Russian Organized Criminal Activities in California

Russian organized crime in California is involved in extortion, narcotics, murder, auto theft, and loan sharking, as well as insurance, fuel, telecommunication, and credit card frauds. The following cases are examples of several different crime categories.

Extortion - Five members of an Armenian organized crime group in Los Angeles were convicted in 1994 for extortion, kidnaping, and attempted murder. They forcibly detained and threatened victims and their families with great bodily harm unless they paid the suspects money. This group is believed to have extorted the Armenian community in the Los Angeles area for the last 13 years.

Fuel Frauds - Fuel frauds, mostly in Los Angeles and New York, cost both the federal and state governments approximately $2 billion annually in tax revenue. The majority of the fuel frauds are committed by Russian and Armenian organized crime groups operating in Southern California. There are a variety of schemes involving the fuel fraud including falsifying state and federal tax forms, use of fictitious companies, known as a "burn" company, extending fuel by blending tax free additives such as transmix or alcohol, rigging fuel pumps, manipulating dyed fuels designated for off-road purposes, and selling lower grade fuel as a premium product.

The "daisy chain" scheme is the predominate method of fuel tax fraud. The daisy chain scheme starts with a string of companies created by Russian and Armenian organized crime groups and is designed to create a massive paper trail. In the daisy chain, a "burn" company is created and exists only on paper. By the time auditors and investigators unravel the series of transactions to determine the tax liability, the "burn" company has disappeared without a trace of records or assets. These groups are pocketing up to 50 cents per gallon in federal and state taxes which enables them to sell the petroleum products below cost. Selling fuel below cost forces the legitimate operators out of business. Often these groups force legitimate businesses out of business using intimidation tactics through kidnaping, assaults, and bombings.

On September 13, 1995, 13 Russian Armenian subjects were arrested and charged with racketeering, including multiple acts of mail and wire fraud, money laundering, extortion, and distribution of heroin and other narcotic controlled substances. The Russian Armenian group, called the Mikaelian Organization, after the group's leader and self professed "godfather" of the Russian Mafia, Hovsep Mikaelian, ran a black market diesel fuel network that supplied gas stations and truck stops throughout Southern California. They defrauded the Internal Revenue Service and the California Board of Equalization through various fraudulent schemes, by purchasing millions of gallons of diesel fuel and avoiding a huge tax liability.

The Mikaelian Organization used wholesale permits obtained fraudulently to purchase tax-free diesel fuel that was intended to be used solely for off-road purposes such as farming and construction. The fuel was then diverted and sold at numerous independent diesel fuel stations, several of which were controlled by this organization. Up to 42 cents per gallon of the federal and state tax collected at the time of sale was pocketed by this organized crime group.

This group was also involved in gaining control, through threats and extortion, of a large segment of the independent diesel fuel wholesale and retail service station and truck stop markets. Permits were also obtained by submitting fraudulent paperwork. In some cases, jet fuel, which can be purchased tax free, was added to the diesel fuel and sold at the service stations and truck stops.

According to the U.S. Aftorney in Los Angeles, this group managed to avoid paying $3.6 million in taxes in just one year. The arrests culminated a two-year joint task force investigation conducted by the Federal Bureau of Investigation, the Internal Revenue Service, the Los Angeles Police Department, the Long Beach Police Department, the California Department of Justice, the Department of Defense, and the Department of Transportation. The task force confiscated more than $2 million in cash and property, including a BMW, Jaguar, and two Rolls Royces.

In order to counter the diesel tax frauds, Senate Bill 840, introduced by former Senator Robert Presley and former Assembly member Johan Klehs, was passed into law and took effect July 1, 1995. The purpose of the new law, which now parallels federal law, is to reduce diesel fuel frauds by imposing tax collection at a higher point (terminal level) in the distribution chain. Under the new law, taxes will be collected on tax exempt fuel by the terminal operator and refunded by the state (tax refund). A terminal is defined as a storage facility where fuel is stored and delivered to buyers. Fuel is delivered to the terminal directly from the refinery which is the first level in the distribution chain.

Telecommunications Fraud - Russian crime figures in the Los Angeles area are extensively involved in telecommunications fraud (cloned cellular phones). Law enforcement sources indicate that the activity is spreading to Northern California. This illegal process involves stealing electronic serial numbers of customers' cellular phones and programming them into computer chips, thus making a duplicate or clone of the telephones. While cloning has been going on for some time, it has grown rapidly and become more sophisticated as the industry has expanded. One cellular station in the Hollywood area is losing approximately $2 million a month in fraudulent calls made on cloned cellular telephones. Armenian organized crime figures are believed to be responsible for the majority of this fraudulent activity.

