How ‘dirty money’ from Russia flooded into the UK – and where it went – The Guardian
It’s a dreamy English view. From the top of Glastonbury Tor, you can see green fields and the Somerset levels. Below is a school.
There is a sports field, boarding houses and pleasant private woods. There is a golf course and a swimming pool. This is Millfield, one of Britain’s most prestigious and expensive schools.
Most parents who send children to Millfield are rich. Some work in the City; others are wealthy foreigners attracted by the lure of a UK education. In September 2011, the school sent a bill to the father of a 12-year-old pupil. The pupil came from Russia. The bill for a term’s fees came to £10,943.
What happened next was not – on the face of it – unusual. An anonymous shell company was used to pay the invoice. The company’s name was Valemont Properties Ltd. It was registered at Companies House in London and filed regular if un-illuminating tax returns. It had directors.
And it was solvent: the cash from Valemont went via a Latvian bank to Millfield’s account with Lloyds TSB in Street, the sleepy village where Millfield’s senior school is based. (The junior or prep school is on a separate site outside Glastonbury.) There was nothing here to trouble the school bursar, who did nothing wrong.
The bursar could not have known that Valemont’s activities had come under scrutiny from an inquiry probing an audacious international money-laundering scheme.
Investigators in eastern Europe have been studying payments from dozens of companies totalling $20bn-plus. The true figure could be $80bn.
The authorities have uncovered a money trail that snakes from Russia to the Baltic states – and from there to Europe and America.
Now we can reveal Britain’s role in this scheme – and how vast sums of potentially tainted money flowed into and out of western banks, including HSBC and the Royal Bank of Scotland, without raising any alarm.
Which raises an obvious question: How?
The ingenious scheme has its origins in Russia. Put simply, it was a way for Kremlin insiders and other well-known Russians to shift cash abroad.
It was discovered in 2013 and the first details emerged in public through the Organized Crime and Corruption Reporting Project (OCCRP), a highly respected independent collective of investigative reporters, which is part-funded by the US Department of State. The OCCRP calls the scheme “the Global Laundromat”.
It features Russian banks, Moldovan oligarchs, and a network of fake UK companies fronted by fake or “nominee” directors, many of them in Ukraine. It had impeccable Moscow connections. Vladimir Putin’s cousin Igor sat on the board of a bank which held accounts that laundered billions.
Before it was rumbled, the scheme was one of several mafia operations that have allowed the rich to spirit money out of the country to spend in the west.
This is not done on a small scale; according to a study by Deutsche Bank, £138bn has flowed into the UK in recent years. A “considerable chunk” of that came from Russia – whose economy is overrun by organised crime.
Money-laundering schemes are extremely lucrative, scrapped over by rival groups within the Kremlin’s ruling power structures.
“Money laundering is the biggest business in Russia,” one former Moscow banker, now living in exile, explained. “You steal from the budget. You’ve got this dirty money. You have to do something with it.”
The banker added: “The whole Russian economy is dying. Bribes are the biggest part of it. People who provide money-laundering services have a lot of political influence.”
Those familiar with this world say a scheme like the Laundromat could only function with support from the top.
So, how did it work?
Shell firms and ‘loans’
Laundromat was big – and at the heart of it was a financial sleight of hand.
Documents seen by the Guardian suggest the scheme began in October 2010 with an apparently innocuous deal.
Valemont signed an agreement saying it had “loaned” $180m to another UK shell company, Seabon Limited. Prosecutors say the loan was not real.
As part of this paper agreement, two Russian companies – OOO Laita M and OOO Spartak – offered to secure the loan.
Documents show the deal was signed by a Moldovan citizen, Andrei Abramov, an airport worker who says he was persuaded to do so for $100 and the promise of a job that never materialised.
First, Valemont accused Seabon of failing to pay back the money – and launched a court action in Moldova to “recover” the funds.
In Moldova, judges were persuaded to certify the authenticity of the debt – making it legally enforceable. (The courts were sometimes shown fake notes between companies.)
The Russian companies then transferred $180m of real money to an account at Moldova’s Moldindconbank. From there, the cash was sent on to an account at Trasta Komercbanka, a bank in the Latvian capital, Riga.
With these transfers, the money had undergone a miraculous transformation.
