The Russians Are Coming!

Robert Friedman’s book is the first to describe in detail the Russian mobsters who have established criminal enterprises throughout the world. His prose sometimes makes it sound like a sequel to Pulp Fiction. A Russian killer in Brooklyn murders a boy, he writes, “by picking him up like a ragdoll with one hand and plunging a knife into his heart with the other.” But more than any other reporter he reveals how sophisticated, ruthless, rich, and multinational Russian criminals have become.

Among other things, he writes, they have arranged the sale of military helicopters and a submarine for the Colombia drug barons, and they have acquired influence over the American National Hockey League by threatening players from Eastern Europe and Russia and extorting money from them. They have infiltrated the international financial system, rigging share prices and buying banks in Hungary, Israel, and California. Now they are expanding into Nigeria, South Africa, and Australia.

The “Russian mafia,” as Friedman describes it, is not a single organization, but rather a catchall phrase for mobsters who come from the former Soviet Union. The term mafiya appeared in the 1970s to refer to corrupt Communist Party officials; since the Soviet Union collapsed it has been used to refer not only to officials but to organized criminals and prominent business leaders, including some of the “oligarchs” who have acquired power and vast fortunes inside Russia.¹ Some Russians object to the phrase “‘Russian’ mafia,” arguing that many of the gangsters are from other nationalities—Ukrainian, Georgian, Latvian, for example. For this reason, FBI reports sometimes refer to “Eurasian” organized crime syndicates, which include those run by Russian nationals; this only creates more confusion since many of the syndicates have nothing to do with Asia. In fact, wherever they were born, most are now Russian citizens, and use Russia or Israel as their base.

It is often said that Russian mobsters started to become active internationally when the Berlin Wall came down and the Soviet Union disintegrated. But Friedman traces their beginnings back to the 1970s, when the Soviet Union, under pressure from Washington, permitted Jews to emigrate. The Communist leaders, Friedman writes, “took this opportunity to empty its jails of thousands of hard-core criminals, dumping vast numbers of undesirables…on an unsuspecting America, as well as on Israel and other Western nations.”

Since tens of thousands of people jailed by the Communists were not criminals, when questions were raised about a mobster’s time in prison they tended to be dismissed, and they still are. But many were jailed because they were in fact criminals—pick-pockets, extortionists, and murderers. Some of the toughest of them formed loosely organized associations while in prison, and maintained their connections with one another after they were released. For example, Friedman writes, gangsters who call themselves “thieves-in-law” (vor v zakonye) take vows never to hold a job, or pay taxes, or cooperate with the police or the state, except to trick them. Some of them, he was told, have on their chests tattoos of a giant eagle with razor-sharp talons. The FBI estimates there are between seven hundred and eight hundred thieves-in-law, some of whom are listed alphabetically in an eighteen-page appendix to a 1994 FBI report, “Russian/Eurasian Organized Criminal Enterprise.” Along with thousands of legitimate Russian-Jewish immigrants, these and other criminals established their first base in Brighton Beach in Brooklyn. From there they moved on to Miami, in a big way, and to a lesser degree to Los Angeles.

Friedman began reporting about Russian organized crime in the 1980s, well before others were aware of it, and he may well know more about Russian mobsters than any single law enforcement official. Unlike many journalists reporting on organized crime who rely on official sources, Friedman spent much time with the mobsters, drinking with them in the garish nightclubs they own. Some of them trusted him enough to allow him to interview them after they went to prison. But some caution is required: organized crime members are, of course, notorious liars, protesting their innocence when caught, and bragging about their importance when they are confident they are not in danger. Friedman was able to extract information from the agencies pursuing the mobsters—the FBI, CIA, British police, Israeli intelligence. A caution here, too: information handed out by police officials contains raw accusations, often based on hearsay.

A flaw of Red Mafiya is that it has no notes. Among other things, this means that it is not always possible to know which of Friedman’s dramatic findings have been discovered by Friedman himself, and which he has taken from secondary sources, such as newspapers or magazines, whose credibility and accuracy cannot be checked. This omission will deny the book the importance it should have with readers and with government officials and policymakers. But even if many of Friedman’s accusations may not stand up in a criminal case, his book is a much-needed exposé of the brutality, sophistication, and influence of Russian-organized crime groups and of the failure of public officials to deal with them.

1.

