22 June 2008

Currency and Corruption

For my previous articles on the Red Mafia and its allies:

Red Mafia and its connectivity

The Shockwaves of 5%, where jihad meets economics

The other source of change in Kenyan politics

Natural gas, crime and destruction

After the fall of Trans World Commodities

Nadhmi Auchi, connecting the dots between the candidates

The Bank of New York scandal and concordant Clearstream scandal and its ties through BNP/BNP-Paribas to the Al Mahdi and Al Taqwa banking systems had set up the largest financial system for the movement of illegal funds by putting them through legitimate channels that has ever been seen. To this day the complexity of Simon Reuben's system for financial movements amongst various off-shore havens through front accounts is one that stymies investigators. And yet its fallout continues to play through in various cases.

One of these is in the telecom industry as seen at RUSTELE in a report on a German probe into a Bermuda based fund, on 02 DEC 2005:

German prosecutors probing an alleged money-laundering scheme linked to a Bermuda-based fund are seeking judicial assistance for their probe from counterparts in other jurisdictions, according to The Wall Street Journal.

Friday’s newspaper report cited letters from prosecutors in Frankfurt. They mention suspicions that Russian telecommunications minister Leonid Reiman was involved in a plan to milk Russian state owned companies for cash or divert their assets elsewhere. Mr. Reiman is a close ally of President Vladimir Putin.

The prosecutors suspect Mr. Reiman “illegally enriched himself through a series of transactions”, and then set up a network of shell companies and trusts to secure and conceal more than $1 billion in assets, according to the report.

The Russian Telecommunications Ministry yesterday denied the reports and demanded an apology from the Journal.

The prosecutors are examining whether employees of Commerzbank AG may have helped the scheme. A bank board member has already resigned because of the Germany investigation and four other current and former officials of the bank including chief executive Klaus-Peter Muller are under suspicion for money laundering. A Commerzbank spokesman told the Journal that the bank fully backs its CEO believes no current staff are guilty of illegal activity in connection with the case.

The Journal reported that investigators are also probing whether the New York offices of Barclays Plc acted as middleman moving funds between firms in Cyprus and Bermuda.

Mr. Reiman, who has always maintained that he has done nothing wrong, says the allegations stem from a battle over a disputed stake in Megafon, Russia’s third largest mobile phone operator.

As previously reported in The Royal Gazette, billionaire Mikhail Fridman’s Alfa Group is fighting Jeffrey Galmond’s Bermuda-based fund IPOC for the Megafon stake. A former Galmond employee who is a convicted felon and Anthony Georgiou, who is Mr. Reiman’s former business partner, have given sworn testimony in the case although both acknowledge they have agreements to receive compensation from the Alfa Group or its allies.

Yes, organized crime fighting it out for a stake in a cellphone operator in Russia! That doesn't give one 'warm and fuzzies' when it comes to thinking about secure telephone calls routed through such a carrier. The IPOC fund, as the article goes on, serves as a system for accumulating funds for the takeover of Megafon, amongst other things, and is Bermuda based putting it outside of normal regulatory channels in the US and Europe. Mr. Galmond stood up IPOC to facilitate Mr. Reiman's movement of funds out of Russia so as to escape regulatory oversight there and in Europe by going through a series of fronts that are unregulated. In this case mostly in the Caribbean basin and Cyprus:

Mr. Galmond, the former Commerzbank executives and Vidya Sharma are the key suspects in the German probe. Mr. Reiman is not a criminal target of Western prosecutors since they do not have jurisdiction over the alleged crimes, which occurred wholly in Russia. The Journal said Russian authorities have reviewed some of the transactions and found no significant legal violations.

Mr. Reiman is named in search warrants and requests for international judicial assistance since prosecutors have “substantial evidence” that he participated in the initial crimes of stealing assets of the Russian companies and paying bribes to Russian officials, a spokeswoman for the German prosecutors told the Journal.

The German probe has caused similar probes in the US, Cyprus and Switzerland. The US Justice Department has begun its own investigation into the shell companies and the business dealings of the New York office of Barclays, which moved funds and converted currencies in many of the deals between firms in Cyprus and the Bermuda Commercial Bank which handles most of IPOC International Growth Funds operations in Bermuda, the newspaper said.

One of the prime ways to move funds is either through unregulated fronts pre-setup offshore via a legitimate source, hiding funds under much larger transactions (as was done in the BoNY scandal originally), by flying 'under the regulatory radar' through small fund transfers that are distributed across many outlets, or via the person-to-person banking systems like the hawala or Black Market Peso Exchange system. Here the legitimate source and multiple fronts are used to mask these transfers not only from the US but from Russia.

The WSJ would publish its article on 19 JAN 2006 (via RUSTELE)and examine the entire affair, starting with David Hauenstein, the IPOC fund manager in Switzerland, and his report on the fund:

Mr. Hauenstein’s affidavit said Mr. Galmond’s earlier sworn statements claiming sole ownership of the fund “could give a misleading impression”. But he added that he doesn’t know for certain whether Mr. Reiman is an owner of the fund, IPOC International Growth Fund Ltd.

In an emailed statement, Mr. Reiman said, “I have no relation to IPOC,” adding that, while he used Mr. Galmond’s law firm in the 1990s, “we are not linked by any business relationship at present.” He added that “it distresses me that because of someone’s poorly thought-out, possibly unprofessional actions, my name is mentioned in a conflict with which I am in no way connected.”

Mr. Galmond, in an interview this week, repeated his assertions that he is the sole owner of the fund and that the telecom minister doesn’t stand to benefit financially from any IPOC-affiliated trusts and companies.

He acknowledged his Denmark-based firm sent a letter to a Liechtenstein bank in June 2002 describing Mr. Reiman as “the ultimate beneficial owner of IPOC,” as well as “the economic beneficiary” of some Galmond-controlled companies, but he said the statements were made by his staff in error. Liechtenstein police seized the document from the bank and seized a similar document from a Liechtenstein law firm. The contents of the documents were described in the Hauenstein affidavit, though the documents themselves haven’t been introduced in court.