From Russia, it was now inside the EU, properly and legally. From Riga, it could go anywhere.
It did. Law enforcement officers in Latvia and Moldova subsequently discovered an omni-tentacled trail, involving 96 countries and about 70,000 banking transactions.
The cash from Valemont and dozens of companies like it went to major territories such as the US, China, Germany and France. And to smaller ones: Denmark, Slovenia, South Korea, Taiwan and Finland.
Most of the billions vanished into a twilight world of offshore companies. The scheme cleverly mingled fake transactions with real ones. Some of it was spent on luxury items: furs, diamonds, Swiss watches, German industrial equipment, fashionable children’s clothes, plus hotel suites in Alpine ski resorts used by Russian oligarchs. It also went to a pro-Kremlin thinktank in Poland.
The Laundromat ran between 2010 and 2014. It was one of the most successful money-laundering frauds ever. Nobody in Britain noticed.
Certainly not UK banks, it seems, which are supposed to have sophisticated anti-money-laundering processes to highlight suspicious transactions.
Two American banks refused to accept the transfers on the grounds that they looked suspicious.
Yet all of the UK’s major high street banks – including HSBC, Lloyds, NatWest and Royal Bank of Scotland – allowed more than $738m to pass through.
HSBC, via its UK and foreign branches, processed the most – $545.3m . RBS, which is still mostly owned by UK taxpayers, processed $113.1m.
Six companies identified by Moldovan police as vehicles for Laundromat money transferred $110.5m to a firm managed in the Isle of Man, RF Procurement Ltd.
It is unclear who actually owns RF Procurement – not to be confused with another firm of the same name, based in Hemel Hempstead.
Alexander McNee, a group director at Boston Ltd, based in Douglas, is a nominee director of RF Procurement. Boston Ltd offers fiduciary services to corporate and private clients around the world and acts as their registered agents in corporate matters. McNee should know the name of the beneficial owner.
But he would not disclose this information to the Guardian, citing client confidentiality. However, McNee agreed to forward questions to the owner about money RF Procurement received from 104 transactions.
The company declined to comment about the transfers or what it knew of the Global Laundromat.
In a statement, the company said: “RF Procurement Limited is an international trading company which sources its products predominantly from the Far East from well-known and reputable suppliers and sells to customers who distribute the products in, amongst others, the Russian Federation.
“We understand our suppliers and customers also exercise their own due diligence when selecting trading partners. We take compliance and KYC [know your customer] extremely seriously and have a robust system of protocols and procedures to ensure the highest standards of care are maintained.”
McNee said Boston complied with legislation covering both anti-money laundering and countering the financing of terrorism.
The Isle of Man regulator is reviewing the transactions.
The documents obtained by the OCCRP and Novaya Gazeta and shared with the Guardian show how closely the UK and the Laundromat scheme were intertwined – and how billions of dollars passed through UK-registered companies.
The money initially flowed through 21 companies – most of them set up and registered in the UK.
They had addresses in London, Birmingham, Edinburgh, Glasgowand North Yorkshire. Their owners or ultimate beneficiaries were invisible. Management agents supplied “nominee” directors.
Often, these agents were located in far-away territories (Belize) or on obscure volcanic atolls (the Marshall Islands).
As the authorities began to unravel the scheme, many Laundromat companies were quietly liquidated in late 2015.
The Russian boy who studied at Millfield comes from a wealthy family.
On social media, he has posted photos of himself driving expensive cars and with designer watches.
He hangs out in Paris, Moscow and St Petersburg. There are family holidays to Dubai, South Africa and Tuscany.
All paid for, presumably, by his father, Vadim Zadorozhny, a successful businessman, one of many upwardly mobile Russians who have prospered in the Putin era.
Zadorozhny started in the antiques trade before moving into real estate and now has a hotel and several restaurants. He also owns one of Russia’s biggest private museums, which houses a hundred classic cars, among them the bullet-proof limousines used by Stalin and Yeltsin.
There are tanks, fighter planes, missile launchers, and pieces of Soviet military hardware. In a 2015 interview, Zadorozhny said he had built his collection for patriotic reasons “The biggest deficit in our country is pride in Russia,” he said.
His son’s school fees, for one term at least, were paid by Valemont, the company at the centre of an ongoing police investigation into the Laundromat.
