Trail of Money Laundering Is Often Faint

To the American businessmen who met him, Samat Konopyanov seemed the very model of a modern post-Soviet wheeler-dealer. He was brash and charming, full of ideas and interested in turning a quick buck.

Most important, he seemed exceptionally well connected. Partners and prospective partners who traveled to Moscow and to his home republic of Kazakhstan at his invitation found themselves rubbing shoulders with government officials and touring the countryside in military helicopters.

“I don’t see how he could have been involved in anything illegitimate,” says Stephen C. Mollath, a Reno lawyer who did business with Konopyanov for several years, traveling to Russia and Kazakhstan five times for meetings. “The interaction with government led me to believe the people we were dealing with [in Russia and Kazakhstan] were not fringe people.”

But Russian authorities have a very different view of Samat Konopyanov. They believe he is connected to a Moscow finance company that allegedly defrauded hundreds of poor and elderly Russians of more than $25 million between 1993 and 1995, and that the company he set up in Reno with Mollath’s help, FSB Group, served as a conduit to spirit some of that money out of Russia.

According to Russian prosecutors, investors there also believe that principals in the financial scheme also took money to purchase goods to be exported to Russia and Kazakhstan, some of it through FSB Group. At least some of those goods never showed up--a pattern, U.S. law enforcement authorities say, often characteristic of money-laundering schemes.

Konopyanov could not be reached for comment on the allegations, which Russian authorities are preparing to present to U.S. law enforcement officials as a request for their investigatory assistance. Mollath says he is unaware of anything illegitimate about the business FSB was engaged in. He also says he has no reason to believe the goods that were paid for by FSB were not shipped as promised.

Whether FSB was in fact a front for criminal cash may never be known, illustrating the difficulties faced by investigators looking into the wider Russian money-laundering scandal.

The U.S. government is investigating whether several big banks, notably Bank of New York, served as a money-laundering funnel for about $7 billion in Russian funds over the last three years. Three bank employees have lost their jobs and one has been charged, along with her husband and a second businessman, with illegally transferring funds through the bank.

The case of Konopyanov and FSB Group underscores that the illicit outflow of capital from Russia has been an issue in that country--if not the rest of the world--for years.

“Why has money laundering in Russia become such an important issue in the United States?” asked Yuri Shchekochikhin, a Moscow newspaper editor and member of the Russian parliament, during an appearance last month before the House Banking and Financial Services Committee. “All of this happened a long time ago. America knew about this. Why only today?”

The case also demonstrates why it may be difficult for American prosecutors to construct a legal chain connecting criminal activities in Russia to funds in the United States, a step necessary to prosecuting the crime of money laundering.

“In money-laundering cases, the transfer of money is often easy to prove,” says Stephen G. Larson, head of the Justice Department’s organized crime task force in Los Angeles. “The problem is proving that the money came from a particularized criminal source.”

In the FSB case, Russian investors and authorities have been working to build a criminal case for years, without apparent success. At one point, they did enlist the aid of U.S. law enforcement officials, who took a deposition from Mollath and subpoenaed FSB’s bank records from Bank of America.

But Mollath said he has not been interviewed again since. Bank of America spokesman John Keane says the bank “never heard of the matter again to anyone’s recollection” after responding to the subpoenas in 1997. Russian authorities have moved again this year to assemble evidence for another request for international assistance. The request is still wending its way through the Russian bureaucracy, and it is not known when it will reach the Justice Department.

Many Reasons, Many Ways to Launder

The term “money laundering” generally means action taken to obscure the real source of funds--because the source is a criminal activity such as drug trafficking, because the owner seeks to avoid taxes, or for myriad other illicit reasons.

The laundering can be accomplished in many ways: by passing the funds from bank account to bank account or company to company, or by depositing cash at a casino in exchange for chips--one reason casino ownership has always been popular among crime organizations.

Experts in banking and financial crime note that Russians--even corrupt Russians--might have reasons for spiriting money out of the country that are quite legitimate in the eyes of U.S. law. These include the volatility and easy manipulation of the Russian currency, the ruble, which undermines the value of ruble-denominated assets; Russia’s poor economic growth, which makes promising investment opportunities there scarce; and the possibility of loss to Russia’s high taxes and powerful crime organizations.

