Smurfing: How Russians laundered €4m in Belgium

The money was part of a €200m fortune which was stolen by a Russian group in Moscow, moved out via Danish and Cypriot banks, and spent in similar ways all over Europe.

The method is called "Smurfing" by money-laundering experts - using minions, like the little blue men in the popular Belgian comic book, to break up stolen funds into small parts and to buy normal things that evade controls.

The €4m trickled into all the big banks in Belgium, under the noses of EU officials in Brussels who are trying to regulate the sector and many of whom have their personal accounts in the same lenders.

Belgian police are investigating the case.

And while the original crime took place some 10 years ago, EUobserver found that the Russian group is still making profits from it in Belgium today.

The White Angel

The chic duplex, plus its parking lot, in The White Angel building on Black Sister Street in Antwerp were advertised for sale for €410,000 last month.

The Russian sellers, Sergey Medvedev and Irina Terkina, originally bought them for €261,708 in 2008, according to leaked bank records seen by EUobserver as well as public cadastral files.

The "price was normal" and there was "nothing suspicious about the transaction", Celis, Celis & Liesse, a Belgian notary firm which handled the 2008 purchase, told this website.

But the money trail behind it was far from normal and it led, via many twists and turns, to the Russian treasury, from where the funds were embezzled in 2007 by corrupt Russian officials and mobsters, research on the leaked bank records also shows.

Medvedev and Terkina paid for the flat via a wire transfer by Arrell Trading, a UK-registered firm, from its account in Danske Bank's branch in Estonia to Celis, Celis & Liesse's account at KBC bank in Belgium.

Prior to that, the €261,708 had also flowed through five other shell firms, a Moldovan bank, and no fewer than 10 Russian ones.

The people who embezzled it, along with some €200m more, are known as the Kluyev Organised Crime Group (KOCG) and the US has named some 40 of them on a sanctions list.

They stole it in a complex fraud involving Hermitage Capital Management, a British hedge fund which used to do business in Russia.

When a Hermitage auditor, Sergei Magnitsky, alerted Russian authorities, he was jailed and died in prison, prompting the Hermitage CEO, Bill Browder, to embark on a years-long quest to find out where the stolen money ended up and to have it seized.

EUobserver could not identify Medvedev, but Terkina is a minor Russian official, according to a Russian foreign ministry webpage.

It is unclear how the two "Smurfs" are connected to the KOCG.

But they also own a second property in The White Angel building, with their names in black and white on a plaque on its door.

They were not home when EUobserver rang their bell on 25 June and the Russian foreign ministry declined to help reach Terkina.

But the story behind The White Angel makes it the Belgian and, symbolically, the EU facade of one of the best-known money-laundering schemes of modern times.

Diamonds and carpets

The €4m spent in Belgium passed through the hands of Belgian lenders Bank J. Van Breda, Belfius, BNP Paribas Fortis, Crelan, and KBC.

It also passed through the Belgian branches of British lender Lloyd's Bank, Dutch lender ING, and Germany's Deutsche Bank.

In a second purchase, also in 2008, the Russian group wired $156,245 (€137,955) from a British Virgin Islands (BVI)-registered firm to a Belgian trader called B.R.T. Diamonds, the leaked bank records, which were obtained by Hermitage and shared with EUobserver, also show.

It is the cost of about 10 carats' worth of stones, which could be a handful of small ones or one large one.

B.R.T. Diamonds is owned by a man and a woman of Georgian origin - Meir Tetroashvili and Ronit Nanikashvili - who live in the suburbs of Antwerp, according to the National Bank of Belgium.

It has an office on the third floor of a shabby building called Diacem in Antwerp's diamond trading district, where its nameplate is a hand-written note glued to a letterbox.

There was no one there when EUobserver visited on 25 June and neighbouring traders did not recall seeing anyone go in or out for months.

When asked by EUobserver if there were many other letterbox-type firms in the diamond quarter, one Belgian gem trader, speaking off the record, said: "Yes. There are lots of companies like this ... They could be used for money-laundering, selling drugs - anything".