The Guardian has seen a bank invoice, dated 1 September 2011, which reads: “Payment for studies.”
What Zadorozhny knew of the Laundromat, or what role he played in Valemont – if any, is unclear.
The Guardian approached him weeks ago, but his assistant Alexandra Valentinovna said he would not comment.
Millfield admitted it had first been made aware of the allegations about Valemont three years ago – and had referred the matter to the National Crime Agency.
“The payment was made from a UK bank account and did not appear in any way suspicious at the time,” Millfield said.
“Since 2014 we have reviewed and strengthened our anti-money-laundering procedures, in addition to the action we took in reporting the matter to the National Crime Agency. We abide by all legislation and would of course immediately report anything suspicious to the authorities.”
Diamonds and furs
Many UK retailers were unwittingly caught up in the scheme.
Some of the money from accounts linked to the Laundromat went on luxury items – including diamonds, leather jackets, perfume, sous-vide ovens, home cinema equipment and chandeliers.
It is not always clear who is spending the money. But the trail goes from fancy Chelsea boutiques to London’s small community of international fur brokers.
Often, the invoices sent to banks turned out to be blatantly fraudulent. In late 2013 one Russian customer visited Graff Diamonds, a top end jewellery store in London’s Bond Street. He or she bought two items, costing $175,000 and $150,000.
Graff would have had no reason to be suspicious. The invoice sent to Barclays claimed the payments were for “building equipment”.
Others inadvertently caught up included Porta Romana, a luxury lighting firm. It sent glass table lamps to a customer in Moscow.
The trail also leads to real estate in London. One anonymous company which features in the leaked data is Quandu Finance, registered in the British Virgin Islands.
It bought a Kensington townhouse for £29m. Seabon Ltd – a company involved in the first Laundromat deal – purchased a double-fronted hotel apartment in Prince’s Square. This cost £13.2m.
Another Laundromat-linked company owns a historic London pub, the Bloomsbury Tavern in Shaftesbury Avenue. Laundromat companies own a car park in Holborn, several flats in Manchester, and a parcel of land in Essex.
The data also shows payments to talent agencies, in London and California. The Laundromat was used to book artists on tours of Russia. They include the Florida rock band the Red Jumpsuit Apparatus and Israeli singer-songwriter Yoav. Both played in Moscow and St Petersburg in the autumn of 2013. There is no suggestion the artists were aware of the scheme.
The Moscow agency that arranged their tours is called Silent Network and has since disappeared.
The Laundromat even reached PricewaterhouseCoopers, one of the big four accountancy firms, which recently hired David Cameron as a speaker. PwC got €27,000 for providing “consultancy services” to a Russian-owned firm in Cyprus.
PwC would not identify its client, but said it had passed details to the Cypriot regulator.
‘They didn’t look like criminals’
Some people caught up in the Laudromat scheme were legitimate businessmen trying to navigate Russia’s corrupt customs system.
To import goods into Russia, they were forced to pay brokers, who ran a sophisticated customs-clearing scam. This, too, involved UK Laundromat companies.
One Russian businessman said it was almost impossible to bring the designer clothes he wanted to sell into Russia without employing third-party firms.
“You really have no choice,” he said. These firms had murky connections to the government, he added.
Typically he would pay these freight forwarders 30-40% of the value of any shipment.
The logistics chain was complex, he said, involving several intermediaries. A truck collected the clothes from a UK warehouse, drove to the Baltic states before heading to St Petersburg and Moscow. The businessman said he paid the brokers directly. They then made payments to bank partners inside Europe.
“We are more than seven years at this market and we still do not know all the scheme precisely,” he said. “It could be even more complicated.” He said 90% of Russian businessmen used the scheme, which was “approved by government”. “More than that, if you try to change the import scheme you face a lot of trouble,” he said.
In theory this is official and legal. In practice, the Laundromat made possible three different crimes inside Russia: tax evasion, evasion of customs duty and money laundering. In 2013 grey import schemes cost the state $40bn, a Russian parliament committee said.
Records obtained by the OCCRP show UK companies imported huge numbers of brands into Russia, at least on paper. The companies, in 2013, were Ventro Trading, Pulman Trading and Mount Industries.
