Originally created 09/22/99

Administration says U.S. must continue supporting Russia

WASHINGTON -- The Clinton administration told Congress today that the United States must continue to support Russia or risk being branded as "scapegoats" for Russia's failure.

But in the wake of what may be the biggest money-laundering scheme in U.S. history, Treasury Secretary Lawrence Summers said the administration will propose to strengthen laws and make it tougher for foreigners to clean ill-gotten gains through American banks.

Summers was the leadoff witness as Congress opened the first of a series of inquiries into allegations that Russian gangsters illegally channeled billions of dollars through the Bank of New York.

The administration backs continued support for Russia in spite of these allegations because "to quarantine, contain or write off Russia as too corrupt would ill serve our national interest," Summers told the House Banking Committee.

"Acting on that view would limit our ability to support Russian economic and financial stability; it would inhibit our ability to promote democratization and it would raise the risk that the United States and the West would be labeled as scapegoats for Russia's failure to address its problems," Summers said.

U.S. investigators have not commented publicly on the case, in which as much as $10 billion allegedly was funneled through the Bank of New York, the 15th-largest U.S. bank.

Two high-level executives of the bank's Eastern European division, Natasha Kagalovsky and Lucy Edwards, were suspended, and Ms. Edwards was subsequently fired for alleged falsification of bank records and failure to cooperate with internal investigators. The two have denied any wrongdoing.

The issue has become a political flash point between Washington and Moscow and prompted Republican leaders to denounce the Clinton administration's policy of supporting aid to Russia.

But Summers stressed to lawmakers today that the administration must weigh the need to remain engaged with Russia, with its huge arsenal of nuclear weapons, while demanding reforms.

He said the International Monetary Fund, at U.S. urging, has already acted to make sure the billions in loans provided by the West are used for legitimate purposes.

He noted that Russia's current $4.8 billion loan program is being provided in such a way that Russia can use the money only to pay back previous IMF loans. None of the money will be disbursed unless the IMF is satisfied that the Russian central bank has put in place adequate controls on foreign assistance.

World Bank President James Wolfensohn said today the bank has not be able to find any misuse of its funds in Russia. The bank investigated its 34 projects in Russia and "everything seems to be straightforward. As of this moment I have nothing to announce," he said.

Summers said that Thursday the administration will release a number of proposals to bolster international cooperation in investigating money laundering and strengthen U.S. enforcement through tighter regulation of financial institutions.

The report will call for Congress to make money-laundering laws applicable to a broad range of international criminals, including corrupt foreign officials, Summers said, and broaden the requirements for filing suspicious-activity reports to cover not only banks but also money service businesses, security brokers and casinos.

Rep. James Leach, R-Iowa, chairman of the House Banking Committee, said at the opening of today's hearing that he also was introducing legislation to tighten laws and "pierce the veil of secrecy that for too long has made it possible" for offshore financial institutions to skirt U.S. laws.

Today, the Swiss government announced that Swiss banks have frozen $16.8 million in accounts suspected to be linked to the Russian case. A 1998 law requires banks to take such action and report to the government when they have well-founded suspicions of money laundering.

Russia now owes some $16 billion of the $22 billion that the 182-nation IMF has lent it since 1992. The IMF board is expected soon to consider approving a second, $640 million installment under a $4.5 billion loan package for Russia that was previously authorized.

Russian President Boris Yeltsin received Nikolai Patrushev, head of the Federal Security Service, today at his country residence for talks on the money-laundering investigation.

Yeltsin has not commented publicly on the expanding scandal, though the Kremlin has issued statements denying any wrongdoing by the president.

A Russian delegation traveled to Washington last week, and both countries agreed to investigate the matter and compare notes, Patrushev told Yeltsin.

Viktor Ivanov, deputy head of the Federal Security Service, Russia's main intelligence agency, said Monday that U.S. investigators have presented no evidence that money from the IMF or other international agencies was involved in money laundering.

Nor was there any evidence that high-level Russian officials were involved, said Ivanov, who headed the Russian team of Russian investigators who met in Washington last week with FBI Director Louis Freeh and other officials.

But Ivanov on Monday said that U.S. investigators have material suggesting Russian businesses laundered money through the Bank of New York, apparently contradicting Russian Prime Minister Vladimir Putin, who said earlier Monday that the visit produced no evidence of Russian money being misdirected.


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