Matryoshka money laundering

Lucy Edwards, a relationship manager at the Bank of New York, opened an account in 1995 for Benex International Co., a defunct company with an empty office in Queens, NY.

Benex was owned by her husband, Peter Berlin, who allowed one of Edwards’ customers, Russia’s Depozitarno-Kliringovy Bank (DKB), to use the company’s account to move money in and out of the Bank of New York (BoNY).

DKB was provided with Bank of New York software that allowed customers to independently wire money out of their accounts. Over the subsequent four years, the Russian bank used the software to move an estimated $7 billion in and out of the Bank of New York on behalf of its own customers.

Regulators recognized this for what it was: correspondent banking.

“I agreed to actively assist DKB to operate what was, in effect, a banking business in the United States,” Berlin later confessed, “even though none of these entities had a license from the US government to operate as a bank or to operate a branch or agency in the United States.”

“Correspondent banking” is banking for banks: when a US bank opens an account that lets a non-US bank move dollars on behalf of its customers, for example. (Because US dollars can only move between US banks.)

It's the arrangement that lets the rest of the world do business in dollars, which is good: It allows US dollars to facilitate global trade, to everyone’s advantage — and the US’ advantage most of all. 

Sometimes it is bad.

DKB used the Benex account to help customers evade Russia’s capital controls by switching their rubles into dollars and moving them offshore. 

In other words, Benex was using its BoNY account to act as a correspondent bank.

Sometimes it was used for legitimate Russian businesses fearing the chaotic Russian government would appropriate its assets. Other times it was mobsters, oligarchs, and corrupt politicians.

It did this illegally. The Bank of New York did not know that’s how its account was being used.

That means it wasn’t technically correspondent banking — it was just a regular corporate account being misused.

But it was the first high-profile case to expose the Achilles’ heel of correspondent banking: A correspondent bank does not know who its customers’ customers are. Or what they’re up to.

Before the BoNY-DKB scandal, correspondent banking had received little attention as a conduit for international money laundering. After the scandal, it received congressional scrutiny that ended in new rules and regulations enacted in 2001: Section 312 of the Patriot Act aimed to make the global banking system easier to police by requiring US banks to vet their correspondent relationships more rigorously. 

Twenty-five years later, it remains a work in progress.

Between 2004 and 2007, Wachovia, a US bank, processed an estimated $378 billion in transactions for Mexican and Colombian casas de cambio without giving much thought to who was ultimately behind the transactions. The Justice Department later determined that it was often drug cartels.

Prosecutors said the large batches of “sequentially numbered travellers checks” deposited by the casas should have set off alarm bells in Wachovia’s compliance department. To the extent they did, they were ignored.

Between 2010 and 2014, at least $13 billion was laundered through US correspondent banks moving money on behalf of Latvia’s Trasta Komercbanka. Trasta, in turn, was moving money on behalf of Moldova’s Moldindconbank, whose customers could not have passed KYC anywhere else.

It was a matryoshka stacking doll of access to the US financial system: A US bank banking for a Latvian bank, banking for a Moldovan bank, banking for a shell company.

Moldindconbank proved to be at the center of a money laundering scheme involving payments on defaulted loans ordered by a Moldovan judge because they were “guaranteed” by a Moldovan citizen.

One such citizen was Ruslan Siloci, who lived with his parents in the impoverished town of Căuşeni. He was listed as majority shareholder in a company that supposedly owed $500 million to its creditors.

Between 2007 and 2015, Danske Bank’s branch office in Estonia moved over $160 billion through US correspondent banks. Much of this was for high-risk customers, including "politically exposed persons” who typically wouldn’t pass KYC at a US bank — like Vladimir Putin’s cousin, Igor Putin, for example.

To atone for its willful failure to properly KYC its customers, Danske pled guilty to charges of conspiracy to commit bank fraud and agreed to forfeit $2.06 billion of revenue to US and Danish authorities.

The US banks that actually processed the payments were found to be in the clear. In fact, prosecutors identified them as the victims: By failing to disclose the high-risk nature of its customers, Danske had defrauded the correspondent banks that gave it access to the US banking system.

In 2026, it’s still happening.

This weekend, the Wall Street Journal reported that Iranian interests continue to move billions of dollars through the US banking system.

None have an account with a US bank. Instead, they have accounts with banks that have an account with a US bank.

For example, the US Treasury has identified the UAE branch of Egypt’s Banque Misr as having routed as much as $1.8 billion through US correspondent banks on behalf of companies believed to be part of “Iranian shadow-banking networks.”

The Journal reports that US officials have warned foreign and domestic banks to do more to cut that network off from the US financial system.

But the US Treasury also implicitly acknowledged there’s not much it can do: The punishment for Banque Misr is that its UAE branch will be denied access to correspondent banks. After a 30-day grace period, that is. 

Banque Misr itself will continue to bank with the US.

The tough talk and weak action are a recognition of an unavoidable tradeoff: Cracking down too hard on correspondent banking would catch too many legitimate actors in the dragnet.

In 1999, for example, the crackdown that followed the BoNY-DKB scandal reportedly turned into a witch hunt of banks freezing the accounts of customers simply because they had Russian-sounding names.

Actors barred from the US banking system have since learned to give their shell companies names that don’t sound remotely Russian or Iranian.

It will be impossible for banks to root them all out. And regulators will be fine with that.

Because the optimal amount of fraud in the correspondent banking system is not zero.

— Byron Gilliam

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