Friedman shows how the collapse of the Berlin Wall and then of the Soviet Union opened up global opportunities for criminals. One of his examples is Boris Nayfeld, a fairly typical heroin dealer who, along with his brother (who murdered a young man for insulting his girlfriend), emigrated from Russia to Brighton Beach in 1990. “He obtained the drugs in Thailand,” Friedman writes,

smuggled them into Singapore, and then stashed them in TV picture tubes and shipped them to Poland through a Belgian-based import-export company, M&S International. From there, Russian couriers from Brighton Beach with valid US passports ‘bodied’ the heroin into the United States through New York’s Kennedy Airport.

Semion Mogilevich, whom Friedman describes as “the world’s most dangerous gangster,” is far more sophisticated in the use of technology:

He has created a global communications network through secure satellite telephones, cellular clone phones, encrypted fax machines, e-mail systems, and state-of-the-art computers, all of which are conducted by a host of Ph.D.’s he employs. Relaxed travel restrictions and the greatly increased volume of international trade have enabled Mogilevich to extend his operations throughout the world, setting up a welter of legal and illegal companies that have helped to penetrate international banking systems and stock exchanges, where he has planted top aides.

Although Friedman has been dogging Mogilevich for many years and wrote a chilling article about his criminal empire in The Village Voice two years ago,² the mob leader’s name did not appear in The Washington Post, The Los Angeles Times, The Wall Street Journal, The Financial Times, or The New York Times until August 1999. He was then named in connection with the investigation into allegations that Russians were laundering billions of dollars through the Bank of New York.

Mogilevich, born in Ukraine and now a Russian citizen, served several years in Soviet prison in the 1970s for illegal currency transactions and fraud. On being released, he made his first millions defrauding fellow Jews leaving the Soviet Union. He offered to sell their jewelry, works of art, and other valuables in Russia, and send them the money abroad. He kept the money.

During a trip to Hungary in the 1980s he fell in love with a Hungarian woman, and after the Wall came down, he set up his headquarters in Budapest. At least that is how Mogilevich explained how he came to Hungary when I talked to him last year. But Budapest was also a place from which Mogilevich could expand his activities in the West. He was protected by a senior police official in Budapest and the Hungarian police did not pursue him while he built up a criminal conglomerate—including prostitution, extortion, drug and weapons trafficking, art fraud, money laundering. (Under pressure from the United States, the police official was fired in late 1998, and Mogilevich may not be so welcome in Hungary these days.)

Mogilevich’s organization had two villas outside Prague where his “enforcers” took those who crossed him or refused to pay blackmail. An FBI report says, “Trained by Russian Afghanistan war veterans, the young athletic enforcers are known for their brutality. Victims are generally repeatedly stabbed and tortured before they die.”

During a three-year period in the early 1990s, according to a British police report, Mogilevich laundered at least $50 million through the Royal Bank of Scotland, with the help of a London solicitor whose wife happened to be a former mistress and the mother of one of his children.³ (He also has an ex-wife, a daughter, and a granddaughter in the United States.) Mogilevich, now fifty-four years old and weighing close to three hundred pounds, denies that he was engaged in money laundering. His problems with the authorities arose, he says, because he was not familiar with Western banking, and did not speak English; he therefore, he says, hired a solicitor, whom he paid $500,000, and that was the only reason the British authorities thought he was laundering money.⁴

When the British closed down his activities, Mogilevich turned to North America, setting up YBM Magnex, a company near Philadelphia whose core business was industrial magnets manufactured in Hungary. The company had well-known businessmen on its board of directors and its books were audited by two prominent American accounting firms. It issued glossy annual reports, and its stock traded in Canada while the company awaited a listing on the Nasdaq. But the company was also a cover for a very sophisticated money-laundering operation. Eventually Canadian and American authorities caught up with it. In June 1999, the company pleaded guilty to securities fraud in the Federal District Court for the Eastern District of Pennsylvania. Mogilevich, meanwhile, is back in business in Russia.

Such tales about the criminal escapades of the Russian mobsters raise the question of what is being done to combat them. The answers suggested in Red Mafiya are not encouraging. In 1992, federal and state authorities finally broke up an operation in which Russian mobsters illegally sold gasoline in several states. This was costing federal and state collectors billions of dollars in revenues annually—“the biggest tax heist in US history,” says Friedman. It was the first significant action against the Russian mob. In general, Friedman writes,

state and federal law enforcement agencies were loath to go after Russian mobsters, instead devoting their energies to bagging Italian wiseguys, a traditional route to promotion. And because the Russian mob was mostly Jewish, it was a political hot potato, especially in the New York area, where the vast majority of refugees were being resettled by Jewish welfare agencies.