Narcotics - ROC groups are not extensively involved in narcotics distribution in California. However, there have been significant events and cases that indicate a possible future trend in this area.

On March 4, 1993, a Russian emigre was arrested for pefty theft. The Burbank Police Department recovered two kilos of cocaine and $2,200 in cash from the emigre's vehicle. It was later learned the emigre was also involved in shipping stolen vehicles to Russia.
On May 1, 1993, a Russian emigre was arrested for immigration violations. Information from the Immigration and Naturalization Service indicates that the emigre was involved in smuggling cocaine from the U.S. to Russia through his import/export business in Southern California. This emigre had spent 13 years in a Russian prison.
In February 1995, Tracey Hill, believed to be a courier for a ROC group, was arrested in Redding, California, for possession of 18 kilos of cocaine. Hill was en route to Vancouver, B.C., from the Los Angeles area.
On May 4, 1995, seven kilos of heroin was seized from a member of an Armenian organized crime group based in the Glendale area. The heroin came from the Middle East and was intended for distribution in the United States.
Medical/insurance Fraud - In Los Angeles, Russian organized crime figures have been involved in various frauds that run the gamut from staged auto accidents to false billing schemes. In 1991, in a case considered the largest of its kind, the U.S. Aftorney's Office in Los Angeles charged 13 defendants in a $1 billion false medical billing scheme that was headed by two Russian emigre brothers, Michael and David Smushkevich. The Smushkevich brothers have long been suspected of being part of a loosely organized Soviet crime syndicate operating in the Los Angeles area during the late 1980s and early 1990S. .14 The 175 count indictment capped a six-year investigation by federal, state, and local agencies.

Authorities reported that the brothers orchestrated a massive fraud scheme to use mobile medical laboratories to conduct unnecessary and false tests on patients. They then sent inflated and false bills to insurance companies and collected large fees. The scam eventually spread to Missouri, Illinois, and Florida. On September 20, 1994, the alleged ringleader, Michael Smushkevich was sentenced to 21 years in prison for fraud, conspiracy, racketeering, and money laundering. Smushkevich was also ordered to forfeit $50 million in assets, pay more than $41 million in restitution to government agencies and insurance companies victimized by the scheme, and pay a $2.75 million fine. David Smushkevich testified for the prosecution and received probation. It is estimated that the Smushkevich brothers pocketed between $50 and $80 million in profits. It is believed the brothers hid their money in an unknown country.

Loan Sharking - In October 1991, two Russian organized crime figures were convicted in Los Angeles of extorting a Russian emigre businessman. The two Russian organized crime figures lent money to the victim at a 30 percent interest rate. The victim borrowed $125,000 and over eight years had paid back $480,000 but still owed $120,000. The suspects threatened the victim and his family if they didn't pay the rest of the money that was owed.

Auto Theft - The Northern California auto theft group specializes in auto theft and operates in Sacramento, other parts of Northern California, Oregon and Washington. Younger members of this group steal vehicles while the older members operate body shops. The body shops are used as chop shops where stolen auto parts are used to reconstruct vehicles bought from salvage pools. Vehicles are also stolen, surgically stripped, and the hulls dumped where they are easily found by law enforcement personnel. These vehicles end up at salvage yards where members of this auto theft group buy the surgically stripped hull and ultimately put the vehicle back together at the chop shops. Vehicles are also bought at the salvage pools for their VIN numbers. The VIN numbers are switched to stolen vehicles.

The vehicles are then taken out of state and re-registered in an attempt to conceal or clear the salvaged title. Many of the stolen vehicles are believed to be shipped out of the country through Seattle, Oakland, and other port cities. This crime group may be using Russian organized crime groups to ship the vehicles to Europe or Russia where they are sold for substantial profits.

Murder - Andrey Kuznetsov and an associate, Vladimir Litvinenko, were shot to death in Kuznetsov's rented house in West Hollywood on January 26, 1992. Kuznetsov was believed to have been the leader of a Los Angeles fraud ring with ties to Russian organized crime in New York and Russia. His widow claimed he introduced her to Russian organized crime leaders and members in Los Angeles and New York.

Los Angeles Sheriffs Deputies arrested two Russian emigres at the murder scene. Sergei Ivanov was drenched in blood and carrying a handgun. An accomplice, Alexander Nikolaev, was also arrested with Ivanov. Sheriffs deputies found the two suspects in the act of cufting off the victims' fingers to hinder identification. Found in the house along with the bodies were numerous boxes of electronic equipment, copiers, TV sets, fax machines, and stereo components. Authorities state most of the equipment was stolen or bought illegally through the use of fraudulent'credit cards and check kiting.

