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The Laundry Bill

In this special TOL report, Justin Kane from the U.S.-based Center for Investigative Reporting offers insights from San Francisco on last week's guilty verdict against a former Ukrainian prime minister who laundered $114 million. So far President Kuchma looks safe from the collateral damage, but the same may not be true for a leader of Ukraine’s democratic opposition. by Justin Kane 11 June 2004 SAN FRANCISCO, California--The most portentous conversation I’ve had about the trial of former Ukrainian Prime Minister Pavel Lazarenko took place in a taxicab shortly after 11 a.m. on 3 June, as I was rushing to the Phillip Burton Federal Building to hear the jury’s verdict.

“The federal courthouse,” I told the cabbie, a bespectacled Indian fellow with a warm smile. As he accelerated away from the curb, he rested his hand on the passenger-side headrest, peered over his shoulder, and asked what had me in such a hurry.

I gave him the pocket version: Lazarenko was on trial for laundering $114 million through U.S. banks. Prosecutors charged he had taken the money in a series of frauds and extortions during his climb from regional governor to prime minister between 1992 and 1997. In his defense, Lazarenko argued that his profits were the legal reward for doing business during the turbulent post-Soviet transition and that his prosecution was persecution--a political vendetta initiated by his rival, Ukrainian President Leonid Kuchma.

I’d been covering the trial for 10 weeks and following the case for months longer. I was familiar with every argument. I had seen most of the evidence. And unlike most Americans, I knew something about Ukraine’s history and politics. But for me, this trial had only complicated the already tangled legal questions behind the case. Here was a Ukrainian being judged by U.S. jurors for breaking Ukrainian laws. And the Ukrainian laws that Lazarenko allegedly violated and that formed the basis for the U.S. charges were a mishmash of Soviet-era criminal code and the statutes of a country that didn’t have a constitution until 1996. The government’s principal witness against Lazarenko, his former partner and friend, had been offered a plum deal to testify. I had no idea for whom the jury would find. I didn’t envy their task.

Despite having never heard of Lazarenko, my cabbie had clearer vision. “I hope they put that bastard away,” he said to me, wheeling through an intersection. “Guys like that, they think they can rob their country and come here. No! Put him in prison for a long time. Give his money back to Ukraine, to the people.” He paused as we pulled up to the doors of the courthouse. “We must show him that America will not take this!”

The jurors agreed. In a case that challenged 12 Americans to pass judgment on a foreign official whose crimes originated in Ukraine, my cabbie’s sentiment apparently struck a chord. Lazarenko’s trial may have showcased the U.S. government’s ability to reach beyond its borders to prosecute crimes, but the jury’s guilty verdict revealed the jaundiced eye with which America sees the uncomfortable friendship among business, politics, and crime that has marked the post-Soviet transition. Now the precedent this unique trial has set will help establish the legal foundation underlying how American law--increasingly important in international relations and business--treats that friendship in Ukraine and other nations of the Commonwealth of Independent States (CIS).

Despite the legal and political ramifications of the case, it has been mostly ignored, both in the United States and in Ukraine. For the Ukrainian media, the lack of coverage has not been by choice. Lazarenko was once close to Kuchma, but the Kuchma administration’s control of the press has ensured that that era will escape a second round of scrutiny. With Lazarenko vowing early on to expose the nexus of business, politics, and crime that revolves around Kuchma, the trial became off-limits.


In April, less than two months before the verdict, Doron Weinberg, one of Lazarenko’s American defense attorneys, said 12 seemingly innocuous words in court that must have rattled Ukraine and its politicians more than 6,000 miles away.

“Your Honor,” he began, “there is a great likelihood that the defendant will testify.” U.S. District Court Judge Martin J. Jenkins looked up from his files in surprise. In the gallery, where only the vice consul of the Ukrainian consulate and I were waiting for Jenkins to set the trial schedule, our whispered conversation died.

With a single sentence, Weinberg and his client signaled their intent to go on the attack in a case that had as much to do with the post-Soviet transition as it did with the accused. Since early 1999, Lazarenko had been in flight from the money-laundering charges against him. Now, it appeared he would turn and fight. The declaration was also a reminder that, halfway into the trial, the questions most important to observers remained unanswered. What light could Lazarenko shed on the transition in Ukraine? What did Lazarenko have to say about his rival Kuchma? Would any Ukrainians hear what he had to say? As Ukraine’s October presidential election draws closer, this trial loomed as Lazarenko’s last chance to make his mark on Ukraine.

