The pounding on the door begins at about 6am on a wintry Moscow day in March last year. Insistent knocking at that hour usually means just one thing: police.
Inside the apartment on Kutuzovsky Prospekt, Alexei Kulikov’s partner, Maria Plyushkina, 23, cares for their infant son. She begs Kulikov not to open the door.
The 40-year-old banker, stunned by the possibility of arrest, knows better than to consider that option. Ignoring the appeals from the men outside while desperately seeking help, he starts making calls — first to his lawyer, then to any and every friend who might have some pull with law enforcement. It is all for nothing. He is alone.
Illustration: Mountain people
The knocking continues for hours, eventually slowing, but never entirely stopping. At about 5pm, police wrench the heavy steel door open with a crowbar.
A half-dozen tired-looking officers conduct a desultory search of the apartment, plucking a wad of cash from Plyushkina’s purse — “spending money,” she recalls later.
The police count every bill they find in the apartment: 2,010,000 rubles (US$34,127) and US$59,243, according to court records.
The officers take Kulikov, who had celebrated his birthday just days earlier, to the headquarters of the Investigative Department of the Russian Ministry of the Interior near the Kremlin on suspicion of defrauding a bank in which he owns a stake. Questioned until 4am the next morning, he denies any wrongdoing. Later that day, a judge at Tverskoi District Court in Moscow orders him to be held without bail.
Kulikov has not been home since. Charged with fraud and embezzlement and facing a 10-year prison sentence, he went on trial in March in the Podolsk City Court, just south of Moscow. The main allegations centered around the alleged looting of 3.3 billion rubles from Promsberbank, a small lender that the Central Bank of Russia had shut down about a year before Kulikov’s arrest.
By Russian standards, it was pretty typical treatment for a businessman in trouble with the law. Kulikov’s arrest got little notice in the local media. He lived large, driving a Mercedes-Benz SLR sports car and hiring stars from Comedy Club, Russia’s hottest TV comedy show, to perform at a birthday party, says an associate, who spoke on condition of anonymity because of the sensitivity of the case.
However, he was no oligarch. As for Promsberbank, it looked like just another casualty in regulators’ efforts to clean up the financial sector. Its collapse drew scant attention beyond its home base in the gritty suburb of Podolsk.
Despite appearances, Promsberbank was, according to the central bank, a “crucial link” in one of the biggest money laundering schemes ever exposed in Russia. Kulikov was not charged with laundering funds, but from its unprepossessing office, his bank helped pump more than US$10 billion out of Russia, the regulator says.
Promsberbank was a key conduit into a channel that used stock transactions called “mirror trades.” These transactions involved buying shares of Russian blue-chip stocks through local brokers in Moscow for rubles and simultaneously selling them in London for US dollars or euros, effectively bypassing regulations to move funds out of the country.
Some of the laundering benefited members of Russian President Vladimir Putin’s inner circle, say people familiar with the investigations. Igor Putin, the son of the younger brother of the president’s father, served on Promsberbank’s board of directors before regulators shuttered it.
VTB Group, one of the country’s biggest state banks, says wealthy Russians keep three-quarters of their money outside the country.
To help avoid detection, the brokers in Moscow made these trades through big Western banks, according to Russian regulators. The bulk of them went through Deutsche Bank AG from 2012 to 2014. Revelations about the mirror trades, first reported on in 2015, rocked Germany’s largest lender, already battered by legal troubles and fines in the wake of the financial crisis.
Deutsche Bank admitted to “systemic” failures in its internal controls, shut down its Russia trading desk, and agreed to pay a total of US$630 million in fines to the UK’s Financial Conduct Authority and the New York State Department of Financial Services for lax anti-money laundering practices. The US Department of Justice is pursuing a criminal investigation in the case.
Russia’s treatment of Deutsche Bank was not quite so harsh. Regulators fined it 300,000 rubles, praised it for cooperating, and closed the case. Although Kulikov’s criminal prosecution makes no mention of the German lender by name, investigators did quiz several witnesses in detail about Deutsche Bank and the mirror trades, say lawyers and witnesses in the case.
