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Corruption Watch: May 23, 2002

23 May 2002, Volume 2, Number 20
By Roman Kupchinsky
Russian companies are the most likely to pay bribes to win or retain business on emerging markets, corruption watchdog Transparency International (TI) announced on 14 May.

Russia received the lowest ranking on TI's Bribe Payers Index. China, Taiwan, and South Korea trailed closely. Australia was given the highest ranking, suggesting that its multinational corporations were least likely to bribe officials.

Corruption was deemed to be most rampant in the construction, defense, and oil and gas industries. Agriculture, light manufacturing, and fishing were considered to be the cleanest.

The results were compiled from 835 interviews with business leaders carried out between December and March in the following emerging-market countries: Argentina, Brazil, Colombia, Hungary, India, Indonesia, Mexico, Morocco, Nigeria, the Philippines, Poland, Russia, South Africa, South Korea, and Thailand.

Russia did not figure in TI's first Bribe Payers Index in 1999, which found Chinese firms the most corrupt, followed by South Korean and Taiwanese companies.

It is illegal in Russia to offer any government official -- inside or outside the country -- a bribe, and accepting a bribe is also rigorously prosecuted, according to a spokesman with the Prosecutor-General's Office.

The world's richest countries must spend less time lecturing poor countries on corruption and do more to crack down on bribery by firms based at home, TI Chairman Peter Eigen said, according to Reuters on 14 May. "Politicians and public officials from the world's leading industrial countries are ignoring the rot in their own backyards."

Russians pay out a staggering $37 billion a year in bribes and unofficial charges, an amount that represents more than half of 2002 government spending or 12 percent of gross domestic product, according to a study by the Moscow-based think tank INDEM released on 21 May.

Cash or expensive presents are given for everything from better treatment at a hospital to a business license or a favorable court ruling. The astounding picture of widespread corruption was uncovered by INDEM in the course of a two-year project funded by the Danish government via the World Bank.

By Roman Kupchinsky

Are Americans involved in defrauding Russian companies to the point of near collapse and making millions of dollars in illicit profits in the process? If so, can such activities help promote the image of the United States among Russian elites?

Hermitage Capital Management Ltd. and its boss, William Browder, have challenged PricewaterhouseCoopers (PwC), the auditors for Gazprom (see "RFE/RL Crime and Corruption Watch," 3 May 2002). Browder, a U.S. citizen, has claimed that he, as a protector of minority shareholder rights, is waging a campaign to force Russian business to be more transparent and "reform Gazprom." He failed to mention that he was also desperately trying to get a seat on Gazprom's board of directors.

Court records in the United States suggest that Browder has not always been so altruistic a fighter for minority-shareholder rights. In fact, Browder and a group of other investors along with a former adviser to the Harvard Institute for International Development, are accused of having entered into a criminal conspiracy to defraud a Russian company, Avisma Titano-Magnesium Kombinat, in Berezniki, Russia, in the late 1990s.

On 13 December 1999, a civil action was filed in the United States District Court for the District of New Jersey by Avisma Kombinat against Dart Management, Kenneth Dart, Jonathan Hay, Michael Haywood, Michael Hunter, Francis Baker, William Browder, Hermitage Fund, and Barclays Bank PLC.

Avisma is seeking to recover in excess of $150 million in damages "for harm caused by a scheme of fraud and money-laundering by which tens of millions of dollars were misappropriated from Avisma and diverted to bank accounts maintained by or on behalf of the Investors and/or their agents and co-conspirators," according to the First Amended Complaint filed by Avisma on 13 December 1999. The alleged activities, as outlined in that suit by the plaintiff, are as follows:

The roots of the allegations extend to when Bank Menatep, a Russian company, obtained a controlling interest in Avisma in late 1995. Menatep forced Avisma to sell its main product -- titanium sponge, a key ingredient in the production of titanium products such as ingots -- as well as magnesium and other products at less than market price to offshore companies. Those companies in turn sold the Avisma products on the international market and kicked back the resale profits to Menatep, the plaintiff alleges. At the same time, Menatep also is accused of forcing Avisma to purchase raw materials at inflated prices from these offshore companies, with the profits again going surreptitiously to Menatep.