After the day’s proceedings adjourned, I waited for an elevator with Lazarenko, his son Oleksandr, and two of his translators. Impeccably dressed in a black suit, hands clasped behind his back and chest thrust forward, Lazarenko peered expectantly at me.

“Doron said there’s a good chance you will testify. Is it true?” I asked him. Oleksandr translated. Lazarenko’s brow wrinkled and he straightened up to his full 6 feet before curtly answering in Russian.

“He says, ‘I don’t remember that. Did he say that?’ ” Oleksandr told me.

Lazarenko smiled broadly.

He and his retinue boarded the next elevator. I stayed, accosting Weinberg moments later and relating my exchange with Lazarenko. Weinberg appeared amused.

“Well, he’s more cunning than I am,” he said.

In the end, Lazarenko never took the stand. A midtrial motion for acquittal filed in May, after prosecutors finished presenting their case, knocked out 24 of the 53 charges against him and, with them, the reasons for him to testify. It seemed the case was going Lazarenko’s way, and exposing him to the prosecutors’ cross-examination was not worth the risk, his attorneys reasoned. Though Lazarenko’s feint proved unnecessary, he has used the tactic throughout his legal troubles to keep his story alive. String the media along with the promise of an embarrassment of riches when the time is right. Now, with the guilty verdict on the remaining 29 counts hanging over him, the latest carrot for reporters is a post-trial tell-all interview.


It’s easy to speculate about what Lazarenko might say and, for the sizable anti-Kuchma faction in Ukraine, tempting to imagine what incriminating dirt he has on the president and his cronies. Lazarenko’s story is inextricable from Kuchma’s--they are from the same town and the same era. They were political allies before they became enemies. Though Lazarenko is nearly seven years removed from the year he spent as prime minister, his rise through the ranks made him an insider in the web of ever-shifting deals and allegiances that has controlled Ukraine since 1994. In his heyday he was wealthy and ambitious, arguably the second-most powerful man in Ukraine.

Legend has it that Lazarenko started out as a lowly tractor driver, but his classmates at Dnipropetrovsk Agricultural University say he was among the top students there. Lazarenko quickly became the head of Kalnin Collective Farm, one of Ukraine’s leading agricultural concerns. He was only 28, the youngest farm director in the Soviet republic of Ukraine.

With Ukraine’s independence in 1991, Lazarenko’s career blossomed. From 1992 to 1995 he led the government in the Dnipropetrovsk oblast as representative of the president and later, when the title changed, as governor, consolidating his grip on a politically and economically important region of Ukraine. The district is home to some of Ukraine’s largest state farms and factories, as well as one of the most powerful political “clans,” whom Kuchma, himself a Dnipropetrovsk native, has often enlisted to solidify his hold on the nation. Lazarenko’s power there was considerable, sufficient to win an appointment to the national government from Kuchma in September 1995, when he became first vice prime minister. Nine months later, he graduated to prime minister.

As Lazarenko rose to prominence, his bank accounts swelled. Cutting deals with local businesspeople left and right, Lazarenko claimed a share of Dnipropetrovsk’s wealth. When he made the jump to Kiev, he brought his cronies with him. Together, they engineered a restructuring of Ukraine’s gas industry that mysteriously brought hundreds of millions of dollars to Lazarenko. (U.S. charges related to the gas industry were thrown out by the midtrial motion for acquittal.)

Most analysts attributed Lazarenko’s ouster as prime minister in July 1997 to the growing threat his wealth and his strong political base posed to Kuchma. Lazarenko resigned under the specter of a government investigation into his fortune; it was the genesis of what became a bitter and brutal struggle for power.

Lazarenko was already a marked man. In 1996 a car bomb exploded near his motorcade, narrowly missing him. The incident was followed by a 1998 car accident that badly injured his son. (Auto accidents are a popular assassination technique in Ukraine.) For its part, the Ukrainian government has alleged that Lazarenko was involved in the murders of two pro-Kuchma members of parliament, Vadym Hetman and Yevhen Shcherban.

