Corruption Watch: January 24, 2002

These reprinted "briefing notes" from a report by the International Organization for Migration (IOM) were provided by the IOM on 8 January. This report on trafficking used more than 200 sources in 28 countries and territories, mainly from NGOs, ministries, governmental agencies, international organizations, and others assisting victims of trafficking.

Despite a lack of reliable data, the report clearly establishes that trafficking in the Balkans remains a significant problem, affecting a growing number of women and children. It underlines that this lack of adequate data partly reflects the low priority many governments give to trafficking; a phenomenon made worse by inadequate legislation and rampant corruption that hinders the prosecution of perpetrators and their associates.

It is estimated that some 120,000 women and children are trafficked every year into Western Europe, including women and children from Africa, South America, and Asia.

The report says the Balkans cannot be viewed as a homogeneous region. Whilst Kosova and Bosnia- Herzegovina remain destination countries; Albania, Bulgaria, Moldova, and Romania sending countries, each has become, to varying degrees, a country of origin, transit and/or destination.

According to this report, the largest groups of women trafficked to Western Europe through and from the Balkans are Moldovan, who are primarily trafficked to Kosova and Bosnia-Herzegovina. Albanian women are mostly trafficked to Italy but also to Belgium, Greece, and to a lesser extent to the Netherlands and the United Kingdom. Bulgarian and Romanian women are mainly trafficked to Greece, Italy, and Austria. Ukrainian women usually transit through Hungary and Yugoslavia before being taken to Kosova and Bosnia. Some victims are then retrafficked via Albania to Italy and to other countries in Western Europe.

The Balkans will remain an important transit region between Eastern and Western Europe because conflicts have led to a breakdown of social, political, and legal structures, a situation which continues to give traffickers significant freedom to operate.

In 2001, IOM offices in the Balkans assisted 697 victims of trafficking, mostly from Moldova (47 percent), Romania (25 percent), Ukraine (11 percent), Lithuania (3 percent), Russia (3 percent), Bulgaria (2 percent), Latvia (1 percent) and Albania (1 percent). Other victims assisted by IOM came from Africa, Asia, and South America.

The report recommends that compatible and appropriate legislation be adopted and implemented to effectively counter trafficking. Protection and assistance mechanisms for victims of trafficking should also be developed and/or strengthened. Prevention through socio-economic support and awareness-raising activities is also an effective way to combat trafficking.

The report underlines the urgent need to collect and exchange information on trafficking through the establishment of a trafficking focal point and to allocate sufficient funds to monitor trafficking, create databases, and carry out further research on this issue.

Afghanistan's new post-Taliban interim leadership has pledged to eradicate the cultivation of opium poppies, Western news agencies reported. Writing in "The New York Times" on 17 January, Serge Schmemann quoted members of the new government commenting on this decree: "All countrymen, especially peasants and farmers, are informed that from now on, the cultivation, manufacturing, processing, impermissible use, smuggle and trafficking of opium poppy and all its derivatives is declared illegal," said the order issued by Hamid Karzai, the interim leader of Afghanistan. "Violators will be dealt with severely."

"The New York Times" added that "without an army or police force, it was unlikely that Mr. Karzai would be able to enforce the decree in a serious way."

Afghanistan has been the world's largest producer of opium, producing a record 4,950 tons in 1999. In 2000 the Taliban announced a crackdown on opium poppy cultivation, but it was only loosely enforced and large stockpiles remained. Many of these stockpiles have now been depleted by recent sales to Iranian smugglers who have sold large quantities of heroin, an opium derivative, to Albanian drug running gangs for distribution into West European markets.

The Czech and Slovak customs have jointly thwarted a new way of producing and distributing drugs, worth over 2 million euros, Czech TV reported on 17 January. The new drug has been described by Vaclav Link, spokesman for the city of Olomouc's Customs Directorate as a hallucinogen and "basically, a type of amphetamine." The production technology is not being released yet by the police of these countries.

Two managers of the Zlin (southern Moravia) Intercaps pharmaceutical company are facing charges on the Czech side of the border. On the Slovak side, several staffers of the Slovakofarma Hlohovec pharmaceutical company in western Slovakia have been charged.

Slovakorfarma owns 100 percent of the Zlin company Intercaps.

Meanwhile, Slovak customs detained two managers of Slovakofarma Hlohovec. The two men are facing charges of illegal production and possession of narcotics and psychotropic substances, carrying a sentence of two to 10 years.

Slovakofarma does not consider the case of alleged illegal production of a new drug, reported by Czech Television on 17 January, to be a problem, according to Slovakofarma spokesman Pavel Hraska, Slovakia's Radio Twist reported on 18 January.