The plaintiff alleges that such fraud diverted tens of millions of dollars in profits from Avisma until 1997. The machinery of the ongoing scheme included the use of offshore conduits. These are said to have included: TMC Holdings Ltd.; TMC Trading Ltd.; TMC Trading International Ltd.; and TMC USA Inc. -- collectively known as "TMC." Avisma Kombinat argues that TMC funneled these funds through its accounts at Barclays PLC to a number of companies, known as Valmet, which in turn funneled the resources through bank accounts maintained at the Bank of New York (BONY) to unknown entities. The accounts at BONY were alleged to have been established with the assistance of a BONY officer who had knowledge of the scam through her husband, the vice-chairman of Menatep Bank.

According to the 1999 First Amended Complaint, the operation was sold as a "turnkey" operation in 1997 to Browder, Dart, and others who "knowingly and intentionally joined in the illegal scheme in order to capture the kickbacks generated from the looting of Avisma." Browder and Hermitage participated in the purchase of the illegal scheme and broke U.S. law in using interstate wires to transfer $2 million to Austrian Creditanstalt Bank (CAIB) to purchase an interest in Avisma in 1997, the company alleges. Browder also maintained ties with Dart and others in the U.S. to defraud Avisma -- that company claims -- and the new "investors" (Browder, Dart and Hay) did to the tune of $8 million. Browder and the other investors then tendered their shares in Avisma to another Russian company, VSMPO, which was to buy out Avismo. This was done in exchange for shares in VSMPO in order to control the new entity and continue the scheme.

The Harvard Institute for International Development had obtained millions of dollars from the United States Agency for International Development (USAID) to help the Russian Federation establish a market economy. Some of this money was used to establish the Institute for Law-Based Economy, where Jonathan Hay worked.

Hay is accused of using his position at the institute to structure the transfer of control of Avisma from Bank Menatep to the "investors." Hay was then elected a member of the board of VSMPO as part of the effort to retake control of Avisma and gain control of VSMPO in order to continue the scheme of kickbacks, the plaintiff charges.

Hay is presently the subject of a criminal investigation by the U.S. Attorney's Office in Boston, Massachusetts.

Yet Hermitage Capital, Browder's company, is still going strong. On 5 November 2001, Hermitage lost a lawsuit concerning the Volzhanka chocolate maker -- where, according to Michael Calvey, the managing partner at Baring Vostok Capital Partners, which owned 50.4 percent of Volzhanka -- Hermitage was "greenmailing, or in other words, is using legal technicalities to exert maximum pressure on the minority shareholder so that Barings is forced to pay a higher put an end to the court battles" (see "RFE/RL Crime and Corruption Watch," 3 May 2002).

William Browder, grandson of Earl Browder, the former head of the Communist Party USA, in the meantime has been promoting himself in the American press as a savior of the "little guy" in Russia. He has retained the services of a high-profile lawyer to plead his case against PwC -- a fact that did not stop Gazprom from opting to keep PwC as its auditor. Gazprom appears determined to defend itself from what it might perceive as predatory tactics -- and not follow in Avisma's footsteps.

The trial in the Avisma case has not yet begun, and lawyers have expressed hope that an out-of-court settlement might be possible. But it is still is a landmark case in which a U.S. court is being used to wage a battle in which U.S. businessmen are effectively being accused of asset-stripping in Russia.

By Roman Kupchinsky

On 5 March, the anti-Mafia coalition in the Ukrainian parliament (which at the time consisted of three of the Russian parliament's 450 members) sent an official letter to the Prosecutor-General's Office in which they wrote:

"According to the press secretary of the Brussels Court of Belgium, the court investigator, Collet Calevart, has initiated charges against the former adviser to Ukrainian President [Leonid] Kuchma -- Volkov, Oleksandr -- for having opened bank accounts for himself and his partners in Belgium, during the period of 1994-97.

"According to Belgian officials, these accounts were used to launder millions of dollars in ill-acquired funds for the benefit of Volkov and his co-conspirators. Belgian officials supplied the account numbers and the dates of wire transfers made by Volkov and his co-conspirators and requested assistance from the Ukrainian Prosecutor-General's Office for help in the investigation. Prosecutor-General Potebenko refused.

