San Francisco Bank Linked To Laundering Probe
At Bank of New York
November 9, 1999, 11:00 a.m.
By Knut Royce
The Center for Public Integrity (c) 2000 All rights reserved.
FROM ALL OUTWARD APPEARANCES, Boris Avramovich Goldstein is a model immigrant, a successful businessman in the San Francisco Bay area, where he lives in a $1.2 million home and where he founded a variety of firms.
But all is not well. In 1994, Goldstein also invested in a local bank. In five short years at the little Commercial Bank of San Francisco, he attracted millions of dollars in interest-free deposits from the former Soviet bloc, mostly from Russia. Alas, that money, in turn, has attracted unwanted attention from the Federal Deposit Insurance Corporation and from law enforcement.
The story of Goldstein and Commercial Bank underscores the failure of U.S. financial institutions to sift the good from the bad money flowing from the former Soviet Union, especially when they aggressively compete for those deposits. The bank now has become intertwined in the massive federal money-laundering investigation of the much larger Bank of New York.
In this and future articles, The Public i explores how the saga of the Bank of New York is being replayed all over America, with the key players sometimes coming out of the former KGB, sometimes from Russia's hard-core Mafiya, sometimes from the corrupt bureaucracy and sometimes from all of them acting in concert.
A MERE DECADE AGO, Goldstein, now 35, was an enterprising Latvian computer science mathematician who had already made a fortune designing and selling sophisticated software, importing and exporting goods and investing in two banks, all the while employing former KGB officers and teaming up with unsavory characters.
Within a few short years, the banks in Latvia and in Moscow failed, in part, according to U.S. intelligence, because of embezzlement at the Moscow bank.
But Goldstein thrived. Fed up, he says, with corruption in Russia and neighboring countries, he moved to the United States in 1991.
Three years after immigrating to America, Goldstein and a Bulgarian partner purchased just under 10 percent of Commercial Bank, at the time a 21-year-old privately held California-chartered bank specializing in local small-business loans. It had $81 million in assets.
Goldstein, who sits on the bank's board and heads its international department, generated wonderful profits with the deposits he attracted and the related wire-transfer fees. In the past four years, the bank's asset base has doubled to $167 million. About a third of the bank's deposits, mostly non-interest-bearing checking accounts, come from small Russian businesses, bank chairman and president Robert A. Fuller Jr., acknowledged in an interview.
THOUGH LUCRATIVE, these new accounts also brought problems. First, the Federal Deposit Insurance Corp. last year became concerned about a troublesome 9 percent "spike" in Russian deposits over a two-month period, an unusually sharp inflow of funds that could indicate possible money laundering. It could also suggest that the bank might need to raise its capital to cover the increase in deposits.
As with the Bank of New York, some of the allegedly corrupted money in the Commercial Bank of San Francisco has been passed through a variety of shell companies and offshore banks. This practice, called "layering," makes it difficult, time-consuming and expensive to learn who is behind the money, especially for small banks.
"The practice of layering can make it virtually impossible for a depository institution in the United States that receives (layered) funds . . . from tracing back the beneficial owner of the account,'' said Jonathan Winer, who recently retired as deputy assistant secretary of state in charge of international crime policy.
But Goldstein denies any illegality.
"If I have financial background from Soviet Union, exactly you are a money launderer," he said in a telephone interview, concerned that he was being unfairly stigmatized.
Though it is difficult to trace the true owner of a company that is layering its transactions, money-laundering experts say there often are telltale clues suggesting that money laundering is taking place, including the layering itself. Another key indication of possible laundering is sudden and unusual deposits and withdrawals from the accounts, especially if they appear unrelated to the purported business behind the account.
Without specifically referring to the Commercial Bank's sudden inflow of funds, Gene Seitz, an official in the FDIC's special fraud unit, said, "We do keep track of those things and try to get an explanation.''
THE FBI and the Manhattan District Attorney's office discovered that some Russian-linked firms they were already investigating in the Bank of New York money-laundering case also did business with Commercial Bank.
The FDIC ordered a number of measures, including the performance of a special outside audit to alert the bank on how to lower the potential for money laundering. The bank has complied with the FDIC directives, Goldstein said.
