Did the CIS Development Foundation consider bootleg vodka "humanitarian aid"?

To Russia With Food Coloring 

Did the CIS Development Foundation consider bootleg vodka "humanitarian aid"?

In June, McCormick Distilling Co. of Weston pleaded guilty in U.S. District Court in Newark, New Jersey, to a single misdemeanor charge of falsifying an export document. McCormick, a privately held company with reported annual revenues of more than $115 million -- and the oldest continuously operating distillery in America -- had been nabbed in a $40 million smuggling enterprise run by Russian organized crime. The government charged that a limited number of McCormick employees were involved, including one senior executive with "substantial authority" within the company; the plea bargain includes prosecutors' acknowledgment that "the case involves other participants more culpable than McCormick," and no individual at McCormick was charged with a crime.

According to prosecutors, the McCormick employees who were involved used food coloring to disguise beverage alcohol as "industrial type products" with such names as "Cleansol" and "Rainbow Cleaning Solution" to escape paying excise taxes and customs fees; some of the alcohol was shipped as windshield-washer fluid. Prosecutors say that the alcohol was disguised at the McCormick plant in Weston, which is one of only two distilleries listed in the National Register of Historic Places.

McCormick pleaded guilty to smuggling 4.6 million gallons of alcohol into Eastern Europe over five years. And documents obtained by PitchWeekly suggest that the distiller's involvement with the Russian mob is connected to the long-running Bank of New York money-laundering investigation.

Government prosecutors named Express Shipping Service Ltd. -- a freight-forwarding company in Linden, New Jersey, owned and operated by Russian immigrants -- as the buyer and exporter of much of the bootleg alcohol. Law enforcement sources decline to estimate the total amount of liquor smuggled over the life of the Linden operation, but documents related to federal criminal charges filed against Leonid Ivanutenko, the president of Express Shipping Service, show that the smugglers shipped more than 4.8 million gallons of alcohol to Eastern Europe, garnering more than $40 million. The government charged that the money was transferred to the Express Shipping Service Ltd. account at Corestates New Jersey National bank "through various accounts at the Bank of New York."

The Bank of New York, the oldest bank in the United States and one of the largest, has been the focus of an intense money-laundering and tax-fraud probe since late 1998, when investigators discovered that more than $7.5 billion flowed through a handful of commercial accounts in the bank's Eastern European division in less than two years. Most of the money went to or from Russian or offshore banks, and it has been widely speculated that at least some of it came from Russian organized crime operations in the United States. However, no specific criminal enterprise has ever been publicly linked with the investigation.

McCormick Distilling paid a $10,000 fine and $2 million in penalties and restitution, accepted a one-week punitive shutdown, and agreed to cooperate in an ongoing Justice Department investigation of Russian organized crime infiltration of the American liquor industry.

Documents filed with various New Jersey, New York, and California courts in conjunction with several lawsuits show that Express Shipping Service has been connected with the purchase of large quantities of beverage alcohol from several American sources for at least the past five years. PitchWeekly has also learned that the shipping company, which was founded in 1993, is closely tied to a dubious nonprofit organization called the CIS Development Foundation, which for a time shared the shipping company's address in Linden (see accompanying story).

Express Shipping Service Ltd. is controlled by Ivanutenko, chief executive officer Michael Dyakovetsky, and a man named Boris Varshavsky. All are Russian immigrants in the process of obtaining U.S. citizenship.

Russians consume almost 5 billion liters of vodka each year, and the country is experiencing an alcoholism epidemic of historic proportions. Two-thirds of Russian men reportedly die drunk; more than half of that number die in "extreme stages of alcoholic intoxication." Russian annual per capita consumption of pure alcohol is the highest in the world at an estimated 14.5 liters; the Moscow News reports that annual per capita consumption in some regions of the country exceeds 25 liters. (The United States, at fewer than 7 liters per capita per year, is not among the top 20 drinking nations.) "Drinking while working, let alone at lunchtime, is a common practice," noted a 1998 article in The Globe, a British magazine devoted to alcohol policy issues, "and it is not unusual for a doctor to brace himself with a few stiff ones during surgery hours." Street kiosks in major cities sell vodka 24 hours a day. Vodka retains value even in the most fractured sectors of the Russian economy: In the province of Altai, teachers receive their monthly salaries in the form of 15 bottles each, and in the province of Tula, state child benefits are paid in vodka and wine. Tula produces more vodka than milk.

Although it's home to many of the most famous and popular vodkas in the world, much of Russia's domestic output is exported, mainly to the West, to provide hard currency for a perpetually cash-starved government. The diversion of domestic production to the export market, combined with Russia's prodigious thirst and an artificially low price -- a liter of cheap vodka in Moscow or St. Petersburg costs about $2.50, or about as much as two loaves of bread -- has created an enormous demand for illicit liquor.

Every country bordering Russia has recorded dramatic increases in alcohol smuggling over the past decade. In 1998 Polish police broke up a smuggling ring that had moved more than 6.5 million liters of black-market vodka, and that same year the prime minister of Kyrgyzstan reported to a government commission that bootlegging cost the country $20 million a year. Much of the money not going to the taxman goes to gangsters. Various agencies and departments of the Russian government have in recent years estimated that organized crime controls between 25 percent and 50 percent of the Russian market. The torrent of illegal vodka pours endlessly into Russia from all directions, and between 1993 and 1998 some of it came from Weston.

