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Russian Organized Crime and Financial Markets
Joseph D. Douglass, Jr.
Over the past few months, the story of Russian money laundering, whose Bank of
New York operation was the first to surface, has expanded as additional tidbits
of information have become available. The amounts of money grew from $4 billion
to well over $10 billion. The involvement of additional banks from New York to
London to Switzerland added more fuel to the fire. Eventually, this concern
over penetration reached so many banks that specific banks were no longer news.
Rather, the issue became Russian penetration of many banks around the world.
At an international meeting sponsored by Mut zut Ethik in Feldkirch, Austria,
this past September, Klaus Schmidt, an intelligence official with Organisierte
Kriminalit¬ t in Europa, spoke in measured terms about the problem. Russian
ministers and top officials are involved in the corruption, he said. Russian
organized crime is a threat to the underpinnings of society, the culture, in
both Europe and the United States, as a result of its activities. Drugs corrupt
the youth and illegal money corrupts the legal, financial, and political
system. Thus, the moral basis of the culture is destroyed.
The process of moving money from the shadows to legal structures is magnifying
the corruption by an order of magnitude. 15 to 20% of this money is now in the
stock market and having serious influence. While in the past, the principal
crime organizations were Sicilian, Japanese, Chinese, and Latin American, the
main problem today is Russian.
Illegal drugs play the lead role. This is no longer just a problem of heroin
and cocaine but also one of synthetics legally produced, particularly by
companies with excess production capacities, e.g. Bulgarian pharmaceutical
companies. Drug crime in Europe has gone from 15,000 crimes in 1995 to 185,000
in 1997. Prostitution, blackmail, and murder are all coupled in and part of the
operations. Organized crime in Russia now controls over 40,000 business, 85% of
the banks, and 20% of the Duma. It is only a short time before organized crime
will control the police forces all over the world and major businesses. They
will also use politicians to expand their stealing potential, and will control
the international financial markets. His closing remark was most sobering:
"This problem can no longer be defeated with legal means."
Three years ago the gross size of international organized crime was estimated
by World Bank specialists to be in the neighborhood of $1.2 trillion per year,
of which at least $500 billion was profit. This year, a study sponsored by the
UN estimated the gross size at $1.6 trillion.
Both of these figures are believed to be low – politically conservative
estimates. More realistic estimates run from $2 trillion to $3 trillion. Over
50 percent of that is profit, which means $1 trillion to $1.5 trillion profit
each year that is transferred into the coffers of international organized
crime. All of this is, of course "laundered" and the bank laundering fee runs
from 15 percent to 20 percent, which helps explain their obvious witting
involvement. Since the drug trade exploded in the late 1960s in the United
States, it is not unreasonable to estimate the total accumulated proceeds in
the $30 trillion to $50 trillion range, mind boggling though it may be.
Moreover, since this is the profit, it is easy to see how the amount spent on
political and police corruption, propaganda, and other influence in important
nations can easily have been many billions of dollars each year.
To understand what is happening, it is necessary to go back many years and
track Soviet strategic intelligence operations. This is hard to do party
because it has been Western policy not to say or reveal anything that would
embarrass the Russians, partly because of the very extensive Soviet penetration
and influence operations in Western governments, and partly because it has been
very difficult to obtain credible "inside information" – Soviet security was
very good. The problem of obtaining good information also was exacerbated
because of the efforts by governments, Soviet/Russian as well as Western
governments, to automatically discredit good information. This information is
embarrassing to both the Russian and Western political leaders, which is why
scandals such as the Russian money laundering through Western banks have been
so hidden in the shadows and how they have grown so large without discovery or,
more important, publicity.
To better comprehend the nature of the present day situation, I would like to
present some history that was explained to me by the former Czech official, Jan
Sejna, prior to his death in 1997. Up until he defected in 1968, Sejna had been
a high-level insider. Prior to his defection he was the chief of staff to the
Minister of Defense, head of the Secretariat of the Defense Council, which
outranks the Politburo in matters of defense, intelligence, counter-
intelligence, deception, and anything of a national security matter, which
includes much of foreign and economic policies. He was also a key official in
the Main Political Administration, Administrative Organs Department, and Main
Party Group, which controlled the Presidium and National Assembly. Most
important, he had an impeccable memory. In 1992, the director, Defense
Intelligence Agency, sent a memo to his bosses stating that Sejna was an
excellent source and had provided reliable intelligence to U.S. and allied
intelligence services for over twenty years.
