- WSJ.com Murdered Regulator In Russia Made Plenty of Enemies
September 22, 2006
PAGE ONE
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Blood Money
Murdered Regulator
In Russia Made
Plenty of Enemies
Targeting Illegal Cash Flows,
Andrei Kozlov Became
The Bane of Shady Bankers
Corruption Fight May Suffer
By GUY CHAZAN
September 22, 2006; Page A1
MOSCOW -- In the spring of 2004, Russia's central bank began a crackdown
on money laundering by yanking the license of a Moscow bank it suspected
of a slew of financial crimes. But when a team of regulators tried to take
control of its headquarters, the bank's dark-suited security force
wouldn't let them in.
More resistance followed. Protests by depositors blocked one of Moscow's
busiest thoroughfares, paralyzing traffic. The target of their wrath was
Andrei Kozlov, Russia's top banking regulator. To make their point, two
protesters dropped their trousers to reveal the word "Kozlov" written on
their backsides.
It was the first skirmish in a high-stakes crusade to clamp down on
Russia's murky and criminalized banking system, a project that lay at the
heart of President Vladimir Putin's ambition to modernize Russia's
economy. Mr. Kozlov, a 41-year-old career central banker, spearheaded the
campaign.
Last week, his ambitions were cut short by an assassin's bullet. Mr.
Kozlov was shot outside a Moscow sports stadium after playing soccer with
fellow bankers. He later died of his wounds.
Mr. Kozlov was one of the most senior Russian officials to be murdered
since the end of communist rule, and his death stunned the country's
elite. Contract-style killings of businessmen were commonplace in the
early 1990s, when capitalism was in its infancy here, but most thought
they had become a thing of the past.
The attack exposed the fragility of Mr. Putin's claims to have ushered in
a new era of stability. It also showed that despite the gradual removal of
political challenges to Kremlin power, crime and corruption still menace
the authority of the state. Indeed, Mr. Putin himself admitted this month
that the lack of progress against corruption was one of the major failures
of his presidency.
Though investigators say they have few leads in the Kozlov murder, Mr.
Putin already has drawn his own conclusions. In a hastily called meeting
of top officials last Friday, he said it showed Russian banking was
riddled with crime. Banks continue to be used to channel billions of
rubles in cash payments used for tax evasion, "huge bribes," terrorism and
the "narcomafia," he said.
Mr. Kozlov was leading a crackdown on money laundering, where criminals
use complex financial transactions to conceal the source of illegally
obtained money. Yet he wasn't concerned just with the dirty money being
pumped into the system, but also with the cash that was being pumped out
and used for criminal purposes.
In the West, most business payments are made by bank transfer, and cash
withdrawals of even a few thousand dollars can raise eyebrows. In Russia,
cash is king. Companies -- both criminal and outwardly legitimate -- often
use it to pay salaries, and so avoid onerous payroll taxes; to grease the
palms of corrupt bureaucrats; and to buy real estate.
To get their hands on that money, businesses must navigate strict rules
barring banks from dispensing large amounts of cash. Luckily for them
there are dozens of small, fly-by-night banks ready to use legal loopholes
-- and a panoply of complex financial scams -- to get around the rules.
For the banks, which charge fees of as much as 5% for customers to
withdraw cash, it is a lucrative business.
To measure the scale of the problem, take Arat, a tiny bank registered in
a village near the Mongolian border whose license was withdrawn by Mr.
Kozlov in August 2005. Regulators said the bank, which had just $320,000
in assets, had dispensed $1.34 billion in cash in June and July of last
year alone. Owners of the bank, which was liquidated last October,
couldn't be reached for comment.
Untraceable cash oils the wheels of corruption and tax evasion in Russia.
It is the lifeblood of a system that links government, business and
organized crime in a web of graft and financial impropriety. Russian
officials, policemen and bankers believe it was Mr. Kozlov's attack on
this system that cost him his life.
Many thought Mr. Kozlov's campaign was futile -- that black cash is such a
feature of life in Russia that the economy can't function without it. "He
said he knew that," said Richard Hainsworth, head of a local credit-rating
company, RusRating, and a friend of Mr. Kozlov. "But he wanted to force
the issue out of the banking system and into the political arena."
Mr. Kozlov's was a lonely struggle. After pulling a bank's license, his
department would regularly pass on evidence of its illegal cash schemes
and money laundering to prosecutors and police. In most cases, the
evidence was ignored. That could change: Among the measures Mr. Putin
ordered Friday was the creation of a task force to handle crime in the
banking system. For the first time, the panel will include police and
prosecutors, in addition to regulators -- suggesting a much tougher stance
on dodgy banks.
Yesterday, Gennady Melikyan, a deputy chairman of the Central Bank of
Russia, was named Mr. Kozlov's successor as Russia's top regulator. A
Soviet-trained economist, Mr. Melikyan previously was in charge of on-site
inspections of Russia's banks.
When Mr. Kozlov joined the central bank in 2002, Russia's
financial-services industry was a mess. For a decade, international
agencies such as the World Bank had been urging an overhaul. The economy,
they said, would remain weak without healthy, well-run banks capable of
channeling private savings into investment in industry, rather than just
spiriting cash offshore.
Amid the political and economic chaos of the Boris Yeltsin years, little
was done. Banking still was recovering from Russia's 1998 financial
meltdown, when some of the country's biggest institutions collapsed under
a heap of debt.
Of the nearly 2,000 banks that were left, many did little more than
launder the proceeds of organized crime, according to World Bank experts.
