1998 Congressional Hearings
Intelligence and Security

September 10 
House Banking 
General Oversight and Investigations Subcommittee

Thomas J. Kneir
deputy assistant directo
FBI criminal investigative division 

Good morning Mr. Chairman, ladies and gentlemen of the subcommittee. I
am Thomas J. Kneir, Deputy Assistant Director, FBI with responsibility
for the Organized Crime/Drug Branch within our Criminal Investigative
Division. Included among the units within this branch is the
Russian/Eastern European/Eurasian Criminal Enterprise Unit which
exercises FBI Headquarters oversight over our domestic and
international investigative programs within this area.

I am pleased to appear before you this morning and I thank you for the
opportunity to discuss FBI law enforcement initiatives related to the
Russian Federation. In particular I am prepared to provide you with a
law enforcement perspective in the issue of public corruption in the
Russian Federation. First, some background information regarding our
Russian Criminal Enterprise investigative program:

Presently our investigative efforts in this area are spearheaded by
five criminal investigative squads which specialize in this area.
These squads are located in Los Angeles, Miami, New York,
Philadelphia, and San Francisco. As of this date we have approximately
240 active investigations nationwide which involve strictly organized
crime or racketeering activity. We have an additional approximate
100-active investigations involving emigres from the former Soviet
Union who are involved in other types of criminal activity primarily
in the area of white collar fraud and other violations.

Many of these investigations involve an active exchange of information
and criminal intelligence between the FBI and our law enforcement
counterparts within the Russian Federation and other republics of the
former Soviet Union. This activity is coordinated by FBI Legal Attache
offices which are presently located in Moscow, Russian, Kiev, Ukraine
and Tallinn, Estonia.

In July 1994, as part of the FBI overseas expansion program, the FBI
opened a Legal Attache office in Moscow, Russia. This had become
necessary due to the gradual increase in racketeering and other types
of criminal activity by a very small minority of emigres from Russia
and other parts of the former Soviet Union. The vast majority of these
cases were being opened in our larger cities, and, in response, the
previously mentioned squads were established.

This emerging problem followed a pattern similar to that established
by other immigrant groups which arrived in the United States in large
numbers during our recent history. Included among the overwhelming
majority of honest, hardworking individuals seeking a new life of
enhanced opportunity, was a small faction of hard core criminals of
the type who exist in every society. In some cases these individuals
were affiliated with known organized crime groups headquartered within
the Russian Federation or within other areas of the former Soviet
Union. Their presence within our borders necessitated an increased
level of cooperation and a more frequent exchange of information with
our counterparts in the Russian law enforcement establishment.

Since 1994, the caseload of our Legal Attache office in Moscow has
grown from 35 cases to 375 cases. In addition, to date, some 660
investigative leads from domestic U.S. FBI field offices have been
covered in Moscow and elsewhere in Russia with the assistance of our
Russian law enforcement counterparts. Many of these investigations
have resulted in significant criminal proceedings involving violent
extortion attempts, kidnapings, multimillion dollar fraud schemes
against Russian and U.S. banks, as well as other frauds perpetrated
against financial institutions, commercial ventures and public
institutions both in Russia and the United States.

Due to the expanding threat posed to the United States and Russia by
international criminal activity, including that emanating from Russian
and Eastern European crime groups, the FBI in 1997 established
additional Legal Attache offices in Kiev, Ukraine and Tallinn,
Estonia. To date, these offices are experiencing an ever increasing
caseload similar to that experienced by our Moscow office. As a result
of the success of our direct liaison efforts in Russia, the Ukraine
and Estonia, the FBI has proposed opening a regional Legal Attache
office within the Republic of Kazakhstan in order to cover the Central
Asian Republics.

It is against this background then that I would like to discuss the
issue of public corruption within the Russian Federation as it is
viewed from the FBI's perspective.

The Russian people, along with the Russian law enforcement
establishment, share our disdain for corrupt public officials. Russian
citizens and high government officials alike have acknowledged this
problem and have expressed outrage at the sinister impact that
official corruption is having upon their society and body politic.
Corruption allegations and investigations are a frequent media topic
throughout Russia and public corruption is an unfortunate fact of life
for the average Russian citizen.