The government probe intensified as Lazarenko became the head of the opposition party Hromada, entered parliament, and began positioning himself as a presidential candidate in the 1999 elections. Early that year, the pro-Kuchma majority in parliament moved to revoke Lazarenko’s immunity, prompting him to flee the country.

The West was unwelcoming. Upon entering Switzerland, he was charged with laundering $18 million, allegedly using Swiss bank accounts to hide a stream of money leaving Ukraine. Lazarenko, whom the Swiss eventually convicted in absentia, jumped his $3 million bail and escaped to New York City. Picked up on 19 February 1999 by U.S. immigration officials, Lazarenko became embroiled in an extradition battle with the Swiss that grew into the American criminal indictment, which has kept him in federal custody for more than five years.


Both Lazarenko’s success and decline are due in no small part to Kuchma. Chased out of office and out of Ukraine, it was no particular surprise when Lazarenko brought their spat to a San Francisco courtroom. Like a wounded animal, Lazarenko now has nothing to lose but his life. The charges have savaged his reputation, and the guilty verdict against him finished it off and secured him at least a few more years in prison. Even before the verdict, Lazarenko knew his future did not hold a triumphant return to Ukraine. He was cornered; his defense attorneys said he wasn’t a flight risk because no country would admit him.

So Lazarenko charged headlong into battle. Before the trial began in mid-March, he used the website of one of his attorneys to challenge Kuchma to a debate broadcast on Radio Free Europe/Radio Liberty, an offer clearly intended as a PR stunt since Kuchma would never accept. And in a brief interview he gave to Ukrayinska Pravda, an opposition website, in March, Lazarenko appeared eager to spill Kuchma’s secrets whatever the price, though he stayed close-lipped at the time.

“I wouldn’t want only good things about me to be said,” Lazarenko said. “The truth must be told about both Lazarenko and Kuchma.”

But prosecutors constructed their case narrowly, confining testimony to the $114 million Lazarenko is charged with bringing to the United States and excluding almost all mention of Kuchma. During its cross-examinations, the defense responded in kind, attacking the prosecution’s criminal characterization of Lazarenko and painting a sympathetic portrait of business practices in Ukraine. However, when prosecutors were forced to drop the charges connected to Lazarenko’s oversight and restructuring of Ukraine’s energy industry during his time in Kiev, Lazarenko’s best opportunity to attack Kuchma in court was thrown out as well.

Nonetheless, the defense continued to argue that Lazarenko had not acted differently than other Ukrainian politicians. What Lazarenko did was business as usual, the attorneys said. Trying to hammer home its point, the defense filed two requests demanding that Kuchma, Defense Minister Yevhen Marchuk, and First Vice Prime Minister Mykola Azarov submit to questioning, calling upon the Mutual Legal Assistance Treaty that the United States and Ukraine signed in 1998. In pretrial filings, the defense stated that it wanted to question the trio about their finances, including a pair of offshore companies owned by Kuchma and Marchuk to which Lazarenko allegedly made transfers. Unsurprisingly, Kuchma ignored the first request, and Marchuk and Azarov both walked out of their depositions before they began. All three have ignored the second request, and although the MLAT has legal force, neither the U.S. nor the Ukrainian government has sanctioned them for their refusal to testify.

Yet the most explosive charge leveled by Lazarenko and his attorneys concerned how Kuchma built a case against Lazarenko and then allegedly took advantage of the anti-corruption zeal of U.S. prosecutors. To demonstrate their version of events, Lazarenko and his defense team presented evidence that they said supported the picture of Kuchma’s regime developed by Keith Darden, a Yale political science professor. Darden has written extensively on how Kuchma has used widespread corruption to blackmail and control all levels of Ukrainian government officials, basing his conclusions in part on the secret recordings of Kuchma made by former presidential bodyguard Mykola Melnychenko.

In one histrionic motion, one of Lazarenko’s attorneys called Kuchma “a bloodthirsty Caligula using the Americans as his lions” to take care of his opponents. The rhetoric was followed by an excerpt from the Melnychenko tapes, in which Kuchma discusses with former Security Service of Ukraine head Leonid Derkach how to handle the Americans’ anti-corruption demands.

