Chapter 3

While previously confined to the Arab peninsula and to
south and east Asia, this mode of traditional banking
became truly international in the 1970's, following the
unprecedented flow of wealth to many Moslem nations
due to the oil shocks and the emergence of the Asian
tigers. Islamic banks joined forces with corporations,
multinationals, and banks in the West to finance oil
exploration and drilling, mining, and agribusiness. Many
leading law firms in the West (such as Norton Rose,
Freshfields, Clyde and Co. and Clifford Chance) have
"Islamic Finance" teams which are familiar with Islam-
compatible commercial contracts.

II. HAWALA AND TERRORISM
Recent anti-terrorist legislation in the US and the UK
allows government agencies to regularly supervise and
inspect businesses that are suspected of being a front for
the ''Hawala'' banking system, makes it a crime to
smuggle more than $10,000 in cash across USA borders,
and empowers the Treasury secretary (and its Financial
Crimes Enforcement Network - FinCEN) to tighten
record-keeping and reporting rules for banks and financial
institutions based in the USA. A new inter-agency Foreign
Terrorist Asset Tracking Center (FTAT) was set up. A
1993 moribund proposed law requiring US-based
Halawadar to register and to report suspicious transactions
may be revived. These relatively radical measures reflect
the belief that the al-Qaida network of Osama bin Laden
uses the Hawala system to raise and move funds across
national borders. A Hawaladar in Pakistan (Dihab Shill)
was identified as the financier in the attacks on the
American embassies in Kenya and Tanzania in 1998.

But the USA is not the only country to face terrorism
financed by Hawala networks.

In mid-2001, the Delhi police, the Indian government's
Enforcement Directorate (ED), and the Military
Intelligence (MI) arrested six Jammu Kashmir Islamic
Front (JKIF) terrorists. The arrests led to the exposure of
an enormous web of Hawala institutions in Delhi, aided
and abetted, some say, by the ISI (Inter Services
Intelligence, Pakistan's security services). The Hawala
network was used to funnel money to terrorist groups in
the disputed Kashmir Valley.

Luckily, the common perception that Hawala financing is
paperless is wrong. The transfer of information regarding
the funds often leaves digital (though heavily encrypted)
trails. Couriers and "contract memorizers", gold dealers,
commodity merchants, transporters, and moneylenders
can be apprehended and interrogated. Written, physical,
letters are still the favourite mode of communication
among small and medium Hawaladars, who also
invariably resort to extremely detailed single entry
bookkeeping. And the sudden appearance and
disappearance of funds in bank accounts still have to be
explained. Moreover, the sheer scale of the amounts
involved entails the collaboration of off shore banks and
more established financial institutions in the West. Such
flows of funds affect the local money markets in Asia and
are instantaneously reflected in interest rates charged to
frequent borrowers, such as wholesalers. Spending and
consumption patterns change discernibly after such
influxes. Most of the money ends up in prime world banks
behind flimsy business facades. Hackers in Germany
claimed (without providing proof) to have infiltrated
Hawala-related bank accounts.

The problem is that banks and financial institutions - and
not only in dodgy offshore havens ("black holes" in the
lingo) - clam up and refuse to divulge information about
their clients. Banking is largely a matter of fragile trust
between bank and customer and tight secrecy. Bankers are
reluctant to undermine either. Banks use mainframe
computers which can rarely be hacked through cyberspace
and can be compromised only physically in close co-
operation with insiders. The shadier the bank - the more
formidable its digital defenses. The use of numbered
accounts (outlawed in Austria, for instance, only recently)
and pseudonyms (still possible in Lichtenstein)
complicates matters. Bin Laden's accounts are unlikely to
bear his name. He has collaborators.

Hawala networks are often used to launder money, or to
evade taxes. Even when employed for legitimate
purposes, to diversify the risk involved in the transfer of
large sums, Hawaladars apply techniques borrowed from
money laundering. Deposits are fragmented and wired to
hundreds of banks the world over ("starburst").