Mr. Galmond also disputed the accuracy of a 2001 internal memorandum that police seized from the office of Liechtenstein lawyer Daniel Kieber, which is also described in the affidavit. Mr. Hauenstein states that the memo claims Mr. Galmond himself, or one of his partners, “indicated that Leonid Reiman was the ‘economic beneficiary’ “ of three different trusts later used to set up IPOC. Mr. Galmond’s legal partner, F. Michael Boemke, who the memorandum said was also at the meeting, declined to comment.

This is a very strange sort of 'clerical' error to be made and affirmed multiple times by an organization and its owner, and then disputed by that same owner some years later. But the kicker comes as to why the thing starts to fall apart:

The fund’s legal retreat also followed the emergence of a previously undisclosed trust that Mr. Galmond set up in 1996 to benefit Mr. Reiman called Meridium. The Hauenstein affidavit alleges that, in meeting with an associate in 2001, Mr. Galmond “represented Leonid Reiman to be the economic beneficiary of Meridium”.

In at least five depositions or affidavits totalling thousands of pages that Mr. Galmond has filed in the past three years regarding IPOC and Mr. Reiman, he never disclosed the existence of Meridium. In the interview, Mr. Galmond said he had forgotten to disclose the trust and that it never paid any money to Mr. Reiman. At a separate press briefing, he publicly apologised to Mr. Reiman for any embarrassment he has caused Mr. Reiman.

The criminal inquiries grew out of a civil-court dispute between IPOC and Russian conglomerate Alfa Group over ownership of a stake in Russia’s third-largest wireless firm, OAO Megafon. Alfa has claimed in court filings that Mr. Reiman and Mr. Galmond are illicitly depleting Russian state telecom assets to fund a private telecom empire.

That is normally called 'embezzlement' amongst other epithets and legal terms attached to it. It is via a similar system that Semion Mogilevich was able to use the penetrated BoNY/Clearstream system to move funds via off-shore financial institutions to his Cyprus based Highrock Holdings and then from there into Ukraine via Dmitri Firtash, a holder in Highrock, to invest in the natural gas industry not only there but in places like Turkmenistan. Here the funds were taken from various sources, mostly Russian telecom, filtered through exterior systems or via stock holding in the US through Barclay's, and then into different mechanisms that then led to IPOC International Growth Funds in Bermuda and into Meridium. From there Mr. Rieman and Mr. Galmond could utilize those funds to go after the cellphone system of Megafon in contest against Mikhail Fridman's Alfa Group.

Over at Dirty Money Digest on 02 APR 2007 the source of this scheme is put into the context of utilizing the BoNY system, and for this the original Red Mafia article I did will stand you in very good stead:

Reiman triggered a process of privatising the St Petersburg phone company, creating a private company called Telecominvest in 1994 with the aid of his lawyer, Jeffrey Galmond. In the course of the privatisation, Reiman apeared to have acquired ownership of a large portion of the company.

His acquisition of the stock has not been fully explained or documented for understandable reasons. It would be alleged in subsequent litigation that he used his political position to steal the stock directly from institutions under his direct control in Russia. But others would say he acquired it at a market price from a third party for personal enrichment.

Galmond piloted the transfer of Telecominvest across many jurisdictions and companies. The company would be owned by Danish and Luxembourg vehicles, while the Russian state’s stake was reduced and Reiman’s increased.

The company made a particularly important stop-over in Germany. The German conduit for the assets was Commerzbank, a leading German institutional and corporate bank. Commerzbank calls itself ‘the creative relationship bank for the successful German Mittelstand, for major corporates and institutions in Europe as well as multinationals from all over the world.’ Galmond introduced Reiman to the bank, and the bank’s manager agreed to make a public statement to the effect that the bank had entered the Russian telecoms market on its own account.

In the course of negotiations, it would be made clear that secrecy in the transfer of beneficial ownership from Reiman to Galmand was essential. Reiman could clearly not be seen to hold the stock himself. He would not only have to explain how he had bought the stock on a ministerial salary, but also how, as minister, he could be a neutral arbiter when he owned a large share of the sector. The appointment of Commerzbank as his proxy was very attractive to the Minister and his advisers.

Commerzbank appears to have been untroubled by its client’s request for a fictional ownership structure. Revelations made long after the events in question show that the bank knew that a document declaring Reiman to be the beneficial owner was in existence. This triggered an investigation of the bank’s role by the German authorities. The bank’s head of Eastern European operations took responsibility and departed.

The asset’s final destination was Bermuda. Galmond had set up a mutual fund, of which he was declared the beneficial owner. This fund is called IPOC International Growth Fund Ltd and it is said to have stakes in Russia worth $1 billion. IPOC is a mutual fund, but with a single investor-- an unusual structure in itself. The fund was initially run by Vidya Sharma, a convicted fraudster, who had served time in a German prison for fraud. Sharma was a far from reliable employee as later litigation would reveal he had been bribed with over $1 million to give evidence against IPOC.

Vidya Sharma's bribers were, most likely, the very same Mikhail Fridman and the Alfa Group, just so you don't get a feeling that any of the players are inexperienced in the ways of these things:

Galmond had ridden the laundering roundabout with his IPOC fund for a number of years, no doubt earning considerable fees in the process, before his scheme hit an obstacle. This was the Russian oligarch Mikhail Fridman who decided to challenge his claim to ownership of a stake in a mobile phone company.

Fridman is the majority owner of a company called Alfa Group, which is today known as Altimo. Alfa owns stakes in VimpelCom, in a mobile phone operator in Ukraine and in Russia’s fixed line operator, Golden Telecom. Fridman made one early fortune by selling an interest in his oil business (originally acquired from US commodities trader, Marc Rich) to BP Amoco for $6.75 billion. He is no stranger to controversy. His company faces a lawsuit from the Canadian energy company called Norex, which alleges that Alfa issued invoices for fabricated services that were performed by offshore shell companies. Alfa has also been accused of bribing Ukrainian officials and is black-listed by the European Bank for Reconstruction and Development.

Alfa Group is assisted by two controversial characters. The first is Pyotr Aven who has allegedly been engaged in various misdeeds, including drug trafficking. The other is Hans Bodmer who allegedly worked with Fridman and Aven to send instructions to IPOC to wire money through banks in New York. Bodmer recently pled guilty to the criminal conspiracy to launder money and conspiracy to violate the United States Foreign Corrupt Practices Act in connection with a scheme to bribe foreign leaders.

