1998 Congressional HearingsIntelligence and Security
1998 Congressional Hearings
CORRUPTION IN RUSSIA September 10 House Banking General Oversight and Investigations Subcommittee Thomas J. Kneir deputy assistant directo FBI criminal investigative division Good morning Mr. Chairman, ladies and gentlemen of the subcommittee. I am Thomas J. Kneir, Deputy Assistant Director, FBI with responsibility for the Organized Crime/Drug Branch within our Criminal Investigative Division. Included among the units within this branch is the Russian/Eastern European/Eurasian Criminal Enterprise Unit which exercises FBI Headquarters oversight over our domestic and international investigative programs within this area. I am pleased to appear before you this morning and I thank you for the opportunity to discuss FBI law enforcement initiatives related to the Russian Federation. In particular I am prepared to provide you with a law enforcement perspective in the issue of public corruption in the Russian Federation. First, some background information regarding our Russian Criminal Enterprise investigative program: Presently our investigative efforts in this area are spearheaded by five criminal investigative squads which specialize in this area. These squads are located in Los Angeles, Miami, New York, Philadelphia, and San Francisco. As of this date we have approximately 240 active investigations nationwide which involve strictly organized crime or racketeering activity. We have an additional approximate 100-active investigations involving emigres from the former Soviet Union who are involved in other types of criminal activity primarily in the area of white collar fraud and other violations. Many of these investigations involve an active exchange of information and criminal intelligence between the FBI and our law enforcement counterparts within the Russian Federation and other republics of the former Soviet Union. This activity is coordinated by FBI Legal Attache offices which are presently located in Moscow, Russian, Kiev, Ukraine and Tallinn, Estonia. In July 1994, as part of the FBI overseas expansion program, the FBI opened a Legal Attache office in Moscow, Russia. This had become necessary due to the gradual increase in racketeering and other types of criminal activity by a very small minority of emigres from Russia and other parts of the former Soviet Union. The vast majority of these cases were being opened in our larger cities, and, in response, the previously mentioned squads were established. This emerging problem followed a pattern similar to that established by other immigrant groups which arrived in the United States in large numbers during our recent history. Included among the overwhelming majority of honest, hardworking individuals seeking a new life of enhanced opportunity, was a small faction of hard core criminals of the type who exist in every society. In some cases these individuals were affiliated with known organized crime groups headquartered within the Russian Federation or within other areas of the former Soviet Union. Their presence within our borders necessitated an increased level of cooperation and a more frequent exchange of information with our counterparts in the Russian law enforcement establishment. Since 1994, the caseload of our Legal Attache office in Moscow has grown from 35 cases to 375 cases. In addition, to date, some 660 investigative leads from domestic U.S. FBI field offices have been covered in Moscow and elsewhere in Russia with the assistance of our Russian law enforcement counterparts. Many of these investigations have resulted in significant criminal proceedings involving violent extortion attempts, kidnapings, multimillion dollar fraud schemes against Russian and U.S. banks, as well as other frauds perpetrated against financial institutions, commercial ventures and public institutions both in Russia and the United States. Due to the expanding threat posed to the United States and Russia by international criminal activity, including that emanating from Russian and Eastern European crime groups, the FBI in 1997 established additional Legal Attache offices in Kiev, Ukraine and Tallinn, Estonia. To date, these offices are experiencing an ever increasing caseload similar to that experienced by our Moscow office. As a result of the success of our direct liaison efforts in Russia, the Ukraine and Estonia, the FBI has proposed opening a regional Legal Attache office within the Republic of Kazakhstan in order to cover the Central Asian Republics. It is against this background then that I would like to discuss the issue of public corruption within the Russian Federation as it is viewed from the FBI's perspective. The Russian people, along with the Russian law enforcement establishment, share our disdain for corrupt public officials. Russian citizens and high government officials alike have acknowledged this problem and have expressed outrage at the sinister impact that official corruption is having upon their society and body politic. Corruption allegations and investigations are a frequent media topic throughout Russia and public corruption is an unfortunate fact of life for the average Russian citizen. Corruption matters are, for the most part, vigorously and thoroughly investigated by the Russian law enforcement establishment to the extent that prevailing Russian law allows. The primary agencies involved in these investigations are the Ministry of Interior (MVD), the Federal Security Service (FSB) and the Federal Procurators office. For them, there is no higher priority than the issue of public corruption. As a whole, the Russian law enforcement establishment has taken a firm stand against all types of official corruption and has taken various steps intended to combat corruption not only in governmental and commercial areas, but also within their own ranks. Most law enforcement agencies within the Russian law enforcement establishment have experienced at least some degree of internal corruption. The Ministry of Internal Affairs or MVD, by far is the largest law enforcement agency in Russia, has candidly acknowledged this problem and has undertaken strenuous efforts to eradicate corruption within its ranks. They have recognized the fact that before a law enforcement agency can effectively deal with public corruption within the society at large it must, as a first step, deal effectively with it within their own ranks. The MVD leadership has undertaken this challenge and has been energetically pursuing this goal. Moreover, they are tackling this problem in an extremely difficult economic, social and political climate in which their officers are not only poorly paid but in some cases are not paid on a regular basis. As a result, morale has plummeted and