens as well as many foreigners who have invested in the country have been burned during the last years of the Yeltsin era. The methods by which the fleecing took place are myriad and complex. But as the investigation moves forward, the key mechanisms are likely to become clear:

The tax scams: Benex (and other companies like it) routinely arranged schemes by which Russian businesses were able to pay for imports offshore in hard currency. By reporting a lower, phony price in Russia, companies were able to avoid confiscatory tax and custom duties. Benex was well known among Russian businesses and financial authorities, and openly advertised its ability to move dollars in and out of the country for a service charge. The schemes were endless, Russian businessmen say, and, according to authorities, many of them were completely fraudulent. Central Bank chief Viktor Gerashchenko told NEWSWEEK in a recent interview that the scams often included the purchase of the passports of dead people, in order to draw up phony import contracts that allowed dollars to move offshore--with no goods ever going to Russia in return.

The sole purpose for many of the phony deals was to get money offshore. "Every company has a secret department that deals solely with getting cash in and out of the country," says one businessman who says he routinely used Benex's services. These deals cost the Russian budget billions of rubles in an era when Russian soldiers, teachers and doctors are routinely going unpaid. For years, in fact, the International Monetary Fund has hounded Moscow to improve its tax collection. That some members of the Russian government--though not the Tax Police--now dismiss the schemes as business as usual is extraordinary.