Fridman is ably abetted by Leonid Rozhetskin a former investment banker who managed the New York listing of mobile phone network operator VimpelCom, part of the Alfa stable of telecoms interests. Rozhetskin is also a colourful character. He is an American-educated lawyer, who appeared on the cover of the Russian edition of Forbes, under the headline ‘The Most Dangerous shark in our waters.’

Rozhetskin’s activities threw a spoke into Galmond’s wheel. According to a suit brought by IPOC vs Leonid Rozhetskin, Mikhail Fridman, Pyotr Aven, Alfa Group Consortium, Alfa Capital Markets Inc, Alfa Telecom (n/k/a Altimo) and Hans Bodmer in the United States District Court for the Southern District of New York, June 8 2006, Rozhetskin’s company LV Finance was touting around an option to buy a stake in a nascent Russian telecoms company called Sonic Duo. The funds were to be used as seed capital, and Galmond made an initial payment to LV of $15m in early 2001. He put further money into the business over the course of the year, bringing his investment to $40m. The result was the creation of a company called MegaFon which was formed by bringing together IPOC and a communications company called TeliaSonera, a merger of Finnish and Swedish interests.

That should give the flavor of the goings-on between Rieman/Galmond and Fridman/Altimo & friends. Suddenly it is a corrupt Russian Minister against a corrupt Russian Oligarch, and things no longer look as nice as, whoever wins, it will be a corrupt institution. And just look at that list of names, groups, companies, funds and various exchange groups! How about Marc Rich, the man who sold Iranian oil during the Hostage Crisis... oh, wait, he was *pardoned* for his past misdeeds by President Clinton. Bet all the rest got cleared up by an act or two of Congress, right?

Remember, post-2001 things are supposed to be so much better, but most of the triggers for this come after 2001 and due to greed by the individuals involved and not due to US banking and financial regulations. The question then starts to arise: did 2001 do much of anything to help things out?

Leaving that question up to the individual to decide, lets start out with the smallest fish, the mercenary 'testimony for bribery' individual of Vidya Sharma, as it usually helps to get a handle on a smaller player to understand what is going on with the larger ones. The Guardian would look at this story on 07 DEC 2003 as the initial lawsuits started to be presented and try to puzzle its way through IPOC, Alfa and MegaFon, and come up with this little bit on Vidya Sharma after looking at the mess that unfolds:

IPOC claims it agreed to buy 25 per cent of MegaFon from Russian-based investor LV Finance in 2001, and has since handed over around $74m in transfers and loans towards the purchase. But Alfa, it is alleged, bought LV Finance in August, and transferred the stake into its own portfolio. Alfa challenges this version of events, insisting it is the rightful owner of the shareholding.

Already there have been legal skirmishes in Bermuda, the Bahamas, Rotterdam and elsewhere. In the British Virgin Islands, IPOC secured a court order appointing receivers to take control of Alfa's assets in the jurisdiction. Who owns what will only be fully decided at an international arbitration in Switzerland, which starts this month but could take years.

Nor is ownership the only issue. Under MegaFon's shareholder agreement, Alfa is prevented from taking control of the 25 per cent stake because it has a significant investment in Vimpelcom, one of the company's industry competitors. Alfa is trying to overturn the shareholder agreement in a Moscow court, arguing that since it is governed by Swedish law it should be rendered null and void in Russia.

If the court accepts this argument, says IPOC's general manager Roland Bopp, it will leave all international investors in Russia without proper legal protection. 'We believe the integrity of contracts with Russian companies is at stake,' Bopp said.


Aspersions have also been cast on some IPOC executives. Its co-founder Jeff Galmond used to advise Telecominvest, another major player in the sector, but Bopp denies the firm has any relationship either with Telecominvest or with its former president Leonid Reiman, who is now Russia's Telecoms Minister.

More damaging was the revelation in October that Vidya Sharma, a former Merrill Lynch banker and IPOC's former president, had a conviction for fraud. Bopp says IPOC had been unaware of the conviction and that Sharma left the firm on the day it emerged.

Glad such a guy left Merrill Lynch... and if you had any dealings with them prior to 1992 you might want to think about the fact that some of that may have gone through him, as we will see a bit later. Caribbean Net News on 24 NOV 2004 has a look at some of the ongoing legal matters and the actual testimony of Vidya Sharma:

The written ruling was a response to concerns raised by defendants in the case, including members of the Alfa Group, that the $40 million security deposit paid by IPOC could be the proceeds of money laundering. Defendants didn’t want to incur the risk of accepting any funds that themselves could become the subject of future litigation because their origin was unclear. Justice of Appeal Gordon noted that Vidya Sharma, former president and director of IPOC, gave evidence that IPOC was “part of a sophisticated money-laundering scheme that has been taking illegitimately obtained money out of Russia and cleaning that money for reinvestment into Russia.” Furthermore, Justice of Appeal Gordon cited Alfa’s concerns that “IPOC has demonstrated a marked reluctance to disclose details of who its beneficial owners are.”

Justice Gordon acknowledged that in making the decision, the court took into consideration that “the evidence indicated that these alleged acts of criminality had been on-going for nearly a decade.” Affidavits and “17 or 18 large ring binders struggled to contain” evidence entered for the court’s consideration, he noted.

Yes, ongoing for at least a decade by 2004, which makes this a pretty nasty affair even as it started to unravel in 2001. Also note that this case involves the banking and financial laws of: British Virgin Islands, Cyprus, Russia, United States, United Kingdom, Germany, Sweden, Norway, France, Ukraine, Netherlands, and lovely little Switzerland. I am, probably, leaving out a few countries as it is always necessary to cross up as many financial regulations as possible amongst as many Nations as possible to obscure financial wrong-doings. And by placing this starting in the 1991-1994 era, that places it pretty close to the founding of the BoNY scandal in the US.

Another look at Vidya Sharma, and a bit more revealing, comes from the Times Online (UK) on 09 NOV 2003, just as Vidya Sharma turned on IPOC:

Roland Bopp, general manager of IPOC and a former chief executive of Deutsche Telekom America, says: “We expected the shares to be delivered in August and were shocked to find out that they had apparently been sold to companies belonging to Alfa Group. You cannot sell the same stake twice.”


