'Moneyland: The Inside Story of the Crooks and Kleptocrats Who Rule the World' (Profile Books) is investigative journalist Oliver Bullough's 2018 book about the corrupt world leaders who prosper at the expense of their people. "Moneyland" is a concept of Bullough's creation, a "country" made up of the services and laws of nations around the world that allow this class of super-rich to hide their ill-gotten gains. Below is an extract from the book, the chapter "Sex, Lies and Offshore Vehicles", about the beginnings of Russia's oligarchy.
The 1990s in Russia were disastrous. The army lost a war against Chechnya, a region with fewer people than Russia had soldiers. The economy collapsed. The government defaulted on its debt. Male life expectancy fell below 60 years. Epidemic diseases spread fast. The country was ruled by an erratic alcoholic, whose government was bullied by oligarchs and in hock to the International Monetary Fund. Still, though, a late night news broadcast on the 17th of March, 1999 represented a new low, even by the standards Russians were used to.
For several minutes, the state-owned RTR station broadcast grainy but unmistakable footage of a paunchy, pouchy, balding, nude man cavorting with two much slimmer, far younger, equally naked women, neither of whom was his wife. The women were not identified, but the man – the presenter said – was a "person resembling" Prosecutor General Yuri Skuratov, who was at the time clinging on to his job despite pressure from President Boris Yeltsin that he resign. RTR's implausible justification for airing this excruciating footage was that it wanted to protect the country’s most senior lawman from blackmail. "The aim of the All-Russia State TV and Radio Company was to protect the interests of the state, society and the prosecutor general himself from the possibility of this material being used to the detriment of the state, society and prosecutor general," the channel said in a statement.
Skuratov's explanation for what had happened was more convincing. He said the government had attempted to blackmail him with the video, because it wanted him to stop investigating a corruption scandal that threatened to engulf everyone from President Boris Yeltsin downwards, and had chosen to play dirty when he refused. Central to his investigation were kickbacks supposedly paid by a Swiss construction company for contracts to restore government buildings, including both houses of parliament. There was a subsidiary scandal, too. It attracted relatively little notice in the noise surrounding the video, but it was perhaps even more consequential, since it involved far more money and penetrated just as deeply into the heart of the state.
In February, Skuratov had told members of the Duma – Russia’s parliament – that the Central Bank had passed $37.6 billion, 9.98 billion deutschmarks, ¥379.9 billion, 11.98 billion French francs and £862.6 million to an obscure offshore shell company called FIMACO between 1993 and 1998, a time when the country’s finances were in free fall. Much of this money had originated in IMF loans, and FIMACO had invested it in the government bond market, which was at the time returning fantastic profits. The prosecutor accused central bankers of using the profits from these trades to live lavish lifestyles, while hiding the details from both government and legislature behind the wall of offshore secrecy that FIMACO provided.
FIMACO was registered in Jersey and had, it transpired, been quietly in existence – without staff, premises or a physical presence of any kind on the island – since November of 1990, the dying days of the Soviet Union. It had been created by Bank Commerciale pour l’Europe du Nord, the same Moscow-owned but Paris-based bank whose "Euro" telex handle may have given eurodollars their name back in the 1950s. But no one could say for certain why the bank had created it, since the explanations of central bankers kept changing. At various times, they said they had used FIMACO to check whether investment mechanisms worked as they were supposed to. At other times, they said the vehicle was useful for holding foreign reserves. At still other times, they said FIMACO provided expertise. This last explanation was absurd: FIMACO had no expertise, because it had no staff. It was as if the Federal Reserve had decided to secretly route billion-dollar transactions via a Cayman Islands shell company, then claimed that the operation was not only routine and beneficial, but actually helped it learn some new skills.
Eventually, the Central Bank’s chairman, Viktor Gerashchenko, admitted that FIMACO had been used to hide Russia's assets from its many creditors, including the IMF, which expressed annoyance at having been lied to. He said he had been worried that, if Russia lost a court case, creditors would have been able to seize its assets overseas. That is why, he said, it had been useful to hide them in the black hole that was Jersey. It was not a dignified answer, since it presented Russia as little better than a cheating husband stashing his cash in Nevis so his wife couldn’t find it. But it was better than the alternative explanation, which was that the bankers were on the take.
Gerashchenko’s admission did not stop the alternative explanation from being widely discussed. Boris Fyodorov, who had served as finance minister in the early 1990s, said that he had raised the subject of FIMACO while in office, but had been told it was none of his business. He was sure the scheme was a way of creaming off commissions for insiders. "They were simply allowing friends to earn handsome profits," he told journalists as the scandal brewed. There was never a final resolution of the issue, however, thanks to the Skuratov sex video. Yeltsin suspended the troublesome and libidinous prosecutor from his job within days of RTR’s broadcast. Parliament was then persuaded to sack him, and his replacement enjoyed a long and successful career after wisely deciding to halt the probes into both the Swiss corruption scandal and the use of FIMACO. This meant the cases were never tried in court, or aired in public. The IMF did oblige Russia’s Central Bank to commission an audit into FIMACO, but it was widely derided, since it relied exclusively on information provided by the Central Bank and had no independent investigatory powers.