At his trial, Kulikov pleaded his innocence and said he was being made the fall guy for the more powerful players who really controlled Promsberbank. Only Kulikov was charged in the Promsberbank affair, but the names of his partners in the bank read like a who’s who of Russian money laundering.
Two of the bank’s investors, Igor Putin and Alexander Grigoriev, were shareholders in Russky Zemelny Bank, which was shut down for suspicious activities in 2014 after being linked to a US$20 billion-plus money laundering scheme, an operation so large it came to be known simply as the “Russian Laundromat.”
Meanwhile, in September last year police turn up at No. 284 on the 11th floor of the newly completed Dominion luxury complex near Moscow State University. They are there as part of an investigation into corruption allegations against a police colonel named Dmitry Zakharchenko. They remove the door with power tools.
Nobody is home, but something gets their attention: a custom-built vault. Inside, police find so much cash — US$124 million and 1.5 million euros (US$1.7 million) — that it takes them all night to count it. It is stashed in wine boxes and plastic tote bags embossed in faux-Burberry plaid. There are bricks of stiff US$100 bills shrink-wrapped in US$100,000 bundles.
The raid on Kulikov’s home might not have made headlines in Moscow, but the story of the Dominion vault did. Investigators still have not publicly disclosed where the huge amount of cash came from.
Local media reports were full of speculation about the money’s origins: the strongrooms of failed banks or maybe bribes and other illicit payments known as chorny nal (black cash).
Zakharchenko was charged with abuse of office, bribery and obstruction of justice. He said in a court hearing in August that the charges were “fabricated.” Further hearings in his case, which has not gone to trial yet, were declared closed to the public because prosecutors feared the disclosure of sensitive information.
Zakharchenko said he did not live in the apartment, which belonged to his sister. She did not actually live there either. Apparently, only the money did.
As with the Dominion stash, some illicit funds, whether proceeds of crime or business profits that the wealthy want to conceal from the Kremlin’s prying eyes, stay home, perhaps to be used for crooked or off-the-books dealings. However, huge tranches of it — as much as US$100 billion a year, according to official estimates — flow out of Russia into safe havens.
To stay ahead of regulators, money launderers frequently alter the complex chains of transactions, banks and front companies they use to get the money out of Russia and into the global financial system. Mirror trades were a favored conduit in the first half of this decade, regulators say, but they have been replaced by other mechanisms for moving money, including illicit reinsurance contracts and fraudulent court orders.
Other laundering channels seek to take advantage of weak regulatory environments in former Soviet nations such as Moldova.
“It is always easier to steal money than it is to earn it,” says Pavel Medvedev, ombudsman at the Association of Russian Banks.
However, then you need to clean it and keep it safe, which explains why so much of it ends up outside Russia.
“The protections for money overseas are better,” Medvedev says.
He would know: As a member of parliament representing Kremlin-aligned parties for two decades, he helped write much of Russia’s
banking law.
“In Russia, the rules of the game are not reliable, the shadow economy is very big, and corruption is high,” he says.
For years, Russian regulators fought a losing battle to stem the outflows. After tensions with the West surged in the 2014 Ukraine crisis, and US and EU sanctions targeted the overseas wealth of Vladimir Putin’s inner circle, the Kremlin began to put more muscle behind the crackdown. Vladimir Putin called on Russia’s rich to bring their money home to strengthen the country’s economic defenses. The plunge in the price of oil, Russia’s main export, only intensified the need to bring back the cash.
“Economic security became more important than the loyalty of the elite,” says Kirill Kabanov, a member of a Kremlin advisory panel and head of an anti-corruption group. “It became political.”
Publicly, senior Russian officials insist the crackdown on illicit financial flows is working, but in private, they admit the effort has targeted mainly low and mid-level players, leaving the masterminds behind the huge trade largely untouched. That is certainly the way Alexander Lebedev sees it.