"The anti-Mafia inquiry into the Prosecutor-General's Office showed evidence provided by Belgian investigators, including the various shell companies used by Volkov and his associates to launder money from suspected illegal operations."

The Prosecutor-General's Office replied to this inquiry on 4 October 1999, stating, "There is no evidence for initiating a criminal case against Volkov, O.M."

In the new letter from 5 March of this year, the parliamentarians again demanded that the prosecutor-general take action against Volkov.

On 15 May, Mykola Melnychenko, a former bodyguard of Ukrainian President Kuchma who secretly taped conversations in the president's office, released the following transcript of two conversations between the Ukrainian president and Volkov.

The first conversation, from 7 July 2000, concerns the question of parliamentary immunity from prosecution:

Kuchma: What? I do not understand you. Are you really for canceling immunity [from prosecution] for members of parliament? This can't be.

Volkov: Leonid Danylovich, I will tell you honestly. Me and Bakaj [Ihor Bakaj, the former head of Naftogaz Ukraina who resigned from his post in 2000 amid press reports of corruption and was elected to parliament, but lost his bid for re-election in March], we understand everything very well. We are not children; we understand that for us there is only one 'immunity for deputies,' and that is you. If you're not there, everything else is nonsense (khernia). But if the prosecutor-general brings this up, I will get 310 [votes] and he [Bakaj] will get 312; they will vote for us. We understand all of this very well, Leonid Danylovich.

Kuchma: You understand everything very well [laughter], and they would have moved against you if I wasn't sitting here. But soon another one will come and it will be raised in the parliament. Therefore it is not necessary to play games...

The second conversation, on 17 May 2000, apparently concerns kickbacks received by Kuchma from business deals. The name of the person who gave the kickback is deleted in the transcript, as is the name of the bank. According to bodyguard Melnychenko, Kuchma used Volkov as his banker and kept his money in Volkov's accounts, from which funds were then transferred offshore.

Kuchma: How much did he [name deleted] give you, 18? Or how much?

Volkov: Who [name deleted]?

Kuchma: Yes.

Volkov: Yes, 17 million.

Kuchma: He said that this figure did not exist earlier.

Volkov: He confirmed it with documents.

Kuchma: He told me that he gave me seven million. I did not count it, I don't know how much. I gave you more, because in addition to this, there were others.

Volkov: Yes, yes, yes!

Kuchma: So, now there were three transfers, as I recall; he showed me 500, 700, 800 for Volkov.

Volkov: No, Leonid Danylovich -- this is stupid, check the accounts.

Kuchma: He showed me the accounts and three million in bonds are in his account at [bank name deleted], and there is normal money there earning large percentages.

Volkov: Leonid Danylovich, had he transferred them to me, it would show on my computer; such transfers are not there.

Kuchma: Go and find out what happened.

Volkov: And the three million?

Kuchma: The three million we need to take, absolutely.

On 16 March 2002, Volkov told website "Ukrainska Pravda" (, "I don't recall this conversation," and he added that these recordings were "totally false."

According to Radio Liberty's Ukrainian Service correspondent in Brussels, Volkov's trial on money-laundering charges is to commence in the near future.

Antidrug police squads in Iran's southeastern Kerman Province on 15 May killed six drug traffickers and arrested three accomplices, IRNA press agency reported. Thirteen kilograms of hashish was confiscated from the drug traffickers in addition to their motor vehicles.

Twelve members of international crime groups have been charged with drug smuggling following a two-year investigation by authorities in Russia and abroad, ITAR-TASS reported on 16 May, citing the deputy chief of the Russian Interior Ministry's investigation committee, Valeriy Syzrantsev. In March, he said, law enforcement concluded its probe in the international drug-dealing case and sent it to a court. The drug ring was exposed through joint efforts by law-enforcement agencies from Russia, the United States, and the U.K. The probe began after U.S. customs authorities found cocaine concealed in industrial equipment traveling from Colombia to Russia in May 2000. Law enforcement identified six Russian citizens who had received a shipment containing 56 kilograms of cocaine and prepared the drugs for further transportation to Great Britain. The cocaine, estimated at a value of more than $8 million on the black market, was seized in Khimki near Moscow.