The accusation stems from a misunderstanding that will be cleared up soon, said Hraska. "Our company handles on regular basis substances that fall under the law on narcotics and psychotropic substances," he said.

British police experts will train their Czech colleagues in fighting organized crime and corruption within a joint project of the Czech Interior Ministry and British Home Office which will be financed from the Phare (EU economic reconstruction aid for Eastern Europe) program, Petr Ibl from the Interior Ministry said, the CTK news agency reported on 17 January.

The project, which will cost 1 million euros, will last 18 months and will be attended by some 200 people. The project will have three phases. The first phase will focus on the development of governmental policy in fighting organized crime and data protection. In the second part, police officers will learn how to protect witnesses and how to fight Internet crime. The third part will include the training of Czech lecturers who would then train other police. The lectures will take place in the Czech Republic and Britain.

Prostitutes are not allowed to work in Rozsadomb (Rose Hill) -- the most elegant part of Budapest -- because officials say the neighborhood is a protected zone because so many foreign diplomats live, Hungarian TV 2 reported on 15 January.

The prostitutes wanted to move to this district because -- despite a recent law that mandates it -- a zone of tolerance has still not been allocated for them.

According to the Interior Ministry, in theory, prostitutes are allowed to work on Rose Hill but only where there are no residential homes occupied by foreign diplomats. TV 2, however, learned that there are more than 500 residential homes occupied by foreign diplomats in Rozsadomb, and no prostitutes can work the streets within 300 meters of these.

The prostitutes state that they do not want to break the law but they don't understand how they should know which home is occupied by a diplomat. If the prostitutes unwittingly work within a protected zone because they had not been notified in advance or given maps, the police cannot launch proceedings against them for a misdemeanor.

The Azerbaijani newspaper "Ekho" on 17 January wrote that counterfeit dollars from Iran may seriously damage the Azerbaijani economy and reduce the local currency's exchange rate against the dollar. The newspaper also doubts the effectiveness of Azerbaijani law-enforcement agencies in stopping their shipment to Azerbaijan.

Experts from the Main Department for Combating Organized Crime told the newspaper that Iranian counterfeiters are known for their great skill. These banknotes, unlike those printed in Chechnya and Russia, are identical to real banknotes. While checking the authenticity of fake dollars printed in Iran, even the detector, which checks banknotes with infrared and magnetic waves, is unable to distinguish fake $100 bills from genuine ones.

Fake $100-dollar banknotes are usually smuggled from Iran through the Lerik and Yardimli districts on the Azerbaijani-Iranian border. Smugglers transport small consignments of money not only on horseback, but also on foot.

Iran's membership in the World Trade Organization would help eliminate the illegitimate concessions enjoyed by special groups, the pro-Khatami Tehran "Iran Daily" reported on 15 January.

Foreign trade is the prime area where economic corruption takes place, the newspaper reports. "A government system, by nature, cannot be successful in trade. The only remedy to this dilemma is that the government delegate 90 percent of foreign trade to private entrepreneurs within a three-year schedule. Foreign business privileges, accounting for 70 percent of total illegal concessions, are generated through several channels: state-controlled imports worth $10 billion; state and private imports (with defined quotas) worth $4 billion; and illegal imports. No precise estimates are available on the value of illegal imports. The Ministry of Commerce puts the figure at an annual $6 billion. Assuming a 50 percent profit rate for illegal imports, contraband goods annually generate 24 trillion rials ($1.37 billion) in profits. There is a simple cure for this ailment: liberalization of foreign trade. Liberalizing the import of prohibited goods (with a custom duty of 10 percent), though, would not encourage legal imports. Rather, smugglers will continue to bring in merchandise through illegal channels but with lower profitability. The second source of economic corruption is foreign currency provided at special government rates (1,750 rials to the dollar).

Access to the dollar at this rate means access to goods that are 14 times less expensive than the market price. Concession groups bagged around 40 percent of $14 billion worth of foreign currency supplied at the rate of 1,750 rials/dollar last year. Unification of foreign exchange rates is the only way to block these illegitimate profits.

Bans cannot hinder the import of goods. Smugglers reap heavy profits by bringing in contraband products. Import restrictions and efforts to combat smuggling enable domestic producers to monopolize the market. Under such conditions, consumers have no choice but to pay what the unrivaled suppliers demand. In addition, a state monopoly of services sectors such as banking, insurance, air travel, water, electricity, and telecommunications also promotes financial corruption. Service providers must exist in a competitive atmosphere. Each year $12 billion worth of goods and services are provided at subsidized rates, $10 billion of which are allocated to energy. Only $4 billion of this figure benefit the people, whereas another $8 billion is absorbed by concession groups. The remedy is to establish a direct subsidy system within a new social welfare framework.

