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Corruption Watch: April 4, 2002

4 April 2002, Volume 2, Number 13
American officials have quietly abandoned hopes to substantially reduce Afghanistan's opium production this year and are now bracing for a harvest large enough to inundate the world's heroin and opium markets with cheap drugs, "The New York Times" correspondent Tim Golden wrote on 2 April.

While U.S. and European officials have considered measures like paying Afghan opium farmers to plow under their fields, they have concluded that continuing lawlessness and political instability will make eradication all but impossible. Instead, U.S. officials will pursue a less ambitious strategy: They have begun trying to persuade Afghan leaders to carry out a modest destruction program as opium poppies are harvested over the next two months, if only to show they were serious in January when they declared a ban on production. The Americans will also encourage destruction of opium-processing laboratories and a crackdown on brokers, while providing neighboring countries with funds to combat smuggling. The campaign is being strongly backed, and even to some extent led, by Britain, which traces nearly all heroin on its streets to Afghanistan.

But the continuing upheaval in and around Afghanistan will limit the effectiveness of those strategies, U.S. and British officials admit, making it likely that Afghanistan will produce enough opium to dominate the world supply again.

On 17 January, with strong encouragement from the U.S. and the United Nations, the chairman of the Afghan interim administration, Hamid Karzai, announced a new ban on opium cultivation. His prohibition went beyond the Taliban's decree, to include processing and trafficking, which the Taliban had tolerated and, to some extent, profited from. While foreign officials have applauded Mr. Karzai's ban, it was issued only after the poppies were planted and without any viable means of implementation.

The unabated flow of opium and heroin from Afghanistan will have a direct impact on Turkmenistan and Iran, the major transit countries for Afghan heroin. "Today, Turkmenistan is becoming a transit country for delivery of Afghan heroin to Uzbekistan, Kazakhstan, Russia, and Europe," "RFE/RL Crime and Corruption Watch" noted on 28 March. "The largest quantity of narcotics was seized by customs officers in 1998: 10,558 kilograms of hashish routed from Afghanistan to Russia."

Opium and heroin processed in Afghanistan reaches the West by one of two major routes: the Northern route, through Central Asia to Russia and Ukraine, then through Poland to Western Europe; or the Balkan route, via Turkey to Bulgaria, Albania, and Italy, then north to Austria and the rest of Europe. "The Balkan route is largely controlled by Albanian organized crime gangs while Russian authorities have stated that there are 2.5 million drug traffickers in their country," "RFE/RL Crime and Corruption Watch" noted on 6 December. "A substantial amount of drugs, mostly heroin, from Afghanistan has been confiscated from traffickers recently in Iran, Tajikistan, and Bulgaria [see below]. But most law-enforcement officials claim that these are insignificant amounts compared to the volume presently in the pipeline." RK

Anthony Colannino, a deputy district attorney for the city of Los Angeles who specializes in Russian organized crime, said that between 1970 and 1985 about 300,000 legal Soviet immigrants entered the U.S., 5,000-10,000 of whom are "hardened criminals," "The Guardian" wrote on 25 March. According to Colannino, there are now tens of thousands of such immigrants entering the U.S. illegally every year, many crossing the Mexican border before going to LA. "They include ex-KGB officers, former special forces and government officers. They're very good at computer crime, electronic balance fraud, insurance fraud, pimping, narcotics, loan sharking, racketeering." Colannino said that mobsters from the former Soviet Union now constitute the largest ethnically based crime group in the U.S.

