On August 18, 1999, Natasha’s phone rang in her office on the ninth floor of One Wall Street. It was a correspondent from the New York Times asking her about a particular company account. Natasha explained that her department didn’t have access to companies’ accounts, as they only dealt with other banks. A minute later, a handyman came to Natasha’s office to install a lock. She was surprised; they had never locked their offices before. She asked the handyman, who happened also to be a Russian emigrant, why a lock was being installed. He said he didn’t know; he was just following orders. Then her phone rang again. Natasha was called up to the tenth floor—BoNY’s executive level. There she was informed that she was now suspended because of an investigation launched by the district attorney’s office. She was then escorted out of the building, and her colleagues were told not to contact her. Natasha would never see her office again.5
The next day the world learned that something was rotten at BoNY when the New York Times ran a front-page story under the headline, “Activity at Bank Raises Suspicions of Russia Mob Tie.”6 “Billions of dollars have been channeled through the Bank of New York in the last year in what is believed to be a major money laundering operation by Russian organized crime,” reported the Times. The two persons who had surfaced in the investigation, the paper reported, were both senior officers with the bank’s Eastern Europe division. Both had emigrated to the United States from Russia, and both were married to Russian businessmen. The paper named them: Natasha Gurfinkel (the Times claimed “the accounts have been handled” by her) and Lucy Edwards.
FBI investigators had discovered that Lucy’s husband, Peter, had set up several companies whose bank accounts were at BoNY. These accounts were used for transferring billions of dollars from Russia to the United States. One account, registered to a company called Benex, was linked to a notorious mafia boss from the former Soviet Union, a man wanted by both US and British authorities. According to the Times’s story, British intelligence reported that “some of the money from the account went to pay contract killers and some went to drug barons.”7
The scandal gathered momentum, and more accusations followed. US media outlets published more stories; $7.5 billion was said to have been moved out of Russia through the accounts controlled by Lucy’s husband in just three years via BoNY.8 American newspapers began naming various Russian oligarchs as well as, among others, Boris Yeltsin’s son-in-law.9 Moscow decided to run its own investigation.
Things got hotter in September 1999 when the US House of Representatives’ Committee on Banking and Financial Services launched hearings on Russian money laundering. The BoNY investigation became even more important when Yeltsin vetoed Russia’s ratification of the International Anti-Money Laundering Convention.
“I was summoned by Yeltsin,” remembered Khodorkovsky, who, by late 1999, was one of Russia’s top oil tycoons. “He told me that the FBI complained about me because of the scandal. I said I knew nothing about it. Yeltsin said, ‘Then go and get it sorted out.’ So I came back to my office, we prepared all documents, and I phoned the US embassy in Moscow and asked to talk to the FBI people. I gave them our documents, went back to Yeltsin, told him that I spoke to these guys and that everything was OK.”10
What Khodorkovsky failed to mention was that he had been invited to testify before the American congressional committee on Russian money laundering and had declined to come.11 The congressional committee also invited Natasha Gurfinkel and Lucy Edwards to testify, but they also failed to come. Instead, the bank sent its chairman and CEO, Thomas A. Renyi, a Vietnam veteran. It was Renyi who had supervised the integration of the Irving Trust and BoNY. On the witness stand, Renyi admitted that allowing the suspect accounts “to remain open and active without sufficient questioning was a lapse on the part of the bank.”
Before long, many financiers in Russia and the United States came to see the BoNY case as an anti-Russian witch hunt. As the Russian presidential election of 2000 approached, fighting among different power groups intensified. The country was recovering slowly from the devastating economic crisis of 1998 when Russia defaulted on its national debt. Now politicians tried to capitalize on emerging feelings of inflamed patriotism combined with a sense of grievance against the West for its failure to rush in and help the Russian economy. Even liberal Russian newspapers treated the BoNY scandal as a manifestation of anti-Russian bias.12
The scandal had started with a bang. But after just a few months, it became clear that little would change. Too many interests had too much at stake to stop the hemorrhaging of Russian money. US law enforcement never accused either Galitzine or Gurfinkel of any crime. Natasha, for her part, was angry that BoNY had done nothing to protect her. She spent a month and a half in New York waiting to be questioned about BONY, but nobody was interested in talking to her. Eventually, she resigned and moved to London. Her lawyers in Moscow subsequently sued BoNY, and in the end, the bank agreed to unfreeze her money, benefits, and bonuses—all in all, over a million dollars. But she never got another job.