Money Laundering - Russian organized crime groups in the former Soviet Union are wire transferring huge amounts of money, ranging from several thousand to millions of dollars from bank accounts located in Finland, Cayman Islands, and Europe to U.S. banks.

The source of this money is believed to come from narcotics activity, illegal trade in arms and antiques, and prostitution. Money is also stolen from the Russian government. According to a Russian newspaper, upwards of 1.5 trillion rubles (worth in excess of $1 billion) were stolen from the state with forged documents in 1992 to 1993.

ROC groups launder the money through a elaborate trail of fictitious companies set up in Russia. The money is wire transferred to "tax haven" countries such as those in the Caribbean Islands. Money is also reportedly wire transferred to other countries in Europe, such as Switzerland and Finland. A substantial amount of this money is ending up in U.S. banks. Most of the wire transfer activity is occurring in California's larger cities such as San Francisco and Los Angeles. It is believed that once the money has been exchanged into U.S. dollars, some of the money is sent back to Russia and is invested in lucrative financial and industrial projects, real estate, enterprises, and banks.

The Russian emigres connected to the U.S. bank accounts are opening import/export businesses in the Los Angeles and San Francisco areas. These business may be set up for the sole purpose of shipping large amounts of U.S. dollars to and from Russia.

Interaction With Other Organized Crime Groups

In New York, the LCN and Russian organized crime figures have formed working relationships in areas of fraudulent fuel tax schemes. The LCN is believed to have forced the Russians to pay tribute on the profits they made on these schemes.

There is no information indicating that the LCN is exacting tribute from Russian fuel tax fraud operations in California.

Colombian cocaine distributors are believed to have formed an alliance with organized crime groups in Russia to import large quantities of cocaine into that country. These ties became evident after a 1.1 metric ton shipment of cocaine was seized in St. Petersburg, Russia in February 1993.

Criminal intelligence reports indicate Russian organized crime groups are not extensively involved in narcotics distribution in California. However, the following significant case illustrates a possible future trend and the alliances that are forming.

On September 8, 1993, several Russian crime figures were arrested in St. Augustine, Florida for conspiracy and intent to import 800 kilos of cocaine. These subjects were attempting to establish a drug distribution route from Florida to Detroit and New York. It is believed groups of Russian organized crime figures in Los Angeles and New York were part of this operation. The Russian group was dealing with Costa Rican drug traffickers and had plans to smuggle a large quantity of cocaine from Colombia to Italy aboard a vessel. The Russian group was dealing with the Sicilian Mafia in this venture.

Although at the present time law enforcement authorities are not aware of any additional ties between Russian organized crime groups in California and other organized crime groups, it is probable that formalized alliances will occur in the future.

Tattoos

From the mid 1960's to the 1980's, approximately 35 million people were incarcerated in Soviet prisons. Approximately 28 to 30 million Russian inmates were tattooed. According to criminologist Arkady G. Bronnikov, who has studied taftoos of Russian prisoners for 30 years, inmates wore tattoos only after they had committed a crime. The more convictions a criminal received, and as the terms of incarceration became more severe, the more tattoos a convict would have.

Taftoos spell out lives of crime and establish the hierarchy of inmates. According to Bronnikov, at the top of the hierarchy are "pakhans" or organized crime bosses. The pakhans use the second level of the echelon known as the "authorities," (also known as enforcers, fighters, or soldiers) to carry out their orders. The "men" are the hard laborers and are the third level in the hierarchy. The lowest category are the "outcasts." These individuals are basically slaves to the upper levels of the echelon.

The tattoos present a picture of the inmate's criminal history. According to Bronnikov, "Tattoos are like a passport, a biography, a uniform with medals. They reflect the convict's interests, his outlook on life, his world view." A prisoner with an incorrect or unauthorized tattoo could be punished or killed by fellow inmates.

Law Enforcement agencies in California and the United States can expect to see more of these tattoos as the Russian criminal element surfaces. The tattoos may be of assistance in determining the subject's criminal background and activity.

Analysis

Among the most significant organized crime groups to come to the aftention of law enforcement in California in recent years, are the Russian organized crime groups. These criminal organizations have the potential to become part of large international networks allowing them to launder money, smuggle goods, and narcotics, and import criminals to carry out specific crimes.

