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Alexey Frenkel's Letter
// Exclusively on the website
Investigators say that Alexey Frenkel contracted for the murder of first deputy chairman of the Central Bank of Russia Andrey Kozlov. Three months before his arrest, Frenkel (seen in the photographs before and after his arrest) planned to make accusations of corruption against officials of the Central Bank and to criticize the policy of rescinding banking licenses as a form of regulation. President of the Moscow International Currency Exchange (MICEX) Alexey Mamontov told Kommersant that Frenkel's father, Efim Frenkel, asked his son during a personal visit to send the material he had sent to Mamontov to the media. "Efim Frenkel met with his son in the temporary holding facility on January 16 and Alexey Frenkel gave his permission for its publication,” Mamontov stated.
The letter is nearly 20 pages long and divided into five sections.
In the introductory paragraphs, the author questions the Central Bank of Russia's motivations for rescinding banking licenses, which is ostensibly done in the battle against money laundering. Establishing a precise definition of money laundering is a key element in his reasoning. Frenkel claims that a banking license can be bought on the “unofficial market” for a minimum of $1 million and attributes the first instance of delicensing (of Sodbiznesbank in May 2004) to the desire to “cool bankers' hot heads and make them work in the real sector of the economy.” The Central Bank rescinded several more banking licenses after Sodbiznesbank. “It turns out the more licenses the Central Bank cancels, the more bankers become involved in the process of money laundering. Strange, isn't it?” Frenkel notes wryly.
Frenkel dedicates the first section of his letter to the Central Bank's battle against money laundering. His argumentation begins with Federal Law No. 115 “On Counteracting the Legalization (Laundering) Income Received by Criminal Means and the Financing of Terrorism.” Western countries have laws analogical to Law 115 and an international organization, the Financial Action Task Force, has been set up to coordinate efforts and distribute information. Therefore, a drug kingpin can spend his earnings only with difficulty, and he is drawn to the thought of “switching to growing calves instead of opium poppies.”
Frenkel argues that it is possible and easy to spend illegally gotten money in Russia, and therefore there is no motivation to legalize (launder) it. The Central Bank has taken licenses away from banks for releasing large sums of money in cash and for transferring money abroad, but giving out money is not a form of laundering. Money in a bank is clean by definition and the bank at worst can be party to making clean money dirty.
Law 115 also concerns the financing of terrorism, however. Clean money that becomes dirty is potentially available to finance terrorist acts and organizations. “Well-known terrorist Shamil Basaev said in an interview,” Frenkel relates, “that he spent about $20,000 on the terrorist act in Beslan. The figure of $500,000 also figured in the press as the sum spent on the terrorist act against the Twin Towers in the U.S. on September 11. Considering the horrifying poverty of the regions of the planet that future terrorist are recruited from, it is not likely that the organizers of the terrorist underground have large sums for maintaining rebel bases and equipping them with arms.”
Frenkel cites information from an interview with Viktor Zubkov, head of the Federal Financial Monitoring Service (Rosfinmonitoring), published in the official Rossiiskaya gazeta on October 30, 2006, that the service sent law enforcement agencies 3000 documents related to money laundering totaling 1 trillion rubles in 2006. President of the INDEM Foundation Georgy Satarov reports that 39 million bribes worth $3 billion were given out in 2006. Three billion dollars is almost 100 billion rubles, that is, 10 percent of the funds turned into cash went to bribery. “Where did the remaining 90 percent go?” Frenkel writes. “To answer that question, it is enough to look at pace of price increases from real estate in Russia and media reports about the acquisitions of property by Russians abroad.”
“Why should the organizers of the terrorist underground spend money received from a bank when a tiny amount of the proceeds from the sale of narcotics is enough?” Frenkel asks, and concludes that the financing of terrorism is not an issue in what is referred to a money laundering in this context. Rather, he says, that money goes to bribery, election rigging, under-the-table salaries, the purchase of luxury items at reduced cost and similar expenses. This is another key point in his argument. He also notes that the Central Bank did not accuse any of the banks it withdrew the licenses from of that crime.
What the Central Bank is really fighting, Frenkel argues, is smuggling. “Gray” money is sent abroad as a result of “gray” imports. “There is a hug hole in customs,” he explains, and in Russia, unlike the West, banks fulfill a demand to convert clean money into dirty.
The second section of Frenkel's letter is devoted to a more detailed examination of the actions of the Central Bank. He accuses the Central Bank of essentially usurping the authority it exercises to fight money laundering.
The 2001 edition of the Code of Administrative Violations of the Russian Federation gives the authority to consider cases of administrative violations relating to the legalization of income to Rosfinmonitoring. In August 2003, however, the Central Bank issued Letter No. 117-T, in which it is specified that the Central Bank, and not Rosfinmonitoring, will take measures against banks for violations of Law 115.
Frenkel notes that the Federal Law “On the Central Bank of the Russian Federation,” article 7, states that “the Bank of Russia… issues normative acts on issues relating to its competence in the form of guidelines, provisions and instructions, binding for federal organs of state authority, the organs of state authority of the subjects of the Russian Federation, organs of local self-government and all legal entities and individuals.” Article 200 of the Arbitration Procedural Code states that “in the consideration of cases disputes of non-normative legal acts, actions (or inaction) of state organs,… the arbitration court… reviews the disputed act… and establishes its conformity to the law or to another normative act.” The Central Bank's normative acts take the form of guidelines, provisions and instructions, but not letters, so the court will not consider a case based on a letter by the Central Bank.