Derkach: And now the last one. Well, the Americans are making nightmares about corruption anyway, and journalists are coming. I think we need to yield [Parliamentary Deputy] Anatoliy Matvienko [from the Yulia Tymoshenko Bloc]. Let them [have him].
Kuchma: Yes.
Derkach: [Socialist Party leader Oleksandr] Moroz, Lazarenko, [former Parliamentary Speaker Oleksandr] Tkachenko, [late director of Naukovy State Farms Mykola] Agafonov. And now [former acting Prime Minister Vasyl] Durdynets, as the ex-chairman of the commission. Let them make nightmares about him a little. Or not to touch?
Kuchma: Well, no, do not touch Durdynets. Don’t.

Derkach: Now, whom from the oligarchs? Who are you sick of? Who can we hand to the Americans? Let them decapitate them.

The promise of Lazarenko’s as-yet unspoken words is that he may turn the tables on Kuchma and become the insider who will corroborate the dirty details of the tactics and crimes that Melnychenko captured on tape. Lazarenko has a brash confidence that suggests what he knows is worth saying. “I have a unique chance to cast light on the events in Ukraine,” Lazarenko told Ukrayinska Pravda in March. “The time has come to show why the regime has chosen me.”


Of course, it is as likely that Lazarenko’s confidence is born of what appears to be the twilight of the Kuchma era in Ukraine. Though the president undoubtedly remains the most powerful man in the country, the recent defeat of his constitutional reform bill, his impending departure from office, and his poor health suggest his grip on the country will loosen regardless of what Lazarenko says, if he says anything at all.

Indeed, there may be too many obstacles for Lazarenko to have even a negligible effect on the October presidential election or Ukraine’s political future. Election day is too far off, and the guilty verdict has rendered whatever he says largely inconsequential. Though Kuchma’s approval rating is dismal, sometimes sinking into single digits, Lazarenko is at least equally reviled in Ukraine, where he has become the poster boy for the corruption that followed the Soviet Union’s collapse.

But the greatest barrier to any short-term effects is the sorry state of the press in Ukraine. Only two media outlets in Ukraine--Ukrayinska Pravda and Radio Free Europe’s Ukrainian Service--featured regular coverage of the trial, and under Kuchma’s repressive eye, neither enjoys an audience of even 1 percent of Ukraine’s population. Since 2002, the mainstream media have marched to the beat of Kiev’s temnyky, the state-issued “theme lists,” which are unlikely to permit the broadcast of any information damaging to Kuchma.

Ironically, despite Lazarenko’s intentions it may be the opposition that is most hurt by his case. Yulia Tymoshenko, leader of the Yulia Tymoshenko Bloc, has already featured prominently in the trial as the owner of three companies that allegedly transferred more than $160 million to Lazarenko in the gas industry restructuring that his indictment charged was fraud. Though the charges were dropped when the defense successfully argued that the transactions incurred no losses to Ukraine, the airing of the allegations alone is enough to build the connection between Lazarenko and Tymoshenko. Particularly if Tymoshenko joins forces with the opposition’s top presidential contender, Viktor Yushchenko, her ties to Lazarenko may test the resilience and the knack for reinvention that has kept her atop Ukrainian politics since Lazarenko’s resignation.

For Tymoshenko and her ilk, Lazarenko’s conviction poses another danger--it affirms the idea that Kuchma-style political warfare can pay substantial dividends. Like Lazarenko, Tymoshenko and other opposition figures made enormous and questionable profits during the transition, despite their current disavowal of corruption. Tymoshenko’s wealth has been estimated at more than $1 billion. Given Kuchma’s control of the media, a well-timed offensive could handicap the opposition’s presidential campaign this fall if the race between front-runners Yushchenko and Prime Minister Viktor Yanukovych is close. Tymoshenko has weathered such attacks in the past--she spent more than a month in prison in 2001--and enjoys the admiration of some powerful U.S. supporters, but the elimination of Lazarenko may inspire a more concerted effort against her. This is one of the truths of the transition: its taint does not respect political platforms.


If any good for Ukraine is to emerge from this trial, it will most likely come not from election-year politics but from the legal precedent that the guilty verdict has established. Suddenly, it has become clear: what is “business as usual” in Ukraine is not business at all in the United States. For policy-makers in Kiev who hope someday to join the European Union, that realization is yet another reminder that the nation has a long way to go toward transparency.