But Fridman will say that IPOC’s only major stake is in Megafon and, rather than being backed by Western investors, it is a vehicle for unnamed Russian interests. Its only other holding appears to be a $2m stake in a Kyrgyzstan telecoms company called Bitel.

Until recently the president and director of IPOC was Vidya Sharma, described in the court documents as “a former executive vice-president of Merrill Lynch”. Sharma left Merrill Lynch in December 1992 after “exceeding his powers”. It has emerged that he was jailed in Germany in the late 1990s for fraud and embezzlement. On Friday it was revealed that Sharma has now left IPOC.

One of the other IPOC directors is David Hauenstein, described as a Swiss banker and certified accountant. But his only recorded ownerships are a cheese shop in Zug, Switzerland, and an interest in a transport firm called Speedy Ant Transport.

The routes that corruption will go through are various and often a bit strange, not only a cheese shop but 'Speedy Ant Transport'! From the mundane to the quaint, you cannot get away from how such activities as embezzling funds to re-invest at a later time and being opposed by normal criminals all have the feeling of operating in an atmosphere not only far removed as in the banking laws, but in the everyday. You just never know *who* is funding that cheese shop, do you?

On 31 JAN 2006 the KYC News would take a look at the Bermuda part of the case in its Offshore Alert newsletter as the Bermuda Minister of Finance would hire KPMG Financial Advisory Services to look into this as one of KPMG FAS' employees was named in the civil lawsuit put in the US District Court for DC by IPOC. The briber was Diligence LLC characterized as a DC intelligence gathering firm headed by a former UK MI5 director and employing former directors of the CIA and FBI. The Royal Gazette on 20 OCT 2006 would summarize the Offshore Alert article:

Several other local businesses have also been linked by Offshore Alert to the scandal, including Bermuda Commercial Bank and/or its affiliates and the law firm of Wakefield Quin and/or its affiliates, including Roderick Forrest, Wakefield Quin's 'Senior Counsel, Corporate' who served not only as a director of at least five IPOC firms but also as vice president of IPOC International Growth Fund.

In addition, a US intelligence firm has agreed to pay $1.7 million in damages to settle an allegation that it corrupted KPMG's investigation into IPOC, according to Miami-based OffshoreAlert.

The newsletter said Diligence LLC, which settled the civil suit brought by KPMG, Mr. Butterfield and Mr. Morrison in June, had been accused of using bribery, deception, and computer hacking to obtain confidential information about the investigation into alleged money laundering by IPOC and 11 Bermuda-registered affiliates.

Businessweek would look at the connection between Diligence LLC and IPOC on 26 FEB 2007 in Spies, Lies & KPMG:

In the spring of 2005, Guy Enright, an accountant at KPMG Financial Advisory Services Ltd. in Bermuda, got a call from a man identifying himself in a crisp British accent as Nick Hamilton. Hamilton said he needed to see Enright about matters of utmost importance.

Over the course of two meetings, Hamilton led Enright to believe he was a British intelligence officer, according to a person familiar with the encounters. He told Enright he wanted information about a KPMG project that Hamilton said had national security implications for Britain. Soon, Enright, who was born in Britain, was depositing confidential audit documents in plastic containers at drop-off points designated by Hamilton.

But Nick Hamilton was not an agent of Her Majesty's secret service, and the documents never found their way to the British government.

Nick Hamilton was in fact Nick Day, now 38, a onetime British agent and co-founder of Diligence Inc., a Washington private intelligence firm that counts William Webster, former director of the CIA and FBI, among its advisory board members. Diligence's client was not Britain's Queen, but Barbour Griffith & Rogers, one of the most formidable lobbying firms in Washington. Barbour Griffith represented a Russian conglomerate whose archrival, IPOC International Growth Fund Ltd., was being audited by KPMG's Bermuda office.

A 2006 scandal involving Hewlett-Packard Co. (HPQ ) put the issue of corporate espionage in the headlines. Diligence's methods, revealed in court documents and interviews by BusinessWeek, show how far some in the corporate investigation business will go.

Q: How do you go from Russian organized crime to Hewlett-Packard?

A: Through a company has an ex-Director of the FBI and CIA William Webster on its advisory board.

That is known as being 'mercenary': hiring yourself out to a lobbying firm fronting for the Alfa Group and, yes, that is how I view 'lobbying groups' - they are 'front organizations' only given a fancy name on the legal side. Now, how much did Barbour, Griffiths & Rogers get to be such a front organization? Popping over to Open Secrets, one can get a look at their 2006 numbers and find Alfa Bank, that lovely Russian banking group gone international with Mikhail Fridman on the Board of Directors, at $580k. Looking at them, and they only go through BGR, we can get their rundown: 2004 - $360k, 2005 - $680k, 2006 - $580k, 2007 - $420k, 2008 - $110k.

For its cash to BGR and getting Diligence LLC to do some corporate espionage against KPMG FAS, the entire thing would unravel:

Diligence was paid handsomely for its work. An invoice produced in a federal court proceeding in Washington involving IPOC and Diligence shows that Barbour Griffith was billed by Diligence "For Bermuda report and Germany work--A Telecom." Diligence was paid $25,000 a month, plus $10,000 a month for expenses, according to documents reviewed by BusinessWeek and an interview with a person familiar with the matter. The company was also paid a $60,000 bonus for acquiring the first draft of KPMG's audit of IPOC. Diligence's total take couldn't be determined.

The undercover Project Yucca ended after someone--it remains unclear who--dropped a bundle of papers at the Montvale (N.J.) office of KPMG on Oct. 18, 2005. The papers included Diligence business records and e-mails with details of Project Yucca.

On Nov. 10, 2005, KPMG Financial Advisory Services sued Diligence for fraud and unjust enrichment in U.S. District Court in Washington. On June 20, 2006, the case settled. Diligence paid KPMG $1.7 million, according to a person familiar with the settlement.

