An Austrian bank’s brush with hot Russian money

Representatives of Italy’s far-right League party travelled to Moscow last October for a clandestine meeting with Russian agents. The Kremlin was ready to secretly fund the populist, anti-EU party. But when a recording of the talks was leaked, the political row that followed set in motion the slow disintegration of the League’s foothold on power, culminating with the collapse of Italy’s government in August.

Yet the disclosure did not just cause political waves. The meeting had been focused on solving a practical problem: how to move dirty Russian money — running into the millions of euros — into Italy, through Europe’s heavily-monitored banking system, without triggering any alarms?

The parties knew they needed a financial intermediary. It had to be in western Europe, but not in a country like the UK. It had to be dependable — and discreet. But above all, it had to seem legitimate. “If it is [through] Austria,” said Gianluca Meranda, a lawyer representing the League, “we have very good links with [Thomas] Moskovics . . . the owner of Winter Bank”.

Mr Meranda’s off-the-cuff remark — caught on the recording which was first revealed by BuzzFeed — has forced Bank Winter, one of Vienna’s oldest and most opaque finance houses, into an uncomfortable spotlight. Little known outside the city’s small Jewish community, or in the treasury departments of other banks, it has tried to shut down what it called “unfounded speculation” about its business and its longstanding connections in Russia.

The League’s scheme with the Kremlin never took off, the bank points out, and the tape makes clear that Bank Winter was not a route the Russians cared to use. Yet that its name should crop up in a discussion about secretive transactions between Russia and Europe was not entirely surprising.

Italy, Rome - June 5, 2018 Matteo Salvini, leader of Lega and Interior Mininister pictured in Moscow during his trip in Russia December 2017 Twitter photo

Matteo Salvini, leader of the League. Leaked recordings revealed the Kremlin was ready to secretly fund the anti-EU, populist party

A lawsuit filed in Vienna in February 2017 accuses Bank Winter — which is contesting the action — of helping to launder $175m out of Russia’s National Bank Trust on behalf of its former management, into a labyrinth of offshore holding companies. Trust was saved from collapse in 2014 by a €2bn bailout from the Russian central bank, which accused its former owners of fraud. When auditors began to pore over Trust’s accounts they were surprised to find that a tiny Viennese private bank was one of its largest counterparties.

The case shined a light on the hermetic world of Austrian banking, offering a vivid tale of how critical Europe’s banks have often been to ensuring the smooth operation of Russia’s banking system — and the extent to which Austria, in particular, has been a key hub for such activities. And it provides an example of the extent to which a banking culture geared towards offshore structures, facilitated by intermediaries and handshakes, can be abused to generate huge flows of illicit money.

“Most of the Russian banking system is benefiting from these transactions,” says Thomas Moskovics, Bank Winter’s chief executive, of the deal at the centre of the legal action. “This whole situation is one big instance of how encumbered the whole Russian banking system is — one whole big mess.”

One court-appointed expert in Vienna disagrees. Marcus Klug says Bank Winter should never have engaged with Trust. “The KYC [know your customer] audit was not completed . . .major documents had not been updated . . . essential documents were missing,” he says. The bank disputes this.

Austria’s financial system is under intense scrutiny. In its most recent assessment, of the country the Financial Action Task Force, a G7 initiative that sets global compliance standards, found “major” or “fundamental” failings in the application of financial rules in seven of 11 criteria.

“There is a tendency to think about Austria as a mini-Germany in terms of its financial and legal system,” says Tom Keatinge, director of the Centre for Financial Crime and Security Studies at Rusi, a British security think-tank. “But really it’s not.”

“People have talked a lot about the Baltic states and their role in Russian money laundering but the banks in the Baltic were really just dumb bits of piping. The transactions which come through Austria are engineered.”

Bank Winter traces its roots back to 1892, when Alfred Winter, a prosperous Jewish merchant in late imperial Vienna, branched out into finance. It flourished at the start of the 20th century. But in 1938, with the Anschluss, Bank Winter was “aryanised” overnight by the Nazis.

A Russian national flag flies above the headquarters of Bank Rossii, Russia's central bank, ahead of a news conference to announce interest rates in Moscow, Russia, on Friday, Dec. 15, 2017. Russia’s central bank unexpectedly accelerated its pace of monetary easing with this year’s third cut of a half point after price growth fell to a record and a deal between OPEC and its allies to maintain oil production cuts until the end of 2018. Photographer: Andrey Rudakov/Bloomberg

Trust Bank was saved from collapse in 2014 by a €2bn bailout from Russia’s central bank, above

It would take almost 20 years for the bank to be revived. The family was able to reclaim its prewar banking licence but had no capital of its own. So it did a deal with Simon Moskovics who had capital but no bank. A wily marketeer, Moskovics had made his fortune trading in postwar Vienna — a harsh, barter-based economy immortalised by Graham Greene in The Third Man. A Talmud scholar by the age of 18, Moskovics tutored far older men on the intricacies and shifting moral sands of the central text of Rabbinic Judaism.