In July 2005, the Central Bank issued Letter No. 98-T on the application of Law 115, which was “recommendatory” in nature, that is, could be applied selectively. It issued three more recommendatory letters relating to money laundering in 2005 as well. The only normative acts the Bank issued relating to Law 115 were purely technical in nature and did not address the fight against money laundering directly.
Section three of the letter examines the reasons why the strange situation described above exists. Frenkel approaches that question by looking at the deposit insurance system, which is reputed to exclude banks that launder money. Several banks were excluded from the system by the Central Bank based on unsubstantiated suspicions of money laundering, while genuinely questionable banks were admitted.
Section four examines several specific banks that lost their licenses. By the beginning of 2006, 24 of the 191 banks that were not accepted into the deposit insurance system had lost their licenses. Another 40 of them suffered that fate in the course of 2006. Frenkel uses several other examples of banks within and outside the insurance deposit system to show that Law 115 was applied inconsistently. In 2005, banks that were rejected for the deposit insurance system began winning their court appeals.
Among the examples Frenkel cites is that of VIP Bank, which he was chairman of. That bank appealed in court the Central Bank's refusal to accept it in the deposit insurance system and won its appeal. Within days, the bank is prohibited to carry out any operations and is disconnected from the electronic accounts clearing system.
“Why?” Frenkel writes. “For a bookkeeping error in 2000 and two transactions out of thousands that were concluded incorrectly. With such a clearly formal pretext, a bank with dozens of regional branches, 500 employees and 15,000 clients was destroyed in one day. And the bank was ordered to close its 600 correspondent accounts that it had opened in the course of several years. Since the bank was forced to turn in its payments to the accounts clearing system on paper, it became possible not to accept those payments for three more days – the print was irregular, the signature was unclear, the paper did not meet government standards. There you go. In three days, a prosperous bank was turned into ruins and panic broke out among its clients. And now, comrade bankers, you can continue going to court with the Central Bank but you'll never get back the business we took away. A little later, VIP Bank's license was cancelled. The formulation was standard… About the real reason, not a word.”
Frenkel notes that, of the six banks that won their appeals of the decisions on their admission to the insurance deposit system, four remain in existence today, and none of them have been admitted to the system. Meanwhile, the number of appeals has decreased substantially.
That information paves the way for Frenkel's conclusion. In the fifth section, he looks at a proposal that he claims was made to executives of Roskomveteranbank to “burn” the bank after 97 million rubles was confiscated from it by the Interior Ministry, leaving it in dire financial straits. “Burning” in Russian banking slang means clearing large sums of cash in a short time. The currency market is controlled by the Central Bank, of course. By agreeing to the proposal made to them, the executives bought time. Otherwise, they would have “ground it to dust within days.” The Central Bank can thus find two late declarations for financial operations (as happened with one bank) and then “people come to you and make a proposal… Your refuse, they'll close you. If you go to court, you'll get what VIP Bank did.”
Meanwhile, a narrow circle of Central Bank favorites has formed. They are state and foreign banks and the personal favorites of Bank officials among small and mid-size banks. Frenkel mentions ways in which that scheme works to the advantage of big investors and foreign banks.
The Central Bank is interested in having foreign banks operating in Russia. They make it possible to export huge amounts of capital from Russia annually. To clear the field for them, Russian banks have to be continually accused of being dirty, hence the so-called battle with money laundering. In reality, there is no demand in Russia for money laundering. The demand exists to carry out exactly the opposite process, but that does not raise anyone's concern. Law 115 is written to Western standards. The fact that it does not correspond to Russian reality is also of no concern.
The Central Bank is not interested in economic crimes, much less financing terrorism. There are other bodies for that. But it has at its disposal Law 115 that can be applied at will to practically any bank (“you find two statements turned in to Rosfinmonitoring late in one year, and you can find that in at least 95 percent of banks, and absolutely all of the large banks, and there you go, please, multiple violations of Law 115… and then you'll never convince anyone it's not for financing terrorism”). With the formal justification to withdraw its license, a bank can be bent any way you see fit. The Central Bank needs to “burn” banks to keep up the appearance of fighting money laundering. Furthermore, the Bank does not control the demand to make money clean or dirty. It can participate in the process, even lead it, which it sees fit to do, but it cannot control it.
As the elections approach, the demand to cancel banking licenses is growing. The Central Bank needs to show that it is preventing possible illegal financing in the upcoming elections, or at least “distract the leadership of the country with that bait,” even while the Bank and the foreign banks are exporting billions of dollars “and not likely into the current president's elections fund.”
“Has anyone thought,” Frenkel asks in conclusion, “about what will happen if, several days before the elections for the head of state, the Central Bank suddenly remembers that the Savings Bank of Russia [Sberbank] lacks adequate reserves for credit operations and is sending its statements to Rosfinmonitoring in late and so rescinds its license? Millions of crazed depositors will wipe out every living thing in their path. And then the person for whose sake the Central Bank has pumped out those billions will ride into the Kremlin on a white horse. I thought about it.”
Alexey Frenkel
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