On June 15, 2006, IPOC sued both Diligence and Barbour Griffith & Rogers in the same District Court, alleging civil conspiracy, unjust enrichment, and other misdeeds. That case is pending. Gavin Houlgate, a spokesman for KPMG, declined comment, as did attorneys for KPMG at the New York law firm Hughes Hubbard & Reed. Kirill Babaev, a vice-president at Alfa's telecom arm in Moscow, said in a statement when asked about Alfa's involvement in the Diligence operation: "We are...not a party in any litigation with IPOC, and therefore cannot comment on any rumours or speculations in this regard."

Barbour Griffith & Rogers' most famous co-founder is Haley Barbour, who is now governor of Mississippi. Barbour left the lobbying firm in 2003, before the Diligence operation began. Another Barbour Griffith co-founder, Ed Rogers, was an early investor in Diligence. The lobbying firm rented space at its Pennsylvania Avenue offices to Diligence. Edward MacMahon, a lawyer for Barbour Griffith, says the firm has done nothing wrong and that no one affiliated with Barbour Griffith currently has an equity stake in Diligence. A person familiar with Diligence says the firm's shareholders are CEO Day, former U.S. Ambassador to Germany Richard Burt, Edward Mathias of Washington-based private equity firm Carlyle Group, and Buenos Aires private equity firm Exxel Group. Burt confirms he is Diligence's chairman but declines to discuss Project Yucca. Mathias confirms he is an investor in Diligence but says he is unaware of the Bermuda events. Exxel Group lists Diligence among its portfolio companies on its corporate Web site but did not respond to an e-mail seeking comment.

It's unclear whether Diligence broke any British or American laws. In an interview at his Washington office, Day says he and his firm always stay within the law but have learned much since 2005: "As an organization we've changed a lot as a result of everything we've been through in the last year." He says Diligence has "spent a lot of time training our staff as to what they can and cannot do."

Now, I think I can do a bit of selective pulling of names without doing any harm to the Offshore Alert newsletter as they are the names of those associated with Diligence LLC with just a bit of re-formatting to make it easier to read:

The firm’s senior management includes

  • Richard Burt, Executive Chairman, who is described as a former Assistant Secretary of State and U.S. Ambassador to Germany who “served as the chief arms control negotiator in the first Bush Administration”, and
  • Nick Day, CEO, who is described as “a former officer of Britain’s Security Service (MI5) and a member of the U.K. Special Boat Service”.

Diligence’s “Advisory Board” includes

  • Judge William Webster, “former Director of the CIA and the FBI”;
  • Lord Charles Powell, “former advisor on foreign affairs and defense to British Prime Ministers Margaret Thatcher and John Major”;
  • Robert Blackwill, “former Deputy National Security Advisor and U.S. Ambassador to India”;
  • Thomas F. McLarty, formerly “President Clinton’s Chief of Staff and then Special Envoy to the Americas”;
  • Rockwell Schnabel, “former U.S. Ambassador to the European Union and earlier, Deputy Secretary of Commerce”;
  • Ed Rogers, “former deputy assistant to President George H. W. Bush”; and
  • Arnaud de Borchgrave, formerly “Newsweek magazine’s long-term chief foreign correspondent”.

There, that is much easier to read! Yes, a tangled web that gets to something pretty simple when you get down to it: Russian corruption both in government and outside it vying for control of a major telecom player inside Russia utilizing off-shore resources to ensure their funding and fight each other over control of said organization, with the Oligarchs going through a front firm in the US to get spies in the US private sector to get information on the other groups holding as they are being investigated in Bermuda. Easy, no?

Now its time to backtrack to Bermuda, having taken a look at how Russian corruption can spread to the US in... well... not easy steps but quick ones. Looking at the Bermuda Commercial Bank, mentioned in Offshore Alert and another place or two, it is interesting to see their connections to a man by the name of John Deuss. Mr. Deuss is a Dutch oil tycoon who got picked up on money laundering charges according to an al-Reuters report at Caribbean Net News on 16 OCT 2006:

HAMILTON, Bermuda (Reuters): A Dutch businessman and oil tycoon wanted in Europe for questioning about money laundering and other illegal activities has been arrested in Bermuda, authorities said on Saturday.

They said police in the British mid-Atlantic territory took John Deuss, 64, once considered one of the world's most important independent oil traders, into custody on Friday.

Deuss recently stepped down from the board of Bermuda Commercial Bank and Bermudan prosecutor Kulandra Ratneser said the warrant for his arrest, originally issued by authorities in the Netherlands, seeks his extradition for questioning about alleged handling of stolen property, money laundering, and belonging to a criminal organization.


Deuss supplied the South African apartheid regime with oil in the 1980s. He has also traded in Russian oil, before and after the collapse of the Soviet Union.

Deuss stepped down as chairman and chief executive officer of Bermuda Commercial Bank last month after it became public the bank's leading shareholder, First Curacao International Bank, was being investigated for money laundering in the Netherlands and on the Dutch Caribbean island of Curacao.

First Curacao International is wholly owned by Deuss, who has had a home in Bermuda for about 30 years.

First Curacao International linked to the Bermuda Commercial Bank by being its leading shareholder and its owner being John Deuss. But his involvement in things actually goes far further back than just the recent money laundering scandal, and stretches across a few continents. From Russia Intelligence on 26 OCT 2006 there is The Strange Case of Banker John Deuss, that looks at that history:

Deuss is widely known in international oil circles for having excelled as a trader in the early 1970s, working in particular with the USSR and handling part of Soviet petroleum exports until the late 1980s. Reputedly close to American and British intelligence services, he won renown in the 1980s for flouting the oil embargo on South Africa through his companies Transworld Oil and JOC Oil. In the 1990s, he acted as “manager” of Oman’s oil operations and, in that capacity, took part in a number of major operations that included construction of the Caspian Pipeline Consortium, the famous CPC.

