An investigation by the Organized Crime and Corruption Reporting Project (OCCRP) into Ruben Vardanyan’s Troika Dialog group, scandalously dubbed “The Troika Laundromat,” paints a fairly damning portrait of the Russian investment bank. But it also raises many questions over how to interpret the facts outlined in it, and what they really reveal.

According to the investigation, from 2004, Troika Dialog group (where, full disclosure, I had previously served as an executive director from 1997 until the end of 2002) set up a network of dozens of offshore companies, some of which were registered in the names of nominal shareholders and with nominal directors, including a construction worker from Armenia who denies all knowledge of the company set up in his name.

From 2006 to 2013, this network of companies received a total of $4.6 billion, transferred $4.8 billion, and carried out internal transactions worth $8.8 billion. The companies were involved in a multitude of contracts for the delivery of various goods, from food items to car parts. The journalists behind the investigation claim that these were fictitious contracts and that although money changed hands, no goods were delivered, albeit no source for this claim is provided in the investigation.

Contractor companies that transferred money to the Troika network or received money from it between 2006 and 2013 included those suspected of involvement in three high-profile cases: the theft of $230 million from the Russian budget using companies appropriated from the Hermitage Capital investment fund, the sending abroad of money resulting from illegal collusion to increase the cost of aviation fuel, and the laundering of proceeds from a tax avoidance scheme allegedly carried out by insurance companies.

The network of companies also had dealings with entities belonging to the eminent cellist Sergei Roldugin, a friend of Russian President Vladimir Putin. A deal with a company owned by Roldugin was canceled, prompting a company from the Troika network to pay Roldugin’s company large fines for reneging.

A disclaimer to the investigation written by Drew Sullivan acknowledges that although significant sums of money of dubious origin passed through the network of companies linked to Troika Dialog from 2004:

1) it can’t be said for sure that any of those transactions were illegal, since the laws of each jurisdiction for the transactions differ;

2) it can’t be said for sure that the corresponding structures at Troika knew about the criminal origins of the funds;

3) for Russia at that time, using a system of offshore companies that transferred funds among themselves under technical contracts was standard market practice, and the aim of such operations was to protect the assets and their owners from corporate raids. 

In his response to the OCCRP report, Vardanyan said that the network of companies created by Troika was a “multi-family office” that offered a range of financial and investment services to high-net-worth individuals, including the creation and administration of offshore companies. The fact that Troika was rendering these services to many HNWIs has been widely known, and the existence of such a set of offshores seems natural for this business. 

Offshore companies are an intrinsic part of the financial world, and their use is legal all over the developed world. As well as being used to reduce the tax burden and improve structuring by using British law, which guarantees flexible shareholder rights and minimal bureaucracy, in Russia they serve another important purpose. Moving funds and assets offshore is a way of protecting them from corporate raids, often led not only by criminals but also by officials and/or law enforcement officers. This is why many clients ask for a nominal owner and director: not just to avoid appearing in databases that could attract the unwelcome attention of local raiders or corrupt investigators, but to be physically unable to give up the assets if asked, since they cannot legally sign them over. 

In offshore jurisdictions, thousands of people of all walks of life work as professional proxy company directors and owners. To avoid disputes, it is common practice in the offshore banking industry to list the beneficial owner on company accounts, too, and to require their confirmation for all transactions. 

In the particular case of the Armenian construction worker featured in the OCCRP investigation, it is highly unlikely that an unknown Troika client appointed a proxy director to an offshore company for money laundering purposes. For that (and indeed for the usual operations of Troika itself), there would be no point in using a proxy director who could easily be tracked down in Russia and who would tell investigators everything straight away. It would be much simpler to use someone in Cyprus or the Cayman Islands, where there is no shortage of candidates. 

There could be several possible reasons for using an Armenian construction laborer working in Russia. Perhaps the client wanted easy access to the proxy (the client could be Armenian, or simply not English-speaking) or already knew the individual. Perhaps they needed the documents to be signed quickly. Either way, the construction worker’s claim that he was unaware of his role is untenable. The risk would be too great of raiders locating the proxy owner unaware of his possession, and tricking him into signing over the company for close to nothing. In practice, the proxies knew very well what they were doing, received cash for their role, and were warned in advance how to behave, including being discreet. This is why the Armenian construction worker, when interviewed by journalists, said that he did not know why and how his name and signature had been used. 

As for the money the journalists traced back to the companies involved in the three high-profile criminal cases, in all three, Troika network companies received money and then, according to the investigation, sent that money onwards, presumably to the beneficiaries of those crimes. 

And that is entirely possible. At the time when those transfers were made, the three scandals were not scandals at all, or even criminal cases. In the case involving Hermitage Capital, the companies performing the transactions were the same ones that had previously managed the Hermitage fund’s assets, so the movement of funds from those accounts was simply business as usual.

Back in 2008, compliance in banking was not what it is today: accounts were opened on the basis of interviews conducted by the sales team. The source of the money was listed as described by the bank customer and was not checked. Investment banks were a perfect way of moving and laundering money: so perfect that the bank would not necessarily have known what was going on. Citibank and Credit Suisse were also unwittingly involved in moving some of the money under investigation abroad, and noticed nothing.

