A visa-free for dirty money: transborder corruption, Russia and the west

The endemic corruption of Russian business, politics and law enforcement is spreading to the west – and becoming a global phenomenon. Русский

Editors of OpenDemocracy Russia
14 June 2017
trump towers in fog.jpg

Hazy money: Trump towers at Miami Beach. Photo CC BY-NC-ND 2.0: Jerry Edmundson / Flickr. Some rights reserved.Western investors are turning to Russia in the hope of fast bucks and savings on social and environmental costs. Russian officials and business owners transfer their assets to tax havens and Swiss banks. Who benefits from transborder corruption – and who pays for it? oDR has been talking to members of the EU-Russia Civil Society Forum’s “Fighting Transborder Corruption” working group.

Discussing this topic with us are: Konstantin Rubakhin, coordinator of the “Save Khoper” movement and author of numerous investigations into corruption; Andrey Kalikh, independent journalist, coordinator of the working group “Fighting Transborder Corruption”, and independent journalist and investigator Anastasia Kirilenko.

Transparency International’s working definition of corruption is “the abuse of entrusted power for private gain”. Corporate gain can also be included in this definition. What exactly is the gain from transborder corruption, the scale of which goes far beyond freebie watches, yachts, training shoes or even property?

Konstantin Rubakhin: It’s not just a question of material wealth per se, but also of systemic influence. In this context, personal prosperity is linked not only to an increase in business activities, because at a certain point it’s no longer just a question of earning a living, but of winning a race – for wealth, for political influence and so on. This can all come under the term “private gain”.

But the main private gain in this situation is security. In the Russian context, for example, this means a guarantee that the government won’t hand you over to an international investigation, as we’ve seen in the Russian mafia affair in Spain. Thanks to this immunity, for example, the names of oligarchs Iskander Makhmudov and Oleg Deripaska are not to be found on any Interpol wanted lists. In return, corrupt business owners are involved in various deals, including some with European business, which they try to sway towards Russia. A good example is the case of the Alstom Group, also involving Iskander Makhmudov as well as Andrey Bokarev, head of the Russian government’s International Financial Relations department.

Corruption is not a question of mere sweeteners, bribes transported across borders in suitcases

Andrey Kalikh: Everything that Konstantin has said comes under the heading of the “globalisation of corruption”.

There is, of course, nothing new about this. Corruption has long since moved beyond national governments: corrupt links cross borders, and we’re not talking here just about business links, but links between officials involved with business as well. And in general, corruption is not a question of mere sweeteners, bribes transported across borders in suitcases. It’s become much more complex than mere bribery and the very narrow and one-sided definition used in Russian law.

For our kleptocrats, gain from transborder corruption means, in the first place, the opportunity to salt their assets away in the west, and in the second, the opportunity to work with associates in the west. This is a unique situation, consisting of two interlocking processes – on the one hand, the export of Russian corruption to Europe, or the entire globe, has led to Customs officers and business people being infected by this virus. On the other hand, foreign officials and corporations invest resources in Russian projects, because they know that Russia means easy money.

In other words, Russia is offering its corruptive attraction to the whole world: look, you’ll find your projects very easy to carry off here, and if you also say nice things about us, you’ll be rewarded and get lots of preferential treatment. Given that the harshness of our laws is mitigated by their non-observance and is in any case only aimed at “outsiders”, for “insiders” the freedom to spend money as they like is much greater in Russia. The reason international corruption is so successful in Russia is that here it’s easier to infringe the law and ignore environmental norms and the rights of the local population – just like in Africa, for example.

Transborder corruption also has a crucial political side to it. Russia has been actively bribing European politicians and corporations for many years. Many Russian officials are convinced that creating a group of political supporters in the west is only possible with the help of money or preferential treatment: setting up investment projects in Russia, for example. But, in any case, it is important to set up a support group like this in political and business circles.

Here’s a concrete and tied and tested example: the financing of right-populist European political parties and movements, interference in elections and operations aimed against anti-right forces. In France, Hungary and several other countries there have been enough documents relating to this published for it to be spoken about openly.

A pool of tame supporters of Russia’s political system exists in the West – people who may not necessarily need to speak well of Russia, but at any rate may not criticise it

So a pool of tame supporters of Russia’s political system is created in the west – people who may not necessarily need to speak well of Russia, but at any rate may not criticise it. They enjoy profitable contracts and dodgy tenders which they helped draw up and are heavily involved in. This is a particularly important area of transborder corruption that needs to be combated because it creates support for Russia’s political system.

