Dirty Money and State Collapse

Prosecutors allege this is dirty money that Ralf K. later transfered to accounts around the world.

But Ralf K. is only a small helper, one cog in a larger game. He does not receive orders from HP, but from the Russian Sergej B, according to state prosecutors. He met Ralf K. in the early 1990s when Sergej B. did an internship in Saxony. After that, the Russian and the German established companies with almost identical names and did business together across the former Soviet empire.

The investigators can also identify some of the recipients of the dirty money – primarily employees of the Russian intelligence service and the Prosecutor General’s Office of the Russian Federation.

The suspects also include Russian officials who did not receive direct payments, such as a Deputy Prosecutor General. Yuri Biryukov is a small man as hard as steel with an unpleasant rasping voice, who, on behalf of the Prosecutors General’s Office, signs fraudulent documents that set the bribery in motion.

Biryukov is a very important figure in Putin’s power structure. One example: in 2003, when the oil company Yukos is broken up and its boss, the oligarch Mikail Chodorkovsky, is sent to a prison camp, the person who signs the arrest warrant is the same Yuri Biryukov.

Investigators say, beginning in 2004 the bribes negotiated by Biryukov go via front companies to employees of the Prosecutor General’s Office and the intelligence service,  FSB.

If an indictment filed by prosecutors against three former HP employees and Ralf K. leads to a conviction, then sentence could include stiff fines and the confiscation of millions of euros in profits. Is it merely another corruption scandal in a quintessentially corrupt country? Or is there more behind all this?

Yes, there is more.

How Putin takes power

We discover the real significance of the case when we go back to the year 1999. It is a fateful year for Russia. In this year, Putin stages a sex scandal, incites a war, breaks the independence of the Russian judiciary, rises to the Russian presidency – and enables bribery dealings with HP.

At the beginning of the year 1999, Russia is still a state governed by something resembling the rule of law, despite corruption and arbitrary power. A separation of powers is in place; independent representatives raise their voices in the parliament, the Duma, and parts of the judiciary work independently. The president’s name is Boris Yeltsin. But he faces difficulties. The Prosecutor General of the Russian Federation is investigating Yeltsin and his relatives. Undeclared assets belonging to the Yeltsin family have turned up in Switzerland. There Swiss prosecutors say the funds were used to purchase luxury goods. Meanwhile in Russia, the Prosecutor General, Yuri Skuratov,  pursues a similar investigation.

Boris Yeltsin is in big trouble. But the president receives help from Vladimir Putin. A year earlier, when the investigation had only just begun, Yeltsin made Putin head of the domestic intelligence service FSB, the successor to the KGB.

The pressure on Prosecutor General Skuratov is immense. But he continues the investigation. Until 18th March 1999. On that day Russian television broadcasts a film showing a man resembling the Prosecutor General in bed with two women.

Looking at the grainy black-and-white video today, the suspicion immediately arises that it is a blatant fabrication. The participants behave as in a pornographic film, taking the camera position into careful account. And Prosecutor General Skuratov swears he is not the man in the film. 

But the denial does not help. FSB chief Putin says in a televised interview: his experts have determined that the naked man in the sex tape is Prosecutor General Skuratov. The word of Putin, head of the spy service, is stronger – the same Putin who, when he was a an officer for the KGB in Dresden, wanted to blackmail a professor with pornographic material to get access to research results.

CORRECTIV asked the Russian president to comment on these allegations, but we have not received a reply.

With that, the Prosecutor General is finished, and soon he is put on leave. His successor is already in place: Vladimir Ustinov, along with his deputy, Yuri Biryukov, the small tough man with an unpleasant rasping voice. The two men know each other from the northern Caucasus, from the chaotic years after the First Chechen War.

The investigation of Boris Yeltsin is subsequently put on ice. And the president’s gratitude is shown: on 9th August 1999, Yeltsin appoints Putin as Prime Minister, the second man in power.

Putin’s tenure in office begins with terror. Every week for a month apartment buildings are bombed, almost 300 people die. On 22nd September, residents observe a number of men carrying sacks into the basement of an apartment building in the town of Rjasan. The police come and confiscate the sacks – which a bomb expert identifies as explosives. The men, it turns out, are agents of the spy service FSB.