Still, she didn’t hold a grudge against Lucy. “Lucy was just a fool. She traveled to Russia a lot, saw this crazy amount of money coming and going, and couldn’t resist the temptation,” Natasha told us.13 Then she admitted, “Well, it was our mistake, mine and Galitzine’s—we didn’t watch her.”
After a year and a half of investigation, US federal agents took Lucy Edwards and her husband, Peter Berlin, to District Court in Manhattan. The couple told a federal judge that they helped create a money-laundering scheme that successfully moved billions of dollars out of Russia through a network of front company accounts at the Bank of New York that were controlled by Lucy’s husband. From there, the money went to offshore accounts. The scheme was designed by “a group of small but politically well-connected Russian banks.”14
The couple said the scheme had three main goals: to avoid Russian customs duties on imports, to evade Russian taxes, and to wash the profits of criminal groups through legitimate banks—including the ransom for the young Russian lawyer kidnapped in Moscow. Lucy and her husband admitted that they earned nearly $2 million in due course.
This was evidence of wide-scale state plundering. Yet, ultimately, it had little or no effect on how business between the two countries was done.
Lucy and her husband cooperated with the investigation and pleaded guilty. In 2006 they were sentenced to five years’ probation.15 A year before that, the Bank of New York agreed to pay $38 million in penalties and victim compensation arising from the case of money laundering and fraud.16
In Russia, the scandal ended with a whimper. No one in Moscow was accused of any wrongdoing whatsoever. In 1999 Vladimir Putin, then prime minister, said that Russian law enforcement agencies had investigated the case and could not confirm that Russian money had been laundered through the Bank of New York. As Putin rather cynically explained, “Our senior law enforcement officers met with their American counterparts. But, unfortunately, or fortunately for us, the information that was in the media was never confirmed.”17
In the end, only two people were held responsible for the scheme.
Once the Russian émigrés had pried the door to the American financial market open for Russians, their main concern was to keep that door open. Abiding by the rules, on the other hand, was never a top priority.
It took a good decade for US policy makers to realize just how corrupt and cynical the political system really was that replaced Communist rule in Russia. At least for some, this understanding also entailed an awareness that this corrupt and cynical system had the potential to one day infect the United States.
In September 1999, James A. Leach, chairman of the House Committee on Banking and Financial Services that had held the hearings on Russian money laundering, was struck by the notion that some of the laundered money could have seeped into the American political process. He remarked:
When we look at Russia today and we see the infiltration of former KGB into the financial system, into the ec
onomy, and we wonder what is unique about Russia, because there are other kleptocracies in the world, but one of the unique aspects of Russia today is: A, that it is so large and extraordinary; and B, it is a backward economy in many ways, but it is immensely sophisticated in many other ways, for example, intelligence. The combination of kleptocratic greed, coupled with centralized controls and bureaucratic expertise and coercion of a historical nature is something that the world has never seen before.18
Back in 1999, the American congressman couldn’t know how prescient he was. In the years to come, Russian money would flood into the United States by the billions. Russian oligarchs became investors in America. They sought out, made, and cultivated important political connections. For many years they acted on their own behalf, not the Kremlin’s.
But Russian foreign intelligence was never far behind. And the collapse of the Soviet Union hadn’t changed them much.
CHAPTER 18
SOME HABITS DIE HARD
In the wake of the fall of the Soviet Union, a weighty question hung in the air: What would become of the KGB? The Communist Party no longer existed. It made perfect sense that the KGB—the Communist Party’s most trusted instrument for protecting the regime, both inside and outside the country—would also dissolve or at least change beyond recognition. Thus in the 1990s, under Yeltsin’s democratic government, the KGB’s foreign intelligence apparatus was doomed.