They prefer to avoid violent crime if possible, Colannino said, "but they'll kill you if they have to." He added: "Unlike the old Italian mob, who would send flowers to your wife after they'd killed you, they'll kill you, your wife, your children, your uncle, your cousins, your neighbors. They're bloody ruthless, they really are." RK

Belarusian President Alyaksandr Lukashenka stressed at a government conference held on 25 March that the country's law-enforcement and security agencies should concentrate their efforts on preventing criminal capital from coming to Belarus and on combating all manifestations of corruption, the Belapan news agency reported on 25 March. Among the shortcomings, Lukashenka mentioned the practice of accepting donations from companies, which he said leads to accepting dependence on the donor. The Belarusian president ordered the agencies to draw up proposals concerning the establishment of a single forensic investigation service. He suggested increasing law-enforcement and security agencies' efforts to eradicate crime among their officers, which he defined as "betrayal of the profession." He stressed that harsh measures should be applied to those who take bribes and extort money. Lukashenka did not welcome a proposal to increase the numerical strength of law-enforcement agencies. He said that their membership should be gradually reduced, but officers' skills should be improved. He also rejected a proposal to give more powers to some agencies. "We will not expand the activities of the special services thoughtlessly," he said. RK

State prosecutor Marie Benesova told CTK on 27 March that a provocation, known in the United States by law enforcement agencies as a �sting� operation, could serve as one of the means for fighting corruption in the Czech Republic. Such activities -- decried by critics who allege they constitute entrapment -- could include offering a bribe to civil servants for services; if the civil servant in question accepts the bribe, he or she could then be punished. "The number of corruption cases is growing. The idea of the staged provocation could meet with opposition, but it is anyway one of the possible solutions," Benesova told CTK. The goal is not to punish people who are prepared to accept a bribe. It would be enough if a civil servant who accepts a bribe is dismissed from his post, she said. "The situation in the Czech Republic is so serious that it requires a radical solution," Benesova said. The state Prosecutor's Office is now collecting information about how some countries use such operations in the fight against corruption. Benesova has said her office could propose such activities. However, the method will have to be approved by the parliament, she said. According to statistics, bribe-taking cases in the Czech Republic rose from six in 1993 to 58 last year. The illegal offering of bribes increased from 47 in 1993 to 170 last year. RK

The Ostrava Regional Court sentenced four customs officers who assisted in cigarette smuggling to 3.5-4 years in prison, the CTK news agency reported on 25 March. The officers knowingly facilitated the smuggling of at least 16,000 cartons of cigarettes from Poland to the Czech Republic. "The customs officers enabled the smugglers to pass safely through the customs control and even warned them of extraordinary inspections," the judge said. "Many more customs officers participated in the smuggling, but we could not prove that." RK

Police in the central Polish city of Lodz are investigating circumstances around the disappearance of four Arrow anti-aircraft missiles, Polish radio reported on 27 March. The missiles went missing from a train en route from Skarzysko-Kamienna, where the Mesko arms plant is based, to Gdansk. "The transport was escorted by employees of a [private] security firm," a police spokesman said. "The police have been searching the whole rail track for several hours. We are examining devices which will allow us to check where the train stopped and we are questioning witnesses." A Ministry of Defense (MON) spokesman said the missiles did not belong to the ministry. They were being transported by an intermediary from the manufacturer to a buyer, and were to be exported. RK


By Roman Kupchinsky

Russian arms sales to Iran began increasing in 2000, when Russia pulled out of a secret agreement reached in June 1995 by the Gore-Chernomyrdin Commission banning new weapons sales to Iran. (Russia was allowed to honor its earlier contracts under that agreement, including a number of "supply and service" agreements with Iran which were not due to expire until 2011.) This emerging market in Iran soon attracted the Russian criminal world.

Iran needed to buy Russian arms, especially air-defense systems, but did not have the cash to pay for these purchases. This led to a system whereby the purchases were partially paid for in cash with the balance remunerated in oil. According to Moscow defense analysts, of the $5 billion worth of orders that Russia's military-industrial complex fulfilled for Iran, just $1 billion was transacted in cash. Iran had to settle its bills through a series of much less attractive deals which included Soviet-era debt write-offs and oil barter deals.

The companies selling the arms, such as Rosvoruzhenie, the state arms export company for new equipment, did not have the means to resell the oil on the open market and had to find a way to sell this oil in order to cash out. So on 21 December 1995, Rosvoruzhenie signed a contract with Sintez Corporation Limited (contract number RV 56430802120-00), which is headed by Aleksandr Nilovskii, to sell oil supplied by Iran as payment for Russian military equipment. The contract provided for the total amount of Sintez Corporation's earnings from the sale of the Iranian oil to be transferred to the account of Rosvoruzhenie at the Moscow National Bank within three days of the sale.

