Testimony of Yuri Shvets
Before the
Committee on Banking and Financial Services
of the
United States House of Representatives
September 21, 1999
From 1980 to 1990 I worked with the KGB foreign intelligence service. In September of 1990, I resigned from the agency on political grounds. It was clear to me that the leadership of the KGB and the Soviet communist party were ruining the country.
Starting from 1988, the KGB intelligence service focused primarily on following domestic developments in the Soviet Union. Also, it was "preparing" for future market reforms in the country. Number one priority of any KGB officer was to work on establishing new businesses or penetrating existing businesses, including the banks. I was a senior analyst, and my responsibility included analyzing the information provided by the field officers and composing reports to the top leadership of the country.
In this report I would like to focus specifically on just one KGB business operation. I believe it will by example give the distinguished members of this committee a better understanding of how Russia has been looted. This issue is widely discussed today, but the loot in Russia started before the Soviet Union collapsed.
In September 1990, KGB active duty officer Major Chukhlantsev together with a young free-wheeler Alexander Konanykhine established a private company named Rosinformbank. Prior to that, 24-year-old Konanykhine had been involved in an unremarkable construction cooperative. He did not graduate any college, was energetic and apparently liked publicity. According to the KGB standards, he was a good candidate for a role of a KGB front.
It should be noted that active duty KGB officers were authorized to engage in business activities under one condition only: When their activities in private business are carried out on behalf of and under directions of the KGB. In other words, Rosinformbank was a joint venture between Konanykhine and the KGB. Later, Rosinformbank gave birth to a number of other businesses and then vanished without a trace. Even a Russian military prosecutor office was unable (or unwilling) to find a single document pertaining to the establishment of Rosinformbank. It is noteworthy, because from an intelligence viewpoint, it is essential that the first front organization to be established cover all traces of its successor organizations or its exposure can have a domino effect on the rest of front businesses.
In December 1990, Konanykhine and his wife established a company named Fininvestservice. In January 1991, Rosinformbank (KGB) together with Fininvestservice established a company named the All-Russia Exchange Center (AREC). In doing so, Rosinformbank provided 100 percent of the initial capitalization of AREC, but gave away 80 percent of the shares to Fininvestservice (Konanykhine.) This may not make sense from a business point of view, but it makes good sense from the KGB perspective: It made Konanykhine a front for AREC. The fact that this also turned Konanykhine into an official stockowner of AREC entitled to 80 percent of the profits did not matter. The KGB had a large arsenal of tools and methods to solve these minor technical issues much to their advantage.
The KGB Major Chukhlantsev was appointed "technical director" of AREC. He also controlled AREC’s finances. Other KGB officers – Boldyrev, Chukhlantsev and Sumskoy – were appointed to the board of directors of AREC. Konanykhine officially served as the chairman of the board and unofficially – as a front for the KGB-run AREC.
Later, the All-Russia Exchange Center established the All-Russia Real Estate Exchange, the Secondary Resources Exchange and finally created the All-Russia Exchange Bank (AREB). The KGB controlled all those businesses through its officers placed on key positions. Usually, they would take the top positions, or positions of deputy boss, and always filled in positions that controlled company’s finances.
The All-Russia Exchange Bank was established on 24 April 1991 by the All-Russia Exchange Center (controlled by the KGB), Investtrade (Director – KGB officer Boldyrev), Souzinformatizatsia (General Director Ryzkhov – KGB) and the All-Russia Real Estate Exchange (created under the KGB control.) All key decision-making authority for the establishment of the All-Russia Exchange Bank was the responsibility of the All-Russia Exchange Center, established and controlled by the KGB. In other words, the KGB had full control over all those businesses from the very start.
Konanykhine fronted the KGB in the All-Russia Exchange Bank as its president.