Sometimes, the money ends up in the account of origin
("boomerang").

Hence the focus on payment clearing and settlement
systems. Most countries have only one such system, the
repository of data regarding all banking (and most non-
banking) transactions in the country. Yet, even this is a
partial solution. Most national systems maintain records
for 6-12 months, private settlement and clearing systems
for even less.

Yet, the crux of the problem is not the Hawala or the
Hawaladars. The corrupt and inept governments of Asia
are to blame for not regulating their banking systems, for
over-regulating everything else, for not fostering
competition, for throwing public money at bad debts and
at worse borrowers, for over-taxing, for robbing people of
their life savings through capital controls, for tearing at
the delicate fabric of trust between customer and bank
(Pakistan, for instance, froze all foreign exchange
accounts two years ago). Perhaps if Asia had reasonably
expedient, reasonably priced, reasonably regulated, user-
friendly banks - Osama bin Laden would have found it
impossible to finance his mischief so invisibly.

V. Straf - Corruption in Central and Eastern Europe

The three policemen barked "straf", "straf" in unison. It
was a Russianized version of the German word for "fine"
and a euphemism for bribe. I and my fianće were
stranded in an empty ally at the heart of Moscow,
physically encircled by these young bullies, an ominous
propinquity. They held my passport ransom and began to
drag me to a police station nearby. We paid.

To do the fashionable thing and to hold the moral high
ground is rare. Yet, denouncing corruption and fighting it
satisfies both conditions. Such hectoring is usually the
preserve of well-heeled bureaucrats, driving utility
vehicles and banging away at wireless laptops. The
General Manager of the IMF makes 400,000 US dollars a
year, tax-free, and perks. This is the equivalent of 2,300
(!) monthly salaries of a civil servant in Macedonia - or
7,000 monthly salaries of a teacher or a doctor in
Yugoslavia, Moldova, Belarus, or Albania. He flies only
first class and each one of his air tickets is worth the bi-
annual income of a Macedonian factory worker. His
shareholders - among them poor and developing countries
- are forced to cough up these exorbitant fees and to
finance the luxurious lifestyle of the likes of Kohler and
Wolfensohn. And then they are made to listen to the IMF
lecture them on belt tightening and how uncompetitive
their economies are due to their expensive labour force.

To me, such a double standard is the epitome of
corruption. Organizations such as the IMF and World
Bank will never be possessed of a shred of moral
authority in these parts of the world unless and until they
forgo their conspicuous consumption.

Yet, corruption is not a monolithic practice. Nor are its
outcomes universally deplorable or damaging. One would
do best to adopt a utilitarian and discerning approach to it.

The advent of moral relativism has taught us that "right"
and "wrong" are flexible, context dependent and culture-
sensitive yardsticks.

What amounts to venality in one culture (Slovenia) is
considered no more than gregariousness or hospitality in
another (Macedonia).

Moreover, corruption is often "imported" by
multinationals, foreign investors, and expats. It is
introduced by them to all levels of governments, often in
order to expedite matters or secure a beneficial outcome.

To eradicate corruption, one must tackle both giver and
taker.

Thus, we are better off asking "cui bono" than "is it the
right thing to do". Phenomenologically, "corruption" is a
common - and misleading - label for a group of
behaviours. One of the following criteria must apply:
(a) The withholding of a service, information, or goods
that, by law, and by right, should have been provided or
divulged.

To have a phone installed in Russia one must openly bribe
the installer (according to a rather rigid tariff). In many of
the former republics of Yugoslavia, it is impossible to
obtain statistics or other data (the salaries of senior public
officeholders, for instance) without resorting to kickbacks.
(b) The provision of a service, information, or goods that,
by law, and by right, should not have been provided or
divulged.