Writers who kept looking into the case found much to trouble them, however. One noted that, in 1999, the Russian Central Bank had a staff of 86,000, as compared to 3,000 at the Bank of England and 23,000 at the Fed. On top of this lavish pot of patronage, Gerashchenko earned 70 percent more than the most important central banker in the world, the Fed's Alan Greenspan, plus extra for his role as a board member of the bank’s subsidiaries. The Russian Central Bank (RCB) looked out of control, the kind of institution that might decide to trade on its own account with the government’s money.
"Since the RCB did not have to obtain Duma approval each year for its budget, executives at the RCB could use the profits from their subsidiaries’ trading activities in Europe and through FIMACO in any way they wanted and, apparently, they did," the American economist Marshall Goldman noted in his 2003 book The Piratization of Russia, on the failure of Russia’s reforms. "It is not simply a case of outright theft or plundering of the state treasury that is common to some countries in Africa, Asia or Latin America, but a much more sophisticated example of the abuse of domestic and international trust involving state-sanctioned money laundering ... if the director of the RCB engaged in money laundering at the highest level, how could he be expected to serve as a role model for the rest of the country?"
The use of FIMACO may have even allowed the Russian Central Bank – part of the Russian state – to avoid paying taxes on its trades, which makes this a remarkable case study of how offshore-enabled secrecy allows even the most unlikely institutions and individuals to avoid scrutiny, dodge taxes and make profits. While ordinary Russians were waiting months for their salaries, these government employees were able to use the government’s money to make money from government-issued debt, without paying taxes to the government on the profits, then were able to stash it – via FIMACO – in Moneyland.
This is the kind of thing that disillusioned those naïve Westerners who had hoped that, when communism collapsed and the Soviet Union broke into 15 republics, Russia could succeed in building a free, democratic, rules-based system for the first time. By the end of the decade, that viewpoint was confined only to the most obstinate, ignorant and/or wilfully blind optimists (people like me, in fact). The wholesale looting of the country, enabled and concealed by tax havens like Jersey, doomed any prospect of development, and rewarded the very people responsible for making things worse.
In 1999, the US House of Representatives convened a series of hearings to discuss the danger of dirty cash from Russia making its way into the US banking system. This risk was real, since the Bank of New York had recently been revealed to have helped billions of Russian-origin dollars flow undetected into the country, through a labyrinthine network of bank accounts and shell companies. The House Committee on Banking and Financial Services heard from several experts, including a former KGB agent and several specialists in the mechanisms of money laundering. Perhaps the most startling testimony, however, came from Richard Palmer, who had served as the CIA's station chief in Moscow in 1992–4. He explained how the ex-Soviet elite had strategically exploited the secrecy provided by offshore centres like Jersey to seize anything they could steal. FIMACO had been one of hundreds, if not thousands, of corporate structures used to undermine Russia’s sovereignty for the benefit of its rulers, he said.
"Profits from these operations were deposited in tax havens such as Switzerland, Cyprus, the Caribbean, Panama, Hong Kong, Ireland and the British Channel Islands, where they would be ready to assist in forming 'non-attributable' companies," he wrote to the committee. "There is one constant thread throughout these steps to loot the state. The goal was to take the money outside of Russia, and keep it there, safe from any threats of retrieval attempts by subsequent Russian governments."
His evidence is extensive, available online, and deserves to be read in full, not least because of a warning that the money that was pouring out of the ex-Soviet republics posed a long-term danger to the stability and honesty of America’s political system, which looks extremely prescient in the age of Manafort, Trump and Robert Mueller. Apart from that, perhaps the most striking section of his testimony is when he rubbishes some of the more optimistic myths about the post-Soviet transition. He describes one such myth as being the belief that Russia was on the right course, that life there was broadly akin to that in Chicago under the rule of Al Capone, and that all everyone had to do was wait for Russia to sort itself out and things would be OK.
"For the US to be like Russia today," he wrote, "it would be necessary to have massive corruption by the majority of members of Congress as well as by the Departments of Justice and Treasury, and agents of the FBI, CIA, DIA, IRS, Marshall Service, Border Patrol, state and local police officers, the Federal Reserve Bank, Supreme Court justices, US district court judges, support of the varied organised crime families, the leadership of the Fortune 500 companies, at least half of the banks in the US and the New York Stock Exchange. This cabal would then have to seize the gold in Fort Knox and the federal assets deposited in the entire banking system. It would have to take control of the key industries such as oil, natural gas, mining, precious and semi-precious metals, forestry, cotton, construction, insurance and banking industries – and then claim these items to be their private property. The legal system would have to nullify most of the key provisions against corruption, conflict of interest, criminal conspiracy, money laundering, economic fraud, and weaken tax evasion laws. This unholy alliance would then have to spend about 50 percent of its billions in profits to bribe officials that remain in government and be the primary supporter of all the political parties ... the US president would not only be aware of these activities but would also support them – including the involvement of his own daughters and all of his close political and financial supporters. Further, he would direct a campaign to smear and remove the Attorney General for investigating the office of the president."
