Rifkin’s heist made it into the Guinness Book of World Records under the category of “biggest computer fraud,” and the legendary hacker Kevin Mitnick started his own book with a description of the heist.4 But because the first part of the scam—the transfer of more than $10 million from a telephone booth on the street—was so spectacular, few people paid attention to anything other than that.
In fact, the smoothness with which an American from Los Angeles could fly to Switzerland and pick up a suitcase of Soviet diamonds worth $8 million at the local airport’s duty-free desk—right in the middle of the Cold War—was perhaps even more remarkable. Indeed, the ease with which this was accomplished speaks volumes about the nearly perfect system built by the Soviet Union for transferring commodities like diamonds smoothly from the East to the West.
Lon Stein, for example, was no stranger to Moscow. Later, Malinin, who handled the transaction for Russalmaz, would say that when his firm received a Telex message from L. Stein expressing interest in buying $8 million worth of diamonds, Russalmaz followed up with an inquiry.5 “I phoned Moscow,” Malinin said. “They told us they knew this person (Stein). He had been to Moscow several times.” Taking this as a go-ahead, Russalmaz agreed to the scheme and waited for the money to be deposited in its account at the Wozchod bank.
The Wozchod bank, however, was by no means a conventional Swiss bank. Rather, it was part of a large archipelago of Soviet banks abroad (Wozchod means “sunrise” in Russian) that extended from London to Singapore to Tehran to Paris to Zurich. Some of the banks were launched in the 1920s; others, like the one in Zurich, started up in the late 1960s.
All of them were created with one mission: to help the Soviet Union buy, sell, and borrow in hard Western currency. Starting in the 1960s, the Kremlin had another requirement for these banks: to operate in a way that was untraceable by the United States. The new requirement was prompted by one 1959 lawsuit—a Russian émigré in the United States, Elena Weilamann, sued the Soviet Union in a New York court, accusing Soviet authorities of failing to make payments on their obligations to two English corporations with concessions in the Soviet Union. Weilamann was one of the holders of these obligations. She also brought a suit against Chase Manhattan Bank for transferring money from the accounts of Soviet banks at Chase. That so scared Soviet bankers that they moved all their accounts in dollars to Soviet banks abroad—in Paris and London.6 The goal, a high-ranking Russian banker explained to us, was “to make Soviet dollar transactions impenetrable for the US government.” And that was why there was no Soviet bank in the United States.
Even among this archipelago of banks, the Wozchod was remarkable. Located in a nondescript five-story building at Number 1, Schutzengasse, in the heart of fairy-tale Zurich, the Soviet government tasked the bank with very sensitive missions indeed.
One of them, exclusive to the Wozchod bank, was the sale of Soviet gold. It worked like this: Soviet gold was transported to Zurich by ordinary Soviet passenger aircraft, five to seven tons of gold per flight. Standard ingots of 12.5 kilograms were distributed evenly throughout the plane under the passenger seats—the gold was heavy, and the aircraft had to be carefully balanced.
The Wozchod bank also helped sell diamonds, another of the Soviet Union’s precious commodities. Russalmaz was the exclusive exporter of Soviet diamonds, and it had an account with Wozchod.
Furthermore, the Soviet government put the Wozchod in charge of working with American banks, one of which was the Irving Trust—the bank so cleverly used by Rifkin to transfer his more than $10 million out of Security Pacific.
But was Rifkin actually so clever? On the American side, his ingenuity allowed him to exploit a breach in bank security. But once his plan reached international waters, Rifkin simply tapped into an existing scheme, one designed by very smart people in Moscow to transfer much-needed US dollars smoothly and untraceably from the United States to the Soviet Union. “I had nothing to do with the selection of Russalmaz: it was completely under the control of the broker. I had not heard of them before or since,” Rifkin told us in an email exchange.7
Even after Rifkin’s arrest, the Los Angeles bank’s money was still in Moscow. As a Soviet magazine gleefully remarked in 1980, “The ending of this story is awesome. There are no victims in it.” The magazine then added, “The Swiss company made an excellent deal, selling diamonds for eight million dollars.”8 We must point out that the company—Russalmaz—was not Swiss but Soviet.