The owner of two banks, one in Bermuda (Bermuda Commercial Bank) and the other in Curacao in the Netherlands Antilles (First Curacao International Bank), Deuss lived the life of a financial high flyer in recent months, with homes in Bermuda and Holland, a stud farm in Canada, two private jet aircraft and the“Fleurtije,” the biggest yacht in Bermuda where yachts tend to be big. Over those months, however, the Dutch and British authorities were beavering away to investigate fraud involving the recovery of VAT on exports. The scams, which normally resulted in ill-gotten gains landing in offshore banks (the Netherlands Antilles and British territories in the Caribbean) are said to cost the finance ministries of European Union countries a cool $50 billion a year. They involve vast networks that import and re-export goods such as cellular telephones and operate through front companies that end up by recovering VAT on the transactions. In the space of two years, the assets of Deuss’ bank in Curacao are said to have soared from $60 million to $25 billion, with the cash being spread among several thousand accounts.

That would make Simon Reuben proud, to know that someone had decided to one-up him by getting several thousand accounts spread globally to hide such funds... although it is probably electronically tracked unlike what Mr. Reuben did. This starts to tie a few things together, though: the Transworld Oil connection with the Caspian Pipeline Consortium and the cellular telephone scam showing the ability to link into the entire MegaFON affair in Russia.

In fact these definitely tie in as Russia would actually try something different this time:

By a strange coincidence, it so happens that Russia, which fears it could be contaminated by this type of crime, has been cooperating with the concerned EUnations, and particularly with the Netherlands (which has also just been invited to take a stake in the Nord Europe gas pipeline project alongside Gazprom). It also so happens that Deuss’ banks harboured considerable amounts of Mikhail Khodorkovsky’s money just before the boss of Yukos was arrested in October, 2004. Deuss was a close friend of Stephen Curtis, a British lawyer who held power of attorney over most of the offshore affiliates of Menatep and Yukos, in direct league with Khodorkovsky and his partner, Leonid Nevzlin. Curtis was killed in the spring of 2005 in a helicopter crash in southern England. Is there a link between these elements and could Deuss be the victim of Russian revenge, with the Dutch acting as stand-ins for Moscow ? There is no evidence to back that possibility for the moment even though Deuss’ friends believe it could well be the case. Russia Intelligence will obviously keep a close eye on developments.

Yukos, the neverending story of how one representative in Texas can have the entire assets of a Russian business considered to be under US law, for all the fact that their sole ownings are a house in Texas. You have to love that concept! Beyond that, however, is the money from the Reiman/Galmond/IPOC funds winding up going through the Bermuda bank *owned* by John Deuss. And as Reiman was part of the "Yeltsin Group", or those coming to financial and ministerial success under Boris Yeltsin (although not loyal to him) a certain kind of connectivity starts to show up of similar people doing similar things through same institution all knowing the same people. Not necessarily a 'conspiracy' but, perhaps, more of a 'business operational agreement' given how much was being looted out of Russia during those years being far more than what *just* a conspiracy could do.

Looking at his Russian contacts is Kommersant which has an article from 17 OCT 2006 on John Deuss and his work in the USSR and then Russia:

Although Russia does not figure in the missing trader schemes, the Deuss case is likely to have an impact here as well. Deuss owned companies that were active in the USSR, Russia and the CIS from the 1970s through the 1990s. Deuss was involved in the foundation of the Caspian Pipeline Consortium as the head of the Omani company Oryx, which has a 7-percent share in the consortium. That company is now controlled by the Omani government. He was also involved in the conflict over SIDANKO. Deuss' relations with the Soviet Union are even more interesting. He guaranteed deliveries of part of the Soviet oil that entered the world market and was taken to court by the Soviet government on accusations of stealing $122 million on one of his contracts. The USSR reached an out-of-court settlement with him and his companies continued exporting oil from the former USSR through the beginning of the 1990s. Deuss is known around the world for the activities of his company JOC Oil, which sidestepped the OPEC embargo to deliver oil to the United States in 1980 and 1981. It also evaded U.S. and EU embargoes of the Republic of South Africa. Deuss, a multimillionaire, has been a permanent resident of Bermuda for several years and heads offshore banks around the world.

John Deuss, then, is out not to support anyone but himself, easily playing 'both sides' of any game to look for his own advantage. Very few people actively tried to cheat the USSR, and yet he would get through that and *still* maintain his contracts with them. This takes us back to the RUSTELE site for another article on 02 DEC 2005 on the topic looking a bit more at the US side of things, especially Barclay's:

The chief money-laundering suspects named in the German probe include Mr. Galmond, who denies any wrongdoing, the former Commerzbank executives, who also have denied any improper conduct, and Vidya Sharma, who served time in a German prison for fraud before being hired to run Mr. Galmond's Bermuda mutual fund. Mr. Sharma's lawyer didn't respond to a phone call seeking comment.

Mr. Reiman is named in search warrants and requests for international judicial assistance, German prosecutors' spokeswoman Doris Moller-Scheu said. That's because prosecutors have "substantial evidence" that he participated in the initial crimes of stealing assets of the Russian companies and paying bribes to Russian officials, she said.

Commerzbank allegedly helped finance the expanding empire and conceal its true ownership, while Barclays handled many of the suspect transactions between its numerous offshore entities, according to investigators. A spokesman for Barclays in London said the bank can't comment on any law-enforcement matters.

A Commerzbank spokesman says the bank fully backs its CEO, Mr. Muller, who is one of the suspects, and it believes no current staff are guilty of illegal activity in connection with the case.

The U.S. Justice Department has begun its own investigation into the business dealings of the banks and shell companies, according to people familiar with the inquiries. It declined to comment.

The New York office of Barclays, the focus of the U.S. inquiry, acted as the middleman moving funds and converting currencies in many of the deals between firms in Cyprus and Bermuda, transaction records show. The bank acts as a "correspondent" bank for the Bermuda Commercial Bank Ltd., which handles most of Mr. Galmond's operation on Bermuda. John Deuss, chairman of Bermuda Commercial, declined to comment.

The Galmond fund in Bermuda, IPOC International Growth Fund Ltd., has been under investigation by the Bermuda government, which is looking into whether it violated regulations that require mutual funds to have many shareholders. Mr. Galmond acknowledges he is secretly the primary owner of IPOC, but the fund denies any impropriety.