“If one were to pay all taxes, then there wouldn’t be any business at all” in Russia, Shchekochikhin told the congressional committee. “It’s safer to hold the money in the West.”

The result is a multibillion-dollar outflow of capital intended to be kept out of reach of Russia’s government and crime lords.

Much of this money is welcomed to American shores by official U.S. economic policy, which holds that capital flight often merely reflects that the originating country’s policies aren’t working--and that large outflows might even force governments to fix those policies.

“We’ve forgotten that our fundamental economic policy has been the encouragement of the free flow of capital,” says Stanley Morris, former director of the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN.

Morris recalls being asked during a congressional hearing for his opinion on the huge capital flows then coming out of Mexico, which was experiencing one of its periodic economic meltdowns.

“They wanted to know whether this was dirty money or clean money,” he says. “I said I couldn’t tell. I could only say that it was smart money.”

Partially for that reason, U.S. law defines the crime of money laundering very narrowly when the funds originate overseas. While dozens of federal crimes can be the basis of a money-laundering case within the U.S., the list shrinks to only seven when the crime takes place overseas: narcotics trafficking, murder, kidnapping, robbery, extortion, bombing and fraud against a foreign bank.

“Under current law,” Assistant U.S. Atty. Gen. James Robinson told the congressional committee last month, “we would be precluded from bringing money-laundering charges in a situation where a corrupt foreign government official embezzled foreign government funds and laundered them through a U.S. bank.”

In any event, the saga of the FSB Group indicates that following the trail of allegedly illicit funds is no small challenge for law enforcement authorities.

One problem is the difficulty of coordinating investigatory efforts on both sides. With the probe of FSB, according to investigators in the Russian office handling the case, delays in processing the case in the U.S. as well as in Russia have stalled the investigation for years. The FBI, for example, did not respond to the initial Russian mutual assistance request until September 1997--a year after it was filed.

Among other obstacles, the Russian investigators had no money to translate English-language documents forwarded by U.S. authorities, or their own requests for information; it was left up to the deceived investors to request that the U.S. Embassy render some of the translations free of charge.

Culture clashes also interfered. The initial Russian request for help was written so narrowly, sources say, that when FBI agents questioned Mollath they kept only to the questions specified by the Russians, failing to ask even obvious follow-ups. Russian authorities hope their second request, which is awaiting approval from the Ministry of Foreign Affairs, will be broadly written to elicit new information.

Firm Founded in Early Days of Capitalism

According to Russian sources and bank documents obtained by the Moscow newspaper Novaya Gazeta and made available to The Times, FSB Group had dealings with a Moscow enterprise known as First Financial Construction Co., which was known by its Russian initials FSK.

FSK was founded by a Kazakhstan native named Alim Karmov in 1994, when Russia was first becoming acquainted with the potential--and perils--of unrestrained capitalism. As former CIA Director James Woolsey put it, Russian businessmen were building “a capitalist market system that is modeled not on Silicon Valley, but on the Chicago liquor market of the 1920s.”

FSK’s purported goal was to finance the construction of office buildings in Moscow. The firm advertised on Moscow television, offering returns 20 percentage points above the annual rate of inflation, which was then nearly 200%.

The pitch was tailor-made to appeal to people like Viktor Veryutin, a retiree who had spent 32 years working for the KGB. (He won’t reveal what his job was, but sources say he worked on KGB construction sites.) Hyper-inflation was relentlessly eroding Veryutin’s life savings, so when he saw FSK’s ads, which included an endorsement from a powerful deputy to Moscow Mayor Yuri M. Luzhkov, he invested his last $3,500.

Veryutin and other investors believe that as much as $3.5 million of FSK’s proceeds left the country.

“Three and a half million dollars was sent to you, to America,” Veryutin says. “Already 20% of the shareholders have died. When are you going to send back our money?”

Within a year, FSK was defunct, allegedly unveiled as a pyramid scheme, in which the earliest investors are typically paid attractive returns out of the money put up by later investors. Karmov fled to the Czech Republic, where he promptly set up another pyramid scheme. He was arrested there for fraud by Czech officials, according to Russian sources, and is currently in prison outside Prague.