Or was it?
Early on a sunny October morning in 1990, a year before the collapse of the Soviet regime, the head of the KGB’s foreign intelligence, a middle-aged man with neatly combed dark hair and thin, tightly pressed lips, stepped out of his dacha. One of twenty wooden houses in the Yasenevo Forest (Yasenevo means “plenty of ash trees”) just a few miles southwest of Moscow, Leonid Shebarshin’s house was part of a dacha colony situated on the edge of a large compound occupied by the KGB’s foreign intelligence service headquarters.1 These houses were well looked after and furnished with servants to clean the rooms, do laundry, cook meals, and tend the garden.2
This morning Shebarshin took his time as he strolled through the woods on his way to work. Fifty-five years old, sardonic, aloof, and highly ambitious, he had been at his current post—head of the entire Soviet foreign intelligence operation—for just under two years.
It was a lonely, twenty-five-minute walk to his job—a daily routine that gave him a chance to think.3 The living compound was quiet, and the manicured path through the woods felt completely deserted. The security fence encircled such a large area that, here in the woods, it was nowhere to be seen.
Shebarshin spotted an early morning runner on a side path. The man, who was wearing a blue sports suit topped by a motley knitted hat, was waving his arms, doing some kind of gymnastic exercise. Shebarshin recognized him immediately as Vladimir Kryuchkov. Once a protégé of Andropov, Kryuchkov was now the chairman of the entire KGB and Shebarshin’s boss. Kryuchkov’s office was in Lubyanka, in downtown Moscow, but he still held on to his beloved dacha in quiet Yasenevo. Shebarshin bowed and kept a respectful distance; he admired his boss.
Shebarshin also felt that he owed Kryuchkov for the meteoric rise of his own career. When Gorbachev had made Kryuchkov head of the KGB two years earlier, Kryuchkov had in turn tapped Shebarshin to run the KGB’s foreign intelligence.
Shebarshin was a surprising choice. He had spent most of his spy career in the East—India, Pakistan, and Iran—rather than dealing with the Main Adversary, as the United States was known in Lubyanka.
But Kryuchkov felt that Shebarshin’s experience dealing with Afghanistan in the 1980s justified his promotion to the post. As head of the foreign intelligence agency, Shebarshin oversaw roughly twelve thousand people.
After a twenty-minute walk in the woods, Shebarshin approached a checkpoint. The sign by the gate read Science Research Center—the cover name adopted by the KGB’s foreign intelligence service for its forest headquarters when it relocated from Lubyanka in 1972. The guard recognized him, and the iron gates opened noiselessly. Beyond the checkpoint, Shebarshin took a path that led through a grove of maples to a stumpy seven-story concrete building.
It was probably no accident that this compound in the woods reached that particular height. The old CIA headquarters at Langley were also exactly seven stories high, and the KGB’s spies always seemed to have their American counterparts on their minds. Who knows? Maybe this relationship was more emotional than commonly thought. The resemblance was strong enough that within Moscow’s CIA station, people referred to the Yasenevo compound as “the Russian Langley.”4
The seven-story building was only one part of the forest headquarters. Behind it, toward the west, rose a twenty-two-story office high-rise; to the east was a shorter structure with two wings, like the tail of a dove. This swooping building housed shops with discounted prices, a department store, and a clinic; there were two saunas, a swimming pool, several gymnasiums, and multiple tennis courts. All in all, it had the feeling of an exclusive American country club—and if an officer was short on time, a masseuse could be summoned to his office.5
This morning, like every morning on entering the giant lobby, Shebarshin passed beneath the inevitable, stern-faced, granite bust of Vladimir Lenin. It was relatively early—9:00 a.m.—and the corridors were still empty. A private bank of elevators whisked him to the third floor. A duty officer opened the door to the waiting room of Shebarshin’s office, which was inhabited by two very noisy parrots in a birdcage—a gift from colleagues at the Cuban secret services. Their cries drowned out the ticking of a loud electronic clock—also a gift from colleagues, this time from Vietnam.