During the course of thousands of hours discussion with Sejna between 1976 and
1997, Sejna explained to me in detail how, as part of Khrushchev’s
modernization of the Soviet revolutionary war strategy in 1955-1956, drug
trafficking, organized crime, terrorism, and deception became major Soviet
strategic intelligence operations. Drugs and terrorism were run mainly out of
the GRU (military intelligence) because they were sabotage operations.
Organized crime was mainly a KGB (civilian intelligence) operation because it
was more political (in contrast to military) in nature. Organized crime was
believed to be closely coupled into the banks and politicians, both of which
were considered primary targets for espionage and political influence
operations.
In organized crime, they infiltrated existing crime families first, then
organized their own operations. By 1960, their initial infiltration had been
most effective. For example, the Bulgarians had 23 penetrations into the
Italian Mafia, the Hungarians had about the same number, the Czechs slightly
fewer, and the Soviets slightly more than the Bulgarians – and all this just in
the Italian Mafia. Within five years, the Soviets and their surrogates had well
over 100 organized crime operations that they had started around the world! The
Czechs alone managed or had penetrated 50 organized crime groups around the
world.
The GRU, Soviet military intelligence, had the lead role in terrorism because
of the major quantities of guns, explosives, and associated training and
support that were required. However, because of the strong political mission of
terrorism, which was to destabilize regions and prepare countries for political
revolution, the KGB was also involved, especially in the overall management.
Another political use of terrorism was to help split the West and isolate the
United States.
Drug trafficking was used mainly to corrupt and weaken the society, mainly the
youth, which provides the backbone of the military. The schools were main
targets because that was where the future leaders were to be found. Drugs were
also a major component used in espionage and to corrupt public officials and,
especially, banking institutions.
Deception was used as an adjunct to foreign policy. It was also used to protect
drug trafficking, organized crime, and terrorism by shifting the blame and
protecting the key elements. For example, deception was used to promote the
idea that organized crime, the Mafia, was behind drug trafficking and was used
to protect the banks – or, as Sejna explained, "to prevent the spotlight of
publicity from shining on our friends the banks."
By 1965, so much money was flowing in, that closer cooperation with
international finance was organized. International finance and Moscow were very
close, Sejna said. "Never was an important decision made in Moscow that
international finance was not present." The organization of money laundering
was managed by international finance. The financiers and Soviet officials met
in special villas in Prague because it was considered too risky for the bankers
to travel to Moscow for such meetings. Every week there were meetings in
Prague. Sejna knew because his staff had the task of coordinating the use of
the special villas for these meetings.
The guidance the Czech intelligence services received was very explicit. In
1964, they were specifically instructed to use nine banks in fifteen countries,
which included Singapore, Austria (Vienna), Argentina, and Holland. They were
even given the names of "reliable" people to use at various banks. They were
also told to use banks that were not closely watched, as for example, banks in
New Zealand and Norway.
Banks in Switzerland, Spain, Luxembourg, and Liechtenstein were also used, he
said, but more to corrupt the banking officials than to move large amounts of
money. It is very important to understand the importance of the banks in Soviet
strategy. In 1964, the large banks were the Soviet priority target for
intelligence penetration because of the banker’s access to and influence over
political decisions and because the banks were such good sources of information
of a technical espionage nature. What is also easily overlooked is that the
banking officials are a valued channel to use in obtaining "casual"
introductions to industrialists and people of power and influence. The bankers,
thus, were not only key providers of information but great facilitators as
well. In the 1960s, two top Austrian banking officials were Czech agents as was
one of the top Swiss banking officials. The Czechs were particularly effective
in Switzerland, even though the Germans and Russians were the primary
intelligence operators in Switzerland. As Sejna explained it, there was so much
information coming in on a daily basis from Switzerland that it "was like
watching the 7 o’clock news."