So, what are the chances that having Red Mafia ties with some parts of the Yeltsin Group, that Mr. Deuss would not know of a large scale money laundering system going through a bank that he owns? To me those are down to two - slim and none. Where this will take us is to the MI5 and the unfortunate death of Stephen Curtis. An article at OffshoreNet looks at this by Thomas Catan on 14 MAY 2004 for the Financial Times entitled Before the Crash, examining how Stephen Curtis went from being a a retiring millionaire to the business of the Russian Oligarchs:

Today they are among the richest people in the world. But, in the early days, many used dubious means to reach their goals, causing Russians to fear that communism had been replaced by a form of "gangster capitalism".

During those days, Curtis was very much in evidence in Russia. As one western money manager with lengthy experience investing in Russia explained, the Russians in the early days were very unsophisticated and were grateful for the services he provided. Or, as a British lawyer who sometimes crossed paths with him said, Curtis was "a bag-man for the oligarchs".

Documents obtained by the FT show that for clients such as Yukos, Curtis set up a dizzying array of shell companies in tax havens around the world apparently to conceal money from prying eyes.

His partner in many of these schemes was Peter Bond, a financier based on the Isle of Man who has been investigated - but not prosecuted - by the FBI and other law enforcement agencies in connection with suspected money-laundering schemes around the world. He is facing disqualification proceedings by financial regulators on the Isle of Man after admitting to hiding millions of dollars for clients at the trial of a US stock promoter convicted of money laundering and fraud. Bond was granted immunity from prosecution by the US authorities in exchange for his testimony.

Inquiries and public records searches have revealed close links between Bond's company, called Valmet, Curtis's law firm and Khodorkovsky's Menatep Group. Just how close was made clear at an encounter between Curtis and Bond on June 1 1999, at Curtis & Co's elegant London offices at 94 Park Lane. A confidential "attendance note" of the meeting, obtained by the FT, shows that Curtis and Bond created a financial structure involving a web of shell companies stretching from Gibraltar to Cyprus and the Isle of Man.

The purpose, the documents strongly suggest, was to conceal profits from the sale of Russian oil so that they would not appear on Yukos's balance sheet. This would allow the company's principal Russian shareholders to avoid paying taxes and could also be used to deceive the minority shareholders - often western investors. The structure, one of several referred to in the documents, was codenamed "Jurby Lake" after a place on the Isle of Man.

Stephen Curtis would parlay his skills and law practice for the Yeltsin Group, Yukos and Bank Menatap, the latter of which was involved with Mogilevich and the BoNY penetration. What Khodorkovsky and others sought was to compromise the western financial institutions to hide money gained from Yukos and other enterprises via Stephen Curtis and Peter Bond. This was explicitly stated:

Did the Russian oligarchs know what Curtis and Bond were doing on their behalf? It seems very likely that they did - indeed, that both Khodorkovsky and Lebedev had personally authorised the creation of this financial structure. In a letter to a Yukos lawyer, also obtained by the FT, Curtis outlined a potential conflict of interest raised by his ownership stake in two shell companies involved in his financial structure. In the process, he made clear that his work had been authorised at the highest levels of the Yukos hierarchy.

"You, Mr Lebedev and Mr Khodorkovsky," he wrote, "were made aware of this conflict at a very early stage and kindly indicated that you did not believe it would prevent me in assisting in preparing this Structure."


Two other officials are mentioned in the minutes of the meeting and in personal correspondence from Curtis: Viktor Prokofiev, then a Menatep official, and Vasily Alexanyan, a lawyer for Yukos. A Menatep spokesperson said Prokofiev no longer worked at the company. Alexanyan, who now represents the interests of the principal shareholders, could not be reached for comment. Questions submitted to him via Yukos were not replied to.

While Mogilevich was interested in getting hard cash out of the US and Canada, and the BoNY system used to shift fraudulently earned money out, Stephen Curtis and Peter Bond were involved with Menatap seeking to shield oil money, also hard currency, from the record sheets so as to avoid taxation and distributing fair value to smaller stock holders in Yukos. The parallels to shield Trans World, YBM Magnex and the other Oligarchs through the BoNY/Reuben structure looks very similar to the work being done in the case of Yukos for the reason of needing the same obscurity through diversity of off-shore financial institutions.

Here is a bit of a look further on at how that worked in this case:

The work that Curtis and Bond performed for Khodorkovsky and the principal Menatep shareholders in Yukos was wide-ranging and extensive, and the relationship between them deep and long- standing. This helps to explain why Curtis was appointed managing director of the Russian billionaire's main holding company at a time when the Russian government was aggressively moving against its principals. Curtis was one of the very few people who knew his way through the maze of Menatep's complicated finances. Naturally, because he had helped to create it.

Following the complex trail of shell companies that hop- scotch from one secretive offshore haven to another shows that both Curtis & Co and Valmet have had important ties to Menatep, as well as to each other. In some cases, they have shared office space; in others, directors or shareholders. But behind both Valmet and Curtis & Co, Russian billionaires on the run from Russia's government can very often be discerned.

For example, Curtis & Co is mentioned in the UK registration information for Totbest Ltd, a now-liquidated company that has had all the key Menatep shareholders in Yukos on its board. The office for Yukos UK is based at Curtis & Co's Park Lane premises. And Curtis's number two, James Jacobson, sat on the Yukos UK board until 2002, when the company moved to Cyprus "for tax purposes". Jacobson declined to be interviewed for this article, referring questions to a public relations representative from APCO Worldwide. "[Jacobson] is not doing any media at the moment," said his spokesman, Simon Whitehead. "He's just sorting out his affairs and Stephen's affairs and making sure that things are running [at the office]."

This is the 'trust network' concept used by multiple organizations to hide finances: Becs and Benex shared the same individuals controlling them, while Benex and Blond Management shared office space. That said, because numerous individuals in a given network can be used on a global basis, such as how Nadhmi Auchi parlayed a few high ranking Ba'athists and cousins into a global financial misdirection system called the Al Mahdi, and it would include the al Qaeda Al Taqwa system, the HAMAS/Citibank joint venture, and contacts with the Menatap group via Marc Rich and others. To accomplish these things each of these organizations cast its own set of front companies, fraudulent financial vehicles, bank accounts and even couriers to get around the financial 'safeguards' put in place in the banking exchange system. The penetration of the Clearstream clearinghouse for financial transactions to Europe by Menatap and Auchi would mean that the SWIFT system, used to clear other transactions, would also be used to clear *these* transactions.