As for the FBI, which has the resources and the legal authority to investigate the Russian mob, Friedman says that were it not for the bureau’s “own sluggishness in addressing the problem, the Russian mob in the United States would never have become as powerful as it is today.” It wasn’t until 1994 that the bureau set up a special force to deal with Russian organized crime. By then, Friedman says, there were some five thousand “hard-core Russian criminals” in the New York region. Yet the FBI’s spokesman in New York, Joe Valiquette, told Friedman, “The Russian Mafia has the lowest priority on the criminal pecking order.”

Recently, Jonathan Winer, a former senior United States government official, provided a rare view of how federal authorities bungled a major investigation into the Russian money laundering involving the Bank of New York. Winer was deputy assistant secretary of state for international law enforcement; his job was to find ways to work with other nations to curtail money laundering and international crime. After Friedman’s book was published, Winer told a congressional committee that he was first alerted to the Bank of New York’s large-scale money-laundering operation by the Manhattan District Attorney’s office in March 1999. When he learned more, six months later, it was still not from anyone in the United States government, but from British officials, who were keeping an eye on Mogilevich.⁵

From the British, Winer learned that in eight thousand transactions during eighteen months $4.2 billion had been moved through a suspicious account at the bank—an average of one wire transfer every five minutes, twenty-four hours a day. But this was not enough to make anyone suspicious, apparently. The transactions were handled by a small company called Benex, which turned out to be the creation of an officer at the Bank of New York, Lucy Edwards, and her husband, Peter Berlin.⁶

“My jaw literally dropped open,” Mr. Winer said in his congressional testimony. “I had never heard of any money laundering case of this magnitude.” Yet, he said, only one FBI investigator, in New York, had been assigned to the investigation, and when Winer had returned from the British briefing, he discovered that no one in Washington was aware of it. He promptly reported the British findings to his superiors at the State Department, as well as to the National Security Council and to the Justice Department, which was in the dark even though the FBI was supposedly investigating.⁷

As soon as the Bank of New York scandal became front-page news in August 1999, congressional committees held hearings, and Republicans used it to criticize the Clinton administration’s policies toward Russia. Yet no one seemed concerned to ask why no serious action had been taken while billions of dollars were being sluiced through the accounts.

Obviously that much money could not have come from Mogilevich, no matter how vast his criminal empire. Most of it came from Russia’s oligarchs, the handful of wealthy Russians who looted Russia for their own personal wealth, buying up businesses at low prices during privatization, then stripping them of their assets. The oligarchs used the Bank of New York to launder their riches; other Russian businessmen used the Benex-Bank of New York pipeline to cheat the Russian government out of customs duties and tax revenues.

Federal authorities did not close down the connection between Benex and the Bank of New York until the links between them were publicly disclosed in newspaper accounts. FBI officials said they had left the account open because they wanted to follow the money trail and to find others in the Russian crime network. In other words, while Russia was being bled of billions of dollars, federal authorities watched—another matter that Congress has not investigated.

Nor has Congress given the Justice Department the laws it considers necessary to combat money laundering. To break the power of today’s international criminal cartels—whether run by Russians or Colombian drug barons—will require shutting down their ability to move illegally acquired funds through Western financial institutions. The United States and European governments criticize small island nations such as Antigua, the Cayman Islands, and Nauru, as well as Cyprus and Liechtenstein, for their willingness to protect illegal money. But the Bank of New York case shows how American laws can be equally at fault.

For a foreigner to launder money through an American financial institution is a crime only if the money comes from drug trafficking, terrorism, or bank fraud. But money made from prostitution, extortion, or weapons trafficking, for example, can be washed through an American bank without any consequences to the depositor or the bank. Corrupt foreign politicians and dishonest foreign businessmen can get their money into American financial institutions, as they did in the Bank of New York case, without violating American laws.

Efforts by the Justice Department to toughen money-laundering legislation have been blocked by Congressman Henry Hyde, the conservative Republican from Illinois, who has kept the legislation bottled up in his subcommittee.⁸ Just why he does so remains unexplained.

