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Context
Austria and Russia have historical ties that date back to the eighteenth century despite having been territorial rivals or on opposing sides of conflicts. After the Allies withdrew from Austria in 1955, Vienna pledged neutrality. During the Cold War, Austria was generally viewed as a pliant and receptive diplomatic conduit for the Soviet Union. Since the collapse of the Soviet Union, bilateral economic relations between Russia and Austria have strengthened. Even after the European Union imposed sanctions against Russia in 2014, a loophole built into the European Union’s financial sanctionsbill(Article 5) allows Vienna-registered subsidiaries of Russia state-controlled banks to operate across Europe without restrictions, which was stronglyencouragedby the Austrian government during the sanctions negotiations. By 2016, Russia had become the second-largest single investor in Austria in part by attracting complex Russian financial investments as Austrian financial supervision authorities require limited information-sharing from Austrian banks. Due to these favorable conditions, Austria has become an attractive destination for Russian investment, Russian companies, and individuals seeking to utilize Austria’s banking subsidiaries throughout Central Europe and the Western Balkans. Corporate-service providers, such as law firms, as well as tax and trust-fund consultants, grow the development of offshore financing and complex beneficial ownership schemes, which have become an increasingly importantelementof the country’s economic model.1By deepening as well as widening these types of financial networks, such “enabling services” increase the attractiveness of particular European Union member states as a destination for potentially illicit financial activity, in turn, “Europeanizing” such illicit funds and rapidly spreading their malign use globally.
An Example: Meinl Bank AG
Meinl Bank AG is part of the Austrian Meinl business empire, founded in 1862, and long involved in the luxury grocery business. In the 1990s, Julius Mein Vtransformedthe business and the family-run bank into a financial services provider. The bank provides services around the world but in recent years has concentrated its banking activities in Eastern Europe. It currently operates a €1.2 million equity fund that invests in Eastern Europe, including Russia and Turkey. Thesecond-largest holdingof this equity fund was in Russia’s Sberbank as of June 2018, a bank that has beenimpactedby U.S. and EUsanctionsrestricting access to their capital markets after the annexation of Crimea. Meinl is not the largest Austrian financial player in Russia (Raiffeisen Bank is estimated to be the largest one), but it concentrates on providing manyservicesto wealthy investors and oligarchs. For some time, Meinl V hadattemptedto invest in Russian real estate although his initial attempt ended in lengthy legal proceedings.
An alleged fraud scandal in 2009 threatened Meinl Bank’s survival. Austrian authoritiesaccusedJulius Meinl V of having used complex ownership structures and offshore schemes to conduct investmentfraudon a systematic scale. Charges weredroppeddue to inconclusive evidence. Although Meinl Bank encountered domestic difficulty, after 2009, the bank was able to expand its businesses in Russia successfully. Over the years, Meinl has been involved inseveralallegedfraudcasesand allegations of breach-of-trust that included the use of offshore companies. One particular issue ties Meinl Bank to oligarchic and Russian interests.
One of the biggest scandals to hit Meinl Bank in recent years was its alleged role in the laundering of almost $2 billion from Ukraine, some of which wasfunneledout of the country by former president Viktor Yanukovych’s inner-circle and his family. The Kyiv general prosecutor and, later, Austrian authorities, suspected Meinl of having enabled a large insider lending scheme with a number of Ukrainian banks that registered correspondent accounts at Meinl, then extended loans to offshore firms for which the collateral was the money in the Meinl accounts. Although Ukrainian authorities had publiclywarnedAustrian Central Bank authorities about this in 2014, this lending scheme seemed tocontinueuntil late 2015. In 2017, Austrian prosecutor service started toinvestigatethe case—investigations are still ongoing.
In 2017,reportssurfaced that Meinl Bank was allegedly implicated in the “Russian Laundromat” scandal, whereby more than $20 billion had been stolen from the Russian government through organized crime activity or corrupt officials. The moneycirculatedthrough Moldova and onward to several banks in Europe. Between 2012 and 2014, 17 Austrian banks were reportedly involved in the laundering machine, including Meinl Bank, which processed a little over €300,000 in suspicious transactions. While bank accounts at the bank were reportedly used for these transfers, the institution has not been accused of any wrongdoing.
After over a decade of examining Meinl Bank scandals and dealings, all investigations by Austrian authorities into the bank’s dealings have been closed except for the one related to the $2 billion scandal. There have beenno convictionsor guilty pleas. Austrian authorities appear reluctant to thoroughly investigate repackaged investments through multiple financial institutions and ascertain beneficial ownership. For example, Austria’s National Bank does not have a cooperation agreement with the Ukrainian National Bank on investigations to help determine where the funds could have gone,impedingthe fight against these practices, including the 2014-2015 scheme in Ukraine.
A Politically Influential Timeline
Throughout this time period, there were several new political developments in Austria that are of interest and note.
On April 20, 2016, Meinl V paid a personalvisitto President Putin in Moscow to thank him “for his efforts to preserve the cultural life of the Jewish community in Russia.” At the time, President Putin had faced increasing criticism and isolation from the West for his support of far-right parties and movements in Europe—some of which are anti-Semitic—and the ceremony provided the opportunity for the Kremlin to defuse such criticism. On April 24, Austria held the first round of its presidential election. A run-off election was held on May 22 between a Green party candidate, Alexander Van der Bellen, and a candidate from Austria’s far-right Freedom Party (FPÖ), Norbert Hofer. A new runoff vote was held on December 4 due to improperly counted absentee ballots in the May runoff. The FPÖ narrowly lost the presidential election.
Fifteen days after the December 4, 2016 vote, the leaders of the FPÖ, including Mr. Hofer and Heinz-Christian Strache,traveledto Moscow to sign a formal agreement with the deputy head of the United Russia party, Sergei Zheleznyak, an individual sanctioned by the United States for his support of the illegal annexation of Crimea. The FPÖ announced its agreement with United Russia at the same time as it announced its leadership hadmetin New York with (then) newly-named U.S. national security adviser Michael Flynn. Austrian parliamentary elections were held on October 15, 2017. The center-right Austrian People’s Party (ÖVP) won the largest number of seats and formed a coalition with the FPÖ, which had become the third-largest party in Austria. Mr. Strache is now vice chancellor of Austria and has repeatedly called for the European Union to end sanctions against Russia because they damage the Austrian economy. Austria currently holds the six-month rotating EU Council presidency until December 31.
1The services sector accounts for 70 percent of Austria’s GDP and for three-fourths of its labor force. The financial sector’s estimated value added, which measures the sector’s contribution to the economy, was €12.8 billion in 2015, or 4.2 percent of total value added. “Austria, CIA World Factbook,https://www.cia.gov/library/publications/the-world-factbook/geos/au.html; see also: Christian Beer and Walter Waschiczek, “What is the financial sector’s contribution to the Austrian economy?” Oesterreichische Nationalbank, Monetary Policy & The Economy (Q2, 2017): 54-72.
Austria and Russia have historical ties that date back to the eighteenth century despite having been territorial rivals or on opposing sides of conflicts.
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