Syzrantsev said that during the course of the investigation, police found additional evidence pointing to operations by the same group, including documented proof of the trafficking of at least 150 kilograms of cocaine. Moreover, they found a base in Mytishchi near Moscow producing the psychotropic sedative methaqualone. Police found 90 barrels containing 2,000 tons of powdered methaqualone, as well as 1,300 tons of tablets ready for use. The investigators traced 6,000 tons of methaqualone powder and 400 kilograms of methaqualone tablets back to African and European countries.


By Jeffrey K. Silverman

U.S. President George W. Bush said before a state visit to South America several months ago that the U.S. would not assist corrupt countries. But does that apply to countries that turn a blind eye to high-level corruption that impacts U.S. national security?

Benevolence International, an alleged non-governmental organization (NGO) front for supporting terrorists, is accused by U.S. authorities of sending $685,560 to Chechen rebels between January and April 2000 in supporting their war against the Russian Federation. The U.S. government arrested Enaam Arnaout, the head of the Chicago-based, self-described Islamic charity, for his alleged connections to illegal banking operations and funneling money to fighters in Chechnya and terrorist groups in Afghanistan and Azerbaijan.

This NGO may be but one of a number of fronts for money laundering and terrorist organizations operating in the former Soviet Union and one of the key organizations involved in providing assistance to refugees and Chechen fighters living in the so-called "lawless" Pankisi Gorge. Nevertheless, U.S.-funded programs as well as USAID projects are easy prey for extortionists and those operating under Georgian government protection in grabbing money.

Tracking the money circulating through Georgian banks can alleviate many of Georgia's domestic problems in this area. Some sources in banking management estimate that upwards of 50 percent of the money flowing into Georgian banks comes from laundering operations. Martin W. McCormack, a senior legal adviser to the USAID Bank Supervision and Enforcement Program with the National Bank of Georgia, concurred.

Corruption within international organizations trying to provide aid to Georgia is a special problem that has rarely been addressed because the media in Georgia is afraid of embarrassing international assistance efforts. In a form of symbolic jujitsu, regardless of mutterings about standing firm, it seems that most -- including the USAID, the State Department, and other bodies -- are not really interested in tackling large-scale corruption within programs they administer.

During a visit to Harvard University in October, Georgian President Eduard Shevardnadze was asked by a young Georgian studying in the U.S. about the outcome of the much-publicized Georgian anticorruption commission: Has a single person been brought to justice under acting legislation? "Well, that is a very good question," Shevardnadze responded. He informed the student that he would talk on that subject the following day. He didn't.

The direct question was sidestepped, just as the larger issues are almost never addressed in Georgia, especially by the international community. This begs the larger question of whether anyone really cares about fighting Georgia's blatant and endemic climate of corruption. Georgians consider themselves experts on the topic of corruption; however, when it comes to dealing with the disease, Americans think they know best what to do.

Ghia Nodia, chairman of the board for the Caucasus Institute for Peace Democracy and Development, summed it up in a talk last year in Tbilisi: "We find ourselves in a vicious circle: The state does not pay living wages to policemen, tax collectors, or regulatory bodies, and the only control is through a de facto system of licensing to various corrupt practices. A system of corruption, if properly run, may guarantee relative stability and even well-being for much of the population."

This is not the case on the macro-level or in fighting the war against terrorism. Shevardnadze told the Georgian parliament and the media on 24 April that, "Foreign grants and money flowing into non-governmental organizations should be controlled, and too often funding received by the local organizations from the foreign sponsors are used against democratic principles.''

Terrorism may be a contributing factor to the concern over the flow of international assistance funding. Shevardnadze has ordered Zurab Nogaideli, his finance minister, to work out measures to control the use of foreign grants that might be linked to terrorist organizations and Chechen fighters. However, the initiative is more likely intended to silence many vocal NGOs, such as the Liberty Institute, who are not lost for words when discussing the current state of civil society under Shevardnadze's reign.

(Jeffrey K. Silverman is an American free-lance journalist living in Georgia and specializing in organized crime and corruption in that country.)