Corruption matters are, for the most part, vigorously and thoroughly
investigated by the Russian law enforcement establishment to the
extent that prevailing Russian law allows. The primary agencies
involved in these investigations are the Ministry of Interior (MVD),
the Federal Security Service (FSB) and the Federal Procurators office.
For them, there is no higher priority than the issue of public
corruption. As a whole, the Russian law enforcement establishment has
taken a firm stand against all types of official corruption and has
taken various steps intended to combat corruption not only in
governmental and commercial areas, but also within their own ranks.

Most law enforcement agencies within the Russian law enforcement
establishment have experienced at least some degree of internal
corruption. The Ministry of Internal Affairs or MVD, by far is the
largest law enforcement agency in Russia, has candidly acknowledged
this problem and has undertaken strenuous efforts to eradicate
corruption within its ranks. They have recognized the fact that before
a law enforcement agency can effectively deal with public corruption
within the society at large it must, as a first step, deal effectively
with it within their own ranks. The MVD leadership has undertaken this
challenge and has been energetically pursuing this goal. Moreover,
they are tackling this problem in an extremely difficult economic,
social and political climate in which their officers are not only
poorly paid but in some cases are not paid on a regular basis. As a
result, morale has plummeted and attitudes have deteriorated. This
would be a guaranteed prescription for corruption in any police force
in any country.

In response to this difficult problem, former Russian Internal Affairs
Minister, General Anatoly Kulikov implemented an anti corruption
campaign within the MVD called "Clean Hands" which was designed to
identify corrupt officers within the ranks. According to MVD
statistics in 1997, more than 11,000 Internal Affairs employees have
been placed under investigation for corruption and related offenses.
Of this number 1,770 were fired from the Ministry and about 400 were
demoted in rank. An additional 5,000 employees are said to have
received disciplinary reprimands. Also during General Kulikov's
tenure, an internal investigation unit was established and charged
with removing corrupt officers from the MVD and with the handling of
citizen complaints. The original cadre of this unit, which consisted
of 60 officers, was trained at the FBI Academy in Quantico, Virginia
in those investigative techniques associated with internal corruption.

Included among MVD personnel placed under investigation in the recent
past in connection with allegations of corruption are high-ranking
Generals and street cops alike. Several high-ranking officers within
the MVD have thus far been prosecuted for corruption related offenses.
These anti corruption programs are continuing with the support of the
present MVD leadership despite increasingly severe funding

With regard to other governmental and commercial sectors impacted by
corruption within the Russian Federation the picture is not so clear
and it is difficult to assess, with precision, the full extent of this
problem. However, the existence of official corruption is regarded as
a serious criminal problem toward which the Russian government has
devoted an increasing amount of resources. In order to increase the
number of available investigators, in 1995, the Federal Security
Service, or FSB, was given concurrent jurisdiction along with the MVD
to investigate organized crime and corruption matters. These agencies
are extremely serious in their efforts to uncover corrupt officials
and would vigorously disagree with any suggestions to the contrary. In
addition, the Russian government has drafted new legislation designed
to modernize their criminal code in the areas of money laundering and
other types of financial fraud.

Organized crime and public corruption are two types of criminal
activity which appear to have a symbiotic relationship. As is apparent
from Italy's recent history, organized crime or "mafia" groups depend
greatly on the services of corrupt public officials and seek to
develop these individuals as a matter of organizational strategy. Both
factions, corrupt public officials and organized criminals, use each
other in the pursuit of profit. Known organized crime groups with
virtually unlimited financial resources are known to utilize bribery
as a means of achieving their criminal goals. Within the Russian
Federation bribery of public officials is considered by the MVD and
FSB to be a deeply rooted criminal problem. In the Russian Federation,
organized crime groups are known to have provided money laundering and
other services to corrupt public officials in their efforts to
illegally transfer state funds or property.