He had been persuaded by influential contacts in Zürich’s financial community, who were prepared to extend him credit, to open a lender of his own. Bank Winter was a perfect candidate.

In the 1950s and 1960s, Moskovics used Bank Winter to pioneer a system of tradeable credit notes, allowing goods from Warsaw Pact countries to be efficiently sold in the markets of western Europe, despite sanctions and capital restrictions. Hugely lucrative, it was an arrangement that did not always sit easily with other European governments, which saw Vienna increasingly as a financial black hole being used by the Soviet Union to shore up its finances.

But with the end of the cold war in 1991 and then the death of Moskovics senior two years later — coupled with rapid consolidation in the financial world — the new family head had to take the bank in a different direction.

Thomas Moskovics used the first decade of the 21st century to turn Bank Winter into a capital arbitrage house, using its small but very secure balance sheet to effectively underwrite pools of assets held by far bigger banks. And significantly reducing the amount of buffer capital regulators required the bigger institutions to hold.

By 2011, with the financial crisis making such arrangements difficult in Europe, Bank Winter went back to its roots in the east. Its agent in Moscow introduced an Englishman, Ben Worsley, who was employed by the owners of Trust — a trio of Russian businessmen — Ilya Yurov, Sergei Belyaev and Nikolai Fetisov.

Mr Worsley had acted as a conduit between western and Russian businesses through his headhunting firm, Central Search. and was, on paper at least, owner of a network of more than 200 offshore holding companies run on behalf of the three men. Bank Winter says it believed that Trust was the ultimate owner of the holding companies.

In September 2011 Trust deposited $175m of Russian government bonds with Bank Winter in Vienna, which issued a statement declaring the deposit. That statement was provided to Russia’s central bank as evidence of Trust’s fungible, readily available assets. In reality, and unknown to the central bank, a second transaction saw Bank Winter loan those bondsto a Cypriot entity, entitled Black Coast, under the control of Mr Worsley.

Bank Winter and Trust Bank

Bank Winter & Co. AG

The case of Bank Winter shows how critical Europe’s institutions have been to ensuring the smooth operation of Russia’s banking system © Gavin Gough

$175m

Sum allegedly laundered out of National Bank Trust with Bank Winter’s assistance, which is contesting the lawsuit brought in Vienna

>200

Offshore holding companies ran by Ben Worsley, on behalf of Trust Bank owners Ilya Yurov, Sergei Belyaev and Nikolai Fetisov

$2bn

Value of the 2014 central bank bailout of Trust Bank, which accuses its former owners of fraud. Trust is now a ‘bad bank’ with Rbs2tn of assets

According to Bank Winter, the scheme was conceived as a clever, and legal, way of circumventing Russian capital rules. Black Coast, they believed, was a Trust-controlled entity set up for the Russian bank to invest in a Black Sea resort — Project Stivilon. Russian rules would have required the bank to set aside a significant capital buffer due to the perceived risk of a property scheme. By disguising the transaction as a holding of highly fungible government bonds, no risk buffer was required.

“We always knew it was ring around the roses,” says Mr Moskovics. “As far as we were concerned, the money was coming out of one part of the bank and going to another. The money went from Black Coast straight back to the bank.”

The new owner of Trust’s legacy assets — effectively Russia’s central bank — sees it differently. Bank Winter performed almost no due diligence on the transaction, it asserts, and was a willing accomplice to a deal that allowed Trust’s owners to siphon vast sums of money from the bank for their own illicit schemes. A civil case against Messrs Yurov, Belyaev and Fetisov is being heard in London’s high court. Trust’s new management is accusing them of breach of duties and seeking $830m in damages. The trio admit hiding bad assets from the central bank but say it was to stop it from declaring Trust bankrupt, not to steal assets, and deny the accusations against them and are contesting the case.

Mr Yurov says he never dealt with Bank Winter directly: “I am sure that all of Winter Bank’s deals with Trust, if there were any, went through compliance control in advance, just like all other deals with other Russian banks.”

The 2014 central bank rescue of Trust was structured to give Otkritie, a private bank, abundant cheap funding to absorb and recapitalise Trust. Three years later, the central bank was forced to spend nearly $50bn nationalising Otkritie and two other banks, turning Trust into a “bad bank” holding Rbs2tn in bad assets. The central bank controls both Trust and Otkritie and is seeking to recover as much from their collapse as it can.