Sintez Corporation Limited was a subsidiary of Korporatsia Sintez, which was registered in Moscow and re-registered with headquarters on Malaya Nikitskaya Street, 29, Building 1. The president of Korporatsia Sintez was Leonid Lebedev. Among its other founders were Nilovskii, Aleksandr Ilyich (the same Nilovskii who headed Sintez Corporation); Garber, Mark Rafayelovich; and Bekker, Aleksandr Lvovich. (These names return later in this narrative.)

The Moscow National Bank went bankrupt in 1998, and the money owed to Rosvoruzhenie was not recovered. The obligations under the original contract between Sintez Corporation and Rosvoruzhenie was then transferred to SC Oil Invest, the successor to Sintez Corporation. SC Oil Invest then signed a separate contract with the Jersey-registered company Rostok Limited, allowing Rostok to sell the Iranian oil -- which it did, in Western Europe. On 28 January 2000, Sintez Corporation was served a writ of execution for the recovery of debt owed to Rosvoruzhenie in the amount of $46.3 million. But the writ could not be executed, since SC Oil Invest did not have the money. Rostok Limited had used some of this money to buy real estate, and some to buy weapons and oil products for illegal smuggling operations. Sources in Russia claim that some of the money was laundered in Croatia and now is being legalized through the Tyumen Oil Company's business projects in the privatization of gas pipelines in Europe, mostly in Croatia. Altogether, Lebedev and friends are suspected of stealing a total of $124 million from Rosvoruzhenie.

During the Balkan wars of the 1990s, the United Nations imposed an arms embargo on Croatia. This embargo, however, was systematically broken by many states and arms traffickers -- though few ever faced charges. One of the most glaring examples of the breaking of this embargo was when the freighter the "Jadran Express," which is owned by a Croatian businessman, was detained by Italian authorities outside of Venice in the Channel of Otrento on 11 March 1994. It was carrying a large shipment of weapons bought in Belarus on a fake Nigerian end-user certificate destined for Croatia. It had left the Ukrainian port of Oktyabersk on 27 February 1994, where it stated that its destination was Nigeria. It then stopped in Izmir, Turkey, then Port Said and headed back northeast to the Adriatic, where it was seized.

A number of years later Italian police, together with the British National Criminal Intelligence Service, the Ukrainian Security Service (SBU), and other national police forces, broke the case (code-named "Vlada") and arrested a number of arms traffickers in early 2000 for breaking that embargo. One of the men arrested at the airport as he was entering Sardinia with three other men and a woman on their way to his multimillion-dollar mansion was Aleksandr Zhukov, now a British subject and the chairman of Sintez U.K. Ltd.

Formerly a powerful businessman in Odesa, Ukraine, Zhukov was involved in most of the deals which went on in that city. His company, Sintez, dealt in oil, and he owned a bank, Mortransport Bank, which handled all budget disbursements for the city. Sintez was also involved in the dealings around the Odesa oil refinery.

According to press accounts, "Sintez was the major player at the Ukrainian Black Sea port of Odesa, where it had its own oil storage facilities and, together with Russian giant LUKoil, owned a stake in the city's refinery. Sintez was also a major client of Chevron in Kazakhstan, transporting Kazakh Tengiz crude by rail to Odesa and arranging its transshipment. Its position in Odesa has weakened, however, as other Russian companies consolidate their position there" (NEFTE Compass 26 April 2001).

On 20 April 2001, the Milan newspaper "Il Sole-24 Ore" reported: "On interrogation by Turin magistrate Silvana Podda, Zhukov, denied all charges: 'My business is entirely lawful,' he stated. However, it emerged from DIA (the anti-mafia division) investigations that part of the enormous profits from the trade were channeled into 'Trade Concept,' a Jersey (Great Britain) company regarded as the real financial locomotive behind Sintez."

