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CNN-Moneyline News Hour             
Aired September 28, 1999 - 6:30 p.m. ET              

New allegations of money laundering through the Bank of New York tonight. Italian prosecutors say they've discovered evidence that Russian criminal organizations washed millions through the bank. Italy is just one of a half a dozen countries following the money trail. Among the questions investigators are asking: When did top executives at the Bank of New York realize there might be a problem with their Russian business? Bill Dorman has our report.


DORMAN: The fall of the Berlin Wall opened new worlds for Western bankers. As communism fell across Eastern Europe and the Soviet Union, the bank of New York aggressively pursued business. Throughout the 1990s, the bank added Russian accounts, eventually becoming the world's top handler of Russian money transfers.

EMANUEL ZELTSER, AMERICAN RUSSIAN LAW INSTITUTE: The Bank of New York was, since 1992, the prime correspondent bank of virtually all Russian banks, certainly the hundred largest Russian banks.

DORMAN: The Bank of New York continued to expand its Russian business, even after Russia's Central Bank reported evidence of financial fraud at one of the Bank of New York's top Russian clients, a bank called Inkombank. Emanuel Zeltser is an attorney who used to represent Inkombank. He is now involved in a legal battle with his former client. He claims Inkombank owes him money. The bank accuses him of fraud. Congressional and federal investigators are examining documents Zeltser says he obtained as part of his lawsuit, records showing a close relationship between Inkombank and the Bank of New York dating to the early '90s. For example, in April 1996, a Bank of New York executive wrote to Federal Reserve board Chairman Alan Greenspan, supporting Inkombank's application to open a New York office. The letter says -- quote -- "There is no question that Inkombank is one of the most stable, sophisticated and technologically advanced commercial banks in Russia." It also calls Inkombank -- quote -- "best prepared to deal with international transactions on Western banking standards." The letter is signed by the Bank of New York's senior vice president in charge of Eastern European business, Natasha Gurfinkel. Six weeks after she wrote the Federal Reserve on Inkombank's behalf, Russia's central bank issued a scathing report on Inkombank, finding -- quote -- "violations in accounting transactions." It also said the "financial situation of the bank is unstable," and "the capital of the bank is at least 10 times lower than reported by the bank." Now known by her married name, Natasha Kagalovsky has been suspended pending the outcome of the money laundering investigation. The Federal Reserve tells MONEYLINE Inkombank's application for a U.S. office was withdrawn last September, just weeks before Russian regulators shut the bank down for fraud and mismanagement. Testifying before Congress last week, the chairman of the Bank of New York said his bank always extensively investigates its Russian clients.

THOMAS RENYI, CHAIRMAN & CEO, BANK OF NEW YORK: Our diligence today and certainly over the past several years not only incorporates on-site visitation to these banks but also visitations to the central bank and the authorities there to get, as best we can, a line, if you will, as to the reputation, the local reputation of those banks.

DORMAN: MONEYLINE asked the Bank of New York why it continued to do business with Inkombank following the Russian central bank's condemnation. A spokesman said the bank never comments on client relationships. Before Congress, Bank of New York Chairman Renyi downplayed the size of his firm's Russian business, calling it less than one-half of 1 percent of the bank's worldwide dollar clearing operations. But within that specialized business, Inkombank was important. A 1995 Bank of New York memo sent to Renyi, who was then president of the Bank of New York, says -- quote -- "Inkombank is our largest generator of fee income." The memo was sent by Vladimir Galitzine and Natasha Gurfinkel. Galitzine worked under Gurfinkel. A Bank of New York spokesman said he was aware of the memo but declined to comment. Investigators want to know whether top officials at the Bank of New York were aware of how their Russian business was being conducted and how far the bank's due diligence extended.

ZELTSER: And who knows where it's going to end up? It's certainly not going to stop at Natasha Gurfinkel's level.


DORMAN: Natasha Gurfinkel Kagalovsky has not been charged with any wrongdoing and neither has the Bank of New York, which is cooperating with investigators. The investigation is still in its early stages, and so far, no criminal charges have been filed.