Among the Bank’s employees there were about 200 KGB officers, including several Generals. Shortly after the aborted coup d’etat of August 1991, Konanykhine employed General Leonid Shebarshin, former KGB Chairman and the right-hand man of Vladimir Kryutchkov, leader of the aborted coup d’etat. Konanykhine would later claim that he hired the KGB men for protection. With respect at least to General Shebarshin this explanation is deceptive.
After the failed coup d’etat, the top leadership in the KGB turned into pariahs in Russia. Kryutchkov was thrown into jail, and his men feared for their lives. They were afraid that the events in Russia might become similar to what had happened in 1956 in Hungary, where a number of state security officers had been lynched by mobs in the streets. After the failed coup d’etat in Moscow, the mob torn down monument of the founder of the KGB and was ready to storm the KGB headquarters.
Faced with unprecedented public outrage against the KGB, most Russian government institutions, which traditionally had served as the KGB covers, declared after the aborted coup d’etat that they would close the KGB positions. The KGB top leadership was not a protection any more. They were huge liability. In that situation for a private business to employ a former KGB Chairman was next to insanity unless Konanykhine could not refuse the KGB demand. It was not General Shebarshin, who was protecting Konanykhine. It was rather Konanykhine, who was protecting the former KGB Chairman.
There are strong indications that the All-Russia Exchange Bank was a "reliable cover" for the KGB, where the front man would clearly understand that he was entirely dependent on the KGB and had to comply with all the KGB instructions irrespective of the consequences. In most cases, the front man of a reliable cover company was a KGB human asset. The KGB had a file on him with as much of compromising materials as possible. A standard material was a document signed by the front man, in which he pledges to faithfully cooperate with the KGB. Given the importance of the All-Russia Exchange Bank for the KGB, I believe the strictest standards were applied to Konanykhine.
After the aborted coup d’etat of August 1991, the KGB was ostracized and soon officially disbanded. It was reborn under the different names. The KGB men, who had penetrated businesses and banks, continued to operate there. To avoid confusion, I will keep calling them here "the KGB."
On 21 October 1991, the All-Russia Exchange Bank received a license from the Central Bank of the Russian Federation that authorized the All-Russia Exchange Bank to execute transactions with hard currency. The license actually granted the All-Russian Exchange Bank a monopoly on banking transactions between Russian businesses and organizations and foreign institutions. Also, it authorized the Bank to buy and sell hard currency. The ruble was in a free fall. Trading it was a bonanza.
According to the Russian political tradition, the decision for granting the license could not be made without the involvement of the top government and security officials. The motives of the decision have never been made public. It’s remarkable, however, that the monopoly for hard currency transactions was given to a group of people that had absolutely no experience in running a bank, not to mention working with foreign financial institutions. In normal circumstances, their chances for obtaining the license were nil. They were sure, however, they would get the license well before it was actually granted. It was not surprising – the KGB traditionally had very strong positions in the Central Bank
The All-Russia Exchange Bank did not offer or engage in or provide traditional banking services. Its main function was to serve as a pipeline in channeling large amounts of money out of Russia, and it operated in this capacity approximately from November of 1991 to May of 1992. The first corresponding account of the All-Russia Exchange Bank was opened at the Central-European International Bank, Budapest, Hungary. The Russian government and law enforcement agencies have never officially disclosed amount of money channeled by the All-Russia Exchange Bank out of Russia. However, in February 1997, the Russian interior minister Kulikov, speaking in a closed-door session of the Russian parliament, said that as a result of Konanykhine’s activities as a financier $300,000,000 had vanished from Russia. Last week, Russian acting Prosecutor General Yuri Skuratov in personal conversation confirmed to me that his office suspects Konanykhine of participating in a scheme, which resulted in illegally taking out of Russia at least $300,000,000.