The FBI has been involved in several sensitive joint criminal
investigations with the MVD and FSB which involve the possible
corruption of Russian officials. Initiated based upon the likelihood
of violations of U.S. law, these investigations have been very
revealing regarding the scope and level of this problem.

One such investigation was opened in our San Francisco Division in
1994 and continues to this day. This particular investigation, which
was recently reported upon in U.S. News and World Report, centered
upon a company known as GOLDEN ADA. This firm was ostensibly
incorporated for the purpose of processing precious gems, including
diamonds which were to be imported from Russia. As reported, this firm
was highly capitalized and had acquired highly expensive facilities in
San Francisco area. The principal subjects of this investigation
included one ANDREI KOZLENOK, a Russian national with ties to high
level officials in the Russian Federation.

It appears that KOZLENOK and his business partners, in collusion with
high level governmental figures in Russia, utilized GOLDEN ADA as a
"golden calf." Although established for the stated purpose of
procuring and distributing Russian diamonds on the world market in
order to generate collateral for U.S. bank loans, GOLDEN ADA became an
efficient mechanism for looting the Russian treasury. Through high
level contacts in Russia who had access to vast government
repositories of raw diamonds, gold and objects of art, GOLDEN ADA
received shipments of these precious goods by the ton. Most of those
materials ultimately disappeared. Estimates of the loss experienced by
the Russian treasury vary as this continues to be assessed. However,
some estimates place this loss in excess of $170 million.

During the course of this investigation, FBI Special Agents from the
San Francisco Division worked closely with an investigator from the
Russian MVD who had traveled to San Francisco in connection with the
FBI's Practical Case Training Program. The FBI and the MVD both
benefited from this exchange as each gained valuable insights into
each agency's investigative techniques and methodologies.

This particular investigation revealed a pattern of criminal activity
which is consistent with other, similar fraudulent schemes originating
within the Russian Federation. That is, the utilization of front
companies in order to establish a facade of legitimacy, the exchange
or transfer of large amounts of cash, the fraudulent manipulation of
banking and business records, the opulent lifestyles displayed by the
principals, the involvement of corrupt government or commercial
individuals, the fear of violent retribution for cooperation with the
authorities, and almost always a suggestion of the use of "enforcers"
at some level.

The GOLDEN ADA investigation has recently gathered additional momentum
with the arrest of KOZLENOK in Athens by Greek authorities. He has
been extradited to Moscow where he remains in custody and where this
investigation continues to be pursued by the MVD and the Procurator's
office. We understand that additional Russian subjects, including
former high-level government officials, are also under investigation.
Its ultimate outcome however is far from certain despite the best
efforts of the MVD and Procurators office since this investigation
remains vulnerable to high level political pressure.

Yet another similar investigation which was conducted jointly by the
FBI and the Russian MVD involves a large scale bank fraud and
embezzlement matter which was initiated by our Los Angeles Division in
1994. This investigation, which remains active, involved the theft of
approximately 60 million dollars from business interests, government
institutions, banks, and more than 4,500 bank depositors in Moscow
during the period 1991 through 1994.

The main subject of this investigation, a former maintenance worker in
Moscow, received a license from the Russian Central Bank to operate a
banking institution in Moscow. This bank, which came to be known as
RVG Bank, was a fraudulent enterprise from its inception. The
operators of this institution created a public image for RVG as a
legitimate and prosperous banking enterprise which allowed them to
attract large investments, not only from individuals and other banks,
but from governmental institutions such as the Academy of Sciences of
the Russian Federation. Through a series of false loans to front
companies established worldwide by the main subject and his
associates, they completely looted the banks' assets. Millions of
dollars found their way to the United States where the main subject
had established residency and had also purchased millions of dollars
in real estate in the Los Angeles area.