In this case the Valmet company name would be deployed in many places, and yet retain the same cast of characters wherever it showed up:

Valmet has also had long-standing links with Menatep, guiding its emerging billionaires through the complicated maze of offshore havens. An old Menatep prospectus lists Valmet (Bermuda) as a subsidiary, and company documents show that Menatep has held a 20 per cent stake in the overall Valmet Group. Bond's former partner at Valmet, Christopher Samuelson, told the FT that Menatep held shares in Valmet until 2001.

Completing the triangle between Khodorkovsky, Curtis and Bond is a series of factors linking Curtis & Co with Valmet. They have shared directors: Samuelson, who ran Valmet with Bond, was also a director of another Curtis company, 94 Park Lane Ltd. And the registration documents of 94 Park Lane Ltd reveal that its ultimate holding company is Valmet Holdings Ltd in Gibraltar. In fact, so close was Valmet to Curtis that its former marketing director, Branson Bean, told the FT that "we actually had offices in his building at one point".


While at Valmet, Bond worked on several controversial deals for Yukos and its principal shareholders at Menatep. Western investors, led by the reclusive US financier Kenneth Dart, launched lawsuits in 1999 contending that Valmet had been instrumental in a bare-faced scheme by the majority Russian shareholders to defraud them. Dart successfully sued in the Isle of Man to halt a secret effort to transfer Yukos's prize assets out to a wide array of dummy companies in jurisdictions around the world. Several of them had been set up or were operated by Valmet. Valmet later claimed that the transaction never got beyond the "early stages of contemplation", according to The New York Times.

Bond was also involved in a second dispute between Menatep and western investors, which again involved Dart. After buying a huge Russian titanium producer called Avisma from Menatep in 1997, the investors alleged in lawsuits on the Isle of Man and in Ireland that they were being swindled on a massive scale. They said they had discovered that tens of millions of dollars a year in profits were being drained by an offshore company called TMC, which was owned and operated by one Peter Bond. The investors claimed that the profits were finding their way back to Menatep. In 1998, the investors got a judge on the Isle of Man to freeze $20m that TMC was holding at Barclays Bank. TMC was forced to settle the case, returning some $8m to investors.

Back to Barclays, are we? This is proving to be an interesting bit of work, really, how multiple fraud schemes revolve around a set of financial institutions that appear again and again. Just as BNP-Paribas would support Oleg Deripaska in his pursuit of getting the assets of Trans World Commodities with the same limited suite of financial institutions, here this larger web concentrates on a few key institutions that have either lax practices or strict practices externally but lax ones internally. This scheme was part of the larger BoNY scandal:

Partly because of its role in the Avisma case, Valmet was also one of the first companies that US and Swiss investigators looked at during the Bank of New York money laundering scandal that erupted in August 1999 after more than $7bn in suspect Russian funds was found to have been funnelled through the venerable bank. It didn't help that Valmet had been moving the funds alleged to have been looted from Avisma though accounts at the bank.

Avisma, as of late, has been on the receiving end of help in Ukraine from Group DF, Dmitri Firtash's institution parlayed together after its deals with Gazprom which the primaries had been able to get in place three separate and continuous times, under different organizational names. The outlook, internally to such organizations is plain, and Peter Bond would testify about them under immunity, here about Robert Brennan a shady US stock promoter:

In the courtroom, Bond was remarkably candid about what he did, while never admitting wrong-doing himself. He testified that he set up dozens of dummy companies around the world to shield tens of millions of dollars for Brennan. On one occasion, Bond said he received $4m in bearer bonds which Brennan was hiding from creditors. "It was a very bizarre experience," he said, recalling his return trip to Britain holding the suitcase stuffed with bonds. "You think about putting it down in the gents toilet and losing it," he told the court. Bond testified that he had kept $1.7m in fees and expenses for setting up the dummy companies for Brennan. The latter's lawyer's roundly attacked Bond's credibility as a witness.

Curtis's connection to Bond helped him to get work managing offshore money for Arab clients and, increasingly, the emerging Russian oligarchs. Curtis worked for Boris Berezovsky, the Russian billionaire who was granted political asylum in Britain last September and, according to friends, enjoyed a close personal relationship with him. Last year Curtis worked to prevent Berezovsky's extradition to Russia, where he was wanted on charges of fraud. Curtis was one of two people to financially guarantee that Berezovsky would not flee while the extradition hearing was going on. Berezovsky has told friends that Curtis's death proves his contention that it is unsafe for him to return to Russia, for reasons that are unclear. Berezovsky declined to be interviewed for this story. There is no evidence to suggest that Curtis did anything improper for him.

Bond and Curtis would also work to help Roman Abramovich with Runicom. That said Curtis also held an interest in the Israeli Haaretz and the Ikea franchise in Israel, plus the ISC private investigation firm. Even though the oligarchs were starting to realize that bad reputations and PR was hurting them, the change to a more 'open' view would not, of necessity, shield them from their past works. In the days before his death in a helicopter accident, it became apparent that Stephen Curtis may have been trying to safeguard himself, or secure a position on 'both sides' of the board:

In the days before his death, he had been assigned to a handler at the UK's National Criminal Intelligence Service (NCIS), which collects information about organised crime in Britain. "My sense," someone close to British intelligence told me, "was that he was fearful of being prosecuted by the Russian authorities for being party to assisting in the capital flight and that he thought that going to the UK authorities would give him some sort of top cover."

Curtis was likely to have needed a great deal of cover. For the 45-year-old lawyer had found himself in the middle of one of the highest stakes contests between state and private power in the world - between Russia's most powerful man, President Vladimir Putin, and its wealthiest man, Mikhail Khodorkovsky.

This would not be the last of the deaths to follow the Red Mafia around in the UK, but it was one that marked the power of its influence there and more globally. And one which continues to influence markets, companies and Nations in many ways.

1 comment:

A Jacksonian said...

Lee - It is a difficult topic to go through and I've taken a second look at Khodorkovsky and the case of Litvinenko. Both tragic figures and Khodorkovsky is paying for his past misdeeds but seeking to put forward a new path for Russia, while Litvinenko paid for showing the corruption directly, with his life.