Others were just the treasury departments for post-communist tycoons
unwilling or unable to service the wider economy. State-owned OAO Sberbank
dominated the landscape, with the lion's share of retail deposits. Most
others were tiny and undercapitalized, with inflated balance sheets and
murky ownership structures.
A veteran central banker who had switched to a private-sector bank after
the 1998 crash, Mr. Kozlov was brought in by Sergei Ignatiev, a respected
economist whom Mr. Putin appointed head of the central bank in March 2002
with a mandate to clean up the system. "Andrei had the president's full
support," says Arkady Dvorkovich, Mr. Putin's economic adviser. Mr. Putin
had come to power in 2000 promising to rebuild Russia's economy, and
financial services were to be a key part of the revival.
'Dirty Attacks'
From the start, Mr. Kozlov was aware he could earn enemies, both inside
and outside the central bank. "I'm being watched very closely right now,"
he said in an interview in June 2002 with The Wall Street Journal. Seven
"dirty attacks" had appeared in the local press, he said, accusing him of
taking bribes. "They are weighing every word I say," he added.
Western bankers regularly took visiting top executives to drop by his
office in the central bank. "It was always a pleasure to introduce people
to him, because he was so clearly someone who symbolized the progress that
Russia is making," said Mark Robinson, head of Citibank Russian Inc.'s
operations.
Though trained in the Soviet system, Mr. Kozlov, married with three
children, was more Western-oriented than most Russian officials. A keen
soccer player, he studied international economic relations at one of the
Soviet Union's most prestigious colleges, the Moscow Finance Institute.
Some of his classmates went on to become Russia's richest businessmen and
most powerful bankers.
In 2001 he was made Moscow head of the Financial Services Volunteer Corps,
a U.S.-government-funded not-for-profit group set up by the first
President Bush in 1990 to aid banking overhauls in transition economies.
While there he consulted with U.S. Treasury officials in Moscow and
drafted a comprehensive plan for a banking overhaul. Those ideas formed
the core of his agenda when he joined the central bank a year later. They
also shaped his liberal position on allowing foreign banks to compete on
largely the same terms as Russian ones. That philosophy didn't win him
many friends in the Russian banking industry, but it has helped turn
Russia into a key target for foreign giants such as Citibank.
Installed as Russia's top regulator, Mr. Kozlov set to work restoring
confidence in the country's banks by pushing through a deposit-insurance
law. The measure, which had languished in Parliament for years, would
compensate depositors if their bank crashed.
To be admitted into the program and earn the right to work with retail
customers, banks had to provide much more information to the authorities
than before. They were forced to disclose who their real owners were and
to present a detailed business plan, and those that qualified were subject
to rigorous monitoring.
Tense Time
It was a tense time. Mr. Kozlov headed the committee that decided who
qualified, and he used the process to weed out Russia's dodgiest banks.
The law gave him wide discretion. In the end, 343 of 1,270 applicants
failed to make the grade. That provoked fury in the market. Articles in
the Russian press claimed banks had to pay bribes of $150,000 to be
allowed into the program.
Mr. Kozlov brushed off the criticism. Anatoly Aksakov, a member of the
Russian Parliament's banking committee, saw him late one evening after a
day spent screening banks for the new system. "He was walking past the
Bolshoi Theater, on his way from the central bank, and I asked him: 'How
come you don't have a bodyguard?' " Mr. Aksakov said. "He just laughed and
said, 'Why should I? I'm a law-abiding citizen.' "
In 2004, Mr. Kozlov embarked on the next stage of his crusade -- a
crackdown on criminal banks. In May, he hastily summoned reporters to the
central bank's elegant 19th-century headquarters to announce he had yanked
the license of Sodbiznesbank, a midsize institution based in Moscow. It
was a historic moment: the first time the authorities had used a newly
adopted antimoney-laundering law to close down a bank. He had the
Kremlin's full support, according to Mr. Dvorkovich.
Regulators accused Sodbiznesbank of a host of financial irregularities.
They said it had knowingly handled ransom money during an infamous
kidnapping, and in 2003 had dispensed more than $1 billion in cash --
about 9% of all such transactions in the banking system for that year. The
bank, Mr. Kozlov told journalists, combined "dubious operations with an
active campaign to attract depositors."
Sodbiznesbank fought back. Its chairman, Roman Petrov, called Mr. Kozlov's
move "utterly arbitrary" and challenged it in court. For two weeks,
security guards barred central bank-appointed administrators from entering
the premises. They ultimately needed a police escort to break in.
Meanwhile, Sodbiznesbank's management mobilized hundreds of customers to
protest outside the bank. They blocked off one of Moscow's busiest
streets, accusing Mr. Kozlov of trying to steal their savings. A vicious
attack was launched in the Russian media against the banker.
A finance official hinted that other banks might soon have their licenses
pulled. Panicked, banks stopped lending to each other, provoking a
liquidity squeeze. Anxious customers lined up at cash machines to withdraw
their savings, and some banks ran out of money. One big institution, Guta
Bank, was forced to close its doors after a run by depositors and
eventually was taken over by one of Russia's big state banks.
Mr. Kozlov claimed the banking crisis had been deliberately engineered to
discredit the government. Many in the banking sector demanded he resign.
Mr. Ignatiev and the Kremlin stood by him. "It was clear the trouble was
due to fundamental problems in the banking system," Mr. Dvorkovich said.
"There was no point blaming one individual."
Investigators continued to probe Sodbiznesbank. They alleged that in the
months before Mr. Kozlov pulled its license, management had str...