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. Last Updated: 07/27/2016

Financial Monitors Wary of Mini-Madoffs

Rezeda Rafinkova, a 32-year-old doctor, took out a bank loan of 200,000 rubles in 2006 to invest in what appeared to be a legitimate financial company promising annual returns of up to 50 percent on the booming real estate market.

Just over a year later, Rafinkova discovered that she was among 100,000 victims of the Rubin Business Club, an officially registered, St. Petersburg-based pyramid scheme.

Prosecutors say the Rubin scam, uncovered in February 2008, defrauded investors of tens of billion rubles, yet it was just one of 200 financial pyramids that the Interior Ministry investigated last year.

While police arrested one of the accused organizers in St. Petersburg last week, the club's founder remains missing more than a year later.

"The company existed officially for two years in the center of St. Petersburg. Lawyers looked it over and said it was fine," Rafinkova said in a telephone interview from the Tatarstan city of Nizhnekamsk.

And while the Russian press has closely followed the investigation into Bernard Madoff's alleged $50 billion Ponzi scheme -- dubbing it the "American MMM" in reference to the most notorious Russian pyramid of the 1990s -- the government's financial watchdogs say they're more worried about a resurgence of homegrown swindlers.

In addition to the social harm they cause, financial crimes undermine trust in government regulators both in Russia and abroad. The U.S. Securities and Exchange Commission has been thrown into chaos over accusations that it overlooked warning signs in the Madoff case for years.

According to Interior Ministry statistics, more than 500 financial pyramids have gone bust or been liquidated in the country since 1991. In the past few years, however, there has been a "sharp growth" in fraudulent organizations, the Federal Financial Monitoring Service told The Moscow Times in a response to questions.

Some of 2008's Biggest Pyramid Schemes
Business Club "Rubin"

(OOO, ZAO "Sun")
Tens of billions of rubles100,000 RussiansSt. Petersburg-based2006-2008
"Garant-Kredit," "Garant-Invest," "Garant Invest Holding"18 billion rubles250,000 RussiansMoscow-based2005-2008
"Irkutsk Stock Center"2 billion rubles2,000 RussiansIrkutsk2002-2008
"Kuban Mutual Aid"More than 100 million rubles5,000 RussiansKrasnodar2006-2008
"Capital-Plus"8 million rublesMore than 900 peopleVolgograd2006-2008

Yury Korotky, the service's first deputy chief, told Rossiiskaya Gazeta in an interview published Wednesday that financial crimes, including pyramid schemes, could start to rise even more sharply because of the economic crisis. He said particular attention would be paid to lending pools and fraudulent investment projects.

Rafinkova said she didn't blame the government for her losses but that the state should have done a better job regulating the Rubin Business Company and the various deals it advertised.

"I had 100 percent trust in them," she said, referring to the Rubin organizers. "There were disabled people, war veterans and survivors of the Leningrad Blockade who defended their country for so many years and then invested their life savings in this company."

The monitoring service, Russia's financial intelligence body, said it shared the concern that the pyramids could "result in a loss of trust in the government," and officials have been working in recent months on a series of new anti-fraud regulations.

Prime Minister Vladimir Putin last month threw his support behind rules drafted by the Federal Service for Financial Markets that would impose stricter regulation of advertisements for retail financial services.

But the government may also have to retool as economic criminals move toward more sophisticated fraud.

In the past, Russia has had a higher number of asset diversion cases, incidents where, for example, a company might employ a fictitious supplier to make payments under the table. Now there is likely to be a rise in account manipulation as companies face pressure to maintain business as usual after years of tremendous growth, said Ian Colebourne, head of forensics at KPMG in Russia and the CIS.

"You basically have a double whammy -- a higher risk of account manipulation because of the market downturn. And also, as the market goes down, you have the risk that historic practices will get flushed out," he said.

The past few months have unveiled the small-scale pyramid schemes of a number of "mini-Madoffs" as well as other instances of high-profile, white-collar crime.

Ramalinga Raju, CEO of Indian IT company Satyam, disclosed in January that $1 billion -- or 94 percent -- of the company's reported worth was fictitious. In Denmark, IT Factory chief executive Stein Bagger skipped a November ceremony where he was to be named Ernst & Young's Danish entrepreneur of the year because he was busy fleeing the country after allegations of an estimated $185 million fraud.

"When I was reading about Satyam," Colebourne said, "in the back of my mind was: Where is Russia's Satyam going to be?"

Ivan Ryutov, head of risk advisory, fraud investigation and dispute services at Ernst & Young in Moscow, said he expected more pyramids in Russia this year. "In uncertain times, people are willing to take larger risks for larger rewards. During the turmoil, the rewards will potentially be higher," he said.

The Interior Ministry reported a 1.9 percent decrease in financial crimes year on year in the period from January to November, the most recent period for which data are available.

But the gap between crimes committed and detected could be masking the extent of the problem, Ryutov said.

The ministry uncovered 429,600 economic crimes in the first 10 months of 2008, and of them, 26,600 were incidents of tax fraud. Comparable figures for other countries are much higher, Ryutov said. "It's ridiculous that in such a big country as Russia only 1,500 commercial corruption cases are detected," he said, referring to 2008 data through October.

One of the biggest tasks facing the state is improving financial literacy, said Andrei Salashchenko, head of the RTS exchange's department for cooperation with the government.

"The state understands that any defense measure might not be enough if private investors don't understand how the market operates and what the risks are," he said.

Pyramids typically target lower- and middle-class Russians, who are sometimes tricked into investing their life savings and even borrowed money in schemes that have no regulatory approval, the Federal Financial Monitoring Service said.

"Those of us who invested weren't specialists," said Rafinkova, the Rubin investor. "But some specialists were fooled themselves."

The Russian investors rumored to be among Madoff's victims are likely of an entirely different set. The New York Times reported last month that a handful of Russian investors lost millions of dollars to Madoff through Austria's Bank Medici.

Bank Medici has repeatedly denied that it had any Russian clients as well as reports that it had been looking to expand into Russia.

But the bank's claim to not have had Russian clients may ultimately rest on a technicality, said Bruce Marks, managing director of the law firm Marks & Sokolov, who organized a seminar for Madoff victims in Moscow last month.

"I would be surprised if there were individual Russians or Ukrainians who invested in their own name," Marks said. "Typically, Russians and Ukrainians invest through offshore vehicles," such as Cyprus and the British Virgin Islands.

Rafinkova said she knew about the Madoff scandal from Channel One television but that there seemed to be few similarities between his scheme, which attracted established banks and institutional investors, and Rubin's, which targeted ordinary citizens.

Still, she said, there's a reason why these schemes thrive.

"People want a better life," she said. "It's normal."