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Bank of NY scandal widens; senior exec implicated

By Heather MacGregor, Bridge News


NEW YORK--Nov 1--The Russia money-laundering scandal is expanding to link former top Bank of New York executive Natasha Gurfinkel Kagalovsky directly to Inkombank, a Russian bank with alleged organized crime ties, according to documents given to BridgeNews. The Bank of New York was Inkombank's correspondent bank since 1992, and continued to do business with it despite years of accusations against the Russian bank dating back at least to 1995. The Bank of New York and Kagalovsky have repeatedly denied any wrongdoing, and neither have been charged with anything illegal.

* * *

Kagalovsky, formerly senior vice president of Bank of New York's Eastern European division, is the second Bank of New York executive allegedly connected with what is now considered the largest financial scandal ever reported. The first executive, who has been the subject of extensive press coverage, was Russian expatriate Lucy Edwards, who ran Bank of New York's East European division in London, reporting to Kagalovsky. Edwards and her Russian husband, Peter Berlin, were indicted Sept 16, 1999 by a U.S. federal grand jury and charged with illegally transferring about $7 billion through the Bank of New York. Arrest warrants were issued on Oct 28 for Edwards and Berlin along with Alexei Valkov. The documents connecting Kagalovsky are the first thus far in the Russia scandal to create a direct link between the Bank of New York, one of its officials, and now-insolvent Inkombank. The implication of this would be that the bank's Eastern European division was run by two executives with alleged links to organizations under official investigation. The Bank of New York suspended both Kagalovsky and Edwards on Aug. 18, subsequently firing Edwards. Kagalovsky resigned two months later, insisting that she had done nothing wrong and lamenting that the bank had left her to "swing in the wind." 

---The Documents---

Kagalovsky has not been charged with any wrong-doing.  However, a trail of documents given to BridgeNews links her to Inkombank. First is several "negotiatable demand notes" issued to Kagalovsky by Inkombank, according to copies of those notes obtained by BridgeNews. The notes were made out to her former married name - Gurfinkel. At least one note, in the amount of $200,000, appears to have been issued Nov 22, 1995 and stamped the same day "negotiated Inkombank-Cyprus Offshore Banking Unit." Second is documents showing that Inkombank in March 1995 issued Kagalovsky a "general mandate," a term used in Europe and offshore jurisdictions to describe power of attorney. People familiar with the document and its issuance said that general mandates are routinely issued as evidence of control in anonymously owned offshore companies.  The mandate was signed with Kagalovsky's name and that of Inkombank's then-chairman, Vladimir Vinogradov. It gave her control over Tetra Finance Establishment's "money and bank accounts, business and financial affairs." A copy of the mandate is stamped with the insignia of Inkombank's Cyprus banking unit and indicates the agreement was valid through March 1998.  Inkombank officials used Tetra, an offshore company registered in Liechtenstein, as an unlicensed banking office in New York between 1994 and 1996 while Inkombank was seeking US Federal Reserve Board approval for a representative office, according to documents shown to BridgeNews.  In 1996, Kagalovsky used Bank of New York stationery to write letters in support of Inkombank's application. In letters to Federal Reserve Board Chairman Alan Greenspan and Associate Director William Ryback, she characterized Inkombank as "one of the most stable, sophisticated and technologically advanced
commercial banks in Russia." 

Kagalovsky's lawyer, Stanley Arkin, said his client denied ever receiving any payments from Inkombank or having control over any company maintained by Inkombank officials. "The allegations are untrue," he said. A spokeswoman for Inkombank in Moscow said that the organization was under new management and she had no information about Kagalovsky.

James Boynton, a lawyer with Salans Hertzfeld Heilbronn Christy & Viener, which represented Inkombank in a 4-year-old shareholder suit against the bank, said its representation of the bank does not extend into these allegations. The lawfirm remains the attorneys of record in the underlying shareholder suit against Inkombank.  Bank of New York spokesmen have consistently declined to comment on its dealings with Inkombank or Kagalovsky.

---The Russian Power Banker---

Kagalovsky was well known around bank conference tables in Moscow, London and New York. She was leading ventures into a potential gold mine for one of the US' largest banks--satisfying the demand of economies stunted by more than 70 years under communism. Her husband, Konstantin Kagalovsky, was a senior executive at another of Russia's largest banks, Menatep. The Bank of New York sponsored American Depository Receipts on behalf of both Inkombank and Menatep. 

The Kagalovskys were a power couple. While she worked at the 1 Wall Street office of the Bank of New York, he worked not only at Menatep, but also as Russia's representative to the International Monetary Fund (from 1992 to 1995), and is currently vice president of Yukos, one of Russia's largest oil companies.

--Early Warnings--

Despite public indications of suspected wrong-doing at Inkombank, the Bank of New York continued to conduct business with the Russian bank. In March 1995 New York Newsday wrote an article citing a CIA report that linked Inkombank and other Russian banks to organized crime. The Washington Times had also written about the report in 1994. And in June 1996 the Central Bank of Russia issued an audit report detailing fraudulent banking and accounting tactics at Inkombank. Finally, on Oct. 29, 1998, the Central Bank of Russia revoked Inkombank's banking license and ordered information of the notice distributed to the media and published in the Russia bank register. At that time the Central Bank said Inkombank failed "to comply with Federal laws and administrative edicts of the Bank of Russia, regulating conduct of banking business and failure to honor its financial obligations to creditors and the default in making mandatory payments." End 

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Symbols: US;BK

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American Russian Law Institute
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