The law enforcement matter could be more problematic.
Over the past year, Commercial Bank handled nearly $8 million in wire transfers from Benex International, the New Jersey shell company that is at the center of the massive Bank of New York money-laundering investigation.
Benex and the Bank of New York were used as conduits not only to conceal billions of dollars belonging to Russian bureaucrats and businessmen seeking to avoid duty payments or hide profits from tax authorities, but also to launder cash generated from criminal activity. In 1997, the then-Russian Prime Minister, Viktor Chernomyrdin, estimated that 60 percent of Russia's economy was controlled by crime gangs, typically alliances of thugs, corrupt bureaucrats, powerful industrialists and former KGB officers. Chernomyrdin himself has been linked by the CIA to unsavory Russian businessmen.
"Some of our customers had transactions with Benex,'' Fuller, the bank president, said. "We didn't know who Benex was. So we asked our customers, and they didn't know who Benex was either, which isn't surprising either. If you're selling a product, you get your money, you don't really care where it comes from.''
HE SAID COMMERCIAL BANK found that Benex's corporate standing had expired in New Jersey and that its Moscow office was unoccupied. "So we said (to the customers), `We don't know who they are and you don't seem to either, so we aren't going to accept any transactions from them or send money to them.'"
Fuller said that the Benex transactions all were routed through the Bank of New York. He said Commercial Bank notified both the Treasury Department and the Bank of New York about the suspicious transactions earlier this year. By then, $8 million had already cleared.
Asked whether the FDIC's review of Commercial Bank's activities might have helped prompt Commercial Bank to identify the questionable Benex transactions, Fuller said, "It's not an easy question to answer. Consequently, the honest answer is, I don't know.''
Several of the Commercial Bank's accounts are held by shell companies formed by the Moscow office of an Isle of Man company, International Company Services Ltd., Fuller admits. ICS also created a shell company for Peter Berlin, a key figure in the Bank of New York investigation who established several of the accounts central to the investigation. Berlin, a Russian native who is now a U.S. citizen, is married to Lucy Edwards, a former vice president of the Bank of New York. He ran several of the companies, including Benex, out of a small Queens, N.Y., office.
The FBI and the Manhattan district attorney's office also are investigating three San Francisco-based companies, Sinex Corp., Sinex Bank and Sinex Securities, and their connections to firms that routed the billions of dollars through the Bank of New York. Sinex Bank, licensed in Nauru, a Pacific offshore banking haven that has attracted Russian crime figures over the past several years, had a correspondent account for a few months last year at Commercial Bank, according to Fuller.
ASKED WHY Commercial opened an account for the Sinex Bank, given the notoriety of the unregulated offshore banks in Nauru, Fuller said, "At the time we wondered, and we tried to monitor their activities. Later in the year, we decided that we were uncomfortable there, with offshore banks basically. And we closed all those accounts. Closed or froze them.''
One of Sinex Bank's directors is Aleksey Volvov, who, together with Berlin, was indicted by a federal grand jury in September on charges of operating an illegal money-transfer business in connection with the Bank of New York. Sinex Bank's president is Andrey Mizerov.
Fuller said his bank held no accounts for the Sinex Corp. or Sinex Securities and said he did not believe that any of the bank's accounts funneled funds to or from those companies.
Goldstein, the banker now under a magnifying glass, is an enigma. Fuller describes him as "an incredibly bright but very warm person as well.'' U.S. intelligence casts him as a opportunistic businessman who formed alliances with former KGB officials and took full advantage of endemic corruption in the region to make his fortune.
Fuller said that he personally checked the backgrounds of Goldstein and his Bulgarian partner, Peter Nenkov, before they were allowed to buy their stake in the bank. By purchasing just under the threshold of 10 percent, Goldstein and Nenkov did not have to seek approval from the California Department of Financial Institutions, which regulates the bank, nor from the FDIC, which insures its deposits.
Both Nenkov and Goldstein had backgrounds that could have been of some interest to the regulators.