Anastasia Kirilenko: Russia does in fact give enormous financial help to Hungary, in return for its leader calling for the removal of sanctions against it – 10 billion Euros to build the Paks nuclear power plant, the financing of which was not even subject to tender. The EU investigated and blocked the deal. Hungary retaliated by refusing to cooperate with the European Commission (there were accusations over political implications) and the investigation petered out, partly because the deal involves secret parameters.

Local investigators, including former Hungarian Minister of Education Bálint Magyar, believe that part of the money will end up, via tax havens, in the pockets of Hungary’s leaders. There are indeed no mechanisms for preventing this outcome, until/unless the Hungarian government itself decides to do so.

What effect does transborder corruption have on Russia’s economic development? Surely, as well as the short term gains made by companies thanks to their ability to circumvent the law, there are also certain risks involved.

Anastasia Kirilenko: So far, the desire for large profits outweighs the risks. For example, the concessions when foreign companies carry out construction projects in Russia – foreign concessions are organised through tax havens in such a way as to make it obvious that PEPs (politically exposed persons – important politicians, secret friends and bureaucrat acquaintances) – will get a cut of the cash.

ximki road building.jpg

Logging on a proposed construction site in the Khimki forest, on the St Petersburg - Moscow highway in 2010. Photo (c): Valery Melnikov / RIA Novosti. All rights reserved.As a result, no one monitors business efficiency, because the Russian budget will pay out for everything, even loss-making projects.

A prominent example of this has been the construction, by the French company Vinci, of a motorway between Moscow and St Petersburg through the Khimkinsky Forest, although the road remains unused. According to civil society campaigners, the company evidently paid a cut of up to 30% (around 300 million Euros) to Aleksandr Plekhov (described in the Panama Papers as a friend of Vladimir Putin) and Arkady Rotenberg, one of the most influential businessmen in Russia and the president’s former judo sparring partner. Interestingly enough, Vinci is under investigation by France’s Prosecutor General and has been named, along with Siemens, in an OLAF (European Anti-fraud Office) report as one of the six most corrupt companies in Hungary.

If you make a deal with the Russian government, the money will never be called corrupt or illegal

Konstantin Rubakhin: Western business is happy to take part in money laundering schemes, so long as they work. Russia is a kind of laundering laboratory – something passes through it and money comes out the other end. And if you make a deal with the Russian government, the money will never be called corrupt or illegal. You can bring some dodgy cash in, and earn a pretty good profit on it. You can declare one sum on the way in and another one on the way out, depending on how your business is going, and the second sum will always be legal. You can put any figures into your accounts. It frankly amazes me how respectable auditing firms can work in Russia, where you can write anything you like in your accounts.

To play devil’s advocate for a moment, here’s a question: does this mutually beneficial process have any unforeseen positive side effects? Is there a factory being built somewhere, on the proceeds of corruption, but which will provide jobs for the local populace?

Konstantin Rubakhin: I can give you concrete examples of this straight away. Take the long running and high profile Save Khoper campaign, calling for a complete ban on copper-nickel mining in Russia’s Black Earth region. In Europe, no one will lend you money unless you comply with the “Equator Principles”, which provide a framework for banks to assess and manage the social and environmental impact of large projects to which they provide finance. There are also structural funds from which a company can receive up to 50% of its finance if it is environmentally sound, allowing it to develop and install cutting edge green and energy saving technology.

In Russia, all these developments are immediately cancelled out by the fact that laws are never observed and there is no feedback from the public or any civil control. So a corrupt company is useless by definition.

xoper protests moscow.jpg

Participants of a country-wide protest against Nickel mining in the Black Earth region of south-western Russia. Moscow, 2014. Photo courtesy of Konstantin Rubakhin.From an economic point of view, corruption only works if it incorporates environmental dumping. On the Khoper, for example: it’s clear from geological surveys that mining will involve the dumping of radioactive waste products that will end up in people’s food and water. Indeed, radioactive underground brine pockets full of toxic elements have already been found in food sources as a result of the geological surveys themselves. But the local authorities are determined to prevent disclosure of this situation, and just try to clean up after the mining company. And everybody knows why.

As a result, the millennia long agricultural potential of the Black Earth region is being eradicated in the cause of quick nickel extraction, the profits from which will disappear into tax havens and from there into the pockets of Makhmudov and Bokarev and their corrupt partners and officials. What good can come from? Zero – a 100% negative result.

You can talk about the positive effects of corruption on a person’s daily life, but to speak of it at a governmental and public level is pretty ridiculous.

Anastasia Kirilenko: I can give you an example. I was talking to an Italian businessman who bribes Customs officers at Sheremetyevo Airport. He’s happy. “After a bribe”, he told me, “it all works much more quickly than our Customs in Italy”. Everything is done within a few hours and it does, of course, breach the concept of competition between businesses. One guy pays a bribe, so he gets preferential treatment, with his goods getting clearance before other people’s. There’s also the case of Vinci, which paid bribes in Russia and in doing so infringed the rights of other French companies by creating unfair competition. But business people regard all this as normal – they’re not necessarily anti corruption.