2.

Whatever the American laws, a successful campaign against Russian mobsters will require the cooperation of other governments, particularly those of Russia and Israel, the two countries that are now the principal residences of most Russian crime bosses.

Mogilevich lives openly in Moscow. Moscow is also home for Sergei Mikhailov, head of Solntsevskaya, the largest of the Russian criminal organizations, which, according to the FBI, has some two thousand members worldwide. Mikhailov was acquitted by a Swiss court on money-laundering charges in December 1998, in part because the Russian authorities did not fully cooperate with the Swiss prosecutors; he returned to Moscow a hero for having beaten the authorities in the West.

A grand jury in Philadelphia has been investigating Mr. Mogilevich for more than a year, and Friedman suggests at the end of his book that the jury has already handed up a sealed indictment. I have not been able to confirm this, but federal law enforcement officials and Mogilevich’s lawyer in Los Angeles say that they expect him to be indicted. If that happens, how hard will the next administration put pressure on the Putin government if it refuses to hand Mogilevich over? United States officials say that the Russian government has given almost no help in the Bank of New York investigation.

“Of all the nations where the Russian mob has established a presence, none has been more deeply compromised than the State of Israel,” Friedman writes, adding that the Russian mafia has “become a grave threat to the stability of Israel.” Although this may be a bit hyperbolic, the Russian mafia does have a strong, safe base in Israel—a story that American and Israeli journalists have largely overlooked. One FBI report observes, for example, that most members of Mogilevich’s criminal organization have Israeli passports. And Jonathan Winer told Friedman (when Winer was still the State Department’s crime expert), “There is not a major Russian organized crime figure whom we are tracking who does not also carry an Israeli passport.”

The Russian mobsters have taken advantage of the right of any Jew to become an Israeli citizen, and of the country’s desire to attract capital. Israel has no money-laundering laws. Its open banking system, a US official told me, was “developed for good motives,” but was “perverted by the Russian mafia types. One could pick up a passport and a bank account, and operate like you couldn’t in the rest of the Western world.”

Along with Mogilevich, American officials put high on their list of suspects two of his lieutenants, Gregori Loutchansky and Vadim Rabinovitch. Loutchansky ran a trading company called Nordex, which American and European officials say has links to Russian organized crime and once acted as broker in the sale of Scud missiles from North Korea to Iraq. Rabinovitch ran the Nordex office in Kiev.⁹

In Israel, the Russian mob leaders have bought protection from senior government officials, and have poured so much money into political campaigns there that they have been able to name candidates for local and national office. The admired former Soviet dissident Natan Sharansky, who has become active in Israeli politics, has admitted taking campaign contributions from Nordex, in spite of pleas from American officials to cut his links with Loutchansky.

When Loutchansky invited a list of prominent Russian mobsters to his birthday party in Israel in 1996, the Israeli police began to grow alarmed. And an Israeli police official told me that they have begun to look more closely at how the Russian mobsters got their citizenship. A naturalized Israeli citizen can’t be deprived of citizenship if he commits a felony, but he can if he has obtained that citizenship by fraud, such as falsely claiming to have Jewish ancestors. Late last year, the Israelis revoked the citizenship of Sergei Mikhailov, the mob leader acquitted in Switzerland; an Israeli police official recently told me that others’ will also be revoked.

Recognizing the threat to American interests from Russian organized crime, the FBI opened an office in Budapest in April of this year. Not only has the city been the headquarters for Mogilevich and Mikhailov but, according to investigators, over half of the money that went through the Bank of New York was first funneled through Budapest banks.

This is the first full-scale bureau office outside the United States. Until now, the FBI has had agents posted as attachés in American embassies around the world, but they function primarily as semi-diplomats. The Hungarian government was eager to have the FBI office installed in Budapest, and, after a brief protest, it has had enthusiastic support in Hungary, even from the opposition political party.

But, such moves have not been widely applauded within the bureau. Much opposition has come from senior officials who wanted the office to be opened as quietly as possible; they also fear political repercussions if anything goes wrong, such as an FBI agent getting caught in a shoot-out. Conservatives in Congress argue that the FBI ought to stay home and keep the streets and banks safe for Americans; liberals fear any expansion of the FBI’s power, in view of its past abuses. But the reality is that the Russian crime gangs don’t respect borders; they now can reach into the United States without coming close to Brighton Beach.