By joining the international campaign against money laundering and legalisation of criminal incomes Russia did not only bolster its reputation but reduced economic crime.
In October 2001, President Vladimir Putin made a speech on tax reform at the session of the World Economic Forum held at Moscow's Marriott Grand Hotel. However, the first question after he finished his speech was about something else. "When will Russia create a financial monitoring service and what will happen to bank secrecy if it happens?"- the deputy chairman of the board of Rosbank, Mikhail Alekseyev, asked.
"Do we have it [bank secrecy]?" Putin asked, drawing laughter and applause from the audience.
Mr Alekseyev says that it was an impromptu question: "When the President finished his speech there were no questions and a heavy silence settled over the conference room. I decided to ask something simple to ease the tension. In general we at the Soviet Finance Ministry [where Mr Alekseyev worked in the late 1980s] were taught not to put questions to our bosses to which we did not know answers ourselves. I knew that a draft decree on creating a financial monitoring service had long been on the President's desk waiting to be signed. To justify the question I decided to mention bank secrecy, after all, I am a banker." However, Mr Alekseyev (now President of the Board of UniCredit Bank) admits that the creation of financial intelligence hardly made a dent in banking secrets in Russia. But the absence of that institution tarnished our country's image.
"This is sheer negligence".
Actually, the West formed special services to detect dubious financial operations only ten years earlier than Russia. An intergovernmental organisation to fight money laundering, called FATF (Financial Action Task Force of Money Laundering) was created by the G7 in 1989. It has come up with 40 recommendations to counteract the legalisation of proceeds from crime. The key part of the code is passing a law on combating money laundering and enforcing it with the help of financial intelligence.
By February 2000, 26 countries were fully complying with FATF recommendations or were its members. Russia was not one of them.
By that time FATF had decided to regularly publish a list of countries that were derelict in fighting money laundering. To this end its experts conducted investigations in 50 countries, mainly offshore zones. At the same time, FATF threatened to expel from its ranks, for example, Austria, because it disclosed anonymous bank accounts (whereupon the Austrians promptly dropped the practice).
The first black list of 15 suspect countries was published on June 22, 2000. The news that the list included Russia along with Cayman Islands, Nauru and Vanuatu came as a bolt out of the blue for the country's leadership, a high-ranking former Kremlin official admits. This despite the fact that echoes were still reverberating from the previous year's scandal over the laundering of Russian money through the Bank of New York, and FATF's reaction was quite predictable. True, Rick McDonnel of FATF assured that the scandal had nothing to do with the blacklisting of Russia "although the affair was a good demonstration of how money could be laundered".
"I went out of my way to persuade our Interior Ministry to join FATF, but did not succeed," Alexander Lifshits lamented in the summer of 2000, shortly after he was sacked from the post of Russia's representative at the G7 talks. He said that the decision to make a black list of countries involved in money laundering and include Russia was taken by G7 ministers at a meeting that was not attended by Russia. "Had our representative been there he would at least have blocked the inclusion of Russia in that list", Mr Lifshits believes.
But the main mistake, according to the former Kremlin official, was that none of the Russian leaders bothered to tackle the problem at the managerial level: "This was sheer negligence. There are international rules that have to be observed, but we didn't happen to have the right kind of law." The Finance Ministry had developed a draft of the relevant law back in 1998, but by 2000 it was still working its way through the bureaucratic system.
After the unpleasant affair with FATF the bureaucrats reworked the document to include even tougher anti-money laundering measures than was common elsewhere in the world. The draft law was submitted to the State Duma before the New Year. The Director of the Federal Tax Police Service, Vyacheslav Soltaganov, also submitted to Mr Putin his proposals regarding the creation of the financial intelligence. That initiative put the business community on the alert, especially in the context of Mr Putin's quips about the bank secrecy. But by November 2001, when the President issued a decree on the creation of a Financial Monitoring Committee (FMC), Mr Soltaganov had retired and the FMC was formed as a unit of the Finance Ministry, which business did not consider to be "dangerous". The head of the new service was Viktor Zubkov whom Mr Putin knew well since they had worked in St Petersburg together.