EUobserver later reached Nanikashvili at home by phone. She said she now sold carpets, but declined to answer further questions.

In a third purchase, the stolen money also paid for €3,472 of designer clothes from Belgian firm Dries Van Noten.

The company declined to comment on the record, but EUobserver learned the money was a deposit for a larger order by a Russian retailer.

In any case, real estate and luxury items accounted for a fraction of the €4m, which went to 34 companies and individuals in Belgium in total.

One of the largest chunks, €416,721, was paid to Belgische Fruitveiling, a Belgian fruit growers' cooperative.

But most of it was paid out in sums of €10,000 to €120,000 to Belgian suppliers of construction materials and engineering equipment, such as flooring, heating, lighting, and ventilation systems.

Most of these were small and medium-sized firms in Belgium's Flemish-speaking north.

But the Russian group also paid €116,630 to the Belgian branch of US engineering giant Honeywell for "turbochargers".

Most of the companies declined to comment, but a handful of those who did, speaking off the record, said the clients were Russian and the goods were shipped out of Belgium.

Smurfing

The method was always the same - the money came into Belgium from a UK, Belize, BVI, or Panama-registered firm via Danske Bank's branch in Estonia (formerly called Sampo Bank) or via FBME Bank in Cyprus, with a trail leading back to the original €200m embezzlement.

Purchase of assets such as real estate, diamonds, and designer clothes is known as "end-user" money laundering in law enforcement terms.

Purchase of tradable goods, such as engineering supplies, is known as "trade-based" money laundering - it converts dirty money into clean goods which can be resold for clean money.

One of the smallest Belgian transactions was a €1,400 transfer from a Belize-registered firm to the ING bank account of "Dmitry Podolskiy", whom EUobserver could not identify, for "services".

But breaking up stolen money into tiny parts is also standard practice.

It is called "Smurfing", according to Frank Verbruggen, a professor of criminal law at Leuven University in Belgium.

"The idea is you get servants, little guys, courier guys to make transactions which fall below thresholds that would set off alarm bells," he told EUobserver.

The KOCG used the same modus operandi in several other EU jurisdictions, including Austria, Finland, France, Germany, Luxembourg, Spain, and the UK, the Hermitage-obtained records show.

In the UK, for instance, the group paid for some "end-user" items such as yacht charters and designer clothes, but most of the £24m (€27m) they spent there went on "trade" items such as IT equipment or diesel generators, while Smurfs broke it up into some parcels smaller than £20,000.

That the Belgian story goes back over a decade does not make it out of date because under Belgian law money-laundering is a "perpetual offence".

"The money is always changing hands, acquiring more value, and with every subsequent transaction, a new crime is deemed to have been committed," a contact, who asked not to be named, at the CTIF-CFI in Brussels, Belgium's financial crime unit, said.

Bruno De Hous, an Antwerp-based judge, is leading a Federal Judicial Police probe into what happened.

Police have knocked on doors of banks and traders asking for documents in what the judge's office told EUobserver was an "ongoing" investigation.

De Hous went into action after Hermitage's law firm in Belgium, Van Cauter Advocaten, filed a criminal complaint last February.

"We want those responsible for the money laundering to be held accountable for their actions. If any illegal proceeds can be found in Belgium, it is our wish that they be seized," Karel De Meester, one of the Hermitage lawyers, told this website.

The mere fact De Hous launched an investigation does not mean he believes Hermitage has a case, because Belgian authorities were obliged to look into such complaints, Leuven University's Verbruggen noted.

But none of the Belgian banks or traders denied the authenticity of the suspicious transactions when contacted by EUobserver.

And the evidence obtained by Hermitage has already been tried and tested in France, Luxembourg, Switzerland, and the US, where authorities froze Russian assets.

The system

Belgian traders, such as Dries Van Noten, have no obligation to report unusual behaviour, such as paying for clothes via a Panamanian-registered firm.

Notaries and banks are supposed to report suspicious activity to the CTIF-CFI.