And that was not all, because, of course, this dystopia was not confined within national borders.
"Most of the stolen funds, excess profits and bribes would have to be sent to offshore banks for safekeeping. Finally, while claiming that the country was literally bankrupt and needed vast infusions of foreign aid to survive, this conspiratorial group would invest billions in spreading illegal activities to developed foreign countries."
As the story of FIMACO demonstrates, and as Palmer made clear, it is remarkably easy to loot a country providing you are in charge of it. And this is the true power provided by Moneyland, and which the rulers of Russia had grasped.
In the early days, the days of the pioneering eurobonds, Moneyland had been a device used by rich Westerners to shield their cash from governments wishing to take it from them. These were the wealthy Brits parking their savings in Jersey; the Belgian dentists sending their money to Luxembourg; the Americans stashing their cash in Switzerland. These tricks and ploys had been created by London’s most ingenious bankers, been honed by the sharp minds of Zurich and Wall Street, had evolved in multiple tax havens, until wealthy Westerners could be confident their money was safe from the best-resourced and most diplomatically fearsome tax authorities on the planet. This was naughty, perhaps, but few would argue that it was actually evil.
The true revolution happened, however, when these tricks were deployed in countries without the rule of law, or the robust political institutions of the West.
The creation of Moneyland in the aftermath of the Second World War, when capital was hemmed in by the controls of the Bretton Woods system – the compartments in the oil tanker of the world economy – had been the result of a battle between tax authorities and the wealthy, who had already been jousting with each other for centuries. This long-running campaign for control of the wealthy’s money had created an evolutionary arms race between predators and prey, who spurred one another to ever-greater feats of speed, cunning and agility. Imagine tigers and buffalo becoming ever more perfectly adjusted to each other over the millennia; this was the fiscal equivalent, except the weapons were not muscles, horns, claws and teeth, but shell companies, trusts, secret bank accounts, bearer instruments and more. Even the US Treasury struggled against this kind of opposition, but at least it understood what it was up against.
When lawyers and accountants released these predatory instruments into the ecosystems of sub-Saharan Africa, Asia and the former Soviet Union, however, the mismatch was total. It was as if tigers had been suddenly introduced to a continent inhabited primarily by large, peaceable flightless birds. Unprepared tax authorities and underfunded investigators were being asked to resist the most skilled rules dodgers in the world. They didn’t stand a chance.
Thus was unleashed the orgy of looting that led eventually to the excesses of Yanukovich and his log-built palace on the edge of Kiev. But it began long before, in the final days of Western imperialism. Offshore finance hit the weak and shambolic administrations of sub-Saharan Africa and the ex-Soviet Union with the impact of a Hellfire missile on a Napoleonic warship. Nothing and no one was safe, except the people doing the stealing.
If you look at the subsequent careers of the individuals involved in the Russian sex tape scandal, you will understand quite how unequal the battle became. Skuratov tried to resurrect his career by running for president in 2000, but he came in a disastrous ninth with just 300,000-odd votes. Thereafter, he slipped into obscurity, whence he emerges only as the occasional butt of a joke. The sordid tape of his exploits can still be found on the internet, and my generation of Moscow journalists still chuckles at the words "person resembling". To anyone younger than us, however, his name means nothing.
The man who authenticated the tape also ran for election in 2000, but did rather better for himself. Vladimir Putin headed the FSB, the main KGB successor organisation, at the time of the scandal, and suspicion has long pointed to his organisation for having provided the footage to Russian television in the first place. After he won the presidency in 2000, none of the individuals criticised by Skuratov for having enriched themselves at Russia's expense were prosecuted. According to Felipe Turover, a Spanish banker who advised Russia’s government on debt deals and provided many of the documents used by Skuratov and the Swiss investigators, Putin himself did particularly well from equivalent scams, thanks to a role he held in the Kremlin running Russia’s property portfolio.
"In 1997, all possible kinds of front companies, joint-stock companies and limited companies were created. The majority of the most expensive property and other foreign assets was registered to these structures. That means foreign property arrived in the state’s hands in a thoroughly plucked form. And it was the current premier who did the plucking," Turover told a journalist from the respected Russian investigative publication Novaya Gazeta in late 1999, while Putin was still prime minister. When pressed further, he replied: "I am not going to answer that question for now. I think both you and I want to stay alive." (Turover later denied having mentioned Putin in the interview, but Novaya Gazeta has not retracted the story.)
All those assets are still safely nestled away, in Moneyland, where they have joined money that has been gathering from almost every corner of the world, for decades. This has not happened by accident. Moneyland exists because it makes money for its stewards, who are well paid for serving its wealthy citizens. They, not the Moneylanders, are the tigers whose claws and teeth are shell companies, trusts and secret bank accounts. One might be tempted to call them paper tigers, but they are truly formidable, as we shall see.
'Moneyland' is available to buy now.