It should be noted that when the first democratic government of Russia chaired by Yegor Gaydar was formed, it discovered that Russian hard currency reserves were depleted. Rubles were not freely convertible, and there was an acute shortage of hard currency to import the most essential goods – food and medicine. In this situation, the government appealed to the West to provide humanitarian aid to Russia. The aid, paid by the Western taxpayers, started to flow in. At the very same time, hundreds of millions of U.S. dollars were secretly channeled from Russia to the West by the Bank run by the old KGB guard and Konanykhine.
In his resent appearance on CBS’ 60 Minutes, on 19 September 1999, Konanykhine acknowledged that $1 billion was stolen from Russia through the All-Russia Exchange Bank.
Konanykhine was not a mastermind of the crime. However, given the information available to me at this point I strongly believe that he was an accomplice, who knowingly participated in the crime.
In summer of 1992, the "pipeline" shut down – the Bank stopped channeling money out of Russia. Inexperienced founders of the Bank did not know how to operate it in normal circumstances, and it went de-facto bankrupt. Former KGB senior officials – the real masters of the Bank – withdrew. Lower-ranking KGB officers, formal officials of the Bank, started quarrel with Konanykhine over the remaining $12 million left on the Bank’s accounts.
In September of 1992, Konanykhine entered the United States. He claims he had narrowly escaped a KGB attempt to kidnap him in Budapest, Hungary. The circumstances of this story, however, show that it was a mock kidnapping, if any kidnapping at all. It looks much more as an attempt of accomplices of the theft to split the profits "nicely."
The next major financial operation was started by Konanykhine in March 1993, out of Willard hotel in Washington, D.C. At that time, Boris Yeltsin entered into a mortally threatening clash with the Russian parliament and no one could predict the outcome of this clash (it climaxed with Kremlin sending tanks to shell the parliament building in October of 1993.) Raising tension in Moscow was accompanied by massive flow of capital out of Russia.
During this critical period Konanykhine, together with his partner, Yelena Cidorchuck, approached an American consulting firm with a project: to establish a bank, which was to receive billions of U.S. dollars from Russia. He also is seeking about 125 naturalized foreign passports and diplomatic passports at any cost for very special Russian clients. His partner, Yelena Cidorchuck, made it clear to the American consulting firm they had retained that she and Konanykhine were working for the top political and social elite of Russia. They were receiving instructions from Moscow. The establishment of the bank and the purchase of naturalized foreign passports for the prominent political and social elite was a matter of urgency.
Technically, the whole operation launched by Konanykhine in Washington, D.C. has a strong resemblance to the story of Golden Ada – a Russian company established later in San Francisco, whose objective was to build Boris Yeltsin and his close associates a financial heaven in the U.S., where they could escape in case of Yeltsin’s defeat in presidential elections of 1996.
There are indications that Konanykhine and his partner were working on a similar project on the eve of a bloody clash in Moscow of October 1993. He acted in capacity of vice-president of Menatep Bank. Details of Konanykhine’s operation indicate that Russian intelligence officials were involved in it, at least on the planning stage. My personal knowledge as a former intelligence officer suggests that the people who directed this operation from Moscow understood that very soon American government agencies might learn about it but turn a blind eye on it. Apparently, the Russians believed that their clout as a bastion against communism in Russia would outweigh their "small sins." Without this understanding the Russian masters would never dare to execute the operation out of American capital.
In March 1994, the Russian Military prosecutor office starts criminal proceedings against Konanykhine charging him of "gross embezzling of state property and personal property – funds through fraud." On 30 September 1994, the Russian government requested his extradition to Russia. Konanykhine was not discouraged. In December of 1994, Konanykhine made a short trip to Moscow and then went to Antigua, where he worked on the establishment of European Union Bank. The trip to Moscow shows that he did not believe he would be persecuted there and was not afraid for his life, something he claimed later while applying for political asylum.
Konanykhine was arrested by the INS and sent to jail in June of 1996. Prior to the hearing of Konanykhine case in the INS court, the Russian military prosecutor’s office sent to the INS documentation, which was supposed to substantiate criminal charges against him.