attitudes have deteriorated. This would be a guaranteed prescription for corruption in any police force in any country. In response to this difficult problem, former Russian Internal Affairs Minister, General Anatoly Kulikov implemented an anti corruption campaign within the MVD called "Clean Hands" which was designed to identify corrupt officers within the ranks. According to MVD statistics in 1997, more than 11,000 Internal Affairs employees have been placed under investigation for corruption and related offenses. Of this number 1,770 were fired from the Ministry and about 400 were demoted in rank. An additional 5,000 employees are said to have received disciplinary reprimands. Also during General Kulikov's tenure, an internal investigation unit was established and charged with removing corrupt officers from the MVD and with the handling of citizen complaints. The original cadre of this unit, which consisted of 60 officers, was trained at the FBI Academy in Quantico, Virginia in those investigative techniques associated with internal corruption. Included among MVD personnel placed under investigation in the recent past in connection with allegations of corruption are high-ranking Generals and street cops alike. Several high-ranking officers within the MVD have thus far been prosecuted for corruption related offenses. These anti corruption programs are continuing with the support of the present MVD leadership despite increasingly severe funding constraints. With regard to other governmental and commercial sectors impacted by corruption within the Russian Federation the picture is not so clear and it is difficult to assess, with precision, the full extent of this problem. However, the existence of official corruption is regarded as a serious criminal problem toward which the Russian government has devoted an increasing amount of resources. In order to increase the number of available investigators, in 1995, the Federal Security Service, or FSB, was given concurrent jurisdiction along with the MVD to investigate organized crime and corruption matters. These agencies are extremely serious in their efforts to uncover corrupt officials and would vigorously disagree with any suggestions to the contrary. In addition, the Russian government has drafted new legislation designed to modernize their criminal code in the areas of money laundering and other types of financial fraud. Organized crime and public corruption are two types of criminal activity which appear to have a symbiotic relationship. As is apparent from Italy's recent history, organized crime or "mafia" groups depend greatly on the services of corrupt public officials and seek to develop these individuals as a matter of organizational strategy. Both factions, corrupt public officials and organized criminals, use each other in the pursuit of profit. Known organized crime groups with virtually unlimited financial resources are known to utilize bribery as a means of achieving their criminal goals. Within the Russian Federation bribery of public officials is considered by the MVD and FSB to be a deeply rooted criminal problem. In the Russian Federation, organized crime groups are known to have provided money laundering and other services to corrupt public officials in their efforts to illegally transfer state funds or property. The FBI has been involved in several sensitive joint criminal investigations with the MVD and FSB which involve the possible corruption of Russian officials. Initiated based upon the likelihood of violations of U.S. law, these investigations have been very revealing regarding the scope and level of this problem. One such investigation was opened in our San Francisco Division in 1994 and continues to this day. This particular investigation, which was recently reported upon in U.S. News and World Report, centered upon a company known as GOLDEN ADA. This firm was ostensibly incorporated for the purpose of processing precious gems, including diamonds which were to be imported from Russia. As reported, this firm was highly capitalized and had acquired highly expensive facilities in San Francisco area. The principal subjects of this investigation included one ANDREI KOZLENOK, a Russian national with ties to high level officials in the Russian Federation. It appears that KOZLENOK and his business partners, in collusion with high level governmental figures in Russia, utilized GOLDEN ADA as a "golden calf." Although established for the stated purpose of procuring and distributing Russian diamonds on the world market in order to generate collateral for U.S. bank loans, GOLDEN ADA became an efficient mechanism for looting the Russian treasury. Through high level contacts in Russia who had access to vast government repositories of raw diamonds, gold and objects of art, GOLDEN ADA received shipments of these precious goods by the ton. Most of those materials ultimately disappeared. Estimates of the loss experienced by the Russian treasury vary as this continues to be assessed. However, some estimates place this loss in excess of $170 million. During the course of this investigation, FBI Special Agents from the San Francisco Division worked closely with an investigator from the Russian MVD who had traveled to San Francisco in connection with the FBI's Practical Case Training Program. The FBI and the MVD both benefited from this exchange as each gained valuable insights into each agency's investigative techniques and methodologies. This particular investigation revealed a pattern of criminal activity which is consistent with other, similar fraudulent schemes originating within the Russian Federation. That is, the utilization of front companies in order to establish a facade of legitimacy, the exchange or transfer of large amounts of cash, the fraudulent manipulation of banking and business records, the opulent lifestyles displayed by the principals, the involvement of corrupt government or commercial individuals, the fear of violent retribution for cooperation with the authorities, and almost always a suggestion of the use of "enforcers" at some level. The GOLDEN ADA investigation has recently gathered additional momentum with the arrest of KOZLENOK in Athens by Greek authorities. He has been extradited to Moscow where he remains in custody and where this investigation continues to be pursued by the MVD and the Procurator's office. We understand that additional Russian subjects, including former high-level government officials, are also under investigation. Its ultimate outcome however is far from certain despite the best efforts of the MVD and Procurators office since this investigation remains vulnerable to high level political pressure. Yet another similar investigation which was conducted jointly by the FBI and