The arrest of Yakov Goldovsky, the president of the petrochemical giant Sibur, prompted a commentary in "The Moscow Times" on 16 January by Yulia Latynina:

"The new year has been marked by a number of arrests. Perhaps the one most symptomatic of underlying trends is the arrest of Goldovsky.

"Goldovsky got his entry to Gazprom through his work with Roskontrakt -- a curious organization that took over many of the functions of the all-powerful Soviet supply agency, Gossnab. By swapping CIS countries' debts for gas that Roskontrakt had inherited from Gossnab, Goldovsky not only made himself trusted in Gazprom, where outsiders are pathologically feared, but also managed to use Gazprom to create his own petrochemicals empire, Sibur. The linchpin in this empire is the Surgut gas refining plant which sits on the main pipelines for gas condensate, and he who controls the Surgut plant is in a very strong bargaining position.

"However, the director of the plant, Aleksandr Ryazanov, was not inclined to give it up. Ryazanov was arrested in Surgut, and one night Goldovsky paid a visit to his cell and gently chided him for his intractability.

"Ryazanov was one of the uncrowned kings of Surgut. The ease with which he was put behind bars made such an impression on him that he not only handed the plant over to Goldovsky, but for one and a half years barely showed his face in public. Until last year when Aleksei Miller appointed him as his deputy at Gazprom.

"Sibur is the first harlot that Miller has tried to return to the Gazprom fold. But then, all of a sudden it transpired that there was no Sibur. There was money that Gazprom had given Goldovsky to purchase various petrochemical plants and these Sibur-owned assets had then been handed over to firms belonging to Goldovsky's trusted cohorts.

"Poor Gazprom found itself unexpectedly in the role of a wealthy sugar daddy who has bought diamonds for his lover only to see her to run off with another man. Miller evidently was unable to return the diamonds by legal means, so he decided to cut this particular Gordian knot using familiar methods: with the assistance of the prosecutor general.

"The police decided to ask Goldovsky in person how he would go about returning the assets. In fact, they went about it in much the same way that Goldovsky did with Ryazanov three years earlier.

"The Goldovsky case has every chance of becoming a much-copied model.

"Any major fortune in Russia is acquired by no less dubious methods than those employed by Goldovsky. And every major oligarch has enemies whom he has ruthlessly crushed: Oleg Deripaska has Mikhail Zhivilo, Lev Chernoi, and Anatolii Bykov; Yukos has Yevgenii Rybin, etc.

"The issue, however, is somewhat different. Sibur is not simply a bunch of stolen enterprises as the chekists view it. It is a vast corporation that was built exclusively on the back of Goldovsky's business acumen and it functions properly because it is managed by Goldovsky. Had there been no Goldovsky there would be no Sibur and nor would half the enterprises that comprise Sibur exist either. They would quite simply have perished from a lack of funds and the random pilfering by their directors, whom Goldovsky booted out.

"By employing the same methods as Goldovsky, Gazprom's management has shown itself to be his equal in terms of unscrupulousness and brutality. But Goldovsky, apart from lacking scruples, is a talented strategist and manager. Whether Miller is his equal in this respect is doubtful."

This final installment about the activities of former Ukrainian Prime Minister Pavlo Lazarenko is largely based on information published on the independent Ukrainian website Criminal Ukraine (http://www.cripo.com.ua/) in 2001. It shows the web of connections between members of the Ukrainian ruling elite and their families in activities which are improper at best and most likely illegal. The trial of Lazarenko is scheduled to begin in San Francisco in November.

In March 1997 a closed tender was held in Kyiv to allocate frequencies for the GSM-900 system of telecommunications. The winners were announced at a press briefing by the committee which conducted the tender. The winners were three companies; the first two were well established joint-venture companies operating in Ukraine for a number of years: Ukrainian Mobile Communications and Ukrainian Radio Systems. The third winner was an unknown company without an address or phone number in the capital called Kyiv Star.

A few days after the results were announced, Motorola, one of the joint-venture partners of Ukrainian Radio Systems, angrily announced that it was leaving the country after having invested $500 million into its operations there. Nobody seemed to care that Motorola was leaving the market. Some were pleased by this turn of events, especially people in President Leonid Kuchma's administration and in Lazarenko's Cabinet of Ministers.

