Business News Media (BNM), a Moscow-based company which publishes the daily newspaper Vedomosti in affiliation with London-based Pearson Plc and U.S.-based Dow Jones & Co., Inc., has been engaged in financial transactions that contravene Russian anti-laundering statutes, evade Russian taxes, and violate Russian financial regulations for publicly listed companies, a source familiar with the transactions has charged.

Pearson is the owner of the Financial Times of London; Dow Jones publishes the Wall Street Journal and other titles.

The source alleges that nearly 10 percent of annual revenues of BNM are paid out through dummy companies and false invoicing each year. An investigation by The Russia Journal (TRJ) has uncovered documentary and other evidence of dozens of questionable transactions in the past two years.

BNM’s CEO is Derk Sauer, publisher of The Moscow Times. He has denied the allegations. Despite repeated requests, BNM, Financial Times and Wall Street Journal executives have not answered specific questions relating to the transactions and company records. Sauer's corporate group Independent Media (IM), together with Pearson and Dow Jones, formed a joint venture in Cyprus called Delovoi Standard Ltd in 1999, with equal stakes in the company. Delovoi Standard is the parent company of Business News Media (BNM), which publishes Vedomosti, a daily Russian language newspaper specializing in business reporting. It was established by BNM in 1999 and claims to have a print run of 66,000.

The whistle blower has supplied detailed records of BNM's financial transactions in 2002 and 2003 to TRJ. The documents show regular payments to companies whose existence cannot be verified. The source charges that this is an example of BNM executives using false invoicing from non-existing or shell companies to launder large sums of money from company accounts. In total, the source identified the sum of US$800,000 as being unlawful transfers during 2002. This sum constitutes nearly 10 percent of the turnover recorded in the documents. BNM and its auditors have refused to give balance sheets for the company or its holding company for the corresponding period. The source has identified some 20 transactions over a two-year period - 2002 and 2003 - with ten companies that seem to have no physical existence. A six-month long investigation by TRJ followed in order to attempt to locate these companies, and establish whether they have any purpose other than providing invoices and conduits for payments from BNM in Russia offshore.

The source, who requested anonymity, came forward on its own initiative. The source said it had approached TRJ because of a well-known history of competitive frictions between it and IM when TRJ was then published as a weekly newspaper from Moscow. In May 2000, TRJ’s publisher in Russia had formally lodged a charge against IM of monopoly tactics. Russian anti-trust authorities investigated the case for six months before dropping it on the ground that the allegations could not be verified with publicly available data on Russian media market. And, in 2002, Sauer’s newspaper, The Moscow Times, was awarded damages of nearly US$16,000 from Russian publisher of the weekly Russia Journal newspaper by a Moscow court for an alleged copyright violation when it claimed that an article from the Moscow Times was published briefly on TRJ’s web site.

TRJ has received two e-mails from Sauer responding that “our accounts are audited by internal and external auditors.” On a question relating to invoicing from dummy companies, “We believe your allegations are totally unfounded,” he said. “We take all the usual steps to ensure our financial records are in accordance with relevant laws and regulations. Our financial statements are audited regularly by both external auditors and internal audit teams from our joint venture partners.”

When TRJ asked specific questions about the nature of BNM’s business with a half dozen companies named in the documents, it received another e-mail from a person named Khatuna on behalf of Sauer saying, “Luke Swanson of Pearson forwarded me your mail. As with your last mail, I must strongly deny your unspecified and unsubstantiated claims and allegations,” “To the best of our knowledge, all of ZAO Business News Media's suppliers are legitimate companies. ZAO Business New Media is in no way involved in 'money laundering operations',” the e-mail read. “If there is any specific information that you wish to bring to my attention, you know where to find me.”

Luke Swanson, communications director at Pearson, also responded, saying, “We have nothing to add to [Derk] Sauer's response to your letter, which has our full support”, while William Casey, a BNM board member from Dow Jones, said by e-mail: “I have also read the responses that you received from Mr. Sauer and Mr. Swanson. I agree with them in full.”

Many funny companies

The six-month long inquiry into the allegations was triggered when the source provided TRJ with excerpts of BNM’s business transactions from 2002 and 2003, claiming “the company frequently uses false invoicing to transfer money from its balance sheets or transfer it offshore. It is a large-scale operation done on a regular basis.”

The source claimed that during 2002 and 2003, the company transferred nearly 10 percent of its gross revenue using false invoicing or invoices from dummy companies to pay money out of its balance sheets.

Independent enquiries by TRJ revealed that while all corporations pointed to by the source, and named in the documents, were Russian-registered corporations, none of them seemed to have a physical presence, office, postal delivery point, secretarial desk, employees, or any visible activity.

Five of the companies whose addresses were listed in BNM’s records received sums totaling $346,200 from BNM in 2002 and 2003. The companies were recorded as suppliers of unknown products or services. The companies were not found at the addresses mentioned in the records of BNM. Some of these addresses are empty lots of land and others are residential buildings with no record of the corporate presence. The five named companies could not be found on the Internet or in any Russian telephone directory.

Municipal executives at all the listed locations denied that they had ever heard of the five companies.

TRJ provided the names of the suspect companies from the transaction records to BNM, Pearson and Dow Jones executives. They did not reply to repeated requests to provide details on the transactions.

"Some of these operations certainly do raise a red light,” a forensic accountant retained by TRJ has said. “Specifically, one of the criteria in the Central Bank's directive for blacklisting a company or putting it on suspicious transactions includes lack of any information about a client or company in official directories or inability to contact the client or company in the stated addresses or telephones,” the accountant added. "And, legalization of such money is punishable under Clauses 1, 2 and 3 of Article 174 of the Russian Criminal Code which handles money-laundering cases," he added.

BNM claims to be a profitable publishing venture. According to a shareholders’ statement from Jan. 30, 2004, published in Vedomosti, “Vedomosti made a gross profit of $2.8 million in 2003, an increase of about 98 percent. Board of directors of Delovoi Standard Ltd, the parent company of Vedomosti, is proud of the job done by the newspaper’s editors and reporters . . . since it was founded in 1999.”