Lebedev, a frequent Kremlin critic, is a banker and former lawmaker who has investigated money laundering.
“Individual bankers are arrested, but, as a rule, it is usually for small-time things,” he says.
During his trial, Kulikov sat behind the corrugated bars of a defendant’s cage, a signature element of any Russian criminal courtroom. Thin and bookish, wearing rimless glasses, taking notes on the proceedings in a thick notebook, the banker projected an academic air. Indeed, as he recalled during a break one day, he used his time in jail to complete a doctoral dissertation on Russian economics, adding to the law degree he already has.
Kulikov, a native Muscovite, was a relatively low-profile player in the city’s financial world for years before he invested in the bank that would land him in jail. He dabbled in politics. In 2007, he was one of more than 500 parliamentary candidates put up by a pro-Kremlin socialist party that won only 39 of 450 seats. Kulikov, who lost, was not exactly a fixture on the campaign trail.
“The only time I saw him was in his picture on the campaign poster,” says Alexei Andreyev, who was on the party ticket in the same region.
When he ran for office, Kulikov listed his job as “adviser to the chairman” of Kreditimpex Bank, a mid-size lender in Moscow. He also appears to have been a shareholder: A company he owned, OOO Ordkom, is listed in public disclosures as having a 20 percent stake in the bank. Investigators raided Kreditimpex’s Moscow offices in March, 2013, alleging the bank had been part of a scheme to launder 8 billion rubles in fraudulent tax refunds on imported goods, according to Russia’s Investigative Committee.
While there is no indication that the criminal case progressed any further, the central bank revoked Kreditimpex’s license a year later, citing unspecified regulatory violations.
By that time, Kulikov already had a backup in place. Promsberbank was founded in 1990 during the twilight of Soviet communism. The bank’s name is an abbreviated version of Russian for “industrial savings bank,” and in those days the lender focused mostly on financing factories in Podolsk along the Pakhra River. Never very ambitious, Promsberbank was ranked 264th by assets among Russian banks at the end of 2012.
Around that time, the bank’s original owners sold out to Kulikov and his associates, including Igor Putin, who became one of seven board members, and Grigoriev. Kulikov took a 19 percent stake. Together with his coinvestors, he paid 1.8 billion rubles for control of the bank.
The new owners took over Promsberbank with plans to turn it into a major player, according to court documents. They moved quickly, former employees would later tell investigators. New clients got massive loans days after opening accounts, a radical departure from the previous management’s go-slow approach.
One of the bank’s executives later testified that file folders pertaining to big new clients were marked with the letter “A” to denote VIP handling. As transaction volumes surged, long-time clients found themselves sidelined, according to court records.
Kulikov, meanwhile, was aiming high. Twice during the year after buying into Promsberbank, he visited the Moscow headquarters of Deutsche Bank’s Russian operations, seeking to persuade the German lender’s top executive there to open a correspondent account for Promsberbank, according to Kulikov’s statement to police on the night he was arrested.
Such an account would have allowed Promsberbank to do business through Deutsche Bank. Deutsche Bank declined to comment and there is no indication Kulikov succeeded.
No matter. Kulikov and his associates still managed to do billions of rubles in business with Deutsche Bank.
The mirror trades began in 2012, according to Deutsche Bank’s internal investigation. Among the first participants was Moscow brokerage company IK Financial Bridge. It was one of several local players that placed big orders with Deutsche Bank in Russia to buy large blocks of popular Russian blue chips such as Lukoil and Sberbank.
Simultaneously, seemingly unconnected companies based in the UK or one of its overseas protectorates, the British Virgin Islands, placed matching sell orders for the same shares in the same amounts with Deutsche Bank in London. The German lender paid them the proceeds in US dollars or euros.
The mirror-image transactions — thousands of them over a four-year period — did not yield any profit on the stocks, because they were conducted usually within moments of each other. This was not about making money; it was about moving money.
