Go West, Young Thug

Russian mobsters target Central Europe, and the FBI says nyet

Hand grenades explode at strip bars and casinos as mobsters battle over turf, from Warsaw to Sofia. In Slovakia, an ex-policeman's severed head becomes a hood ornament on his car. A Hungarian gangster turned witness is blown to pieces in an explosion at noon in Budapest on a downtown street.

The escalating brutality is the work of Russian and Ukrainian mobs in Central Europe. But their presence is more insidious than the bloody acts of violence or the rise in prostitution and auto theft would suggest. In Poland, Hungary, and the Czech Republic, Russian mafia groups are weaving a web of unprecedented political and economic influence. "They're not here just to make and launder money," says Laszlo Kover, Hungary's minister in charge of the national civil security services. "They want to penetrate the economy."

KEY BATTLEGROUND. As the three countries prepare to join the European Union, criminal gangs are hustling to create shell companies to inFiltrate corporations, banks, and capital markets in the West. They are buying real estate and trying to break into economic and political spheres of power. "They can dislocate the economy and undermine democracy in the region," worries U.S. Ambassador to Hungary Peter F. Tufo. He also fears "there is a direct link" between Russian gangsters in Central Europe and in the U.S.

That's why the U.S. has targeted Central Europe as a key battleground in stopping the spread of Russian mobs. Since 1995, the FBI has operated a regional training academy in Budapest. But in the past year, as the cRime wave has grown and the region's governments become more alarmed, the FBI and the State Dept. have launched a host of new initiatives. They have moved out of the classroom to advise directly on casework. They have helped draft crime bills and introduced training programs that bring senior cops to the U.S.

Hungary, Poland, and the Czech Republic are the perfect mix of east and west for top gangsters from Russia and other former Soviet republics. Many of the criminals were once members of the Soviet elite, from intelligence operatives to trade officials. They rely on old contacts to help establish companies, acquire permits and passports, and protect them from the scrutiny of authorities.

Gangsters have also taken advantage of the tumult of the early years of market reform. So many new companies have been created in Hungary, for example, that the company registry will catch up on its backlog of new filings only this year. Up to now, police could not check on owners or fInancial backers of companies suspected of being fronts for Organized crime. "Our institutions didn't work properly. It was a paradise for organized crime," says Istvan Miko, head of the Hungarian National Police's Organized Crime Directorate.

But the key reason Russian criminal groups find Hungary, Poland, and the Czech Republic irresistible is their position as gateway to the West. Their growing economies and borders with the EU confirm a legitimacy on companies based in the region. A Prague-based company, for instance, attracts less attention from Western financial regulators than one in Kiev, and is more attractive to potential investors.

Agents are trying to prevent another YBM Magnex International Inc. An industrial magnet maker and oil-trading company headquartered in Newtown, Pa., its original shareholders included Ukrainian-born Semeon Mogilevitch. The FBI and Britain's National Criminal Intelligence service believe that Mogilevitch, who is a legal resident of Hungary, has direct control over criminal operations--from money laundering to art smuggling--in Hungary and the Czech Republic. In a 1995 report, British police called him "one of the world's top criminals." The British government banned him from entering the country. Attempts to reach Mogilevitch were unsuccessful.

Despite the link to Mogilevitch, YBM managed in 1996 to obtain a listing on the Toronto Stock Exchange and attract support from such brokerage firms as First Marathon Securities Ltd. and Nesbitt Burns. Their enthusiasm propelled YBM shares into the Toronto Stock Exchange 300 index. By March, 1998, YBM boasted a market capitalization of $600 million. The share price collapsed, however, and trading was suspended on May 13, 1998, after60 U.S. federal agents raided the company's Newtown headquaRters. Prosecutors have yet to file charges against any officers or owners of YBM, but a source close to the probe says there is evidence pointing to money laundering. A Houston law firm, Yetter & Warren, is readying a lawsuit on behalf of individual investors in YBM, alleging securities fraud by company directors. YBM declined to comment. First Marathon Senior Vice-President Michael Walsh also declined to comment on the investigation or on his company's involvement in YBM. "There's not enough information available yet," he says. The Bank of Montreal, parent company of Nesbitt Burns, also declined comment.

YBM boasted a large Hungarian operation, Magnex. According to company records, it accounted for the bulk of YBM's $90 million in sales in 1996. In fact, it was nothing more than a dingy compound of two-story buildings in the outskirts of Budapest that, according to Hungarian regulators, reported a total production volume of just $1.5 million in 1996. But many analysts failed to do their homework and were ready to believe that a Hungarian operation, however murky its inventories, could quickly increase its profits. "The regulatory controls [in Central Europe] are more lax," says Credit

Suisse First Boston's senior eastern European analyst, Spencer Jakab. "But there are so many good companies, to some extent you could slip under the radar." CSFB did not invest in YBM.

U.S. officials intend to draw the line on Russian organized crime in Central Europe. The focal point of FBI efforts is Hungary, where a new government was elected in May on an anticrime platform. A new agreement signed in Washington sets up a strategy-making body between the FBI and Hungarian police and provides training for senior officials in how to root out internal corruption. The Internal Revenue Service will also help Hungarian tax authorities set up a criminal-investigations division. And the FBI has created a witness-protection program that can offer participants relocation in the U.S.

NEW LAWS. Governments are also moving on their own. Poland is readying laws to fight money laundering. And Hungary's government has introduced bills that would let police use more electronic surveillance and gain access to private records such as banking information.

Still the battle is just beginning. Both the FBI and Central European authorities understand that it will be difficult to put the region's top gangsters behind bars. "We're talking about highly educated, sophisticated individuals," says an FBI agent. It may take a huge investment of time and money to rid the region of the Russian mafia threat.