Transparency International Russia discovered a scheme of laundering money through bogus trading operations. In just a couple of years, $820 million were siphoned off from Russia. This is the amount of money that one Russian region spends, on average, on the entire social sphere in a year. This scheme was used by individuals connected with the ruling Russian elite. They were not held accountable in any way. We're publishing this investigation jointly with Novaya Gazeta. Europe, Meduza, Eesti Päevaleht, Transparency International – UK and Transparency International – Czech Republic.

In March 2018, we received a letter from a person whose name we cannot disclose: the information we managed to discover thanks to just one document that he gave us was immense, whereas the protection for corruption whistleblowers in Russia is immensely small.

We obtained a customs declaration which said that in 2015 a company based in Moscow Oblast imported into Russia an injection molding machine bought from a Latvian company. This type of machine is used to blow mold plastic bottles. The price of this machine stated in the income declaration was eleven and a half million euros, which is almost 800 times more than its market price (around 14 thousand euros).

The Russian company was willing to overpay because its goal was not to buy the injection molding machine, it was to siphon off money abroad. The money that left Russia during this transaction was previously stolen from one of the banks. The machine itself never even crossed the border; our correspondence with Latvian customs confirmed this.

We studied customs' databases and public registers and found out that it was not the only case of this kind. Deal after deal was used to siphon about $820 million from Russia in three years. This is seven times more than the money involved in the scheme uncovered by the auditor Sergei Magnitsky.

The scheme uncovered by Transparency International Russia involved about 130 companies from Russia and other countries. These companies had accounts in 28 Russian banks and 11 foreign banks. 11 of these Russian banks had their licenses revoked soon afterwards, mainly due to violations of anti-money laundering legislation; some of the foreign banks taking part in the schemes were also involved in scandals with dirty money from post-Soviet countries. The scheme was extensive enough to include law enforcement officials, bankers, public officials and downright criminals.

This scheme is an example of trade-based money laundering (TBML) - an approach to laundering money that involves money earned with criminal activity (drug trade, piracy, smuggling, corruption or fraud) being siphoned off abroad, making it look like payments made as part of bogus trade deals. In doing so, money launderers overstate or understate the cost of goods and the volume of shipments, charge multiple times for the same goods, or merely forge customs declarations. One thing never changes: the money that is laundered is always obtained illegally.

Money laundering is the bridge that allows criminals to move "dirty" money away from the shadow economy and then spend it legally. Let's say it again: just the one scheme that we discovered involved about $820 million crossing that "bridge" in three years. We can guess that way more money than that was siphoned off from Russia through similar transactions involving other types of goods that are exempted from VAT and customs duties.

From 2014 to 2016, Russian shell companies, with multiple companies having the same owners and addresses, purchased equipment worth tens of millions of euros from foreign companies. Most of these companies were from Saint Petersburg, Moscow and Kaliningrad. The seller companies were registered in 18 different countries, mostly in Cyprus, the UK and the Baltic states. Soon enough, they were also closed. Many of them belonged to citizens of Russia, Ukraine and Belarus.

The real value of the commodity (an injection molding machine) was no more than a couple dozen thousand euros. During the years when the scheme was going on, such machines were not being produced in Russia. This is why they could be imported with a zero tax rate and without paying any customs duties.

However, it appears that the injection molding machines only crossed the road on paper. In reality, the goods were not delivered anywhere; or, instead of the goods stated in declarations, versions that were hundreds of times cheaper were imported.

The duties of customs include checking the prices of goods as stated in the declarations. Also, import of injection molding machines warranted closer attention as a high-risk operation — after all, they were imported into Russia with a zero tax rate. However, the deals faced no resistance from the customs in the Far Eastern, Central, Southern and Northwestern Federal Districts. This suggests that even if the customs authorities were not fully participating in money laundering, they were, at the very least, turning a blind eye on the exorbitant sums stated in the declarations.

Roughly 80% of all the deals that constituted the scheme we uncovered passed through the North-Western Customs Administration. This was the department whose employees "didn't notice" any TBML on a regular basis; hence we can say that it was an established "channel" for siphoning off money from Russia:

The final argument which proves that we're not mistaken and the "Kaliningrad channel" actually existed is the 2019 sentence against Alexander Vladimirovich Skirdov, a former director of Peterburgskaya Stroitelnaya Investitsionnaya Kompaniya (Saint Petersburg Construction and Investment Company).

The court found this 69 year old retired man guilty of siphoning off money by using sham injection molding machine purchasing contracts. He received a 5 years 6 months suspended sentence. However, he was not charged with creating a scheme and organization of a criminal community. Public prosecutors couldn't find any evidence to back up such claims. Besides, where would a regular retired man acquire skills needed to devise schemes, as well as millions for sham deals? Most likely, Alexander Vladimirovich was merely a nominee director.

For the real beneficiaries of the "Kaliningrad channel", everything turned out great. Their straw man was punished, and almost 6 million euros were siphoned off abroad. This is only a small part of the money that was siphoned off from Russia through bogus injection molding machine purchasing deals.

Transparency International Russia found out that a similar scheme for siphoning off assets had already been used by people connected with entrepreneur Yevgeny Prigozhin, banker Sergey Kononov, sports manager Andrey Safronov, major general of justice Igor Komissarov, former State Duma member Natalya Burykina, a disgraced banker Roman Stroykov, and others.