Russian regulators eventually caught up with Financial Bridge, revoking its license in August 2013, for repeatedly violating securities and money laundering laws.
By then, however, according to the central bank, the mirror trades had been diverted to other brokerages. One was Lotus Capital. According to Russian central bank records, Lotus paid for its side of the mirror trades with rubles from an account at Promsberbank. It held the stocks it bought through Laros Finance, a share depository that was also owned by Kulikov’s Promsberbank associates.
By late 2014, regulators were closing in on the network. They had been tipped off by the large volumes of trades that all seemed to go one way, either all buying or all selling. In April 2015, Deutsche Bank cut off Lotus Capital after the central bank warned that Lotus was conducting suspicious transactions.
In October, again after being alerted by the regulator, Deutsche Bank stopped doing business with another mirror-trade brokerage, Rye, Man & Gor Securities. This was where, once again, Kulikov entered the picture.
A long-time fixture in Moscow, Rye Man had recently come under new ownership and become an active mirror-trader. When its chief executive arrived at Deutsche Bank’s Moscow offices to lobby for a reprieve on the ban, he brought along Kulikov. Kulikov held no position at Rye Man. He told a convoluted story to explain his presence, according to a statement given to police by a Deutsche Bank official who was there.
Kulikov said the investors behind the trades Deutsche Bank had found suspicious were in fact clients of a Cypriot bank. He later told police he was a part-owner of a Nicosia-based bank, which he said was planning to buy Rye Man. However, he refused to name the investors or explain where the money for the transactions came from.
Deutsche Bank’s compliance staff were unimpressed and demanded explanations for the sudden surge in one-way trades and for where the money was coming from. They never got them.
Kulikov did not give up. After the meeting, according to his police statement, he called a Deutsche Bank compliance officer and demanded a meeting. They met in the Kofemania cafe on the ground floor of Deutsche Bank’s Moscow building.
According to Deutsche Bank’s internal report, Kulikov told the compliance official it was vital that the German bank resume trading with Rye Man, insisting the transactions were legitimate.
Then, according to the account the compliance official later gave the police, Kulikov said he had an “unofficial proposal” for the compliance officer and discreetly slid his cellphone across the table.
The screen showed “0.1 to 0.2 percent of monthly volume,” the official told police.
He said he refused what he understood to be a bribe, which he later reported to Deutsche Bank. Asked about this during a break in his trial, Kulikov confirmed the meetings, but denied offering a bribe.
By this time, Deutsche Bank’s mirror-trading days were numbered. Within two months, in February 2015, Russian police turned up at the bank’s Moscow office to investigate a fraud case against Lotus Capital, the broker with the accounts at Promsberbank.
Then, within days, top Deutsche Bank executives ordered the internal probe that would expose the billions in mirror trades. By the spring, several Moscow staffers at the bank had been suspended, and all the clients involved were cut off.
Even so, the mystery would get murkier.
Regulators would discover that the mirror-
trading customers were connected to each other through common directors, owners, employees or addresses. However, all those connections, according to a UK Financial Conduct Authority report earlier this year, were merely “intermediaries that traded on behalf of undisclosed underlying clients.”
In the meantime, Promsberbank was running into trouble of its own. The aggressive expansion under its new owners, including sloppy lending to dubious clients, had left the bank overextended and short of cash. Auditors from the central bank pored over the bank’s records at the end of 2014 and found numerous instances of loans with little or no collateral, Promsberbank’s long-time chief accountant would later testify.
The regulator demanded that the bank set aside heftier reserves for the loans, but there was no money to offset potential losses. By March 2015, the bank did not have enough cash to cover the withdrawals by nervous depositors amid a run on the bank. Files on some of the biggest loans deemed dubious by the regulators disappeared when they were moved from one office to another, according to court documents. On April 2, the central bank revoked Promsberbank’s license. Less than three months later, the Moscow Region Arbitration Court declared it bankrupt.
This is part I of a two-part story. Part II will appear tomorrow.
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