Celis, Celis & Liesse, the White Angel notary, indicated that the Russians had concealed their tracks.

"We have no deeds at the office with Arrell Trading as a party", it said, referring to the UK-based firm that wired money for Medvedev and Terkina's duplex.

The banks declined to comment on individual transactions.

They were "obliged to keep silent" under Belgian privacy laws, Rodolphe de Pierpont, the spokesman for Febelfin, the Belgian financial sector federation, told EUobserver.

But all of the banks concerned, except Bank J. Van Breda, which said nothing, said they were compliant with Belgian rules.

And even if police had questioned this or that lender, it did "not mean the bank has not fulfilled correctly any AML [anti-money laundering] provisions and even less so that the bank is author of any criminal offence," Febelfin's de Pierpont added.

A contact at one of the banks, who asked not to be named, said foreign transactions like the ones which paid for the diamonds or turbochargers might look odd to a journalist, but were part of everyday business for him.

There was nothing illegal in "offshore entities ... purchasing goods or services to be delivered in Belgium or abroad," he said.

The "swift" nature of financial transactions also meant that if Belgian lenders did not trust other eurozone ones, such as Danske Bank, to have clean money then "the system wouldn't work", he added.

"You rely very heavily on the bank you are correspondent with," the CTIF-CFI contact also said.

On the face of it, the 75 or so individual transactions that laundered the €4m in Belgium were probably not systematic enough or big enough to trigger alarm bells, he added.

"It would be too much to say that they [transactions of this type] would be, a priori, an FIU [financial intelligence unit] case", he noted.

Belgian lenders did file lots of suspicious activity reports in other cases and "in general, we're very pleased about the way banks work with the FIU," the CTIF-CFI official said.

Absurd?

But all that sounded "absurd" to Browder, the Hermitage chief.

"In legitimate trading relationships, the seller gets paid directly by the buyer and the goods get shipped to the person that paid," he told EUobserver.

"Here you have a Belgian seller, a Russian buyer, and an offshore company in a high-risk jurisdiction with no obvious relationship to the buyer paying the bill. That doesn't make sense," Browder said.

The €4m case may be small, but it was part of a much bigger problem which posed a threat to the EU banking system, he added.

Danske Bank, last year, admitted to handling €200bn in total of "suspicious" Russian money via its branch in Estonia, causing a furore which cost its CEO his job and saw its share value plunge.

FBME Bank in Cyprus has lost its licence.

Leading Dutch, German, other Nordic, and Spanish banks, as well as smaller ones in Latvia, Lithuania, and Malta have also faced similar fiascoes in recent times in what looks like an EU-wide pathology.

"We've seen customers in Denmark abandon Danske Bank in droves ... these banks should understand that tough anti-money laundering policies are not just good citizenship, but good for keeping their business," Browder said.

The European Commission in Brussels has tried to crack down on flows of illicit money.

New EU laws will create more transparency on who owns offshore firms and on electronic transactions when they come into force in 2020.

But most member states have not yet complied with the last AML laws from 2015.

EU countries have let their friends, such as Panama and Saudi Arabia, avoid heightened money-laundering checks.

And national capitals have strangled the idea of creating a strong EU-level regulator.

That leaves the European Banking Authority (EBA) in Paris alone to do the job for the time being.

It has just two full-time staff dealing with AML in the whole EU banking sector.

By comparison, the CTIF-CFI in Brussels has 62 staff dealing with Belgium alone.

The EBA is preparing to hire eight more people and to get new powers enabling it to trigger national investigations.

But its credibility suffered in April when it said Danish and Estonian regulators had not breached EU laws in the Danske Bank scandal.

"It is important that lessons are drawn from the Danske Bank case and that supervision at national level is effective and fully in line with EU law," a commission spokesman told EUobserver, echoing Browder's warning.

"It is disappointing to see that the EBA has decided not to act," the spokesman added.

"For the commission, the Danske case is not closed. We're looking into possibilities on how to take the matter forward," he said, as news continues to come out on how black money has contaminated the EU banking sector.