the Russian MVD involves a large scale bank fraud and embezzlement matter which was initiated by our Los Angeles Division in 1994. This investigation, which remains active, involved the theft of approximately 60 million dollars from business interests, government institutions, banks, and more than 4,500 bank depositors in Moscow during the period 1991 through 1994. The main subject of this investigation, a former maintenance worker in Moscow, received a license from the Russian Central Bank to operate a banking institution in Moscow. This bank, which came to be known as RVG Bank, was a fraudulent enterprise from its inception. The operators of this institution created a public image for RVG as a legitimate and prosperous banking enterprise which allowed them to attract large investments, not only from individuals and other banks, but from governmental institutions such as the Academy of Sciences of the Russian Federation. Through a series of false loans to front companies established worldwide by the main subject and his associates, they completely looted the banks' assets. Millions of dollars found their way to the United States where the main subject had established residency and had also purchased millions of dollars in real estate in the Los Angeles area. During this investigation, FBI Special Agents from the Los Angeles Division traveled to Moscow to confer directly with their MVD counterparts and to acquire evidence. In support of this matter, MVD investigators traveled to our Los Angeles office where they were able to observe the manner with which the FBI conducted it's portion of the investigation. This exchange of investigators was once again made possible by our Practical Case Training Program. As a result of this investigation, civil forfeiture proceedings were initiated against the main subject's properties in Los Angeles and certain funds were recovered. These funds are soon to be returned to the Russian Federation. This investigation is continuing in Los Angeles and Moscow and is expected to expand in view of the arrest last week of the main subject in Russia. By the way, the Academy of Sciences of the Russian Federation lost $600,000.00 of its $638,000.00 investment as a result of this scheme. Also, a total of 4,500 individual depositors lost more than $20 million collectively. The investigations I have discussed represent the evolution of an increasingly effective law enforcement partnership between the FBI and the Russian law enforcement establishment which is proving to be mutually beneficial. Increased contact between us has allowed the FBI to undertake numerous initiatives designed to assist the Russians in their efforts to battle organized crime and corruption. In addition to the assignment of Special Agents to liaison duties in Russia, the FBI has encouraged the continued exchange of investigators for both training and operational purposes. In many cases, some of which have been previously mentioned, Russian criminal investigators have worked closely with FBI Special Agents on joint investigations. Russian police officers have participated in street surveillances side by side with our agents and they have testified in our courts and before our grand juries. In several instances, they have assisted in the monitoring of court authorized wiretaps and in the preparation of affidavits. The FBI has also expanded its training program for Russian officers and during the last four years we have trained more than 2,000 of them. We have conducted more than 60 seminars in Russia and in other areas of the former Soviet Union. These seminars have addressed a wide variety of police science topics to include money laundering, white collar crimes, bank fraud, organized crime, crime scene processing and bombing investigations. With the assistance of the Department of State, the FBI continues to conduct these seminars and as we speak, two FBI training teams are preparing to depart for Moscow and Krasnodar, Russia where they will be conducting training at MVD Academies in the areas of economic crime, police ethics, and internal police controls. FBI Special Agents have taught at Police Academies all over Russia. In addition, we have had Russian police officers graduate from our National Academy program at the FBI Academy in Quantico, Virginia. An exceptionally productive initiative which has already been mentioned is the Practical Case Training Program, or PCT. Under this program, Russian police officers receive on the job training during the conduct of actual investigations jointly with FBI Agents. This program has proved itself from the very beginning. In 1994 Russian MVD officers traveled to our New York field office and participated in a joint investigation targeting YVACHESLOV IVANKOV. IVANKOV, a violent career felon and major organized crime figure, led an international criminal organization with operations in the U.S. and Canada. The Russian officers made a significant contribution toward the ultimate success of this case which resulted in IVANKOV's eventual conviction for extortion. During this investigation, the Russian officers also gained valuable insights into FBI investigative techniques and evidence handling procedures. They also observed the operations of our U.S. District Court System. The PCT program, along with its requisite Department of State Funding, is an integral part of our cooperative relationship with Russian law enforcement and a vital component of the joint U.S./Russian effort to combat international crime. Additional FBI initiatives in this area involve the International Law Enforcement Academy or ILEA in Budapest, Hungary. This academy serves as a law enforcement training center for officers from Russian and other Eastern European nations. The instructors at ILEA represent a genuine cross-section of U.S. Federal law enforcement agencies, including subject matter experts from the FBI, the Drug Enforcement Administration, the Internal Revenue Service, the Bureau of Alcohol, Tobacco and Firearms, and the U.S. Customs Service. Guest instructors from other countries along with U.S. state and local law enforcement agencies are also invited to participate on a regular basis. In summary then, it is clear that public corruption is a high priority issue for the Russian law enforcement establishment. The FBI will continue to support Russian law enforcement efforts in this area through a combination of operational and training programs. We seek to expand our cooperative efforts with the MVD, FSB, and Procurator's Office in the field of international crime. This relationship has come a long way from the Cold War Era when the prospect of FBI Special Agents working hand in hand with Russian police officers would have been regarded as unbelievable. (end text)