The Russian Laundromat: How $20 Billion were Transferred from Russia to the Rest of the World

In 2017, the Organized Crime and Corruption Reporting Project (OCCRP) brought to light the Russian Laundromat, a complex money laundering scheme that moved over $20 billion out of Russia and into the global financial system. This operation, which spanned several years, leveraged legal loopholes, corrupt officials, and a network of shell companies to clean dirty money and integrate it into the legitimate financial world. The scale of the operation was staggering, yet what was more alarming was how it managed to evade detection for so long.

How the Russian Laundromat Worked

According to the OCCRP investigation, the organizers of the Russian Laundromat set up multiple shell companies in the United Kingdom, Cyprus, and New Zealand, jurisdictions that had favourable corporate tax regulations at that time. The true owners of these companies were hidden through complex ownership structures, making it nearly impossible to trace who was really benefiting from these companies. The scheme always involved a Moldovan citizen and operated through a series of well-planned steps:

1. Creating Shell Companies and Fake Debts

The first step of the scheme involved creating fake debts between these shell companies. One company made a loan to the other with low or no interest rate (which is a red flag itself) Russian companies acted as guarantors. These debts were entirely fabricated - no actual transfers were ever made between the lender and the borrower. The purpose of these companies and the sham loans was to fabricate a legal basis for moving large sums of money from Russia to Europe. Subsequently, the borrowers of these loans technically defaulted – the guarantor (Russian company) was called in to repay the debt of the borrower company.

2. Using Corrupt Moldovan Judges

Next, since the coompanies involved a Moldovan citizen, the organizers exploited the Moldovan judicial system. Corrupt judges were bribed to issue court orders, requiring Russian companies acting as guarantors, to settle these fake debts. The payment was ordered to be made into an account at Moldindconbank, a key bank in Moldova.

3. Flooding Moldindconbank with Money

Following the court orders, Russian companies transferred large sums of money into the Moldindconbank accounts. The funds were suspected to be the proceeds of corruption and other criminal activities in Russia.  Since the funds were supposedly settling court-ordered debts, the bank never asked for the source of funds neither raised any red flags to the authorities. According to OCCRP, “about $8 billion was then withdrawn directly from these accounts in Moldova and spent around the world.”

4. Moving Money to Latvia and Then to the Rest of the World

A large portion of this money was transferred from Moldindconbank to Trasta Komercbanka in Latvia. The choice of a Latvian bank was strategic. As a member of the European Union, transactions from this bank were less likely to raise suspicions among other financial institutions. Once the money entered the European financial system, it was considered clean and could be used without further scrutiny.

According to OCCRP investigations, between 2011 and 2014, the 21 shell companies made over 26,000 payments from their accounts at Moldindconbank and Trasta Komercbanka. These payments were sent to 96 different countries, and much of the money flowed through some of the world’s largest banks without raising alarms.

Challenges for Anti-Money Laundering (AML) Professionals

The Russian Laundromat succeeded largely because it exploited weaknesses in the global financial system with the use of corrupt judges, lax regulations etc. And the scheme was cleverly designed to outsmart AML professionals. Several factors made it difficult for the scheme to be detected:

1. Exploiting the system

The Russian Laundromat exploited corrupt officials to issue fraudulent court orders. These orders were used to legitimize illicit financial transactions, making it difficult for AML officers to reject them. The appearance of legal authority, backed by a seemingly legitimate court order, made it difficult for AML professionals to ask for more information and identify the underlying criminal activity.

2. Concealed Ownership

The real owners of the shell companies were deliberately hidden behind layers of proxies, fake directors and shareholders. This lack of transparency made it extremely difficult for AML professionals to connect the companies to the individuals actually benefiting from the money laundering scheme.

3. Complexity of Cross-Border Transactions

The movement of funds across multiple jurisdictions, each with different regulations, created a confusing trail that, for an AML professional was hard to follow. The flow of money from Russia to Moldova, then to Latvia, and finally into the global financial system was carefully designed to obscure its origins.

4. Role of Corruption

Corruption played a crucial role in the success of the scheme. The involvement of bribed officials in Moldova ensured that the fake debts were enforced without any real scrutiny, allowing the laundered money to pass through the legal system as though it were legitimate.

Key Takeaways

The Russian Laundromat serves as a wake-up call of the challenges faced by AML professionals in preventing money laundering. Some tips for AML officers to avoid similar schemes in the future:

Scrutinise All Transactions

Even when transactions appear legitimate, it’s essential to dig deeper. Just because a transaction is supported by legal documents doesn’t mean it’s legitimate. AML officers should consider the broader context and be suspicious of transactions involving jurisdictions known for corruption or weak regulations.

Be Wary of Shell Companies

While shell companies can serve legitimate purposes, they are also frequently used in money laundering schemes. When dealing with such entities, it’s important to exercise extra caution. Loan agreements between companies with very low or no interest paid should be treated as a red flag - it is an indication of transfer of funds between companies rather than a legitimate business activity.

Understand the Risks of Cross-Border Transactions

Cross-border transactions add complexity to financial activities and can be used to obscure the origins of illicit funds. AML professionals must be vigilant in monitoring these types of transactions and work closely with counterparts in other countries to track the flow of money.

Always Establish the Source of Funds

Scrutinize legal documentation and always look for proof of the legitimate activity that generated the funds. Differentiate between transferring wealth and generating wealth. As AML professionals, we are looking for the legitimate business activity that generates wealth.

Conclusion

The Russian Laundromat was a clever and well-executed scheme that exploited the vulnerabilities of the global financial system. For AML professionals, it underscores the need for vigilance, critical thinking, and a deep understanding of how criminals operate.

In a world where appearances can be deceiving, those responsible for safeguarding the financial system must be prepared to look beyond the surface, ask probing questions, and work tirelessly to prevent illicit funds from entering the legitimate economy.