The fact that Rifkin was caught did not hurt Malinin—he enjoyed a long and successful career in the gem industry, and in the 2000s he became head of Brillianty ALROSA, the cutting and polishing division of the world’s largest diamond mining company, ALROSA.9 Neither did it affect the Soviet Union’s banking operations in any way. The scheme was a very good scheme, after all, and it had been operational for decades.
But just ten years later, in the late 1980s, as the Soviet government began to liberalize its economy, a new, pressing question emerged: Was it possible to use the same scheme to channel money in the reverse direction—out of Russia and into the United States?
Over the next few years, many people would set to work answering this question. Nobody was better equipped to find a solution than people who knew both sides of the coin: the Western and Eastern worlds, the Russian Americans in the US banks. And so in the 1990s, the very same bank Rifkin had used to channel his spoils out of the United States began to play a new role. Russia’s new money launderers used it to move large amounts of dollars out of Russia and into the United States, causing the largest bank scandal of the decade between the two countries.
CHAPTER 16
THE SCHEME DEVISED
Generally speaking, there was no love lost between the aristocratically minded, deeply Russian Orthodox descendants of the first wave of Russian emigration and the third, mostly Jewish wave of Soviet emigrants that began pouring into the United States in the 1970s. History, family background, and prejudices played a part in the divide. But as the Soviet Union liberalized, the emerging opportunity to make money in the homeland brought individuals from these two groups together. The results of this unexpected teamwork would be far reaching, with deep consequences for both Russia and the United States.
In 1988, after what the New York Times described as “one of the biggest, longest-running, and most hostile takeover battles in the United States,”1 the Bank of New York—America’s oldest bank—succeeded in taking over Irving Trust, one of the biggest.2
Thanks to the merger, the Bank of New York got everything the Irving Bank had, including its handsome, Art Deco–style building at One Wall Street. It also got the department dealing with Russian transactions.
Before the merger, Irving Trust had been running an extensive business with Soviet banks. This business was supervised by a Russian émigré named Natasha Gurfinkel. A Soviet Jew who had moved to the United States, Natasha was one of those lucky enough to have had their applications approved by Brezhnev’s government in 1979. In 1986, Natasha got a job with Irving Trust, where she dealt with the lucrative trade with Soviet banks.
Over at the Bank of New York, Soviet banks were handled by a Russian aristocrat from the highest echelons of tsarist society, a Russian prince named Vladimir Galitzine. When the two banks merged, Gurfinkel and Galitzine teamed up, sharing an office on the ninth floor of One Wall Street.
This was the moment when two different waves of Russian emigration to the United States finally came together. These two groups, who had never quite been able to find a way to cooperate politically, finally found some common ground when it came to making money.
With their very different backgrounds, the newly minted banking partners began working together.
Natasha, a nice-looking, outgoing woman, grew up in Leningrad. Her parents sent her to an elite school, the first in the city to teach English. The education was indeed good: the English department was run by the son of a former Russian emigrant who had returned to the Soviet Union from Englan
d, along with his father, in the 1930s.3 After high school, Natasha enrolled at Leningrad University, where she specialized in Eastern studies—her field was ancient Assyria, Babylon, and Sumer.4 In 1979 her family made a tough decision: Natasha, along with her first husband, her sister, and their mother, moved to the United States while their father stayed in Leningrad. In the United States, the new emigrants settled in Louisville, Kentucky, where a vibrant Jewish community dated to the beginning of the twentieth century. From there, Natasha entered Princeton University, where she earned a master’s degree in Near Eastern studies. In 1986 she landed a job with Irving Trust, which put her through a yearlong course in commercial banking.
The thin-mustachioed prince Vladimir Galitzine, nicknamed Mickey, on the other hand, had the “countenance of a silent-screen actor.”5 Natasha was always teasing him for his archaic Russian vocabulary. The Galitzines were, in fact, nobler than the Romanovs—indeed, if it hadn’t been for the fact that the head of the family was stuck in Polish captivity in the sixteenth century, it could well have been the Galitzines rather than the Romanovs on the throne in 1917.6 Despite having lost their sixteenth-century bid, the Galitzines nonetheless remained important in the Russian empire for the next three hundred years.