Once the goods had been cleared the UK firms were liquidated. No duty was paid. Often, Russia’s tax inspectors then took the UK companies to court. Their owners, however, were nowhere to be found and in many cases could not be identified. Meanwhile, new UK firms were registered. The merry-go-round continued.
The Russian businessman who spoke to the Guardian said he had no idea he was linked to the Laundromat.
In 2011 he attended a children’s trade fair in Moscow. A young woman approached him, gave him her card and told him to get in touch if he needed help importing goods. He later visited the firm’s office in central Moscow. “They didn’t look like criminals. The sofa was a good one,” he said.
Another group that made extensive use of the Laundromat was involved in fur. Soviet Russia was one of the world’s biggest fur exporters. These days, most fur is imported to Russia. Russian clients use brokers in London to buy furs at international auction. Another important fur market is China.
The Laundromat data shows numerous fur transactions. One London broker said the purchases were genuine, adding that he had known his Russian clients for many years. Banks including Barclays had got stricter at checking large payments from Russia, he said. “They have tightened up considerably.”
Still, the records suggest banks were sometimes misled. One UK fur company, John Shackman Ltd, received $500,000 from a Russian customer.
The payment in May 2013 was for fur. The paperwork sent to Lloyds TSB, however, claimed the cash was sent to Britain to buy “notebooks”.
There is no suggestion the fur company or its owner, Gideon Bartfeld, did anything wrong. Bartfeld said in an email that the payment arrived via “two highly reputable and respected global banks”. Both “were satisfied that the payment met their rigorous due diligence and compliance requirements”, Bartfeld said.
Who was behind the Laundromat?
According to the Russian newspaper Kommersant, citing law enforcement officials, a criminal ring of about 500 people ran the Laundromat.
One of its alleged architects was Vyacheslav Platon, a Moldovan businessman and former member of parliament. Platon denies wrongdoing. He is in jail in Moldova on money-laundering charges following his extradition from Ukraine in summer 2016.
Another alleged ringleader is Alexander Grigoriev, a 49-year-old Russian banker. Grigoriev was detained in November 2015 while eating in a Moscow restaurant with his girlfriend. He has denied wrongdoing and is still in custody.
Grigoriev ran the Russian Land Bank (RZB) from 2012 until his arrest.
He brought with him a new set of shareholders: six Cyprus-based companies. (One of them, Boaden Ltd, appears in the Laundromat.) Grigoriev brought in a new team of managers. Igor Putin was made chairman of the board.
In 2014-15, regulators stripped Grigoriev of his banking licences amid concerns that funds were mysteriously vanishing.
Russian police sources told Kommersant that Grigoriev was one of a number of prominent people who used the Laundromat to move $46bn in liquid assets out of Russia.
The Russian investigation into Laundromat has been cursory. One investigator admitted his probe into RZB had stalled. Two FSB agents visited their counterparts in Moldova and collected documents. There are suspicions the FSB’s real goal was merely to find out how much investigators knew. In March, Moldova complained that in recent months Russian agents had been harassing Moldovan diplomats arriving in Russia.
Money from the state-owned Russian Railways also appears to have been recycled this way.
Vladimir Putin’s longstanding ally Vladimir Yakunin was in charge of the railways when the Laundromat scheme was under way.
In turn, he relied on a close adviser and friend, Andrei Krapivin, to run the business. Krapivin died in 2015.
But not before billions of dollars supposed to have been invested in the railways ended up in Laundromat-linked accounts.
Asked about this two years ago, Krapivin’s son Alexei said reports of his father’s involvement in wrongdoing were “bullshit”. He declined to comment in detail.
Moldovan investigators believe the Kremlin may have used Laundromat cash for covert political operations. In particular, they think the money could have helped support anti-EU parties.
There is little hard proof. Intriguingly, one bank caught up in the Laundromat is the First Czech Russian bank, which in 2009, before Laundromat was set up, was mired in controversy when it loaned about €9m to Marine Le Pen’s Front National.
More than two years after the Laundromat stopped spinning, many of the banks involved have been shut down. They include Trasta Komercbanka, closed in March 2016. But most of the scheme’s billions have never been identified.
They are likely to remain hidden.
Graphics by Monica Ulmanu
How ‘dirty money’ from Russia flooded into the UK – and where it went – The Guardian