No moment in Lazarenko’s trial was more indicative of the thin line between business and organized crime in Ukraine than the mafialike paranoia and loyalty that colored the entire testimony of Peter Kiritchenko, Lazarenko’s former partner and the prosecution’s star witness. Kiritchenko and Lazarenko go back to Dnipropetrovsk, where Kiritchenko, a former low-ranking Soviet official, sought to expand his fledgling import-export business in the early 1990s. According to Kiritchenko, breaking into the region’s lucrative agricultural and metallurgical industries could be done only with Lazarenko’s approval. At a 1993 meeting in a hotel in Warsaw, Kiritchenko testified, Lazarenko laid down the law: “I work with everyone 50/50.”

Out of that initial extortion grew a network of Swiss bank accounts and offshore companies, Kiritchenko said. He helped Lazarenko manage his money, receiving transfers into corporate accounts and moving funds around the world. By 1995 Kiritchenko was living in the San Francisco area; three years later, he helped Lazarenko engineer his own move by arranging the purchase of a $6.75 million mansion once occupied by Hollywood star Eddie Murphy. But when the two found themselves under investigation for money laundering in 1999, they ended up sharing the same California prison cell for six months.

During his five days of testimony, Kiritchenko answered questions about the uneasy alliance he had with Lazarenko during their time behind bars. In the open, Kiritchenko said, they planned their joint defense; behind each other’s backs, they jockeyed to be the first to strike a plea agreement with prosecutors. Kiritchenko had his suspicions. His wife, his children, and his friends all told him that Lazarenko was disguising his meetings with the U.S. Attorney’s Office as visits to the doctor. The rumors were the final straw, Kiritchenko testified. He turned state’s witness on 21 December, 1999.

Kiritchenko struck a sweet deal, particularly for a man whose other deals had been linked to Russian organized crime by the FBI. The bargain allowed him to appeal any sentence over 37 months and to keep more than $20 million in assets, including his $11 million mansion and a $3 million Los Angeles condo. It also gave him incentive to point fingers at Lazarenko, defense attorneys argued.

The next day he was released from prison. When Kiritchenko said goodbye to his cellmate, the tenderness had a subtext, said Doron Weinberg, Lazarenko’s attorney, as he cross-examined Kiritchenko.

“And you hugged him and kissed him on the cheek …?” Weinberg softly asked.

“When I kissed him, it was a Judas kiss!” Kiritchenko burst out in reply, shocking observers in the courtroom.

That the government’s own witness considered his plea agreement a betrayal worthy of Judas suggests that the West’s disapproval of Ukraine’s crony capitalism came as a surprise. In Kiritchenko’s mind, the guarantee that Agrosnasbyt, his company, would be at the top of the list for licenses to export metals and other goods was well worth handing over a 50 percent stake to Lazarenko. He was no victim--just a savvy businessman who became a millionaire many times over. Indeed, later in the defense’s cross-examination, Kiritchenko admitted that he did not believe he and Lazarenko had done anything wrong in Ukraine.

Kiritchenko is not the only one who believes this. “[The prosecutors] simply could not conceive of anyone in these CIS countries making honest profits,” argued Daniel Horowitz, one of Lazarenko’s attorneys. “I’m not saying that all politicians made honest profits, but I am convinced that there has always been a missing element in their case--no loss to anyone.” Horowitz’s argument went hand-in-hand with the defense’s contention that Lazarenko had not done anything that other politicians in Ukraine were not doing.

Kiritchenko’s situation posed a difficult challenge for the prosecutors. In order to establish that Lazarenko violated U.S. law, prosecutors first had to make the case that he broke Ukrainian law. To do so, they had to convince the jurors that Kiritchenko could simultaneously be a victim and a beneficiary of extortion.

His substantial wealth, which he estimated at more than $25 million during his testimony, did little to clear up the situation. “If that’s extortion, I know a lot of people who would sign up to do that,” Weinberg said during closing arguments.