For weeks prior to the announcement of the winners, the head of the State Committee on Communications, which was responsible for the tender, had not been able to get a good night's sleep. Every day he was being bombarded by telephone calls from the president's administration and from the Cabinet of Ministers with very explicit instructions on which companies were to be awarded the tender. His recently appointed first deputy and head of the commission on licensing radio frequencies was Oleksandr Hneletsky. Hneletsky came to Kyiv from Dnipropeterovsk, the hometown of both Kuchma and Lazarenko. In Dnipropetrovsk, Hneletsky had headed the local telephone network. Soon after the tender ended, Hneletsky returned to his former job in Dnipropetrovsk. He had accomplished his mission in Kyiv.

Many people wondered where Kyiv Star had risen from. It had never placed a telephone call for anyone anywhere. Soon an announcement was made. It seems that Kyiv Star was formed in 1994. Its founding entities were the State Committee on Communications, the Energy Ministry, the Ukrainian State Railroad Company, British Telecom, Teller International, and the Luxembourg-based company Impeks Group. But the company was dormant. It made its first mobile telephone call only on 9 December 1997, eight months after winning the GSM-900 tender.

In 1997 Kyiv Star underwent a total reorganization. It went from being a public stock company to a closed shareholders company under the name Kyivstar GSM with startup capital of $28 million. The company officially claimed that 51 percent of the shares belonged to Ukrainian entities which consisted of the companies Storm (21 percent of the shares) and Omega (30 percent); 14 percent belonged to the U.S.-based investment fund Sputnik and 35 percent belonged to the Norwegian company Telenor. The CEO of Kyivstar GSM was identified as Yuriy Tumanov.

Soon it became known that Tumanov was also the CEO of Storm and, furthermore, that he was the brother of the Ukrainian first lady, Ludmilla Kuchma. His daughter, Svetlana, was also a leading member of the company. It was also discovered that Storm owed 31 percent of the shares of Kyivstar GSM and not 21 percent as was claimed publicly.

The Omega part of Kyivstar GSM was registered in Dnipropetrovsk in October 1996 and in fact held 20 percent of the shares and was, until recently, headed by a member of the Ukrainian parliament, Natalya Donets, a leading member of Lazarenko's political party Hromada and a close friend of Lazarenko's wife. Presently, Omega is headed by Konstantin Avdeyev, the former personal bodyguard for Lazarenko. Among the founding members of Omega are Nataliya Pushanko and Anatoliy Donets, Nataliya's husband. The founding capital for Omega arrived in 1998 from the company Nemura Industrial Group Ltd., which is registered in Antigua.

The Nemura Industrial Group Ltd. is not an unknown company in Ukrainian politics. On 11 July 1997, a Ukrainian-Antiguan joint venture called SP Pravda Ukrainy was formed by the Kyiv company Puls, which was owned by the collective of the newspaper "Pravda Ukrainy" (a newspaper which was the official voice of Lazarenko's party, Hromada) and the Antiguan company Nemura, whose address was the same as the Nemura Industrial Group Ltd. The founders of Nemura were Lazarenko and Petro Kirichenko. The bank account of the company was in the European Federal Credit Bank in Antigua, through which Lazarenko and Kirichenko were laundering vast sums of money.

The third part of Kyivstar GSM consisted of two Sputniks: Sputnik 4 LP, registered in the U.S. state of Delaware, and Sputnik 5 Holdings Limited, registered in Cyprus. Both Sputniks listed their representative as one Gregory Bedrosian. Many in Kyiv suspect that both Sputniks are companies owned, in fact, by Lazarenko. The "LP" at the end of Sputnik 4 gives it away, they claim. Lazarenko had the habit of inserting his name, initials, the names of his daughters, the town he was born in, and other similar facts onto his accounts.

By 1998 the leading personalities of Kyivstar GSM consisted of the following people: Tumanov (President Kuchma's brother-in-law), Chairman of the board; Yelena Frantsuk, (Kuchma's daughter), who heads the marketing department; and Irena Yuriyivna Kravchenko (the daughter of former Interior Minister Yuriy Kravchenko).

The illegally received money for Kuchma's Kyivstar GSM began in Kyiv in the offices of Prime Minister Lazarenko, then made it's way to Switzerland, then to Antigua, then back to Dnipropetrovsk and Kyiv. The circle closed upon itself.

Postscript: On 15 August 2001, Hryhoriy Omelichenko, a member of the Ukrainian parliament and head of the parliamentary committee on corruption, called a press conference and announced that Ukrainian President Kuchma had received a $3.7 million bribe from Lazarenko and that this bribe was in the form of capital to form the company Kyivstar GSM. Earlier, in the fall of 2000, Omelichenko had sent a request to Ukrainian Prosecutor-General Mykola Potebeniko, asking that Kyivstar GSM be investigated to show if any money stolen by Lazarenko made its way to the company. Thus far no answer has been received.