Samat Konopyanov, meanwhile, was making numerous connections among American businessmen. One, Joel Gutensohn, a former official of the Drug Enforcement Administration, recalls him as “a wheeler-dealer of the old school. Samat would rather pocket $1,000 this week than make $1 million next year.” Gutensohn, who owned an airport and ground services company, joined him on a contract to refurbish the airport at Almaty, then the Kazakh capital.

Stephen Mollath, the Reno lawyer, first met Konopyanov at a ski resort in Steamboat Springs, Colo., where Mollath was attending a professional downhill race with a client, Austrian skier Franz Klammer. Konopyanov confided that he was hoping to assemble a team of former Soviet ski racers to send on the international circuit.

Konopyanov was in his 30s but looked older, Mollath recalls. He was short and round, with the dark cast and Oriental features of ethnic Kazakhs. He said he had connections among the political elite there and in Russia.

Mollath accepted Konopyanov’s invitation to a tour of those countries. In Moscow, Konopyanov introduced him to a parade of highly placed government figures, including one who identified himself as Oleg Kalugin, the former counterintelligence chief of the KGB. (Kalugin said in an interview from his office in Washington, where he now works as a consultant, that he does not know Konopyanov, does not recognize his name and does not recall the meeting.)

From Moscow they traveled on to Almaty, where there were further festivities. Konopyanov had told Mollath that his father had been a high-ranking regional official of the KGB, and nothing the lawyer witnessed in Almaty belied the claim.

“Everywhere we traveled in Kazakhstan we went by military helicopter,” Mollath said. During one reception at an Almaty museum, Mollath offered to buy a rather moth-eaten and flaking Soviet-era painting, only to be told by the minister of culture and tourism that it was part of the national patrimony and not for sale.

“Three months later he showed up on my doorstep, carrying the painting,” Mollath says, adding that he still has it.

In March 1993, Mollath and Konopyanov incorporated FSB Group in Reno and established a bank account at a local branch of Bank of America. The firm was typical of a shell company--that is, one without any specific line of business; its shares were held privately, most of them by Konopyanov, who was designated president.

Mollath, who was listed as corporate secretary, told The Times that the firm’s goal was to facilitate the shipment of import goods to Kazakhstan. The initial capital was a deposit of $50,000, sent from abroad to finance Konopyanov’s travel to the U.S.

Several transfers of funds from overseas followed, according to records of the FSB account subpoenaed from Bank of America. Some of the money arrived via banks in Austria and Bulgaria. At least one transfer, for $449,987, arrived in November 1994 directly from Alim Karmov’s Czech firm.

Mollath says the money that arrived by wire transfer usually departed FSB’s accounts quickly, usually within days, as payments to vendors of goods destined to be shipped to Russia and Kazakhstan. But Russian investigators say those goods never arrived.

In 1995, Russian authorities charged FSK with defrauding scores of Russian investors of more than $25 million in the scheme to build office buildings in Moscow. Two years later--at which point they were also looking into the complaints about the phantom import goods--they prevailed on U.S. law enforcement officials to subpoena FSB’s bank records from Bank of America, which complied.

The FBI also questioned Mollath, who told them that he had never heard of FSK; when he was shown a copy of a trade contract between FSB Group and the Russian firm, he said he had never seen it and was unaware of any connection between the two companies, according to documents.

There the trail ended. Investigators from the Moscow regional department of internal affairs say they believe that money stolen from Russian citizens by FSK was deposited in the accounts of FSB Group and “could have been received by Samat Konopyanov or Alim Karmov.”

But their formal request for further assistance from U.S. authorities, which has not yet been submitted to the American Embassy, shows how far they are from actually establishing a case. In it they ask for the FBI’s help in obtaining a photograph of Samat Konopyanov, as well as his present whereabouts.

Mollath says he still hears from Konopyanov from time to time but hasn’t for the last few months. His last known whereabouts were in Almaty, where he was running the airport refurbishment project. But that apparently ended late last year, says Gutensohn, his then-partner.

At that time he apparently ran afoul of the local authorities, who questioned some of his financial dealings.

“From what I hear, he was asked to leave,” Gutensohn says.

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Hiltzik reported from Los Angeles and Reynolds reported from Moscow.

Tomorrow: The bulk of Russian money ending up in foreign banks is not from criminal activity but from citizens and business owners trying to avoid high taxes or protect their savings from Russia’s unstable banking system.