But the prosecution hedged its bets. Along with the Ukrainian extortion and fraud charges, Assistant U.S. Attorney Martha Boersch advanced the theory that Lazarenko had deprived Ukrainians of his honest service as a public official by acting for the benefit of Kiritchenko and others. This honest-services fraud, she argued, could taint Lazarenko’s take of the profits, even if his crime were not a material act but the abstract failure to discharge his duty to the Ukrainian people. The strategy counted on the American jury’s universalizing instinct, a willingness to evaluate Ukrainian norms and standards alien to them. And it’s this theory, so precariously balanced on a jury’s will, that should worry foreign officials in Ukraine and elsewhere.


A half-hour into the videotaped deposition of Anatoliy Minchenko, a former Ukrainian energy minister, Juror No. 2 was already fighting off sleep. It was only early March, just days after the trial had started, but already the gravity of the proceedings had pulled the juror’s eyes shut and left his head hanging limply to the right. As his body slumped into the leather chairs of the jury box, Minchenko’s bureaucratic Ukrainian drone buzzed from two tiny black speakers on the other side of the wood-paneled courtroom. Each question trudged along at one-third of the normal pace, weighed down by the back-and-forth translation of the English questions and the Ukrainian answers. The complex answers Minchenko gave--explanations of Ukraine’s natural gas markets and the day-to-day workings of the prime minister’s cabinet--were alone difficult to follow. But with the distractions, the translations, the video, the sheer foreignness of it all--the odds were against Juror No. 2.

As for the 11 other Americans sitting in the Lazarenko trial, dozing off may have seemed a forgivable response to the convoluted foreign intrigue that unfolded before them. And with the nearly impenetrable density of the questions facing them, who could blame them?

More than two months later, on 27 May, the jury was called upon to deliver a complex verdict on one count of conspiracy to commit money laundering, seven counts of money laundering, 10 counts of wire fraud, and 11 counts of interstate transportation of stolen property. For each charge, jurors had to come to a unanimous decision on Lazarenko’s guilt, on which underlying violations of Ukrainian law were in play. After roughly 24 hours of deliberation spread over five days, the jury returned with its decision: guilty on all counts and all underlying Ukrainian crimes, including the honest-services frauds.

For those who thought American jurors might hesitate to decide whether a Ukrainian citizen violated Ukrainian law in Ukraine, myself included, their unequivocal verdict was a shock. I thought of my cabbie and his desire to make an example of Lazarenko. Afterward, the jurors, now allowed to talk to the media, left the courtroom flanked by U.S. Marshals, squeezed into an elevator together, and disappeared without a word of explanation. Surely they were unaware of the legal import of their decision, but their exit was as well-choreographed as a CEO’s slickest “no comment.”

The structure of U.S. money-laundering law made Lazarenko’s prosecution here possible. But what turned an anomaly into precedent was the willingness of American citizens to undertake the unusual task of determining whether someone who is their peer in only the loosest sense committed a crime in a foreign country. With this legal foundation, the U.S. government is adopting a more uniformly aggressive stance toward prosecuting foreign officials--including other Ukrainian and CIS politicians--who move their money into the United States.

U.S. Attorney Kevin Ryan, who runs the office out of which this case was prosecuted, said as much when he offered official comment on the verdict. “The jury’s verdict should serve as a warning to corrupt public officials at home and abroad that the United States will zealously prosecute them if they seek to conceal and invest their ill-gotten gains through American financial institutions,” he said in a statement to the media.

And by affirming the honest-services fraud theory, the jury opened the door for American prosecutors to pursue not only those who offer bribes to foreign officials but also those foreign officials who accept those bribes. This twist, a reversal of the Foreign Corrupt Practices Act, which criminalizes bribes given by American individuals and companies to foreign officials, could create a dangerous situation even for acting heads of state such as Kazakh President Nursultan Nazarbaev, who allegedly received bribes from American James Giffen--a middleman acting on behalf of Western oil companies who is now on trial in New York.

Lazarenko will appeal his conviction, and his attorneys have expressed confidence that the honest-services theory in particular will be overturned. Even if he succeeds, it is unlikely the decision will erase the American government’s newfound zeal for prosecuting overseas crimes. It is appropriate that a man who came to embody the tumult of the post-Soviet transition has inadvertently helped give birth to tools and an attitude that could help clean up the mess left behind.
Justin Kane is an associate at the Center for Investigative Reporting in San Francisco and covered the Lazarenko trial for Radio Free Europe/Radio Liberty and the Financial Times.
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