Sign Up

BoNY and Clyde — A Modern Tale of Two Bank Robbers

Who were the real winners and losers of the Bank of New York/Russian money-laundering scandal?

October 24, 2000

Who were the real winners and losers of the Bank of New York/Russian money-laundering scandal?

It was candidate Bush who opened the door by criticizing the supposedly massive abuse of IMF loans to Russia. “We gave the Russians IMF funds, and they ended up in the pockets of Victor Chernomyrdin and others,” proclaimed the Republican candidate, perhaps hoping to score points with the electorate through an attack against an international organization. The accusation against the former Russian prime minister may have some truth to it, but at this point, it lacks proof.

However, the incident does raise the question of whatever happened to the scandal that attracted so much attention in the United States and the rest of the world last year? The scandal concerned Russian bank accounts with the Bank of New York (BoNY), and the bank’s role in enabling its customers to launder illegal moneys.

It is believed that the bank assisted in moving over $7 billion from Russia abroad, with at least a part of this money coming from illegal sources. Yet in spite of large-scale efforts by the FBI, there still has not been a breakthrough in finding the culprits that orchestrated the money-laundering. On the contrary: many aspects of the scandal at this point are hard to follow even for careful observers.

For example, early this year, on the main road leading into the center of Moscow from the international airport, a mystifying billboard greeted visitors. Painted in stark yellow and black colors — generally reserved for traffic signs and radioactivity warnings — it declares in Russian: “Gentlemen from Bank of New York, beware: illegal machinations with Russian securities will not be tolerated.”

What this meant and who was behind this ominous warning remains unclear — and the list of unanswered questions continues to grow. Following the arrest of seven people, including some from within the Bank of New York, a large-scale international investigation focused mostly on U.S. companies with Russian business connections. The goal of the investigation was to uncover further channels for money-laundering by the Russian mafia.

However, the result resembled more of a witch-hunt against Russians residing in the United States. Many bank accounts of people with Russian last names were simply frozen, even though most of the account-holders were Russian immigrants that had by then settled in the United States as dentists or computer specialists.

So far, no suspects beyond the original circle of Russian-speaking BoNY employees have been uncovered. No hidden billion-dollar bank accounts have surfaced. The two prime culprits, former BoNY vice-president Lucy Edwards and her husband Peter Berlin, returned to the United States in June and pleaded guilty to unspecified money-laundering charges. They are cooperating with the authorities, and may yet finger other accomplices.

It may thus be an opportune moment to draw preliminary conclusions and to take a look at the winners and losers: who benefited as a result of the money laundering investigation — and who didn’t?

There are surely plenty of losers in both countries.

One U.S. institution to have emerged with a black eye is the FBI. It either failed to find the Russian Mafia’s billions — or is guilty of blowing a relatively minor case way out of proportion. At a time when the rule of law in Russia is quite literally fighting for its survival, one would have expected more from the Americans.

The Bank of New York, one of the oldest U.S. financial institutions, is clearly another loser. But a blow to the bank’s reputation is only half the problem. BoNY had a virtual lock on American Depositary Receipts for Russian companies trading on U.S. stock exchanges before the 1998 financial crisis. But when Russian companies start returning to the U.S. market again it may be excluded from the business. It already lost out to J.P. Morgan to serve as custodian for the shares of MBT, the Moscow telecommunications company, when it listed on the New York Stock Exchange in June.

But not Russian oligarchs, of course. Vladimir Potanin, who recently lamented how hard it is to be a Russian oligarch managed to buy a chateau in France for a few million U.S. dollars in cold hard cash. The lack of a BoNY bank account did not seem to hurt him.

The only real winner in the whole mess will be the Russian government. This is ironic because the Russian government is the main culprit, to be sure. After all, it created the money-laundering problem in the first place.

Even for honest businesses operating in Russia, keeping balances in offshore bank accounts has often been the only way to survive Russia’s confiscatory tax laws, thieving banks and overall economic, political and financial uncertainty.

But with the outside world closing down the loopholes that allowed Russian businesses to smuggle money abroad, Russian President Vladimir Putin has found a way to keep money locked up in Russia. As a result, the ruble has benefited from the BoNY fiasco as well.

Since Russian exporters are obligated by law to convert their dollars into rubles, the domestic currency has been propped up even though investor confidence in Russia remains extremely low.

Preventing currency flight is a certainly a useful first step toward economic advancement. But this has to go along with a considerable improvement of the business climate in the country. For now, preventing money from leaving Russia, in effect, has been a substitute for genuine economic reform. More ominously, keeping the money in Russia gives Mr. Putin more funds to bolster Russia’s military — hardly what U.S. investigators could have originally intended.