The Russian Laundromat

Por: Laura Paola Villa García | Posted on September 30, 2019

Context

More than a fifth of Russia’s population lives in poverty while thirty-six per cent are at risk of poverty (Holmes, 2019). Nonetheless, the corruption that plagues Russia does not contribute to the reduction of poverty because a big portion of public funds that could benefit their citizens has been syphoned off abroad. On top of that the Russian Ministry of Justice has stated that as a part of their strategy to combat corruption, the politicians that incur in acts of corruption could be absolved if failure to observe the law is caused by objective circumstances that made it impossible to comply (Holmes, 2019).

Facts: Who gave what to whom and why?

In 2014, authorities in Moldova, Latvia, United Kingdom and Russia discovered a huge corruption scheme of money laundering known as “Russian Laundromat”. This scheme diverted around USD$20 y 80 million of Russian public funds and worked via a set of shell companies in Russia that only existed in paper and borrowed money to each other. (OCCRP, 2017). In reality, none of these companies existed formally and its beneficial owner could not be traced.

In this way, shell companies created fake debts among them, which were guaranteed by Moldovan citizens and when debtor companies did not comply with their duty to pay their debts, the Russian creditor companies could sue them in Moldovan jurisdiction. Then corrupt judges would sanction Russian creditor companies, ordering them to transfer funds to accounts in a Moldovan bank. The judge would later assign an executor, who was in charge of opening a bank account in Moldindcobank, where Russian companies had to deposit the money. As a result, the Russian money was certificated by Moldovan Court (would appear as legal) and was deposited in banks in Latvia and the rest of the European Union (ICLG, 2019).

On the other hand, part of the funds that were part of the money laundering scheme in Russia came from Russian treasury through acts of corruption such as fraud and tax evasion (OCCRP, 2017). This scheme was used to finance luxuries, rock bands touring Russia and a Polish non-governmental organization that pushed Russia’s agenda in the European Union (OCCRP, 2017).

None withstanding the magnitude of these acts, no one has been sanction. However, according to the head of the anticorruption prosecution office in Moldova, in 2017 there were 14 cases in court; four judicial executors were charged; and Moldindcobank executives were investigated (OCCRP, 2017).

Applicable Law

  • United Nations Convention Against Corruption
  • Federal Law No.155 «On the Prevention of Criminal Proceeds Legalization (Laundering) and Terrorist Financing»

Why the case is relevant?

This case if relevant because various well-known companies and banks were involved in the Laundromat, specifically in the purchase of goods and services. Among the Samsung, Sony Ericsson and Black & Decker. All these companies were receivers of laundered money. Some of the banks involved are HSBC, Deutsche Bank, Bank of China and Danske Bank. In addition, one of the entrepreneurs that participated in Laundromat was Alexey Krapivin, who is linked to Vladimir Putin (OCCRP, 2017).

It is also relevant due to the scale of the money laundering scheme as it is calculated that 19 Russian banks were involved as well as 5,140 companies with bank accounts in 96 countries (OCCRP, 2017).

Lessons learned

Money laundering is an offense with a typology that is constantly evolving and adopts more complex schemes. For that reason, is necessary to implement a mechanism known as “Know Your Customer” (KYC), which is a series of measures designed to combat money laundering which are used by financial institutions. These measures have the purpose of documenting the real identity of a client and assure that money is legitimate (Abogados, s.f.).

What type of corruption is it and what are the crimes involved?

This is a case of grand corruption due to the large amounts of money involved in the transactions carried out  through the money laundering scheme and the violation of human rights of Russians citizens because let’s not forget that the majority of the money laundered came from public funds (Convention, s.f.). Also, the offense that was committed is money laundering, which consists in hiding the origin of money obtained illegally within legitimate economic activities to make the appear legal (Abogados, s.f.).

Likewise, there are several forms of grafts involved such as nominees, beneficial owner and shell companies. Nominees act las owners of companies in order to hide the real identity of whom in reality benefits from the company, who are known as beneficial owners. On the other hand, a shell company is a moral person that has no physical presence in their jurisdiction in which it was created and has no commercial activities as it is used to protect the beneficial owner from taxes or simply prevent his/her identity from being known (Abogados, s.f.).

References (Harvard – Anglia)

Abogados, D., s.f. Glosario de Derecho Anticorrupción. [Online]
Available at: Ebook

Convention, U. N., s.f. Grand Corruption occurs when. [Online]
Available at: Grand corruption occurs when. [Ebook]. Oficina de las Naciones Unidas

ICLG, 2019. ICLG. [Online]
Available at: https://iclg.com/practice-areas/anti-money-laundering-laws-and-regulations/russia

Holmes, H., 2019. OCCRP. [Online]
Available at: https://bit.ly/2kTLrTd

OCCRP, 2017. OCCRP. [Online]
Available at: https://bit.ly/2n4f2WQ

International, T., 2019. Transparency International the global coalition against corruption. [Online]
Available at: https://www.transparency.org/en/news/25-corruption-scandals#Ben%20Ali

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"The Russian Laundromat"; Laura Paola Villa García, México, 2019.