The case against Bank Winter represents one of the largest claims. Mr Worsley — who declined to comment for this article — was accepted without hesitation, the new management allege, without Bank Winter checking whose interests he represented. He never worked for Trust itself. And Project Stivilon has not developed into the multimillion dollar resort it was purported to be. Photographs from 2014 show weed-covered plots and half-finished breeze block constructions along an undeveloped strip of scrub close to a beach.

As the money trail — outlined in the legal documents — makes clear, once the $175m had disappeared into Black Coast, it was, within hours, transferred to a third entity, a company called TIBI. From TIBI the money was again recycled and used to repay a 2007 $118m loan from the Luxembourg-based East-West United Bank. Where the original loan money from that 2007 transaction went, remains a mystery.

Clemens Trauttenberg, the Viennese lawyer representing Trust’s new owners, says the transaction should have been more closely scrutinised from the start. Efforts to perform adequate documentation and customer checks by Bank Winter were fulfilled only after the deal had gone through, he claims.

Mr Worsley won immunity from prosecution in civil court with Trust’s new management by handing over all of his correspondence and data on the bank and Messrs Yurov, Belyaev and Fetisov. Mr Worsley’s email exchanges — copies of which have been seen by the FT — clearly show that other banks were wary of dealing with him.

Mr Moskovics is frank about the deal he cut with the Englishman. “The real purpose of this bond lending was for them [to maintain] the fiction created in their books that they had 30-year bonds sitting pretty in Bank Winter even though the bond position lasted one week . . . it was all transferred into cash,” he says. “A blind man would have recognised that the bonds were not being kept.”

Sitting behind the same huge, wooden desk once used by his father, Mr Moskovics recounts a fable from the Talmud to try and explain Bank Winter’s position.

Bank Winter & Co. AG

Bank Winter, one of Vienna’s oldest and most opaque finance houses © Gavin Gough

“A man is accused of a crime, that he killed someone. There is evidence and motive. As he is trying to defend himself the dead man walks into court. The judge turns to him and says, you sit down over there. We have to hear the evidence.”

If Bank Winter believed the money to be staying in Trust’s control it would be the equivalent of the murdered man being alive and there being no crime, he argues. Bank Winter, says Mr Moskovics, believed the management it was dealing with, and their representative Mr Worsley, were authorised to act as they did. “They were not rogue,” says Mr Moskovics.

Bank Winter, he says, did everything that Austrian law required.

Documents provided by Mr Moskovics show the deal was signed off by Nadia Cherkasova, Trust’s then chairperson and now senior executive at Otkritie. Lawyers for Otkritie declined to comment on Ms Cherkasova’s role. But Florian Botschen, Bank Winter’s financial chief, says that according to 2011 guidance from Austria’s financial regulator, Russia was to be treated as a compliant and equivalent jurisdiction where additional KYC checks were not necessary.

Analysts say it is a position that would not wash in most European financial centres, where bankers must rigorously adhere to compliance rules and processes. It is a situation that shows the degree to which culture and history still dominate the way business is conducted, regardless of international rules, even in an economy as developed and integrated as that of Austria.

Bank Meinl, now known as Anglo-Austrian Bank, which like Bank Winter is one of Vienna’s oldest family-owned lenders, was accused by Ukrainian police in 2016 of helping to launder €2bn of dirty money. The bank said in a statement: “since all the major Austrian banks were engaged in transactions with Ukraine, it is massively dishonest to single out and incriminate Meinl Bank in this case.” Earlier this year the financial regulator in Vienna said it had identified 30 suspects in an investigation of the Ukrainian claims across the Austrian banking system.

A complaint to Vienna’s public prosecutor in March by Bill Browder, the prominent Kremlin critic, alleged that $1bn of dirty money from Russian criminals had flowed into Austrian banks in one particular set of transactions run through Danske Bank — the Danish bank at the heart of another Russian money-laundering scandal. Raiffeisen Bank, Austria’s biggest lender, had handled more than $670m of that, Mr Browder alleged. The bank said it was conducting an internal investigation.

“The compliance architecture in Austria is really very poor,” says Rusi’s Mr Keatinge. “We used to think about Austria as being part of blue-chip Europe, but actually, people are beginning to look at Austria differently today.”

Additional reporting by Max Seddon in Moscow

This article has been updated to correct the name of East-West United Bank

Thanks to the Courtesy of :

https://www.ft.com/content/a7845838-dac8-11e9-8f9b-77216ebe1f17

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