Magazine article Insight on the News

The Unfortunate Reality of Russia: A Thoroughly Corrupt Society

Magazine article Insight on the News

The Unfortunate Reality of Russia: A Thoroughly Corrupt Society

Article excerpt

Despite the impressive scale of alleged Russian money laundering at the Bank of New York -- by some accounts, up to $15 billion may have been moved through accounts there -- the case represents little more than the tip of the iceberg of corruption, fraud and economic crime in today's Russia.

This perhaps is illustrated most clearly by a recent study of the country's insurance sector, conducted by state-controlled insurer Ingosstrakh and reported in the Russian press. According to this analysis, some 80 percent of the life-insurance policies written in Russia are used in fraudulent "wage schemes" and do not represent insurance at all. Thirty-five to 40 percent of risk insurance and 15 to 20 percent of property insurance is similarly fabricated; on average, 47 percent of all insurance is fictitious. The premiums collected on these policies totaled an estimated $1.25 billion in 1998.

The purpose of the wage schemes is quite simple -- tax evasion. Rather than providing insurance, many Russian insurance companies earn commissions of 8 to 12 percent from enterprises seeking to avoid payroll-tax payments, such as those to the Russian pension fund, by channeling money to their employees through bogus policies. This has the side benefit of allowing the enterprises' employees to avoid paying taxes on their income as well.

In some cases, enterprises take out insurance policies to protect them from being unable to pay their employees -- and then do not pay them. The insurance company then pays out the benefit of the policy to the workers. Another strategy allows workers to receive inflated health-insurance payments for minor ailments such as colds.

The corruption of Russia's insurance sector is important for several reasons. It is important to note in this context that the leaders in the Russian life-insurance market accused of fraudulent practices, such as Spasskiye Vorota ("Kremlin Gates"), are not minor companies by Russian standards. Moreover, they are linked to major political and economic figures in contemporary Russia and not just in the Yeltsin camp; Spasskiye Vorota is tied to the Media Most conglomerate run by Vladimir Gusinsky.

Wage schemes also clearly show the damage done by corruption to Russia's economic and political transition. Tax evasion is one of the principal factors behind the government's poor balance sheet and substantially contributed to the country's August 1998 default. …

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