During this investigation, FBI Special Agents from the Los Angeles
Division traveled to Moscow to confer directly with their MVD
counterparts and to acquire evidence. In support of this matter, MVD
investigators traveled to our Los Angeles office where they were able
to observe the manner with which the FBI conducted it's portion of the
investigation. This exchange of investigators was once again made
possible by our Practical Case Training Program. As a result of this
investigation, civil forfeiture proceedings were initiated against the
main subject's properties in Los Angeles and certain funds were
recovered. These funds are soon to be returned to the Russian
Federation. This investigation is continuing in Los Angeles and Moscow
and is expected to expand in view of the arrest last week of the main
subject in Russia. By the way, the Academy of Sciences of the Russian
Federation lost $600,000.00 of its $638,000.00 investment as a result
of this scheme. Also, a total of 4,500 individual depositors lost more
than $20 million collectively.

The investigations I have discussed represent the evolution of an
increasingly effective law enforcement partnership between the FBI and
the Russian law enforcement establishment which is proving to be
mutually beneficial. Increased contact between us has allowed the FBI
to undertake numerous initiatives designed to assist the Russians in
their efforts to battle organized crime and corruption.

In addition to the assignment of Special Agents to liaison duties in
Russia, the FBI has encouraged the continued exchange of investigators
for both training and operational purposes. In many cases, some of
which have been previously mentioned, Russian criminal investigators
have worked closely with FBI Special Agents on joint investigations.
Russian police officers have participated in street surveillances side
by side with our agents and they have testified in our courts and
before our grand juries. In several instances, they have assisted in
the monitoring of court authorized wiretaps and in the preparation of

The FBI has also expanded its training program for Russian officers
and during the last four years we have trained more than 2,000 of
them. We have conducted more than 60 seminars in Russia and in other
areas of the former Soviet Union. These seminars have addressed a wide
variety of police science topics to include money laundering, white
collar crimes, bank fraud, organized crime, crime scene processing and
bombing investigations. With the assistance of the Department of
State, the FBI continues to conduct these seminars and as we speak,
two FBI training teams are preparing to depart for Moscow and
Krasnodar, Russia where they will be conducting training at MVD
Academies in the areas of economic crime, police ethics, and internal
police controls. FBI Special Agents have taught at Police Academies
all over Russia. In addition, we have had Russian police officers
graduate from our National Academy program at the FBI Academy in
Quantico, Virginia.

An exceptionally productive initiative which has already been
mentioned is the Practical Case Training Program, or PCT. Under this
program, Russian police officers receive on the job training during
the conduct of actual investigations jointly with FBI Agents. This
program has proved itself from the very beginning. In 1994 Russian MVD
officers traveled to our New York field office and participated in a
joint investigation targeting YVACHESLOV IVANKOV. IVANKOV, a violent
career felon and major organized crime figure, led an international
criminal organization with operations in the U.S. and Canada. The
Russian officers made a significant contribution toward the ultimate
success of this case which resulted in IVANKOV's eventual conviction
for extortion. During this investigation, the Russian officers also
gained valuable insights into FBI investigative techniques and
evidence handling procedures. They also observed the operations of our
U.S. District Court System. The PCT program, along with its requisite
Department of State Funding, is an integral part of our cooperative
relationship with Russian law enforcement and a vital component of the
joint U.S./Russian effort to combat international crime.

Additional FBI initiatives in this area involve the International Law
Enforcement Academy or ILEA in Budapest, Hungary. This academy serves
as a law enforcement training center for officers from Russian and
other Eastern European nations. The instructors at ILEA represent a
genuine cross-section of U.S. Federal law enforcement agencies,
including subject matter experts from the FBI, the Drug Enforcement
Administration, the Internal Revenue Service, the Bureau of Alcohol,
Tobacco and Firearms, and the U.S. Customs Service. Guest instructors
from other countries along with U.S. state and local law enforcement
agencies are also invited to participate on a regular basis.

In summary then, it is clear that public corruption is a high priority
issue for the Russian law enforcement establishment. The FBI will
continue to support Russian law enforcement efforts in this area
through a combination of operational and training programs. We seek to
expand our cooperative efforts with the MVD, FSB, and Procurator's
Office in the field of international crime. This relationship has come
a long way from the Cold War Era when the prospect of FBI Special
Agents working hand in hand with Russian police officers would have
been regarded as unbelievable.

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