All that was destroyed when the Bolsheviks killed the tsar. Fleeing the revolution, the Galitzine clan spread all over Europe. Vladimir’s parents, newly married, settled in Belgrade, where he was born. In the midst of World War II, the family moved to Germany, where, after Hitler’s defeat, they found themselves in a displaced persons camp in Munich.
They became lost there in the huge crowd of a second wave of exiles from the Soviet Union—the captured Red army soldiers and Soviet displaced persons studied with such assiduity by the American Russia watchers George Fischer and George Kennan.
In 1951 the Galitzines made it to New York, where they settled in the Brownsville neighborhood of Brooklyn. Vladimir’s aristocratic father worked as a hospital orderly, and his mother toiled in a match factory. They were poor, but Vladimir’s mother made sure to send young Galitzine to a good school. In 1960, at eighteen years old, he joined the Bank of New York as a junior clerk.
In the late 1980s, Mickey Galitzine worked his way up from an accounting position to the International Department. His timing couldn’t have been better. This was the very moment when, driven by the pressing need for hard currency in the face of an impending economic catastrophe, the Soviet Union was opening up its financial market.
By the time of the takeover, this process was well under way in the Soviet Union. Gurfinkel and Galitzine didn’t want to miss out.
Before the Irving Trust takeover, Galitzine had made several trips to Moscow, but he didn’t understand the people he met in his family’s native land, nor did he feel any urge to return to Russia for good. “The United States continues to be my home,” he said at the time. “The opportunity to visit the places we’ve been hearing about all these years is all very attractive. But my career is here. My home is here.”7
After the bank merger, Galitzine’s closest ally at the bank, Natasha Gurfinkel, stepped up and began making most of the trips to Russia. Thanks to her work at Irving Trust, she already knew all the big shots in the Soviet banks abroad, so her existing network was very good.
Natasha was a real go-getter and very good at developing new contacts. In September 1989, a rising Soviet political star named Boris Yeltsin was stuck in Moscow’s airport with a group of American bankers. Yeltsin was on his way to the United States to give a series of lectures. At the airport, he was suddenly surrounded by Americans, but he didn’t understand a word of English. Natasha volunteered to help with translation. The two got along swimmingly, and the gentlemanly Yeltsin even carried Natasha’s suitcase to the plane.8
Thanks to the dynamic duo of Garfunkel and Galitzine, by the time the Soviet Union collapsed, the Bank of New York was leaps and bounds ahead of all the American banks suddenly interested in the Russian market. The bank took steps to solidify its lead and promptly formed a new unit within the bank: the Eastern Europe division. It was led by Natasha, with Galitzine happily serving as her right-hand man. Together they were in charge of fifteen people on the ninth floor of the One Wall Street building.
As part of their work, Natasha brought Galitzine to Moscow to meet some people who were big shots, both then and now. “I was on friendly terms with Natasha, and she brought [Galitzine] to us. It was like going to a museum,” remembered Mikhail Khodorkovsky, the richest and most powerful tycoon of the first generation of Russian oligarchs, whose businesses had accounts with the Bank of New York in the 1990s. “Natasha was special,” he went on to explain. “The problem with émigrés—they compensated for their low social status [in the United States] by trying to make the impression in Russia that they were great professionals. They spoke in Russian with a deliberate American accent, all that. That’s why we always treated them with a great deal of humor.” It was different with Natasha: “She was normal, and everybody connected with her very quickly.”9
When the Moscow stock exchange opened an account at the Bank of New York in the mid-1990s, the bank became the undisputed leader in the transfer of money between Russia and the United States. “BoNY [as the Bank of New York was known] took over most of the clearing [operations]. They also opened a bunch of corresponding accounts with Russian banks within Russia,” remembered Khodorkovsky. Soon more than 80 percent of all Russian transfers in US dollars came through BoNY.