Tenders in the Czech Republic are often won through
bribery. The botched privatizations all over the former
Eastern Bloc constitute a massive transfer of wealth to
select members of a nomenklatura. Licences and
concessions are often granted in Bulgaria and the rest of
the Balkan as means of securing political allegiance or
paying off old political "debts".
(c) That the withholding or the provision of said service,
information, or goods are in the power of the withholder
or the provider to withhold or to provide AND That the
withholding or the provision of said service, information,
or goods constitute an integral and substantial part of the
authority or the function of the withholder or the provider.

The post-communist countries in transition are a
dichotomous lot. On the one hand, they are intensely and
stiflingly bureaucratic. On the other hand, none of the
institutions functions properly or lawfully. While these
countries are LEGALISTIC - they are never LAWFUL.

This fuzziness allows officials in all ranks to usurp
authority, to trade favours, to forge illegal consensus and
to dodge criticism and accountability. There is a direct
line between lack of transparency and venality. Eran
Fraenkel of Search for Common Ground in Macedonia
has coined the phrase "ambient corruption" to capture this
complex of features.
(d) That the service, information, or goods that are
provided or divulged are provided or divulged against a
benefit or the promise of a benefit from the recipient and
as a result of the receipt of this specific benefit or the
promise to receive such benefit.

It is wrong to assume that corruption is necessarily, or
even mostly, monetary or pecuniary. Corruption is built
on mutual expectations. The reasonable expectation of a
future benefit is, in itself, a benefit. Access, influence
peddling, property rights, exclusivity, licences, permits, a
job, a recommendation - all constitute benefits.
(e) That the service, information, or goods that are
withheld are withheld because no benefit was provided or
promised by the recipient.

Even then, in CEE, we can distinguish between a few
types of corrupt and venal behaviours in accordance with
their OUTCOMES (utilities):
(1) Income Supplement
Corrupt actions whose sole outcome is the supplementing
of the income of the provider without affecting the "real
world" in any manner.

Though the perception of corruption itself is a negative
outcome - it is so only when corruption does not
constitute an acceptable and normative part of the playing
field. When corruption becomes institutionalised - it also
becomes predictable and is easily and seamlessly
incorporated into decision making processes of all
economic players and moral agents. They develop "by-
passes" and "techniques" which allow them to restore an
efficient market equilibrium. In a way, all-pervasive
corruption is transparent and, thus, a form of taxation.

This is the most common form of corruption exercised by
low and mid-ranking civil servants, party hacks and
municipal politicians throughout the CEE.

More than avarice, the motivating force here is sheer
survival. The acts of corruption are repetitive, structured
and in strict accordance with an un-written tariff and code
of conduct.
(2) Acceleration Fees
Corrupt practices whose sole outcome is to
ACCELERATE decision making, the provision of goods
and services or the divulging of information. None of the
outcomes or the utility functions are altered. Only the
speed of the economic dynamics is altered. This kind of
corruption is actually economically BENEFICIAL. It is a
limited transfer of wealth (or tax) which increases
efficiency. This is not to say that bureaucracies and venal
officialdoms, over-regulation and intrusive political
involvement in the workings of the marketplace are good
(efficient) things. They are not. But if the choice is
between a slow, obstructive and passive-aggressive civil
service and a more forthcoming and accommodating one
(the result of bribery) - the latter is preferable.

Acceleration fees are collected mostly by mid-ranking
bureaucrats and middle rung decision makers in both the
political echelons and the civil service.
(3) Decision Altering Fees
This is where the line is crossed from the point of view of
aggregate utility. When bribes and promises of bribes
actually alter outcomes in the real world - a less than
optimal allocation of resources and distribution of means
of production is obtained. The result is a fall in the general
level of production. The many is hurt by the few. The
economy is skewed and economic outcomes are distorted.

This kind of corruption should be uprooted on utilitarian
grounds as well as on moral ones.
(4) Subversive Outcomes
Some corrupt collusions lead to the subversion of the flow
of information within a society or an economic unit.

Wrong information often leads to disastrous outcomes.

Consider a medical doctor or an civil engineer who bribed
their way into obtaining a professional diploma.