But several days later the head of the intelligence service says the sacks were filled with sugar, and that the operation in Rjasan was an exercise to test local vigilance.

The Russian public still sees the apartment building terror as the work of Chechen terrorists. The Russian army had lost the first war against Chechnya; then it withdrew in 1996. According to one of his friends, Putin saw this defeat as a disgrace he wants to correct. Now he has a pretext. On 1^st October 1999, Russian troops march into Chechnya. A few months later the new Prosecutor General closes his investigation into the purpose of the ominous sugar sacks.

The judiciary is now in Putin’s hands. It will no longer give him trouble.

Between all these events, a different decision has gone without notice. On 14th November 1999, Putin decides to do something nice for the Prosecutor General’s Office. In a government decree, he allows the authorities to borrow 30 million Dollars from a foreign bank to buy a new computer network.

A strange decision. Russia is almost bankrupt after the Ruble crisis. Hospitals are falling apart. Why take on foreign debt in a time of financial crisis for sake the Prosecutor General’s Office? Such deals invite corruption. Putin also knows this. Does he deliberately approve it so that the new Prosecutor General officials can fill their pockets, and so he can secure their loyalty? 

Corruption with a German blessing

The contract is put up for bids. Hewlett-Packard is one of the companies to make an offer – and receives the contract in February 2001. The deal is supposed to be secured with an American export guarantee. But that does not work out.

And so the Russian Prosecutor General’s Office suggests doing the deal through Germany – with Hewlett-Packard ISE GmbH in the Bavarian town of Dornach. Now it all goes quickly: in February 2003 the Russian authorities approve the deal, in November the German HP subsidiary applies for a loan from Dresdner Bank, in March 2004 the German Ministry of Economics and Labor gives the deal its blessing, and then the German HP subsidiary receives an export guarantee from Euler Hermes. That means that HP shifts its risk in the deal to the German taxpayer.

At this point, the bribes have already been arranged – they are hidden in the documents which both the Economics Ministry and auditors at Euler Hermes reviewed. But the German authorities do a sloppy job. They do not apply the same scrutiny as tax officials in the State of Saxony would later apply. Accordingly, the bribery deal receives an official German blessing. A spokeswoman of the Economy Ministry says the ministry can not comment on specific transactions due to business confidentiality.  But the ministry says that in principle the German government would be released from its liability if a transaction should be concluded with the help of corruption. Euler Hermes did not offer any further comment. 

Around 7.6 million Euros, one fifth of the entire sum, is designated as dirty money from the outset. This was promised by the HP representative in Russia – the German Hilmar L.

Hilmar L., who is now 63 years old, is well versed in dubious agreements. He is an astrophysicist who studied in the Soviet Union and later worked at the Central Institute for Astrophysics in Babelsberg. But he is also an informant for the Stasi, the East German secret police. Between 1980 and 1990, he goes to great efforts to spy on his colleagues.

He handles the political changes in Germany well and starts a career in IT in the early 1990s. In 1996, he becomes a manager for HP in Russia. At a business inauguration in 1999, Hilmar L. meets President Putin. Did he approach Putin as a „colleague“? Or did Putin, whose spy service has access to countless Stasi documents, know about Hilmar L.’s former double life? Might this be why HP was awarded the crooked deal?

We do not know. Only one thing is for sure: according to German investigators, HP did not make the cheapest offer. Yet it still received the contract to provide the Russian Prosecutor General’s Office with a computer network. 

Money laundering via display cabinets

At this point, Sergej B. comes into the picture – the Russian computer dealer who is friends with the Saxon Christian Democrat Ralf K. Somebody has to move the dirty money from HP to the corrupt Russian officials. An HP employee suggested Sergej B., now he gets to work with Ralf K., according to prosecutors. In early 2004 they filled up the slush fund, then they start distributing the money.

Around 2.6 million Euros go to the London-based company Verwood Industries Limited – with no services rendered in return. Prosecutors allege that Ralf K. transfers around 310,000 Euros to Bracefield Builders Limited in the UK – also with no services rendered. A mysterious Marple Associated S.A. in Belize receives 632,000 Euros – again with no services rendered. And so on. Via ever more dummy firms in various tax havens, the money finally reaches the Russian apparatchiks.

