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Probe traces global reach of counterfeit ring

The U.S. Secret Service and Georgian police are investigating an international counterfeiting operation that stretches from a separatist enclave in the former Soviet republic to Maryland, where fake $100 bills have been seized, according to senior officials and investigators.
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The U.S. Secret Service and Georgian police are investigating an international counterfeiting operation that stretches from a separatist enclave in this former Soviet republic to Maryland, where fake $100 bills have been seized, according to senior officials and investigators here. The allegations are supported by American diplomats, U.S. court documents and a recent report to Congress.

From a printing press in South Ossetia, a sliver of land with no formally recognized government, more than $20 million in the fake bills has been transported to Israel and the United States, according to investigators. The counterfeit $100 notes have also surfaced in Georgia and Russia, officials said.

The fake notes have been passed at numerous businesses throughout the Baltimore area and have also surfaced in New York, Newark and Buffalo, according to court papers and the joint report to Congress by the Secret Service, the Treasury Department and the Federal Reserve. The report, issued in September, also said the number of counterfeit notes produced in this region and passed in the United States has "increased dramatically" in recent years.

The presence in South Ossetia of an international counterfeiting ring capable of producing thousands of bills, according to investigators, is a stark example of how organized crime has flourished, sometimes through the neglect or alleged involvement of officials, in areas of the former Soviet Union whose territorial status remains unresolved 15 years after the fall of communism.

"Counterfeiting is not the only headache for us if you're talking about criminality in South Ossetia," Ekaterine Zguladze, Georgia's deputy interior minister, said in an interview. "You also have drug trafficking, weapons trafficking, robbery, kidnapping. And our opportunity to fight criminals in there is very limited."

A spokesman for the U.S. Secret Service, in an e-mail message, declined to discuss the case "due to the sensitivities of the ongoing investigations and political considerations." But the joint report to Congress said the Secret Service "is currently investigating a scheme with ties to suspects in Israel, Russia, and the Republic of Georgia to produce counterfeit U.S. currency. The U.S. Secret Service has reason to believe this family of counterfeit notes is being produced in the Caucasus region," as the mountainous area encompassing parts of southern Russia and Georgia is called.

U.S. diplomats confirmed that the location was South Ossetia.

The cash from the Caucasus, as with other lines of counterfeit dollars believed to be from the same source, was given its own code by the Secret Service: c-21558, according to the joint report to Congress.

"Since the c-21558 family's first detection in March 1999 the total counterfeit activity (passed and seized notes) has exceeded $23 million," according to the report. In 2005, the Secret Service detected $5.3 million from the Caucasus ring, up from $1.5 million in 2003, the report said.

That compares to the approximately $2.8 million in "supernotes" linked to North Korea that the agency says it confiscates, on average, each year. The production of supernotes, so called for their quality, has become a major diplomatic issue between the United States and the government of Kim Jong Il.

Georgian investigators said the fake bills from South Ossetia are made with special ink and paper and have watermarks, different serial numbers and other features that allow them to be easily passed off as real. "They are of very high quality," Konstantin Kemularia, secretary of Georgia's National Security Council, said in an interview.

The counterfeiting operation in the region has become another irritant in U.S. relations with Russia, which acts, in effect, as a protector for South Ossetia; Russian peacekeeping troops patrol the breakaway enclave, and most of its residents have been issued Russian passports.

"We have expressed our concerns on this subject to both the Russians and the South Ossetians," said a U.S. State Department official who did not have approval to speak on the record. "This problem is one of many that underscore the urgent need for resolution of the conflict in South Ossetia and the threat it poses to security and border control, among other consequences."

Russia's Interior Ministry, which is responsible for fighting counterfeiting, did not respond to requests for comment. Officials in South Ossetia, where Russian rubles are used for currency, bitterly contested any allegation that a counterfeiting ring existed on their territory.

‘We do not have any criminals’
"Counterfeit dollars? Well, if you are going to listen to Georgians, soon you will say that we have a nuclear bomb here," Mikhail Mindzayev, interior minister in the separatist government, said in a telephone interview. Mindzayev asserted that "we do not have any counterfeit dollars here, and we do not have any criminals."

After a short, bloody war in the early 1990s, South Ossetia broke away from Georgia and achieved de facto independence. Despite the presence of Russian troops, crime has flourished in the province, and in a report, the German Marshall Fund of the United States described South Ossetia and other breakaway enclaves in the Black Sea region as "breeding grounds for transnational organized crime."

On Oct. 27, 2004, its fingers reached Linthicum, Md. At the Hampton Inn near Baltimore-Washington International Airport, Hazki Hen, who had just flown to the United States from Israel, met with two men, one of whom was an undercover Secret Service agent. Hen expected to consummate a deal that had been negotiated over 19 tapped phone calls.

Hen agreed to exchange $230,000 in counterfeit $100 bills for $80,000 in genuine currency, according to a Secret Service affidavit filed in U.S. District Court in Baltimore. Hen also planned to accept $220,000 as a down payment on the delivery of another $1.5 million in fake bills. The affidavit filed in Baltimore said that "Hen also displayed samples of paper used to produce counterfeit Euros and U.S. currency. The paper contained red and blue fibers similar to the fibers contained in genuine U.S. currency."

Just before the Secret Service moved in and arrested Hen, the three men discussed future deals involving between $25 million and $100 million in counterfeit U.S. currency, according to the affidavit.

Nine months later and more than 5,700 miles to the east, Nana Jabelashvili, a resident of Tbilisi, Georgia's capital, was stopped by police as she crossed a Georgian police checkpoint on the road between Gori and Tskhinvali, the capital of South Ossetia. Police found $350,300 in counterfeit bills in Jabelashvili's vehicle and later learned that she was a courier for a Georgian emigre who now lives in Israel, according to Levan Gurgenidze, head of the Georgian Interior Ministry's organized crime unit. The emigre fled Georgia the day after Jabelashvili's arrest, Gurgenidze said in an interview.

When Secret Service agents examined some of the bills seized from Jabelashvili, they found that they were linked to the same family of bills seized in the Hen case in Baltimore, according to a U.S. law enforcement source. Gurgenidze said the source of the bills was a counterfeiting operation run out of a building on Lenin Street in Tskhinvali.

In November 2005, federal prosecutors dropped charges against Hen, then 65, after he became seriously ill and the court agreed to allow him to return to Israel to die.

Jabelashvili was sentenced to 12 years in prison in Georgia in January of this year, officials here said.

South Ossetian officials involved?
Suspicions are growing, meanwhile, that some South Ossetian officials are not just ignoring counterfeiting but are involving themselves in it directly.

In January of this year, Eter Kachmazova, a senior bureaucrat in the South Ossetian Trade Ministry, held a series of meetings with a Georgian undercover officer posing as a Ukrainian businessman. The meetings, at a restaurant in Gori, which is about 30 minutes by car from Tskhinvali, and at the Sheraton Hotel in Tbilisi, were videotaped and recorded by the Georgians, who later broadcast excerpts on state television.

Kachmazova "said she could produce as many fake dollars as the buyers could handle, up to millions," Gurgenidze said. "The Ukrainian, our guy, said he wanted $1.5 million, and she agreed for $25 on every $100."

On Jan. 31, Kachmazova agreed to supply the first $100,000, taking it across checkpoints in lots of $10,000 in case she was stopped and searched. After she arrived with the second bundle of $10,000, police arrested her. Kachmazova is being held at a pretrial detention center in Gori.

"They immediately relocated the press on Lenin Street after she was arrested," Gurgenidze said. "But they are still printing money in there."