Another participant of the scheme, arranging siphoning off of the money, though was supposed to prevent it, were Russian and foreign banks. They have to check transactions for international business activity, transaction certificates and equipment purchasing companies.

Eleven Russian banks entered this money laundering schemes just before their licenses were revoked. Later checks discovered sophisticated schemes of money laundering and, therefore, huge ‘holes’ in their capitals. The better part of the amounts siphoned off through injection molding machines is, apparently, directly related to this embezzlement. Management of the banks could have known of oncoming revocation of license and, quite possibly, participated personally in siphoning off of the money and its embezzlement through simulated foreign trade transactions.

For example, a check of the Transnational Bank performed by the Central Bank discovered a “hole” in the bank's capital of 2.6 billion rubles. We found out that $51,259,621 had passed through the bank in the last month before revocation of its license, while the last transaction took place just two days before the revocation. All four deals conducted by the bank through three shell companies in Russia and two companies in Latvia involved the same customs declarant. Three out of four deals were conducted through the Bagrationovsk customs post in Kaliningrad Oblast.

A similar situation happened with Metrobank. After its license was revoked on June 1, 2015, a 4.5 billion rubles hole was discovered in the bank's capital. Two months before the bank's license was revoked, two tranches were used to siphon off $17,000,000 from the bank through the same shell company. The foreign partner functioning as a cushion was the same company from Cyprus in both cases, and both deals went through the Yamburg customs post in Leningrad Oblast.

Siphoning off of the money from the banks' capitals harmed not only their clients. The money to pay insurance payments to depositors was compensated from the state budget through the Deposit Insurance Agency of Russia. Basically, every citizen of Russia paid out of their own pocket for the money stolen from the banks and siphoned off from the country.

Seller companies also had accounts in eleven foreign banks: Lithuanian Latvijas pasta banka (now called LPB bank) and A/S Norvik banka, Austrian Meinl Bank (now called Anglo Austrian AAB Bank AG), Danish Nordea Bank AS, Polish mBank, Latvian AS Privatbank, SEB Banka, JSC Citadele Banka and AS ABLV (liquidated), Estonian Versobank AS (liquidated) and a branch of Swedbank. These banks were involved in scandals concerning negligence in the performance of anti-money laundering procedures and laundering money from ex-USSR countries.

• Journalists from SVT, a Swedish television channel, reported that $4.3 billion was laundered through Swedbank, or, to be precise, through its branches in Lithuania, Latvia and Estonia; part of this money, about $26 million, was connected with the case of Sergei Magnitsky, an auditor of Hermitage Capital.

• In late March 2018, the European Central Bank cancelled the license of the Estonian Versobank due to systematic violation of the money laundering legislation. It was owned by Ukrainian nationals: Vadim Ermolaev and Stanislav Vilensky.

• In 2017, A/S Norvik banka was fined by the Financial and Capital Market Commission for non-compliance with legal requirements for preventing the financing of terrorism and use of illicit funds, including working with clients who tried to bypass sanctions against North Korea.

Management's interest in money embezzlement is not the only reason for a financial organization to fail to answer the foreign trade transaction verification requirements. The discovered scheme involves small captive banks (belonging to financial industrial groups and providing for their interests). The ability of the top managers of such banks to pursue policies that are independent from the shareholders (owners) is minimal, and compliance with the KYC (Know Your Customer) policy and the regulator's requirement to identify dubious deals are treated as a pure formality by such banks, which opens a wide window of opportunity for abuses. Moreover, it's often difficult to bring the shareholders (the ultimate owners) of such banks to justice, as the banks are formally controlled by the board of directors.

We identified financial and industrial groups who, on one hand, owned the banks involved in money laundering and, on the other hand, were vendors for customs authorities supervising the customs posts that the suspicious transactions went through. Some bankers involved in the scheme were connected with representatives of customs authorities: they were both in the same legal entities' governing bodies.

In late January 2019, Sergey Shklyaev, the head of the Department of Trade Barriers, Currency and Export Control of the Federal Customs Service (FCS), told Rossiyskaya Gazeta in an interview that the times when money flows worth billions were leaving the country through the customs are now gone.

Mr. Shklyaev claimed that the situation changed partly thanks to the tight cooperation between the FCS of Russia, the Central Bank of Russia and the Federal Financial Monitoring Service of the Russian Federation (Rosfinmonitoring). It is true that in 2012 the Central Bank of Russia and the authorized banks started receiving declarations directly from the FCS, and in 2014 compulsory electronic declaration was introduced. All of this was supposed to significantly lower the risks of violations of foreign exchange controls.

But in the next few years, when those policies were already employed, the customs service, especially the Northwestern Customs Administration, was involved in several big scandals related to corruption, smuggling, illegal VAT refunds and siphoning off of billions of rubles abroad. This led to staff rotation in the FCS itself and even in the department of the FSB that oversees the work of the FCS. However, beneficiaries of the schemes discovered in these scandals took no responsibility, and the money stolen from Russia and transferred abroad never returned to the country.

The same way, regulators never managed to interfere in the scheme we investigated - with injection molding machines. Moreover, they seemed to fail to notice it. And finally, beneficiaries of the schemes kept staying "some unidentified persons” - until our investigation.