Human lives are at stake. The wrong information, in this
case is the professional validity of the diplomas granted
and the scholarship (knowledge) that such certificates
stand for. But the outcomes are lost lives. This kind of
corruption, of course, is by far the most damaging.

Unfortunately, it is widespread in CEE. It is proof of the
collapse of the social treaty, of social solidarity and of the
fraying of the social fabric.

No Western country accepts CEE diplomas without
further accreditation, studies and examinations. Many
"medical doctors" and "engineers" who emigrated to
Israel from Russia and the former republics of the USSR -
were suspiciously deficient professionally. Israel was
forced to re-educate them prior to granting them a licence
to practice locally.
(5) Reallocation Fees
Benefits paid (mainly to politicians and political decision
makers) in order to affect the allocation of economic
resources and material wealth or the rights thereto.

Concessions, licences, permits, assets privatised, tenders
awarded are all subject to reallocation fees. Here the
damage is materially enormous (and visible) but, because
it is widespread, it is "diluted" in individual terms. Still, it
is often irreversible (like when a sold asset is purposefully
under-valued) and pernicious. a factory sold to avaricious
and criminally minded managers is likely to collapse and
leave its workers unemployed.

Corruption pervades daily life even in the prim and often
hectoring countries of the West. It is a win-win game (as
far as Game Theory goes) - hence its attraction. We are all
corrupt to varying degrees. But it is wrong and wasteful -
really, counterproductive - to fight corruption in CEE in a
wide front and indiscriminately. It is the kind of
corruption whose evil outcomes outweigh its benefits that
should be fought. This fine (and blurred) distinction is too
often lost on decision makers and law enforcement
agencies in both East and West.

ERADICATING CORRUPTION
An effective program to eradicate corruption must include
the following elements:
1. Egregiously corrupt, high-profile, public figures,
multinationals, and institutions (domestic and
foreign) must be singled out for harsh (legal)
treatment and thus demonstrate that no one is
above the law and that crime does not pay.
2. All international aid, credits, and investments must
be conditioned upon a clear, performance-based,
plan to reduce corruption levels and intensity.

Such a plan should be monitored and revised as
needed. Corruption retards development and
produces instability by undermining the
credentials of democracy, state institutions, and
the political class. Reduced corruption is,
therefore, a major target of economic and
institutional developmental.
3. Corruption cannot be reduced only by punitive
measures. A system of incentives to avoid
corruption must be established. Such incentives
should include a higher pay, the fostering of civic
pride, educational campaigns, "good behaviour"
bonuses, alternative income and pension plans,
and so on.
4. Opportunities to be corrupt should be minimized
by liberalizing and deregulating the economy. Red
tape should be minimized, licensing abolished,
international trade freed, capital controls
eliminated, competition introduced, monopolies
broken, transparent public tendering be made
mandatory, freedom of information enshrined, the
media should be directly supported by the
international community, and so on. Deregulation
should be a developmental target integral to every
program of international aid, investment, or credit
provision.
5. Corruption is a symptom of systemic institutional
failure. Corruption guarantees efficiency and
favourable outcomes. The strengthening of
institutions is of critical importance. The police,
the customs, the courts, the government, its
agencies, the tax authorities, the state owned
media - all must be subjected to a massive
overhaul. Such a process may require foreign
management and supervision for a limited period
of time. It most probably would entail the
replacement of most of the current - irredeemably
corrupt - personnel. It would need to be open to
public scrutiny.
6. Corruption is a symptom of an all-pervasive sense
of helplessness. The citizen (or investor, or firm)
feels dwarfed by the overwhelming and capricious
powers of the state. It is through corruption and
venality that the balance is restored. To minimize
this imbalance, potential participants in corrupt
dealings must be made to feel that they are real
and effective stakeholders in their societies. A
process of public debate coupled with
transparency and the establishment of just
distributive mechanisms will go a long way
towards rendering corruption obsolete.