Sergej B. also keeps the Russian intelligence service FSB in mind. Around 550,000 Euros go to an account in the Republic of Srbska. It belongs to a the Kotrax Group, and the transfer takes place without any type of contract. There is not even an effort to pretend that services were rendered, as in the other cases. German authorities assume that Kotrax is a front for the FSB. According to credit card statements, the money was used to live it up. There are statements for luxury watches and swimming pool equipment, along with a bill from the Hotel Palace Berlin for 108,000 Euros, paid for by the Kotrax Group. The „Presidential Suite“ there costs 1800 Euros per night. In a statement, a hotel representative said that the hotel was not aware of these events, and that she did not have information about such a bill. 

The way he presents himself, Sergej B. is an exemplary internet entrepreneur with a charitable heart. By his own account, his companies have 5000 employees. Sergej B. immediately comes to mind in discussions on e-government in Russia. His employees are tasked with digitalizing files from ministries, libraries, company archives and numerous other data collections.

What Russia’s public does not know: Sergej B. leads a double life. He not only moves around dirty money for the FSB. The German case files also reveal that he himself is an FSB agent.

This puts his engagement in digitalizing data collections in a completely new light. A secret agent with access to seemingly every file in Russia? It is the dream of any spy.

It gets even better. When all is done and dusted and every corrupt bill has been paid, there is still money left over – around 1 million Euros are left in the slush fund. Sergej B. directs his good friend Ralf K. to order display cabinets and safety glass – for renovating the Zarizyno Museum which is being restored by the city of Moscow.

Ralf K. does as told, according to the investigation by Dresden prosecutors. He transfers 945,371 Euros to the company Knauf/Kassel in Fuldabrück for display cabinets and 106,850 to the company Hanseata in Wentdorf for safety glas. Both companies deliver the goods to Moscow in 2007.

But when asked today, the Moscow office of the leading architect who chose the display cabinets says they were financed by the city.

We could not reconstruct this flow of money. But it reeks of money laundering. The display cabinets were verifiably bought with money from Ralf K.’s slush fund. Did the „clean“ money from the city of Moscow then go to Sergej B.? And if it did, where did it go from there?

Another oddity is that Sergej B., who usually enjoys speaking publicly about his business deals, does not mention the display cabinets on his website. There we only find the statement this his company digitalized the archives of the Zarizyno library. Display cabinets are not mentioned. Sergej B. declined to comment when asked by CORRECTIV. The museum and the city of Moscow did not answer questions.

State collapse under Putin

The legend continues: under President Boris Yeltsin, Russia was corrupt. Then Vladimir Putin came in and cleaned everything up. But in fact, at least the separation of powers was in part still upheld under Yeltsin. Only under Putin was the political system brought into line. Fraud became institutionalized.

A central pillar of Putin’s power is the cooperation between the Prosecutor General’s Office and the intelligence service. Members of the intelligence service do the dirty work; then the state attorneys ensure the intelligence officials do not have to account for their actions. 

• Such as when the true perpetrators of the apartment bombings were covered up, leading to the Second Chechen War in 1999.
• Such as in the giant corruption scandal surrounding the furniture store „Tri Kita“ (Three Whales), and where investigators paid for their curiosity with their lives. 
• Such as in the countless raids against Russian business people where greedy officials throw innocent citizens into jail so they could confiscate their assets. In 2011, around 400,000 Russian business people were in jail unjustly – this is one of the reasons why Russia’s economy is suffering. 

Again and again, we come across the Ustinov/Biryukov tandem, the two heads of the Prosecutor General’s Office. 

Ustinov stops the investigation of the ominous „sugar sack carriers“. Biryukov hampers the investigation into the corruption scandal surrounding the furniture store „Three Whales“. Ustinov pushes through the law on „Confiscating Assets“, a carte blanche for the raids against business people. In the investigations of oligarchs, in the scandal surrounding the sinking of the submarine „Kursk“ – again and again, the two heads of the Prosecutor General’s Office save Putin’s skin.

And at the very beginning of this cooperation stands the loan to the Prosecutor General’s Office which Vladimir Putin approved. As if Putin wanted to reward these men for their loyalty.