It can’t be excluded that someone at Troika could have known about the nature of the money going through its system (indeed, how could this be excluded?), but still, it seems unlikely: no particular facilitation of these transactions was required by Troika, and why would the criminals let the broker’s staff in on what they were up to? We should remember that the money launderers used a whole range of top-league European banks in precisely the same way, despite their far stricter monitoring procedures. 

Yet another claim by investigators looks groundless: they say that the Troika offshore companies had an enormous amount of internal transactions, seemingly intended to confuse a potential auditor and launder the dirty money incoming into the system. In fact (and this is confirmed by the investigators themselves), the amount of internal transactions is roughly equal to the external turnover—an absolutely normal situation, given the fact that companies had their specializations, the liquidity was being sold to banks through the dedicated companies, the investments were made through licensed entities and front companies, specifically selected for carrying out the investment businesses, etc. That fact rather suggests that no special efforts to sidetrack were undertaken.    

As for the unsubstantiated accusations of fictitious trade deals, it is not clear why the companies would do this, and the journalists’ theory raises major questions. In the financial world, if an offshore company needs to transfer money to a company with a different owner, it’s traditional to use forgiven debt schemes, which are not taxable or illegal in offshore jurisdictions.

Occasionally, it might be necessary not just to transfer money, but to make it appear that the recipient has earned it through honest work—either to launder illegal income or simply to avoid questions from the bank about why the debt has been forgiven. In these cases, the universal solution is a securities, currency, or derivatives transaction with a predetermined outcome, or, even simpler, a sale and purchase agreement for any sort of securities with non-delivery and the subsequent penalty paid to the side awaiting funds. Why would anyone use a cumbersome scheme involving goods, which entail more paperwork and a high probability of being questioned, or even stopped by a bank or challenged by an auditor?

It is worth noting that there is almost nothing in the investigation about supposedly bogus transactions involving securities, with the exception of one incident in which a transaction was canceled and a penalty incurred (in connection with Roldugin’s company). So, in all probability, the results of the investigation testify to the lack (or only occasional use) of the practice of using such contracts in the Troika family office. 

Regarding the transfer of money from the network companies to companies owned by Roldugin, the investigators appear to pose the question: given the friendship between the cellist and Putin, could those payments be a bribe? It is impossible to answer this question. A bribe differs from sponsorship or a charitable donation in one way only: the action taken by the recipient in response. 

Who was behind Roldugin on this occasion and what he did in response, we will, in all likelihood, never know. But it is likely that whatever the nature of the payment, it did not come from Troika itself, but rather from one of its clients—and Troika officers hardly could refuse to execute the payment (and for what reason?). Troika had nothing to ask for and nothing to receive from Mr. Roldugin—it had another person to deal with: at that time Troika was closely cooperating with the giant state corporation Rostec, and Mr. Chemezov, the CEO of the corporation, was sort of a supervisor of the investment bank. If anything, Troika’s management would have addressed Mr. Chemezov, not anyone else from the top of the Russian power pyramid (it is a “breach of duty” in Russia to ignore “the line of command”). 

An impartial reading of the OCCRP investigation into Troika Dialog can offer only one conclusion, and it is hardly a new one: financial institutions where AML/KYC procedures were far less stringent ten years ago than European regulators insist on today could be used for money laundering. 

That is no more original than concluding that knives can be used to stab people. Yet it hasn’t occurred to anyone to accuse the German blade-manufacturing center of Solingen of murder, and knives continue to be sold freely: regulators haven’t yet thought of shifting the blame for crime onto the creators of its weapons.

Banks and brokers exist not to catch criminals, but to perform financial transactions, and in light of that, the conscious focus of the OCCRP on a financial institution looks like the path of least resistance: to search not for what is hidden, but for what is in plain sight. As a result, one of the very few investment banks that made an unprecedentedly large contribution to the development of the Russian market, industry, and financial sector, and which created standards in Russia for the investment business that were as good at the time as those in developed countries, has seen its reputation attacked.

In the investigation, the questions of who broke the law and how they managed to do so have become mixed up. Suspicion is presented as fact, and harmless facts are brought up to add weight to the allegations.

With all due respect to the work of the journalists, who strive to expose examples of corruption, money laundering, and criminal financial operations, it’s worth remembering the real purpose of the financial system. In this investigation alone, about a dozen major banks are mentioned alongside Troika. If we are to continue down this road, we could reach a stage of paralysis, in which financial institutions will be too afraid to perform any kind of complex transactions, compliance checks will take years, and cases of honest clients having their accounts frozen (which are so far isolated incidents) will become a constant occurrence. 

And there’s no point in hoping that this would stop criminals: illegal operations would simply be carried out via small, obscure companies and regional banks; they would only become more sophisticated, so that bigger banks still could not identify and stop them; and laundering would increasingly be performed using cryptocurrencies.

Professionals should stick to their own work: law enforcement agencies should catch criminals, and banks should carry out transactions. Banks and brokers should be held accountable not for crimes executed through their networks, but for whether or not they carried out all the necessary procedures imposed by law. Unfortunately, we can’t go back to 2008 and ask Troika’s officers whether the rules were always obeyed: there is no one to ask. Troika was acquired by Sberbank and then dissolved long ago. And in any case, the procedures of the time were inefficient—not only in Russia, but in the world as a whole. 

By:
  • Andrey Movchan