VI. The Kleptocracies of the East

The process of transition from communism to capitalism
was largely hijacked either by outright criminals in
budding outfits of organized crime - or by pernicious and
all-pervasive kleptocracies: politicians and political
parties bent on looting the state and suppressing the
opposition, sometimes fatally.

In the past 16 years, industrial production in the
economies in transition tumbled in real terms by more
than 60 percent. The monthly salary in the poorer bits
equals the daily wage of a skilled German industrial
worker, or one seventh the European Union's average.

Gross domestic product per capita is less than one third
the EU's. Infrastructure, internal and export markets, state
institutions - all crumbled with dizzying speed.

In some countries - not the least Russia - privatization
amounted to a mass transfer of assets to cronies and
insiders, often well-connected members of the communist
nomenclature: managers, members of the security services
and other penumbral figures. Laws were passed and
institutions tweaked to reflect the special interests of these
groupings.
"Classical" forms of crime flourished throughout the
benighted region. Prostitution, gambling, drugs,
smuggling, kidnapping, organ trafficking and other
varieties of delinquency yielded to their perpetrators
billions of dollars annually. In the impoverished
economies of the east, these fantastic revenues - laundered
through off shore accounts - were leveraged by criminals
to garner political favors, to buy into legitimate businesses
and to infiltrate civil society.

None of this is new to Western publics. Rogues and
"robber barons" have always doubled as entrepreneurs.

The oil, gaming and railways industries in America, for
instance, owe their existence to dubious personas and
questionable practices. Well into the 17th century, the
British sovereign maintained a monopoly on chartering
businesses and awarded the coveted licenses to loyal
servants and obsequious sycophants.

Still, the ubiquity of crime in east Europe and its reach are
unprecedented in European annals. In the void-like
interregnum between centrally planned and free market
economies only criminals, politicians, managers, and
employees of the security services were positioned to
benefit from the upheaval.

At the outset of transition, the underworld constituted an
embryonic private sector, replete with international
networks of contacts, cross-border experience, capital
agglomeration and wealth formation, sources of venture
(risk) capital, an entrepreneurial spirit, and a diversified
portfolio of investments and revenue generating assets.

Criminals were used to private sector practices: price
signals, competition, joint venturing, and third party
dispute settlement.

Crime - alone among all economic activities in communist
societies - obeyed the laws of the free market. Criminals
had to be entrepreneurial and profitable to survive. Their
instincts sharpened by - often lethal - competition, they
were never corrupted by central planning.

Deprived of access to state largesse, criminals invested
their own capital in efficiently-run small to medium size
enterprises. Attuned to the needs and wishes of their
customers, criminals engaged in primitive forms of
market research, through neighborhood and grassroots
"pollsters" and "activists". They responded with agility
and in real time to changes in the patterns of supply and
demand by altering their product mix and their pricing.

They have always been pioneers of bleeding-edge
technologies.

Criminals are effective organizers and managers. They
excel at enforcing workplace discipline with irresistible
incentives and irreversible disincentives, at setting targets
and at networking. The superior felonious echelons are
upwardly mobile and have a clear career path. Every
management fad - from territorially exclusive franchises
to "stock" options - has been invented by criminals long
before they triumphed in the boardroom.

In east Europe, criminals on all levels, from the organized
to the petty, often substituted for the dysfunctional, or
ideologically hidebound organs of the state. Consider the
dispensation of justice. The criminal code of conduct and
court system replaced the compromised and lethargic
official judiciary. Debt collectors and enforcers stood in
for venal and incompetent police forces.

Crime is a growth industry and sustains hordes of
professionals: accountants and lawyers, forgers and cross
border guides, weapons experts and bankers, mechanics
and hit-men. Expertise, know-how and acumen, amassed
over centuries of practice, are taught in the criminal
universities known as penitentiaries: roads less traveled,
countries more lenient, passports to be bought, sold, or
forged, how-to manuals, goods and services on offer and
demand.

