Jersey’s historical link to the Piratization of Russia - Financial Management Company (FIMACO)[1993-1997]
The Jersey FIMACO affair emerged after Russia's former central banker Sergei Dubinin and deputy Sergei Aleksashenko confirmed to President Boris Yeltsin that cash reserves were transferred to Fimaco between 1993 and 1997. Mr Dubinin said the transfers had been made to protect reserves when Russia was discussing debt restructuring and that the largest amount ever held by Fimaco was £851 million.
The acquisition of FIMACO, an offshore company located on Jersey in the Channel Islands, is another instance of the Soviet-era practice of masking questionable conduct.
The initial decision to acquire FIMACO with the help of the Royal Bank of Scotland Trust Co., Incorporated (Jersey) (RBSTG) may not have been coloured by Soviet-era behaviour.
Incorporated at the initiative of Eurobank in Paris on November 11,1990 and registered with the Royal Court of Jersey FIMACO was apparently intended to duplicate similar offshore entities already established by competing French banks. According to a report prepared by the C.I.Law Agency, a research firm, the date of registration was actually November 17 1990.
Since French law at the time restricted investment trust activities of French headquartered banks, many of these banks circumvented such restrictions by establishing offshore entities (often in the Channel Islands) that could then buy and sell assets for the Paris banks in order to provide the parent bank with extra liquidity.
Following that practice, FIMACO provided trust management for Eurobank’s sovereign debt portfolio, including credit supplied by some Arab countries until at least 1999.
Reflecting its virtual nature, FIMACO provided financial management but had no premises, equipment, or employees of its own.
On March 27,1992, after the collapse of the USSR, FIMACO became a 100 percent subsidiary of Eurobank. In the beginning, shares in FIMACO were held by the RBSTC, on behalf of a mysterious entity called Lavoisier Trust.
Then two seemingly obscure corporations, Ogier Nominees Ltd. and Ogier Secretaries Ltd., took control of FIMACO on December 15, 1992 from Lavoisier.
FIMACO had a listed capital of a mere $1,000.15 Of the 1,000 shares of stock issued, Ogier Nominees received 997 shares as a registered stockholder and Ogier Secretaries received the remaining three.16 Both Ogier entities were 100 percent owned by the Jersey law firm Ogier and LE Cornu and operated more or less as a mail drop. Under the December 15,1992 deed of trust, they served as nominee shareholders of FIMACO and also fiduciary trustees on behalf of Eurobank.
All of these manoeuvres were designed to be opaque, not transparent-very much in the way Gosbank was run in the Soviet era.
When the USSR dissolved on December 25,1991, so did Gosbank. This meant shifting not only Gosbank’s domestic but also its international operations, including its network of overseas banks and affiliates, such as FIMACO, to other entities. As we just saw, to simplify matters, Eurobank (heretofore a subsidiary of Gosbank) took over direct ownership of FIMACO. Thus, with the agreement of the trustees, Eurobank paid $850,000 to the Royal Bank of Scotland for its previous help. That was not bad compensation for what one critic described as “two years of secretarial and administrative work on behalf of a company that had no employees.”
The proceeds, apparently, were then redistributed to what were said to be five charitable foundations, four of which were Russian.
Under the new banking arrangement completed on December 25, 1992, FIMACO became a front for Eurobank. As reported by a PriceWaterhouseCoopers (PWC) audit, under this agreement Eurobank agreed to provide staff, office accommodations, and keep the books for FIMACO. Moreover, Eurobank selected FIMACO’s board of directors. In fact, FIMACO was a financial management company, but with no employees nor any premises. More important, Eurobank also determined FIMACO’s investment moves and managed its funds. All of this was done free of charge for FIMACO until 1995, when it was decided retroactively to pay Eurobank a fee of 500,000 French francs for its previous work.
Initially, FIMACO’s relationship with Eurobank was more or less typical of the way French-based banks operated. Moreover, after the demise of Gosbank, Eurobank continued to serve as the investment arm for the RCB. In that capacity it was mostly responsible for investing the first instalment of the IMF’s initial loan to the Russian government which was announced in August 1992. The money was then disbursed by the IMF on November 23,1992 to the Ministry of Finance. The proceeds of the loan, $832 million and 267 million German marks, were in turn transferred by the Ministry of Finance to its agent, the RCB. Following standard practices, which the IMF was aware of, the RCB then sent the funds to Eurobank for investment.
THERE WAS NO DECEPTION OR MONEY LAUNDERING AT THIS POINT: Eurobank had invested RCB funds this way many times before and there was no indication that FIMACO was transaction. FIMACO’s relationship with Eurobank, however, changed dramatically in mid-1993, when Russian banking officials DECIDED TO USE FIMACO TO HIDE AND LAUNDER FUNDs.
This was a decision taken under Viktor Gerashchenko, who was brought back into central banking in July 1992 as chairman of the RCB by Acting Prime Minister Yegor Gaidar and President Boris Yeltsin. Gerashchenko, as we saw, was well versed in the Soviet Union’s practice of disguising or laundering funds to mask their existence from public view.
At Gerashchenko's suggestion, Yuri V Ponomarev (formerly a senior official and board member of Vneshtorgbank who was then working in a supervisory capacity at Eurobank) ordered the transfer of the IMF funds from the RCB to Eurobank. Under an agency agreement, Eurobank then promptly transferred the funds to FIMACO, which then invested them on Eurobank’s behalf. Since FIMACO had no staff of its own, the staff of Eurobank made the investment choice.
On the face of it, this seems to have been an unnecessary intermediation.
Why was FIMACO brought into the transaction?
The decision to assign FIMACO a more significant and more devious role was a consequence of Russia’s dire economic circumstances and Vneshekonombank’s default and inability to return its depositors’ money.21 In December 1991, because it ran out of its own money, Vneshekonombank froze $6-8 billion worth of customer default and inability to return its depositors’ money.
In December 1991, because it ran out of its own money, Vneshekonombank froze $6-8 billion worth of customer deposits. The ensuing general financial collapse affected not only private depositors, but also the Russian government, which found that it could not pay its import bills or foreign debts.
Chaos best describes Russia’s financial situation at the time. Remember, the official reserve in the RCB had fallen to under $2 billion.
Vneshekonombank’s inability to pay cash to its depositors, however, did not necessarily mean that Russians had run out of convertible currency or gold. On the contrary, there were funds, but they had been purloined or privatized by almost anyone who had access to them. Among those with access were senior officers of the Communist Party,
Komsomol, state banks, KGB, and even the military. In late 1991, Yegor Gaidar, soon to become acting prime minister, hired the US firm Kroll Associates to track down missing state funds.23 After four months they found that thousands of mostly offshore bank accounts, real estate holdings and offshore companies had been set up to launder and shelter these funds and what had been the Soviet Union’s gold reserves.