The problem is that the consumer ends up paying for this, as the cost of bribery is just added to production costs. So you can talk about the positive effects of corruption on a person’s daily life, but to talk about it at government and public level is pretty ridiculous.

Andrey Kalikh: There are market researchers here in Russia who seriously believe that corruption has a positive effect. And indeed, if you look at it from a strictly practical point of view, you feel that corruption makes business more efficient, which is of course a pure illusion. In the first place, corrupt business people are tied hand and foot. Their business is not under their control: the authorities have a file on each one of them and use it. In the second, corruption creates unfairness: those who give and take bribes live (to a certain extent) better than everyone else.

Everyone else – those who can’t or won’t pay bribes – is a victim of corruption. So I really wouldn’t want to talk about this phenomenon having any positive effect s.

In which spheres of industry and business is crossborder corruption particularly endemic?

Konstantin Rubakhin: It particularly affects everything connected with natural resources. And that’s not just the metals and oil themselves, but all the processes and structures around them. Toll smelters, for example, that were around in Russia in the 90s – a means of delivering and smelting raw materials using cheap Russian electricity. Any sector involving natural resources is enormously corrupt. For example, dirty money from casinos, prostitution and so on can be laundered by being poured into financial streams linked to metal processing. There’s a whole collective Mafia cash pool fed by these apparently legal financial operations. And we can see how with the help of this cash and these resources, Russian companies can gobble up European ones and grab their assets.

These schemes can involve both large privately owned and state owned Russian companies. Rosatom, the country’s State Atomic Energy Corporation, for example, is a very large conglomerate that owns, among other things, the Netherlands based Uranium One Holding, through which it acquired 5000 tonnes of uranium in 2013. The German Nukem company also belongs to Rosatom. In other words, it’s a major international structure that uses its influence in the countries in which it operates.

Or let’s take Rosneft – another network that includes dozens of European companies. We’re not just talking tax havens here either, but also Dutch, British, Irish and Lichtenstein firms with millions of Euros flowing through them, which makes you think about Putin’s friends.

Anastasia Kirilenko: There’s also the Russo-Ukrainian company Rosukrenergo, which only wound up its operations after the start of the war in Ukraine in 2014. It was set up by, on the one hand, a dummy figure, Semyon Mogilevich, a man well known in criminal circles, and on the other, by the Gazprombank under its CEO Andrey Akimov.

The company’s evident purpose is to ensure that part of the money earned from the sale of Russian gas goes straight into officials’ pockets rather than into the public purse. One of the reasons for the war seems to have been the need to preserve this, and other similar, honey pots fed by cross border corruption. The Ukrainian oligarch Dmitry Firtash, who made his fortune trading natural gas and might be able to shed light on this matter, was recently arrested in Austria at the request of the FBI. The Austrian police was also interested in his company in the past and I obtained information about how it was set up to cream gas revenue off into private hands from them.

How do the scandals around Trump and Russia’s attempts to control political processes outside its borders affect the transborder corruption situation?

Andrey Kalikh: As regards Trump, it’s worth saying that even the circumstantial details published, for example, in Forbes Magazine, about how half the apartments in Trump’s “Towers” are owned by Russian Mafiosi and business people, show that he had close connections with Russia even before his election as president. That was why Russia thought it had Trump on the hook: it was betting on him and pleased when he won, but as we know now it was just an illusion. To be honest, if I were the American electorate, I would have postponed this election, simply because of the well-founded suspicions of outside interference in them.

Anastasia Kirilenko: The thing is that public opinion in the USA (Trump’s popularity rating has apparently fallen to 42% now) doesn’t really coincide with Andrey’s, and I like that phrase of Karen Dawisha’s [author of Putin’s Kleptocracy], where she says that American and European researchers stand on the shoulders of their Russian counterparts. The description of the apartments in Trump Tower, bought up by members of the Russian mafia, was partly the work of Ilya Shumanov, deputy head of NGO Transparency International’s Russian bureau. Until we, including Russians living aboard, come up with convincing examples of our research and show that “this is the mafia and its interference in Western business and politics is dangerous”, nothing will change.

Meanwhile, Russia’s law enforcement agencies spend their time defending criminals. These are not just words. Konstantin Rubakhin recalled the testimony of Jalol Khaydarov [former director of the Kachkanarsky iron-ore mining complex, in central Russia] during the German trial of the Izmailovo Gang in 2007 – that there were specific FSB and police officers charged with disrupting the trial who reported regularly to the gang leaders.