Zhukov's Sintez U.K. Ltd. was incorporated on 1 December 1992 in England and stated its business as "the provision of services and support to shipping brokers and the oil industry through the operation of a representative office." The parent company of Sintez U.K. Ltd. was Sintez Holding SA, which was registered on 2 November 1992 in Zurich, Switzerland. On 4 November 2001, Sintez Holding SA changed its name to Transit Holding SA and its new home came to be Lausanne, Switzerland, where one Philippe Brelle served as its representative.

The Italian prosecutor in the case, Paolo Tamponi, from Torino, soon announced that in addition to Zhukov, the police had arrested one Dmytro Streshinskii and had charged a number of others -- including the Russian citizens Leonid Lebedev and Mark Garber -- with being part of a criminal organization of arms traffickers. Both Lebedev and Garber were connected to the Korporatsia Sintez, while Lebedev was linked to other companies, including the IBC bank in Russia, where he is the chairman of the management board.

According to Italian police, two major arms shipments were carried out in 1994 and 1999 by two companies, Global Technologies International and Global Technologies Ukraine. Police allege that part of the money gained from the arms deals was transferred to Jersey-registered Trade Concept Ltd. -- which controls 25 percent of Sakhalinmorneftegas (SMNG), the Rosneft-owned producer which this year secured a $90 million loan from the European Bank for Reconstruction and Development (NEFTE Compass. 26 April 2001).

The director of the Trade Concept Ltd. Moscow office is Mark Garber, who is also the head of United City Bank, which was founded by Trade Concept Ltd., SMNG, and a Swiss subsidiary of Banque Bruxelles Lambert. United City Bank became Chase Fleming Bank in 2001. Garber is also a director of the asset-management company Fleming Family and Partners. Until recently, he divided his time between the firm's offices in Russia and its headquarters in Mayfair.

It seems that Lebedev, Garber, and their colleagues decided to form their own banks in order to have greater leverage in their main business of acquiring oil refineries and buying pipelines.

The IBC bank was one of them. Formed jointly by Sintez and TSL Corporation in Moscow in 1994, it was a mysterious entity. According to a 2000 report on the IBC by Standard & Poor's:

"Management of IBC has provided brief information regarding the Sintez group (business profile, some of ownership interests)....

"However, this information was not complete as, for instance, ownership structure of these entities is unclear. The quarterly reports that IBC provides to the Bank of Russia show names and addresses of individual shareholders with holdings of 20% and more of the bank's largest shareholders, Sintez and TSL. According to these reports, the owner of Sintez Corporation is a Swiss-registered company Petrosol Holdings SA, and TSL International is owned by Trade Concept Limited [the same Trade Concept which allegedly laundered money from Zhukov's arms sales to Croatia], a UK-registered company. No business profiles of these two companies are available....

"The ownership structure and influence component of our analysis reflects a situation common for Russian banks and companies, whereby beneficiary owners are not disclosed. The ownership structure represents a list of opaque entities with unclear business profile and ownership. The degree of influence of each of the shareholders or shareholder groups is unclear too as relationships among the company's shareholders are not disclosed and information on related party transactions is incomplete....

"Domination by the former majority owner, a lack of independence, and no committees. The board of directors, elected in 2000, includes five members �- one executive (a Mr. Gaitsgory) and four non-executives. Three of them (Lebedev and Nilovskii, who are part of the Sintez management that allegedly stole $124 million from Rosvoruzhenie, and a Mr. Rychenkov) represented IBC's shareholder group Sintez, a former majority owner. Budakov, a non-executive, told RFE/RL that he represents Trade House Novoarbatskoe, which holds 3.78 percent of the company. He also holds a position on a council of the Moscow Interbank Currency Exchange (MICEX) and holds a number of other part-time positions."

Will the court in Torino be able to sentence Lebedev and Garber for illegal arms trafficking? Thus far, they are both in Russia and the Russian authorities do not seem to be taking an active part in the investigation of their cases. It also appears that the Russian government has dropped the notion of having Sintez repay Rosvoruzhenie the $124 million it owes them.

The smart money says that they will get away scot-free.