Profit margins in crime are outlandish and lead to feverish
wealth accumulation. The banking system is used both to
stash the proceeds and to launder them. Tax havens, off
shore financial institutions and money couriers - all form
part of a global web. Thus cleansed and rendered
untraceable, the money is invested in legitimate activities.

In some countries - especially on the drug path, or on the
trail of white slavery - crime is a major engine of
economic growth.

As opposed to the visible sectors of the east's demonetized
economies, criminal enterprises never run out of liquidity
and thus are always keen to invest. Moreover, crime is
international and cosmopolitan. It is accustomed to
sophisticated export-import transactions.

Many criminals - as opposed to the vast majority of their
countrymen - are polyglottal, well-traveled, aware of
world prices, the international financial system and
demand and supply in various markets. They are
experienced negotiators. In short: criminals are well-
heeled international businessmen, well-connected both
abroad and with the various indigenous elites.

The Wild East in Europe is often compared to the Wild
West in America a century or so ago. The Russian
oligarchs, goes the soothing analogy, are local versions of
Morgan, Rockefeller, Pullman and Vanderbilt. But this
affinity is spurious. the United States always had a civic
culture with civic values and an aspiration to, ultimately,
create a harmonious and benevolent civic society.

Criminality was regarded as a shameful stepping stone on
the way to an orderly community of learned, civilized,
law-abiding citizens.

This cannot be said about Russia, for instance. The
criminal there is, if anything, admired and emulated. Even
the language of legal business in countries in transition is
suffused with underworld parlance. There is no - and
never was - a civic tradition in the countries of eastern
Europe, a Bill of Rights, a veritable Constitution, a
modicum of self rule, a true abolition of classes and
nomenclatures. These territories are accustomed to being
governed by paranoiac and murderous tyrants akin to the
current crop of delinquents. That some criminals are
members of the new political, financial and industrial
elites (and vice versa) - tends to support this long-rooted
association.

In all the countries of the region, politicians and managers
abuse the state and its simulacrum institutions in close
symbiosis with felons. Patronage and sinecures extend to
collaborating lawbreakers. Veritable villains gain access
to state owned assets and resources in a cycle of money
laundering. Law enforcement agencies and the courts are
"encouraged" to turn a blind eye, or even to help criminals
eliminate internal and external competition in their turf.

Criminals, in return, serve as the "long and anonymous
arm" of politicians, obtaining for them illicit goods, or
providing "black" services. Corruption often flows
through criminal channels or via the mediation and
conduit of delinquents. Within the shared sphere of the
informal economy, assets are shifted among these
economic players. Both players oppose attempts at reform
and transparency and encourage - even engender -
nationalism and racism, paranoias and grievances to
recruit foot soldiers.

Fortunately, there is the irrepressible urge to become
legitimate. Politicians, who grope for a new ideological
cover for their opportunism, partner with legitimacy-
seeking, established crime lords. Both groups benefit from
a swelling economic pie. They fight against other, less
successful, criminals, who wish to persist in their old
ways and, thus, hamper economic growth. The battle is
never won but at least it succeeds to firmly drive crime
where it belongs: underground.

VII. FIMACO - Russia's Missing Billions

Russia's Audit Chamber - with the help of the Swiss
authorities and their host of dedicated investigators - may
be about to solve a long standing mystery. An
announcement by the Prosecutor's General Office is said
to be imminent. The highest echelons of the Yeltsin
entourage - perhaps even Yeltsin himself - may be
implicated - or exonerated. A Russian team has been
spending the better part of the last two months poring over
documents and interviewing witnesses in Switzerland,
France, Italy, and other European countries.

About $4.8 billion of IMF funds are alleged to have gone
amiss during the implosion of the Russian financial
markets in August 1998. They were supposed to prop up
the banking system (especially SBS-Agro) and the ailing
and sharply devalued ruble. Instead, they ended up in the
bank accounts of obscure corporations - and, then,
incredibly, vanished into thin air.