The corruption files on "people of power and influence" that were gained from
their criminal and drug operations were massive. The Czechs themselves had
active dossiers on roughly 3,000 such corrupted important people in 1967. Add
in the files of the Soviets, Germans, Bulgarians, Hungarians, and Poles and the
total would easily exceed 20,000 by 1980 – all people who were important and
who were subject to blackmail and influence operations. Secret bank accounts
were no secret to the Russians. As a result of their penetrations, they were
well informed about the secret bank accounts of various national leaders like,
for example, Marcos.
According to KGB estimates at this time, the Soviets ran or were able to
exercise strategic control over 31 percent of the drug trade into the United
States. In the Americas, they had multiple drug operations in Canada, Mexico,
Panama, Costa Rica, El Salvador, Belize, Uruguay, Paraguay, Colombia, Peru,
Chile, Bolivia, Argentina, Brazil, Guadeloupe, Jamaica, and Dominican Republic
that Sejna was personally aware of. The Cuban operation, directed by Raul and
Fidel Castro personally, was a Soviet operation. All of their agents were
trained indigenous recruited agents. This includes the United States where, in
1967, the KGB estimated they controlled 38 percent of the drug distribution
networks. Also, at that time, the Soviets had agents in roughly 75 percent of
Latin American banks and 45 percent of American and Canadian banks, and this
was before the explosion of cocaine money.
The plague of illegal drugs that struck America in the 1960s was no accident.
It was the product of deliberate intelligence operations. The first operation,
organized by the People’s Republic of China, began in 1949. The Soviet scheme
became operational in 1959. The tie-in to the banks, as indicated above, began
very early in the game. How else could a multi-billion dollar a year operation
operate, let alone grow into a trillion plus dollars a year operation? Sejna
recalled some of the Defense Council discussions on their meetings with German
banking officials and the development of fake companies and bogus public works
projects invented to cover the massive transfers of money.
The sudden emergence of Russian organized crime around the globe, including in
seventeen major American cities, a year or two following the collapse of the
Soviet Union was no accident either. These crime operations did not suddenly
"develop" following the collapse. Nor are they the result of independent
entrepreneurs, although that is precisely what we are asked to believe. They
were already large and effective long before the collapse and run by KGB
agents. The KGB went to great lengths to preserve and protect valuable assets
and operations, such as organized crime and drug trafficking, prior to the
dissolution of the Soviet empire. It was clear that these criminal operations
had become so effective that their presence could no longer be kept secret.
According, the only logical course was to "go public" and create the image of
their independent emergence as a natural course of events that was of as much
concern to the new Russian officials as it was to Western officials. Hence the
need for Western security services to "cooperate" with the Russian services in
battling organized crime – with the financial assistance of the West! Given the
important nature of these operations (not only money, but political corruption
and influence operations as well), asking whether the KGB and GRU are still
involved is about as naïve as asking whether they are still involved in
espionage and influence operations. The answer is yes, more than ever before.
The recent revelations that have flowed from the investigations into Russian
money laundering and associated financial manipulations, which served a whole
host of nefarious operations, are just a tiny, tiny glimpse of a massive hiding
monster. The ramifications are orders of magnitude worse than any of the
reported accounts. They include associated political, economic, legal,
financial, and judicial corruption that is present around the world in nearly
all countries. The ties between the organized crime and drug trafficking groups
with terrorist operations is yet another dimension that should not be ignored.
It is a dangerous world, but isn’t it time we took off our eye shades and began
to recognize the problem in its entirety, including what has happened to the
consequences for criminal behavior, which helps tell us where we are headed?
As was clearly evident from the various talks in Feldkirch last month, and
associated intense off-the-record discussions, we may not have much time left.
It is clear that the legal processes and current approaches to police
operations can not begin to cope with the problem. Moreover, the influence in
finance, politics, justice, and the media that international organized crime
has already achieved is frightening.
Joseph D. Douglass, Jr. is director of the Redwood Institute and author of Red
Cocaine: The Drugging of America and the West (London and New York: Edward
Harle, 1999) in which many of the details of Russian narcotics trafficking,
organized crime, and cooperation (and corruption) of the banking industry is
presented.
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