Everything looked normal and proceeded according to the usual routine. But the second-most powerful man in the KGB was anxious. He entered his office and glanced at the huge table with eight phones on it. Four portraits—Lenin, Dzerzhinsky, Andropov, and Gorbachev—stared down at him from the wall. All four men played crucial roles in the fate of the Soviet secret police; Lenin and Dzerzhinsky created it, and Andropov enlarged its role. But Gorbachev’s new policy of glasnost (“openness”) was undermining the KGB by revealing the truth about Lubyanka’s crimes.
Shebarshin scanned the first reports of the day. One from Berlin contained the depressing news of what he termed the “reprisals” being carried out against former employees of the Stasi—the once powerful and feared East German secret police. In January, angry citizens had stormed the Stasi headquarters in Berlin, and Stasi leaders were jailed. Today’s report said that the newly reunited Germany had just created a new government agency to deal with the Stasi files—a first step toward making the top-secret documents available to the public. Shebarshin shook his head. He didn’t like it at all. His pack of cigarettes was almost empty, but he lit another one. Thinking of his beleaguered German colleagues, he made a mental note to remind the Kremlin of its obligations to old friends.
At the regular afternoon conference that day, Shebarshin looked around. What he saw, sitting before him, were men in their fifties and sixties with tired, nervous faces. These KGB generals were clearly on edge. They described what they saw as failing discipline within Yasenevo—officers had started drinking in their rooms, leaving empty bottles everywhere. There were tensions between senior staff and personnel; a deluge of anonymous letters from agents were full of complaints about their superiors.
Shebarshin knew that the political climate in the country was changing, and he understood that the KGB was under attack. All the people in his office that day were saying the same thing in one way or another: they were not sure the Kremlin still needed them or that it would continue to protect them. That’s why people were quitting. Now he had more bad news for them: Gorbachev was supportive of the KGB but would not act for its support. “We need to lobby hard in parliament and the journalistic corps, and with civic organizations,” he told his subordinates.6 In other words, the KGB could not count on the Kremlin anymore. It would have to find a way to protect itself.
That
idea was groundbreaking. The KGB had always been a party instrument, its role to serve as the Communist Party’s advance regiment. And it had always been completely under party control: the party presided over every KGB section, department, and division. But that spring, in March of 1990, the Congress of People’s Deputies of the Soviet Union had changed the Soviet Constitution, removing the article pronouncing the Communist Party the leading political force in the country. The KGB was suddenly and simultaneously left without a boss, protector, and supervisor.
Shebarshin was working on a solution. He shared his idea about what his people in Yasenevo should do in new circumstances. “The Plan of Action should be prepared,”7 he explained. To save itself, foreign intelligence should act on its own, independently from the KGB in Lubyanka. To implement this plan of action, Shebarshin chose the department called Service A.
Service A usually dealt with disinformation. One of its main tasks was to conduct “active measures”—that is to say, to spread fake news made up by the KGB around the world. As Shebarshin described it, “Service A generates and formulates specific ideas, produces false papers, publishes literature and media reports authored by dummy authors.”
Shebarshin had come to think that Yasenevo could be saved only by deceiving the public—in other words, by applying at home the methods that the KGB’s Service A had been using abroad for decades.
Shebarshin knew and trusted Service A: “several dozen experienced and intelligent people” as he put it. Service A was also led by an old friend, a man he had shared a room with while at the KGB spy school and who he trusted to this day.8 Furthermore, Service A was one of the most competent and industrious units in Yasenevo.
“The ideology of our active measures during the Cold War was simple—to inflict maximum political and moral damage on our opponents,” Shebarshin later wrote in his memoirs.9 If this sounds more like the description of weapons capability than of the objective of an intelligence unit, it is for good reason: Shebarshin and others saw foreign intelligence as exactly that, a weapon. And in October 1990, Shebarshin decided to redirect this weapon and aim it at the Russian people.
The Compatriots Page 15