McCormick does business in more than 40 countries and is no stranger to Eastern Europe and Russia. One of McCormick's principal Russian distributors is Krystall, the Moscow distillery that produces some of Russia's best-known vodkas, including its namesake brand (sold in this country as Cristall) and Stolichnaya. The largest vodka distillery in Russia, Krystall produced more than 130 million bottles last year. The company made international headlines in early August when rival groups of armed managers attempted to take control of the factory in an ownership dispute. The standoff between the two groups overshadowed an August 4 raid on the distillery's business office by Russian federal tax police and their Moscow counterparts, who according to the ITAR-Tass news agency, were searching for records of hidden or underreported profits earned since 1998. The news service reported that Krystall has already been sanctioned for concealing profits from operations before 1998.

Representatives of the McCormick Distilling Co. declined to comment on the smuggling case or any other aspect of this story.

The U.S. government's case against McCormick was based on actions committed between April 1995 and December 1997, but a letter sent last December from the office of the U.S. Attorney for the District of New Jersey to McCormick's lawyer describing the terms of the company's plea agreement specified that "this office will not initiate any further criminal charges arising from McCormick's participation with Express Shipping Service Corp. in the exportation of beverage alcohol disguised as industrial product, for the time period 1993 through 1998." Company records show that McCormick did business until November 1998 with a Hackensack, New Jersey, liquor distributor known to purchase alcohol on behalf of Express Shipping Service.

In 1993, McCormick was purchased from Atchison, Kansas-based Midwest Grain Products by a private group of investors led by two longtime liquor-business executives, Edward Pechar and Michael Griesser, now chairman and vice chairman of the board. The two men were executives of Schenley Industries, a once-prominent New York-based liquor company that in 1987 was sold to Anglo-Irish brewing giant Guinness PLC, which is now known as Diaego Inc. and is the largest spirits company in the world.

McCormick, one of several companies that sold large quantities of alcohol to Express Shipping Service, at first supplied the smugglers with vodka, but the operation later switched to pure grain alcohol. (One gallon of 192 proof ethyl alcohol will produce 2.5 gallons of 80 proof vodka.) Express Shipping Service then transported dyed alcohol by sea to Eastern Europe in 55-gallon drums, typically in marine shipping containers holding 148 drums each. The smugglers exported at least 600 such containers, or more than 4.8 million gallons -- enough alcohol to produce more than 46 million liters of vodka with a minimum street value in Moscow of $115 million. The Russian receivers wired their payments to accounts at the Bank of New York.

Questionable transactions between Bank of New York accounts and various Russian and offshore banks have been under scrutiny since September 1998, when federal investigators discovered that a small group of Russians, some of them naturalized American citizens, were transferring hundreds of millions of dollars a month in and out of Russia through a small number of commercial accounts. Two Bank of New York employees were involved, one of them a vice president in the Eastern European division. Three people were indicted for money-laundering.

The case has made almost no visible progress in recent months. The Wall Street Journal reported last September that, according to sources close to the investigation, most of the money flowing through the Bank of New York accounts was generated "not by mobsters but by hundreds of Russian traders in need of a back-channel to pay their foreign suppliers beyond the scrutiny of Russian tax, customs, and foreign-exchange regulations." Records of otherwise-legitimate funds passing through the accounts are of little use to prosecutors because U.S. money-laundering laws apply only to cases involving money from a criminal enterprise.

But at least $40 million in criminal proceeds passed through Bank of New York accounts on the way to Express Shipping Service. The exact amount isn't provided in the plea bargain, but the Justice Department charged Ivanutenko under guidelines applying to crimes generating between $40 million and $80 million.

How much of the booze came from McCormick is unknown. Court documents show that some of the alcohol Express Shipping Service shipped was purchased by Elbron Holdings Corp., a liquor distributor in Hackensack. Lawsuits against Elbron by McCormick Distilling and Pharmco Products, a producer of bulk alcohol and solvents, indicate that Elbron stopped paying its bills in late 1998. (Pharmco is located in Brookfield, Connecticut, but McCormick Distilling Co. registered "Pharmco Products" as a fictitious business name with the State of Missouri in 1989, and renewed the registration in 1993.) By the time Elbron stopped paying its bills, it had purchased at least 1.7 million gallons of 192-proof grain alcohol from Pharmco in less than two years. And last October, McCormick sued Elbron for more than $250,000 in unpaid bills for purchases made by the distributor in a five-week period in October and November 1998. Elbron's response to the lawsuits claims the alcohol was purchased for Express Shipping Service.

The smugglers did not restrict themselves to bulk grain alcohol. In spring 1998, Imperial Spirits, a distiller in Franklin Lakes, New Jersey, accepted an order from Express Shipping Service for 1,989,000 12-ounce aluminum cans of vodka for shipment to Kazakhstan. (Imperial Spirits is no longer in business.)

Express Shipping Service's Ivanutenko is so far the only individual involved in the smuggling scheme charged with a crime. The docket sheet associated with his case says that the government has classified the seriousness of his offense as "Level 4," the same as that assigned to criminal trespassing. Assistant U.S. Attorney Mark Rufalo notes that it is not a violation of American law to smuggle alcohol into foreign countries. "There's no crime that I'm aware of," he tells PitchWeekly. "I wish there was."

McCormick Distilling completed its seven-day shutdown in July, paid all fines and restitutions, and is back to business as usual -- including, presumably, business in the former Soviet Union.

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