Close ties to President Vladimir Putin's family are apparently no guarantee of immunity in today's Russia. A big bank where Putin's cousin served on the board of directors was closed on Nov. 20, amid a large-scale police operation that tied it and a number of other Russian banks to money laundering and illegal capital flight.
Master Bank was only the 68th largest bank in Russia by assets, but it was a top-5 ATM operator and plastic card issuer. It also held about $1 billion in individual deposits. On Nov. 20, central bank Chairman Elvira Nabiullina declared that Master Bank had negative capital of about $61 million and that it had been "involved in shadow activities." The central bank lifted its license just as the police and counterintelligence service were conducting simultaneous searches in 34 banks and financial companies throughout Moscow. The massive bust capped an almost year-long investigation into a money-laundering network that involved hundreds of firms and several immigrant diasporas.
Back in February, Nabiullina's predecessor, Sergei Ignatiev, told Vedomosti newspaper that half of Russia's illegal capital flight, including bribes to bureaucrats and revenues from criminal businesses, "appears to be controlled by one well-organized group of people." He didn't name the group, but insiders thought immediately of Master Bank, a peculiar institution founded by the reclusive Boris Bulochnik, a follower of Nicholas Roerich, an early 20th century Russian mystic. Roerich's disciples refer to him as the Master, hence the bank's name.
A Livejournal blogger calling himself dr_crisis wrote in March: "Hundreds of Master Bank's armored trucks full of black market cash drive around Moscow . . . Every morning there is a line of people at the bank's office on Pyatnitskaya with sacks for cash, and all this is happening in Moscow's plain sight."
Bankers who privately agreed with the blogger's view theorized that Master Bank was allowed to operate because of its ties to the country's first family. The president's cousin Igor Putin worked at the bank as a vice president, before leaving to pursue his own business projects. In June, 2011, he returned as a board member and a Sept. 30, 2013 disclosure by Master Bank still listed him in that capacity. Igor Putin also serves on the boards of two other medium-sized Russian lenders.
Russian regulators and law enforcers moved in June, and the central bank sent representatives to closely monitor Master Bank's activities. Around that time, Ignatiev told the Russian parliament that the regulator and police had cooperated to uncover "a vast network including 173 shell companies used to illegally transfer 760 billion rubles," or about $25 billion.
Some well-informed Russians believe the regulator should have acted faster. Sergei Aleksashenko, a former central bank deputy governor, posted on Twitter that Master Bank was "the result of Central Bank head S. Ignatiev's 11 years of inaction in the field of bank supervision." Be that as it may, Master is the biggest failed bank with which Russia's Deposit Insurance Agency has had to work. On Nov. 20, many Russian banks' clients found it difficult to draw cash or make purchases using their credit cards, since Master Bank was one of the nation's biggest processors of card transactions. Its network of 3,500 ATMs abruptly went offline. The bank, suspected of being the center of Russia's biggest money laundering network, had been firmly embedded in the country's legitimate financial life.
The problem with law enforcement operations like the one conducted in Moscow on Nov. 20, is that while they create temporary difficulties for money launderers, they do not remove the demand for their services. Moscow's shadow economy is still there, and billions of dollars in cash are its lifeblood. With Master Bank gone, "they say in town that the commission for money laundering is up to 15 percent," author Sergei Minaev said on Twitter. Previously, the customary fee had been 7 percent.
The central bank recently estimated 2013 net capital flight from Russia at $55 billion. Though some of the transfers may temporarily stall as launderers seek new channels, the root cause of capital flight -- an unfavorable business climate -- is not going away.
As for Putin's cousin, anti-corruption activist Kirill Kabanov is certain he was just being used. "They tried to involve the cousin to cover up their activities," Kabanov told Radio Liberty. "Somebody is in for a tough reckoning for using him as cover, and that someone is wearing a uniform." Russians, bankers and ordinary citizens alike, find it hard to believe that money laundering on a grand scale is possible without the involvement of law enforcement officials.
(Leonid Bershidsky, an editor and novelist, is a Bloomberg View contributor. He is also a former managing director at KIT Finance Investment Bank. Follow him on Twitter.)