What does Mr Zubkov have to do with it?
Eight years ago Mr Zubkov was hardly a specialist on exposing financial crime even though he had worked with the tax service for eight years and at the time he joined the FMC was Deputy Minister for Taxes and Levies for the North-Western Region.
He approached his job very responsibly. "[In 2001] we recruited people from practically all the agencies that are key to federal government in Russia - from the Foreign Ministry, the Finance Ministry, FSB, the Interior Ministry, the Prosecutor General's Office, the Tax Police and the Central Bank. It was hard to name an agency which had not sent several of its people to work with us. <...> I personally interviewed everyone we hired and I still do so. So today I can say that all our employees <...> have been screened and are equipped to deal with the range of issues with which our service deals," Mr Zubkov recalled in an interview. FATF dropped Russia from the black list in October 2002, and admitted it to its ranks in June 2003.
It is another question that in trying to present a favourable image of our country Mr Zubkov provoked a confidence crisis in the banking market. Addressing a FATF session in Paris in May 2004, he bragged that the stripping of Sodbiznesbank of its license was one result of the work of the Federal Service for Financial Monitoring (the service was renamed in March 2004 - Vedomosti) and another 10 Russian banks were suspected of breaking the anti-money laundering law. The news that there existed a list of 10 banks which could have their licenses recalled provoked a crisis in the interbank market in 2004, Andrei Cherepanov, a former Central Bank and Finance Ministry employee, recalls. Mr Zubkov did not publicly admit his blunder, but he made it clear at a meeting with bankers that he had drawn some conclusions. He has not made any rash statements since. Vedomosti has tried to solicit comments from him for this article, but the First Deputy Prime Minister said his schedule was too tight.
Abuses
"Clearly, the fight against money laundering was an extra burden for all bankers: people were distracted from their main job and they had to do a large amount of work," says Mr Alekseyev of UniCredit. A top manager of a major bank says that more than 1% of the total staff in the bank were engaged in fulfilling the anti-money laundering law: "The service is 50% more numerous than the internal monitoring service". Sometimes it came to absurd lengths: "The banks are supposed to watch the officials of foreign states, but there is still no list of these officials".
According to Mr Alekseyev, all the decent bankers have already adapted themselves to the new rules: "The mechanism is in place and it works and the clients have not been complaining". The chairman of the board of Orgresbank, Igor Kogan, sees the fight against money laundering not only as a burden, but as a gain. "Introducing the law improved the way Russian banks are perceived abroad. Failure to comply with the law gave the regulator a pretext for weeding out organisations that held a bank license but engaged in some dubious transactions. So on the whole the turnover of dubious money in the banking system diminished," he concludes.
However, the deputy chairman of the board of a bank which is in the top 50 in terms of assets disagrees: in practice, he claims, stepped up fight against money laundering merely boosted the cost of services in this criminal market, but did not diminish its business. "The law enforcement practice is such that the people who are brought to account are those who grab too much or those who are cast in the role of scapegoats", the banker laments. "Much of the increase of the pay for money laundering settles in the pockets of the government officials who cover for these banks, which merely increases the amount of dirty cash flows". "The G7 in its time had decided for some reason that by making the route of criminal capital more complicated the level of crime could be reduced. But if people are smart enough to commit crimes they are certainly smart enough to be able to launder the proceeds from their crimes," the former Kremlin official remarks.
Experts, however, do not share his skepticism. "Any economic crime ends with legalisation of criminal proceeds, so an effective battle against legalisation ultimately cuts economic crime," says Andrei Pilipchuk of the Interior Ministry's Economic Security Department. After Russia harmonised its laws with FATF rules, he points out, the number of exposed money-laundering crimes and the criminals punished increased by tens of times.
(This article was written in collaboration with Alexei Nikolsky, Vasily Kudinov and Kirill Koryukin.)
Olga Proskurnina