According to the U.S. Immigration and Naturalization Service, California is attracting the second largest number of Russian emigres settling in any state in this country. California is also experiencing a migration of Russian crime figures from the East Coast. This may be occurring because of the lack of strength the LCN has on the West Coast. The Russian organized crime groups would not have to pay a mob tax or tribute, thereby increasing their profits.

A comparison can be drawn between Russian immigration and that of previous emigrant groups who have become organized crime powers in the United States such as the La Cosa Nostra and Triads. These new Russian emigres will be a fertile source for recruitment by existing Russian organized crime groups. Many of these groups are still in an embryonic stage such as the Northern California auto theft group. However, as immigration increases, these Russian crime groups can be expected to expand and new groups will be established.

Russian organized crime groups in the United States and Russia have formed alliances with the La Cosa Nostra, the Colombian cocaine cartels, and the Sicilian Mafia. These alliances allow these groups to potentially become a dominant wholesale cocaine and heroin distribution factor in California.

As Russian organized crime continues to expand in California, it is probable they will form working relationships with other criminal groups such as the LCN, white collar criminals, or other non-traditional organized crime groups.

Because of their experience at "working the system" in the former Soviet Union, Russian organized crime groups can be expected to continue their involvement in sophisticated criminal schemes, such as fuel and insurance frauds in the United States. Russian organized crime groups specialize in targets of opportunity and take advantage of bureaucratic mazes to build their profit base. They bring with them knowledge and methods to operate complicated fraud schemes which allow these white collar criminals to flourish. While public and law enforcement attention is drawn to gangs and street violence, Russian organized crime groups will make inroads into California using these complex criminal schemes requiring extensive investigative efforts.

Law enforcement sources directly involved in the investigation of fuel frauds indicate that SB 840 will not eliminate the fraudulent schemes. Russian and Armenian organized crime groups will continue to defraud state and federal governments out of excise fuel taxes by coming up with elaborate refund schemes. It is believed that these groups will pool their resources to purchase their own terminals. Once in possession of a terminal and using falsified federal and state tax exemption forms the criminal groups can hide the true ownership of the fuel. They will continue to blend fuels, under-report volume of fuel sold, improperly dispose and store hazardous waste, and sell lower grades of fuel as a premium product. Legitimate terminal operators may be bribed or even threatened into accepting fraudulent state and federal tax exemption forms.

These criminal groups will import tax exempt fuels from other states or Mexico. Fuel will be exported out of state. Once exported out of state, the tax liability will be extremely difficult to track.

These groups discriminately use violence to intimidate competing fuel distributors to force them out of business or sell their business to the criminal groups at reduced prices. These frauds also allow the criminal groups to sell fuel below market price which forces the legitimate operator out of business or into illegal activity to maintain their livelihoods.

Members of Russian organized crime groups are violent but violence is usually employed for specific reasons such as eliminating competition and informants or punishing those who abscond with funds. They are much like the LCN and not like street gangs who use indiscriminate violence. Additionally, law enforcement authorities in California have had several confrontations with crime figures from the former Soviet Union. These crime figures are not afraid of American law enforcement or the criminal justice system and pose a potential threat to police officers.

According to law enforcement sources, drug trafficking has not yet become a major focus for Russian organized crime groups in this state. Given the profits to be made and the experience many of these groups have with drugs in the former Soviet Union, it is highly probable that this will become a growing part of their illicit operations in California. Law enforcement agencies in California have begun to make some inroads against Russian organized crime. However, more information and resources are needed to determine the scope of their criminal operations, the structure and size of their organizations, intra and interstate networks, and their international ties to organized crime in Russia.

Because there is a lack of intelligence data relating to Russian organized crime groups and their structure in this country, it is almost impossible at the present time to determine their magnitude or scope of operations. Based upon this lack of information, it is difficult to develop efficient strategies to counter them.

The law enforcement community needs to work together in order to combat this new threat. In California efforts to combat Russian organized crime are underway. Three law enforcement groups meet routinely to share criminal intelligence and information on these organized crime groups.

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References
"Mobsters Threaten the World's Nuke Safety CIA Chief Says." Boston Globe, April 1994.
Arkady G. Bronnikov, "Special Dictionary of Criminal Jargon." Moscow, 1991.
Myer, Joseph, "Glasnost Gangsters in Los Angeles." Los Angeles Times, April 10, 1992.
"Telltale Tattoos in Russian Prisons." Natural History Magazine, November 1993.
Raab, Sylvian. "Top Echelon of Mobsters Pose Threat." New York Times, August 23,1994.
"The Looting of Russia." U.S. News and World Report, March 7, 1994.
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