Given the corrupt nature of Russia’s public prosecutors and courts, Western prosecutors are formally barred from following the trail of corrupt money from Russia

We civil activists have been trying to increase people’s awareness of these facts, but we are pretty pessimistic about the future. One part of the problem is that cases like this are covered by foreign journalists, who can do very little without the help of their Russian colleagues. Public opinion in France is, for example, quite aware of transborder corruption: the Mediapart.Fr platform has asked why “suspicious and openly mafia-owned banks (the First Czech Russian Bank (PCzRB) and the Strategy Bank) were prepared to give credit to the Front National”. All these banks were closed down after handing over their advances and disappeared in 2016: the Central Bank of Russia revoked their licenses and the deputy head of the PCzRB was arrested in Moscow for fraud.

These loans, however, had little effect on Marine Le Pen’s popularity. The French public still see her as a legitimate presidential candidate, and not an agent of Russian criminality. Specialists recognise her for what she is, but the public pays little attention.

Andrey Kalikh: Given Russia’s endemic corruption and the absence of independent public prosecutors, courts and investigators, western prosecutors are formally barred from following the trail of corrupt money from Russia. They are also formally forbidden to initiate any investigation of the sources of dirty money on their own countries’ territory, as they are not responsible for the “predicate offence”, the original crime committed on Russian territory – the embezzlement of public funds, for example.

It is obvious that the existing legal mechanisms to combat corruption are ineffective. Do you have any ideas about how to improve their effectiveness?

Anastasia Kirilenko: The actual mechanisms provided by the law are reasonably effective, but they are not used often enough. Most cases bite the dust for want of cooperation from the Russian authorities: the Magnitsky case is just one example. In the USA, the case against Denis Katsyv, suspected of financial fraud of the type uncovered by Sergey Magnitsky, was settled out of court. This was, however, a positive result, since, according to my sources, the public prosecutor complained of lack of cooperation from the Russian side and asked for the time allowed for the investigation to be extended. Or, say, the Spanish police have evidence of money laundering – the beneficiaries sold property back to themselves. And the police know that these people were involved in drug trafficking and murders. But none of the evidence gathered by the investigators carries an official Russian stamp – so all the findings of the Spanish investigation cannot constitute grounds for a conviction.

expert group transborder.jpg

Experts of the EU-Russia Civil Society Forum working group on combating transborder corruption. Tallinn, 2 April 2016. From first left: Vladimir Rimsky, Harry Hummel, Pavel Antonov, Andrey Kalikh, Anastasia Kirilenko and Konstantin Rubakhin. Photo courtesy of EU-Russia Civil Society Forum.But there are other, more positive examples, such as the prosecution of Viktor Bout for arms dealing, when a US court was able to convict him without requiring legal cooperation from Russia. Different countries have different attitudes to the subject. Spain, for example, is in the vanguard where investigation of the Russian mafia is concerned. Perhaps it would be possible to try all these cases under its aegis.

Possibly, it’s enough to be aware that there’s no use expecting cooperation from the Russian authorities. It would be enough to have a couple of precedents in the form of convictions from Western courts to convince public prosecutors that they needn’t abandon prosecutions just because they’ve had no legal response from Russia.

It would also be useful in the future to carry out a purge and reform of Russia’s law enforcement agencies, along the lines of those that happened in Georgia, where all members of police forces were fired and new ones hired. I think this would be good – our level of mafia activity is the same as there used to be in Georgia. Small steps are important, but at a certain point you need something more comprehensive.

Konstantin Rubakhin: We civil activists need, of course, institutionalisation - some kind of organising principle. We need greater cooperation with community organisations and we need to develop our own, because if Kostya Rubakhin sends a query, he’ll just get a formal response, such as the one I once had from the British police: “Please send your query to the country where this corruption took place”. Letters from individuals go unnoticed; get thrown out end so on. But when your query leads to ten journalists phoning you about it, then the authorities realise that public oversight really does exist.

We can see how the institutions of civil society work in Europe. In Germany, for example, I had help from an organisation called “Russo-German Exchange” , where they explained that if a crime is committed in a given Bundesland (federal state), you need to file a report to the police of that Bundesland. And the police can see that the report comes from a community-based organisation. Then, to pursue the case, you need pressure from the media and other organisations. And then this dialogue between the government and, in particular, the law enforcement organs of European countries and civil activists can begin. It’s the only way forward.

Translated by Liz Barnes.

Get oDR emails Occasional updates from our team covering the post-Soviet space Sign up here


We encourage anyone to comment, please consult the oD commenting guidelines if you have any questions.
Audio available Bookmark Check Language Close Comments Download Facebook Link Email Newsletter Newsletter Play Print Share Twitter Youtube Search Instagram WhatsApp yourData