The person in charge of the funds in 1998 was none other
than Mikhail Kasyanov, Russia's current Prime Minister -
at the time, Deputy Minister of Finance for External Debt.

His signature on all foreign exchange transactions - even
those handled by the central bank - was mandatory. In
July 2000, he was flatly accused by the Italian daily, La
Reppublica, of authorizing the diversion of the disputed
funds.

Following public charges made by US Treasury Secretary
Robert Rubin as early as March 1999, both Russian and
American media delved deeply over the years into the
affair. Communist Duma Deputy Viktor Ilyukhin jumped
on the bandwagon citing an obscure "trustworthy foreign
source" to substantiate his indictment of Kremlin cronies
and oligarchs contained in an open letter to the Prosecutor
General, Yuri Skuratov.

The money trail from the Federal Reserve Bank of New
York to Swiss and German subsidiaries of the Russian
central Bank was comprehensively reconstructed. Still,
the former Chairman of the central bank, Sergei Dubinin,
called Ilyukhin's allegations and the ensuing Swiss
investigations - "a black PR campaign ... a lie".

Others pointed to an outlandish coincidence: the ruble
collapsed twice in Russia's post-Communist annals. Once,
in 1994, when Dubinin was Minister of Finance and was
forced to resign. The second time was in 1998, when
Dubinin was governor of the central bank and was, again,
ousted.

Dubinin himself seems to be unable to make up his mind.

In one interview he says that IMF funds were used to prop
up the ruble - in others, that they went into "the national
pot" (i.e., the Ministry of Finance, to cover a budgetary
shortfall).

The Chairman of the Federation Council at the time,
Yegor Stroev, appointed an investigative committee in
1999. Its report remains classified but Stroev confirmed
that IMF funds were embezzled in the wake of the 1998
forced devaluation of the ruble.

This conclusion was weakly disowned by Eleonora
Mitrofanova, an auditor within the Duma's Audit
Chamber who said that they discovered nothing "strictly
illegal" - though, incongruously, she accused the central
bank of suppressing the Chamber's damning report. The
Chairman of the Chamber of Accounts, Khachim
Karmokov, quoted by PwC, said that "the audits
performed by the Chamber revealed no serious procedural
breaches in the bank's performance".

But Nikolai Gonchar, a Duma Deputy and member of its
Budget Committee, came close to branding both as liars
when he said that he read a copy of the Audit Chamber
report and that it found that central bank funds were
siphoned off to commercial accounts in foreign banks.

The Moscow Times cited a second Audit Chamber report
which revealed that the central bank was simultaneously
selling dollars for rubles and extending ruble loans to a
few well-connected commercial banks, thus subsidizing
their dollar purchases. The central bank went as far as
printing rubles to fuel this lucrative arbitrage. The dollars
came from IMF disbursements.

Radio Free Europe/Radio Liberty, based on its own
sources and an article in the Russian weekly "Novaya
Gazeta", claims that half the money was almost instantly
diverted to shell companies in Sydney and London. The
other half was mostly transferred to the Bank of New
York and to Credit Suisse.

Why were additional IMF funds transferred to a chaotic
Russia, despite warnings by many and a testimony by a
Russian official that previous tranches were squandered?
Moreover, why was the money sent to the Central Bank,
then embroiled in a growing scandal over the
manipulation of treasury bills, known as GKO's and other
debt instruments, the OFZ's - and not to the Ministry of
Finance, the beneficiary of all prior transfers? The central
bank did act as MinFin's agent - but circumstances were
unusual, to say the least.

There isn't enough to connect the IMF funds with the
money laundering affair that engulfed the Bank of New
York a year later to the day, in August 1999 - though
several of the personalities straddled the divide between
the bank and its clients. Swiss efforts to establish a firm
linkage failed as did their attempt to implicate several
banks in the Italian canton of Ticino. The Swiss - in
collaboration with half a dozen national investigation
bureaus, including the FBI - were more successful in Italy
proper, where they were able to apprehend a few dozen
suspects in an elaborate undercover operation.