Very soon, however, the steady stream of dollars flowing from Russia to the United States became muddy.
CHAPTER 17
MUDDYING THE WATERS
In New York, Gurfinkel and Galitzine’s Eastern Europe division was expanding. In need of more personnel to handle traffic, they hired another recent Russian émigré, Lucy Edwards, in 1992.
“We were looking for people speaking Russian and found Lucy doing something in another department. She was very talented, so we hired her,” Natasha told us. Then thirty-six years old, Lucy Edwards was a resourceful woman. She was also extremely energetic: while others in similar positions at the bank would see four or five clients a day, she saw ten to twelve.1
Nobody at the bank was concerned about Lucy’s background, which was colorful. She had moved to the United States in the late 1970s by marrying a nineteen-year-old US merchant seaman she met in a Leningrad nightclub—a not-uncommon way for an attractive young woman to escape the Soviet Union. In the United States, she and her husband moved to Colorado, where Lucy started working as a bank teller, then as a waitress. After her marriage fell apart, she moved to New York in 1988. There, she landed an entry-level job handling commercial accounts at the Bank of New York.
Four years later, she joined Natasha and Galitzine in the bank’s new Eastern Europe division. Soon Lucy became a loan officer, moving into the executive ranks for the first time.2 In 1994 she was promoted to vice president of BoNY’s Eastern Europe division.
Her record, however, had certain red flags. In the early 1990s, she was caught stealing more than $1,400 worth of clothing from a Nordstrom’s department store in Edison, New Jersey. Two years later she was caught shoplifting at a Bloomingdale’s store in Hackensack, New Jersey. She pleaded guilty both times. (Lucy remarried in 1992. She and her new husband, a Russian emigrant named Peter Berlin, were apparently soul mates: he was also arrested for shoplifting in Fairview, New Jersey, when he tried to steal sinus medicine from a local A&P.3) The bank later claimed it knew nothing of Lucy’s criminal record.
Regardless, for most of the 1990s, the Eastern Europe division was run in the following manner. In New York, Natasha held the highest position, as senior vice president and head of the division, and Galitzine was vice president. As of 1996, Lucy Edwards was seconded to the bank’s London office.
Lucy and her husband, Peter, were getting rich, and they frequently spent weekends in Italy. They also bought a new spacious apartment in central London—a striking contrast to the very modest hom
e the couple had shared in upstate New York. They enrolled Lucy’s daughter in an expensive private school.
And no wonder they were getting rich: money was flowing out of Russia to the tune of billions of dollars a year, and BoNY provided a secure and respectable channel for that flow. “To have an account at BoNY back then was like having a badge of honor; it meant you were important,” a Russian banker who worked with BoNY in the mid-1990s told us.
But that flow of dollars from Russia had begun to attract the attention of law enforcement agencies in not one but several countries. Still, nothing happened to disrupt the channel. Despite warnings from the British authorities alerting the FBI that the money filling BoNY’s coffers could be connected with Russian money laundering or organized crime, the system continued to function without a hiccup for years.4
That changed suddenly in the summer of 1998.
In June of that year, a successful, young Russian lawyer was kidnapped in the center of Moscow. Bandits put a gun to his head when he left home and ushered him into a Mercedes, which drove him to the suburbs. This kind of thing was not unusual in Moscow in the late 1990s—in fact, it happened quite a lot. What was unusual was that a few hours later, the captive lawyer phoned a friend in San Francisco and asked her to transfer $300,000 to his abductors’ account.
The rules of such business in Moscow held that a ransom always had to be delivered in cash, but apparently not this time. The friend in San Francisco duly complied, and the lawyer was released as soon as the money showed up in the kidnappers’ account—which happened to be at BoNY.
The Russian Interior Ministry launched an investigation. They sent a request to the FBI asking for help tracing the ransom. This prompted the FBI to launch its own inquiry. The abductors’ account turned out to belong to a company set up by Lucy Edwards’s husband. Lucy and her husband were put under surveillance, and their phone was tapped.
The Compatriots Page 14
