The Great Moscow Bank Shakedown
11 Dec 2019

Kirill Cherkalin told his parents the piles of cash stashed at their apartment—$50 million, €1.8 million ($1.9 million), and 17 million rubles ($267,000)—were “for work.” At the downtown pad he shared with a girlfriend he had shoeboxes, tote bags, and suitcases stuffed with $22 million, €6.5 million, and 794 million rubles. In his supercharged Mercedes-Benz SUV: $200,000. All told, he had some $100 million in various currencies, dozens of pricey timepieces such as gold-and-diamond Patek Philippes, four apartments, and a 5,000-square-foot house in Razdory, a leafy suburb where rich Muscovites keep homes modeled on English country estates.

Yet Cherkalin isn’t a Kremlin boss or an oil-pumping oligarch. He’s not even a general. Until this spring, he was a colonel heading one of dozens of subdepartments within Russia’s FSB—the Federal Security Service, the main successor to the Soviet KGB.

Cherkalin, 38, was a key figure in the insular—and, for some, apparently highly lucrative—world of bank supervision. At a time when regulators were shutting down lenders at a record pace, often amid allegations of money laundering, fraud, or theft, he was a top manager in Department K, the FSB’s financial sector “counterintelligence” unit. According to officials and former bankers, he and a handful of other regulators had decisive voices on which banks would be closed and whether their owners got bailouts—or jail terms.

Now in Moscow’s Lefortovo Prison, Cherkalin is charged with fraud and bribery but hasn’t commented on the allegations. His lawyer in November conceded in court that most of the immense wealth police found when he was arrested in April “came from sources not envisioned under the law,” though he said that didn’t amount to an admission of guilt.

Cherkalin’s case highlights the economic footprint of the security apparatus forged during Vladimir Putin’s 20 years in power. While it doesn’t show up in official statistics or reports, the reach of the FSB and other law enforcement agencies extends across the business landscape, distorting markets and sapping investment. The vast sums of money at stake go a long way toward explaining why Putin hasn’t followed through on years of pledges to rein in the appetites of his powerful security underlings. “They’ve become one of the key elements of the economy,” says Oleg Vyugin, a former senior official at the Bank of Russia and the Ministry of Finance. “Unfortunately, they’re an element that’s an obstacle to its normal development.”

For years the banking sector was a gold mine for the security services, combining huge, often-illicit flows of cash with plenty of leeway for officials to either turn the screws or look the other way. The numbers are big even by oil-rich Russian standards. Regulators—including the central bank—say managers stole some 7 trillion rubles ($110 billion) in assets from their banks in the past decade, and the central bank has spent more than 5 trillion rubles on bailouts or to pay off depositors at those that didn’t survive, according to Fitch Ratings. Bankers fleeing the country as their institutions failed have become such a problem that Bank of Russia Governor Elvira Nabiullina asked Putin for the power to stop them at the border. He hasn’t granted it.

Russia’s banks were in need of a cleanup as lax regulation, money laundering, and major economic downturns in 2008 and 2014 weighed on hundreds of lenders that fought for business alongside the handful of state-owned giants that dominate the market. “Banks effectively had licenses to steal money, and the owners laundered the proceeds and went abroad,” says Alexander Lebedev, a former KGB agent whose family controls the U.K.’s Evening Standard and Independent newspapers, who says his National Reserve Bank was almost driven out of business after he complained about pressure from the security services.

Not surprisingly, the International Monetary Fund has broadly praised Nabiullina’s decisive approach. In just six years she closed more than half the country’s banks, aiming to strengthen the remaining institutions so they could provide much-needed credit to the sputtering economy. “Of course, it hasn’t been painless or cost-free,” she told parliament in May.

The purge, and the billions in bailouts that came with it, created huge opportunities for graft. Failing banks could be kept afloat to continue illicit operations. Some saw their good assets stripped out and replaced with junk before regulators closed in. Once a bank failed, corrupt officials could rig the cleanup process to divert any remaining valuables to their allies at knockdown prices. “The bank purge has given this army of corrupt officials a new tool: taking banks apart,” says Alexander Sharkevich, a former senior official at the Interior Ministry responsible for financial crimes. “It’s created a massive feeding trough.”

Few in the industry think Cherkalin’s arrest marks a serious effort to root out corruption. Rather, it’s seen as the latest sign of infighting over the loot. In October a Moscow court sentenced another colonel, from an Interior Ministry department responsible for policing banks, to 12 years in prison for bribery and obstructing justice. Investigators found more than $125 million in cash in an otherwise empty apartment held in his sister’s name. Nabiullina “can’t stop people from getting rich on the banking purge, she’s not the head of the FSB,” says Pavel Medvedev, a banking veteran who serves as the industry’s financial ombudsman. “She has no choice. The banks are rotten, but the economy also takes a hit.”

For the security services, the bank cleanup has largely supplanted the torrents of illicit money that flowed out of Russia over the last two decades. The siloviki (“strongmen”), as Russians call them, skimmed a percentage in exchange for silence, former officials and bankers say. It was a dangerous game. A senior central bank official who tried to close dirty lenders was gunned down in a contract hit in Moscow in 2006. A banker was convicted of ordering his murder. But the river of cash—official statistics say $280 billion moved out in “suspicious transactions” from 2005 to 2013—has slowed dramatically amid sanctions, tighter money laundering enforcement in the West, and a Kremlin push to keep money at home.

Cherkalin, who comes from a family of KGB veterans and graduated from the FSB Academy in Moscow, got a top job at Department K in 2011. Since his arrest, a string of former bankers who fled Russia facing criminal charges over the failures of their banks have come forward with accounts of his alleged high-stakes shakedowns. Cherkalin’s lawyer declined to comment on those allegations.

One of these bankers, Sergei Pugachev, was founder of Mezhprombank, a lender that declared bankruptcy in 2010. Pugachev says he has emails from Cherkalin offering to help him avoid criminal charges. Cherkalin promised to make the issue disappear for $100,000, though Pugachev says the price ultimately rose to $20 million (he says he never paid a kopeck). To hasten a decision from Pugachev, Cherkalin sent a draft of a prosecution order to show what would happen if he didn’t pay. “In the end, the criminal case followed the exact scenario he laid out,” Pugachev says.

Pugachev fled Russia for Britain, where he’s been fighting lawsuits by creditors seeking to recover some of the $1 billion-plus they say the bank owes them. Russia has charged him with embezzlement, and a U.K. judge in 2016 sentenced him to two years in prison for flouting court orders and failing to hand over evidence. Pugachev, now in France fighting extradition, calls the cases against him a political persecution.

By Anna Baraulina, Evgenia Pismennaya and Irina Reznik, Bloomberg Businessweek, 10 December 2019

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