First, according to FBI and CIA intelligence, Nenkov, who was a Bulgarian banker, was an associate of criminals in Bulgaria. An administration official familiar with the CIA's files on Eastern European criminal organizations said that Nenkov, who died in a car accident in Moscow in the late 1990s, "moved in some circles with bad guys . . . He did have associates who had criminal backgrounds.''
FULLER EXPRESSED SURPRISE when The Public i told him that Nenkov, according to U.S. intelligence, associated with criminals. So did Goldstein. "This is the first time in my life I heard he was somehow connected to criminals,'' Goldstein said.
Goldstein said that he himself struck it rich as a young man in Latvia, where he was raised, when a software company he founded with 14 software engineers in the late 1980s became an instant success. He soon became a founder of the Dalderis Bank in Latvia. Dalderis, in turn, was merged into the Sakaru Bank in 1991. Goldstein's company, HT Trading, owned nearly 18 percent of Sakaru's stock, making it the largest single shareholder, according to records on file in Latvia.
Other significant shareholders included a mob-affiliated businessman and a Swiss-based construction firm that is alleged to have funneled millions of dollars in bribes to Russian President Boris Yeltsin's family and to top Kremlin officials. They are Mabetex Project Engineering SA and a Swedish firm, Pattyranie & Co. AB. Each owned just under 10 percent of the bank.
At the time, Mabetex was a small construction firm in Lugano, Italy, with less than $65,000 in working capital, according to Corriere Della Sera, the Italian newspaper that has broken several stories linking Mabetex to alleged bribes to the Russian president's family.
MABETEX, NOW A GLOBAL COMPANY with offices around the world, including one in Miami, is owned by Kosovar businessman Bahgjet Pacolli. Among the hundreds of contracts he has received in the former Soviet Union was one to remodel Yeltsin's residence in the Kremlin, as well as adjacent palaces and churches.
Pattyranie was half-owned by Michail Saifullin, a close business partner of Latvia's most powerful gangster, Vladimir Ivanovich Leskov, according to U.S. and Latvian records. Leskov, who has a long criminal record, shared control with Saifullin in the Olimpija Bank in Riga, described by a U.S. intelligence source as "the most mobbed up in Latvia'' before it collapsed under the weight of embezzlement a few years ago. He was also a partner with Leskov in other businesses.
The business manager at Sakaru Bank was Edmund Johanson, who had retired as the last chairman of the Latvian KGB in 1991, when Latvia achieved independence from the Soviet Union, according to U.S. intelligence.
Goldstein says he was only a passive investor in Sakaru, and knew none of his partners. Only after The Public i asked him about Johanson, he said, was he able to confirm that Johanson indeed had been Latvia's top intelligence officer.
U.S. INTELLIGENCE ALLEGES that Goldstein's firms employed as many as five former Latvian KGB officers. Goldstein acknowledged that he had business ties to four of them, but was aware of the KGB background of only one of them. "I have never been involved with the KGB (or) the communist party,'' he said. "So it is very difficult for me to judge (who was and who wasn't a former agent)."
In 1996, Sakaru Bank collapsed, largely because a correspondent account it held at the First Russian Bank in Moscow was frozen when the Russian bank itself became insolvent, according to a Latvian press account. Goldstein acknowledged that the account at First Russian was frozen, and Sakaru could not meet its capital requirement.
Goldstein said he was one of four principals in a company that initially held 30 or 35 percent of the common stock of First Russian, but that these shares had less value than the preferred stock and represented only a small percentage of the bank's total
equity. He said that he was only a passive investor in First Russian, too, and was unfamiliar with its day-to-day operations.
For a while, Goldstein was a director of both First Russian and Sakaru, but left the boards before the banks collapsed.
U.S. intelligence alleges that First Russian's charter was repealed by the Russian Central Bank in 1996 after vast sums of Russian government funds in the bank allocated to the design bureau "Soyuz" and the "Progress" aviation company were embezzled by a top bank official. "I don't know those companies,'' Goldstein said. "Only from publications in the (news)papers.''
He said that after First Russian collapsed, bank officials told him the cause was a major money-market crisis that hit Russia that year, resulting in the death of hundreds of Russian banks.
© Copyright 2000, The Center for Public Integrity. All rights reserved