November 9, 2005
Bank Settles U.S. Inquiry Into Money Laundering
By TIMOTHY L. O'BRIEN, NY TIMES

LINK

Federal prosecutors said yesterday that the Bank of New York agreed to pay $38 million in penalties and victim compensation in a deal stemming from a six-year investigation of fraud and money laundering involving suspect Russian and American bank accounts and other fraudulent transactions.

Prosecutors said the bank, one of the nation's oldest, did not adequately monitor and report suspect accounts at the bank.

The bank agreed to make what prosecutors described as "sweeping internal reforms to ensure compliance with its antifraud and money laundering obligations."

Authorities said that the bank has "accepted responsibility for its criminal conduct" and that it will not be prosecuted as long as it complies with the terms of the deal for three years.

Bank of New York also agreed to allow an independent examiner to monitor its operations.

The investigation, which began in 1998 and ended last year, first became publicly known in the summer of 1999 when Russia's pell-mell rush to privatize formerly state-owned assets resulted in widespread criticism of insider deals and possible corruption among Russia's business elite and officials of the Kremlin.

The fine, which is among the largest ever assessed against an American bank for money laundering violations, consisted of $14 million for failing to supervise suspect Russian accounts and $24 million for a separate series of fraudulent activities involving a branch on Long Island.

Riggs Bank, a subsidiary of the Riggs National Corporation, paid $41 million in federal penalties this year and last to settle a high-profile investigation of money laundering problems at that institution.

Prosecutors with the United States attorneys' offices in Manhattan and Brooklyn noted that the money laundering scheme at the Bank of New York involved unlicensed transmissions of about $7 billion that originated in Russia, passed through American accounts, and then moved into other accounts worldwide.

Authorities said that at least nine individuals, including a former Bank of New York vice president, had been convicted for their roles in the two cases.

The Bank of New York acknowledged in the settlement that it had failed to adequately police and intentionally failed to report suspect accounts at the bank. Moreover, according to the settlement, the bank's general counsel, managing counsel, and other senior executives repeatedly ignored requirements to report illicit transactions until authorities began arresting suspects in its investigations.

The agreement also said that the Bank of New York subsequently provided incomplete reports about suspect activities and failed to report separate transactions that resulted in the defrauding of other banks - even though the Bank of New York had already reached an agreement with regulators to overhaul its troubled monitoring operations.

"We are satisfied that reaching this agreement is in the best interest of our company and all of our constituents," the bank's chief executive, Thomas A. Renyi, wrote in a statement. "We are taking the right steps in today's environment to ensure sound business practices."

Two Russian émigrés - Lucy Edwards, a former vice president at the bank, and her husband, Peter Berlin - originally opened the suspect accounts at the bank in 1996. The couple pleaded guilty to fraud charges in early 2000, conceding that they helped two Moscow banks conduct illegal operations through Bank of New York accounts.

Prosecutors declined to describe the plea agreement but a person briefed on the investigation said that Ms. Edwards and her husband were among those convicted in the scheme. The couple could not be reached for comment and T. Barry Kingham, a New York lawyer representing them when they first pleaded guilty to fraud charges, did not return repeated telephone calls seeking comment.

In 1999, the Bank of New York suspended Natasha Gurfinkel Kagalovsky, a senior executive who oversaw Ms. Edwards. Federal investigators were exploring Ms. Kagalovsky's possible role in the money laundering scheme at the time and she subsequently resigned from the bank and moved to London. She has never been charged with wrongdoing in connection with the investigation. Her New York lawyer, Stanley S. Arkin, said yesterday that his client never violated any laws.

Ms. Kagalovsky's husband, Konstantin Kagalovsky, served in senior government and corporate posts in Russia. He once worked for two large companies, Menatep and Yukos, which the Russian billionaire Mikhail Khodorkovsky formerly controlled. Mr. Khodorkovsky, once one of Russia's most prominent and powerful figures, was convicted in Moscow in May on fraud and tax evasion charges in a highly disputed case pitting him against the Kremlin.

J. Michael Shepherd, who was general counsel at the Bank of New York during the money laundering investigation, left the bank last year to become general counsel of the BancWest Corporation. He did not return a telephone call seeking comment.