GANGS LAUNDER BILLIONS IN PACIFIC ISLAND SHACK

IT IS 13,500 miles from the City of London to the bamboo shack on the
Pacific island of Nauru, but pounds 1m can cover the distance in a
fifteenth of a second. The tiny sovereign state has become a safe haven for
the proceeds of drug trafficking, prostitution, people smuggling and other
rackets by gangs in Britain, Russia and America.

Every day tens of millions of pounds are believed to be laundered through
at least 200 banks and shell companies registered in the hut that houses
the Nauru Agency Corporation (NAC). Investigators chasing dirty money were
astonished that the island, whose main income was once from mining
fossilised bird droppings for fertiliser, has become a huge financial
washing machine.

The discovery is a potential headache for John Battle, the Foreign Office
minister with responsibility for the area. Britain endorsed Nauru's
associate membership of the Commonwealth in May, yet it is hard to see how
Nauru meets the banking rules. Its relaxed regime is an open invitation to
financial crime and money laundering.

Dozens of companies run by the Russian mafia prosper in the electronic
ether behind two dated computers run from the ramshackle office in Yaren,
the island's principal town. Others are suspected of being linked to scams
that have caused chaos in the world's financial markets.

One suspect firm is the Sinex Corporation, now being investigated by the
New York district attorney's office over alleged money laundering through
the Bank of New York. Russian authorities told investigators that an
estimated $70 billion rolled through Nauran bank accounts last year - more
than Russia's annual exports and equal to pounds 8.75m for everyone on the
island.

Several Russian-run banks and companies registered to Nauru have been
trying to break into the City of London by offering investment packages and
banking facilities, according to the British-based International Chamber of
Commerce (ICC). John Merrit, director of its commercial crime unit, said:
"The shell banks try to open accounts with an established bank and use it
as a tool to add to their credibility. Nauru has always been a problem area."

Nauru is a zero tax haven - it does not levy any income, corporation,
capital gains, real estate, inheritance, estate, gift, sales or stamp tax.
Its population has among the highest per capita incomes in the world. The
eight-square-mile speck of coral, 26 miles from the equator, was already
wealthy from its fossilised, phosphate-rich bird droppings. Now the
inhabitants are free to sip cool drinks under palm trees and play in
expensive power boats.

Realising it could not rely on phosphates for ever, the island turned to
financial services in the late 1980s. The NAC and an insurance division
were set up as vehicles for licensing offshore banks, businesses and
insurance companies.

Like all offshore centres, the lure was strict secrecy. Unlike
sophisticated tax havens such as Jersey, Switzerland and Luxembourg, Nauru
is a member of the "second tier" group of offshore financial havens, in the
dubious company of the Turks and Caicos Islands, Liberia and the
Seychelles. Marketing is via the internet, where the Nauruan site
advertises its jurisdiction as the easiest in the world in which to obtain
a banking licence. Applicants pay pounds 5,800 for annual registration.

Nauru is just the latest target of a global network of organised crime run
from Moscow. Russian crime syndicates, rich from drug trafficking,
prostitution and racketeering, have laundered billions of pounds through
legitimate businesses across the world. At least 40% of the Russian economy
is said to be controlled by criminals, and violence, kidnaps and murders
are common.

Investigators claim that Semion Mogilevich, who sparked the biggest
shake-up in the banking world since the collapse of BCCI, is typical of the
new breed of gangster.

Mogilevich is suspected of earning billions through arms dealing,
prostitution, art fraud and extortion. British investigators say his empire
stretches through central Europe to Britain, the Channel Islands and the
United States. He has turned the profits of crime into "clean" cash by
channelling them through apparently legitimate companies and bank accounts.

Mogilevich, known as the Red Don, is suspected of laundering more than
pounds 10 billion through the Bank of New York in 1998, using an apparently
reputable company called Benex as cover. Investigators claim that in the
six months to March this year $4.2 billion, in more than 10,000
transactions, passed through one account.

Mogilevich has denied all the allegations against him, saying: "The case
has been fabricated by dishonest FBI officials."

The investigation by the FBI and the National Crime Squad has had
far-reaching consequences. At least 20 banks and hundreds of accounts could
become embroiled in the Mogilevich scandal, say investigators. As well as
the Bank of New York, Barclays has been co-operating with investigators.

Police are also investigating whether Mogilevich has laundered money
through Nauru. Nagendi Goswami, general manager of the Bank of Nauru, said:
"It has come to our notice that some of the banks have been involved in
money laundering. The Nauru Agency Corporation has cancelled their agencies
with those banks."

Additional reporting: Paul Ham