Close examination of the Russian file showed it was an attempt to cover up KGB crucial role in setting and operating the All-Russia Exchange Bank, and also the real scope of Bank’s operations. Russian military prosecutor’s office, traditionally heavily influenced by the KGB, portrayed Konanykhine as the only culprit of the theft and charged him with embezzling of "just" $8.1 million. Missing $300,000,000, not to mention $1 billion, was not mentioned. In was a classic KGB cover operation, when a smaller thief is exposed in order to protect the big ones.
On the first hearing at the INS court Konanykhine was denied political asylum he requested, but at second hearing political asylum was granted. In my opinion, both decisions were a mistake. The first decision was based on claims of the Russian military prosecutor taken at face value even though the INS had been notified the Russian documentation was a cover-up. The second decision totally missed the fact that although Konanykhine was not a mastermind of the theft, he was an accomplice. I believe it was made possible because the INS could not present to the court all documentation that was available to other U.S. government agencies.
As a result, decision on granting political asylum to Konanykhine opens the door to other Russian money launderer to apply for political asylum in this country or to the KGB human assets to establish themselves in the U.S. This case also shows that cooperation with the Russian law enforcement agencies on money laundering cases may be tricky. The Russian law enforcement agencies are widely corrupt and split between supporters of different Russian interest and often organized crime groups. On the other hand, given the rampant corruption and unprecedented expansion of organized crime in Russia, it is impossible not to cooperate with the Russian law enforcement institutions, and there are honest people there, even though they do not have upper hand now. The solution may lie in following the old Russian proverb: "Trust but verify," meaning at least to scrutinize the documentation supplied by the Russian side. I believe that mistakes on Konanykhine case could have been avoided by timely and thorough analysis of all relevant information.
Money laundering and organized crime in Russia have reached proportions unprecedented in human history. To a large extend it was made possible because large segment of the Russian bureaucracy reaching the top of the government has become the most dangerous part of organized crime. It is useless to appeal to Yeltsin’s regime to solve the problem. The issue of what to do with the Russian kleptocracy has become an international problem.
Institutionalized crime ruins Russia. It represents a serious threat to the whole world given Russia’s vast territory and huge arsenals of weapons of mass destruction and nuclear power plants. In the present situation, to continue financial assistance to Russia means to further enrich and pervert corrupt Russian elite. The house must be cleaned first, and money stolen from the Russian people should be found and returned to them. Russian and Western intelligence services, looking for a sound objective after the end of the cold war, may find a noble assignment here and fertile turf for cooperation. The most odious thieves must be identified and punished. The Russian elite must be told laud and clear that if they ruin the country, transfer money to the West and plan to get away when the country collapses, it will not work. They will have to stay in Russia harvesting results of what they sowed. This message and determination to implement it may become a major deterrent of corrupt Russian elite. Any future financial assistance to Russia should be redirected from the Russian government to the grass-root level, where it can reach Russian people, and it should be done under strict international control.
Some analysts say that tough Western position towards the Russian government on corruption issues may have alienated Russia. I believe, it is not so. As the Russian saying goes, "Those who pay the money call the tune," and in Russia it is taken for granted. As long as the Western taxpayers pay Russian government bills, the West is entitled to state its position on corruption issue laud and clear. Otherwise, it sends the wrong signal to the Russian people that the West sides itself with the "corrupt guys in Kremlin." We should stop worrying about sensibility of corrupt Russian bureaucracy. People that loot their own country have no sensibility. They are totally dependant on the West, because this is the West where they build their safe heavens.
Today, some analysts say that at least a generation is needed to return Russia back on track. I do not think so. Russian is not lost yet. Well-designed and diligently implemented American policy on Russian money laundering and corruption issues may make a big difference for Russian people. It will be much cheaper than the present sponsoring of Russian crony capitalism. It will bring positive results faster. And it will be a contribution the Russian people will appreciate very much.
Yuri Shvets