FOCUS: RUSSIANS IN LONDON: Invasion of the rouble barons

How the Moscow `mafiya' gangs took a grip on London

They call it the octopus - the tentacles of Russian corruption that entwine businessmen, politicians, prostitutes, bankers and contractors across the former Soviet Union and beyond to the West.

Last week came the sensational revelation that its tendrils had embraced even the President himself. A central figure in an investigation of corruption in the Kremlin claimed that Boris Yeltsin and his family received paybacks from the Swiss-based company Mabetex, involved in renovation work at government buildings. Earlier it emerged that Russian businessmen and officials were involved in a suspected international money- laundering scheme worth up to $15bn, including possible loans from the International Monetary Fund. Aeroflot revenues have gone missing; Albanian companies, too, are alleged to have paid bribes to the President's family.

And there are money launderers, mafiosi, people who have fleeced state businesses, and on-the-make entrepreneurs right here in the heart of London. So big is the community of new breed Russians that there are at least 40,000 of them living here; it could be as many as 150,000. So keen are they on the English way of life that their children now make up 20 per cent of the foreign pupils at private schools.

Much of the source of the money funding these lifestyles is under suspicion. US and British investigators are trying to unravel how up to $15bn came to be laundered - siphoned out of Russia through banks and companies while disguised as to exactly where it came from. They are particularly interested in the Bank of New York, one of whose officials, Lucy Edwards, was recently fired from its London HQ at Canary Wharf. Ms Edwards worked in the Eastern European division of the bank and was responsible for Russian business. Her husband, Peter Berlin, is alleged to be the holder of five accounts at the bank which may have been used for laundering.

Key to allegations about what was happening at the Bank of New York was Semion Mogilevich, once dubbed "The Most Dangerous Mobster in the World". Ten years ago, Mogilevich, a 53-year-old Ukrainian, was just a petty criminal in a Moscow gang. He was one of the first to realise that London would be a key centre for laundering the dirty money from East European rackets into clean money in US bank accounts. Now he deals in billions and has associates around the world.

So how has this transformation taken place? In the last decade, the fall of Gorbachev, the break-up of the USSR and Boris Yeltsin's rise to power removed any restraint in the growth of organised crime and corruption. People who had been involved in dubious business activity in Russia - wily ex-cons, tough former sportsmen, embittered veterans of the Afghan conflict and young martial arts exponents - even occasional biker gangs - moved on to bigger things.

From 1990 the new breed of Russian entrepreneurs began to arrive in London, flashing huge amounts of cash, and seeking access to Western money markets through the City and its financial institutions.

"London is not Berlin," explains `Dima', one Russian businessman working in London. "It has the City and access to the world's banking channels. The mafiya wanted that, they wanted prestige and respectability. These are not silly boys. They do serious business, they want their money to work for them. They have huge resources and they want profit. If they can't do it themselves, they hire the best they can get. Money no object."

Not all money was the proceeds of rackets - the former Soviet Union in the early 1990s was a Wild West where fortunes could be made or lost overnight, and much was. Often brash and free-spending, the new Russians rubbed shoulders uncomfortably with London's small but long-established Russian community, consisting mainly of political emigres. While many "White Russians" congregated around suburban Chiswick, the wealthy new arrivals prefer Hampstead, Knightsbridge, or the flashier parts of Surrey. In some neighbourhoods, one in four houses costing over pounds 1m went to Russian families. Lucy Edwards and Peter Berlin reputedly bought their luxury apartment in W1 for pounds 500,000 cash last year.

Antony Wardell of estate agent Knight Frank's office in Ascot, Surrey, has housed a dozen Russian families in properties varying from pounds 1.5m to pounds 4.5m. He finds them particularly keen on the Wentworth Estate, near Virginia Water.

"They are very discreet people," said Mr Wardell. "They tend to be into hi-tech industries, oil and gas, banking and even property. They favour anonymity and they're conscious that their countrymen have previously had unfavourable media coverage."

Richard Humphreys, a director of Goldschmidt & Howland, one of the biggest agents in north-west London, said: "When they are here, for whatever reason, they like to keep themselves pretty anonymous, but they do like houses that make a bit of a statement. The amount of marble that might appeal to a Russian would perhaps be a little over the top for some Western European buyers."

Many Russians are anxious to take advantage of the British education system. According to the Independent Schools Information Service, Russian pupils made up only 3 per cent of overseas students at private schools in 1994 but the latest figures show that the proportion has swelled to 20 per cent.

Not all the new money is spent in such a savoury way. "Michelle", a petite and attractive 24-year-old mother, was kidnapped in her Lithuanian home town last year after she placed an ad in a newspaper looking for work. She fell into the hands of a East European mafia gang specialising in trafficking prostitutes to London. She ended up imprisoned in a flat in Lisson Grove in Marylebone and forced into prostitution. Police raided the flat and others run by the Russian gang, dubbed "The Doctors", and found one girl as young as 15.

British detectives and intelligence services now closely monitor signs of Russian mafia activity. A variety of routes is used to get money out of Russia, many of them passing through London, while the offshore tax havens of the Channel Islands and the Isle of Man are favourites too. Putting money through accounts in Cyprus, Antigua and other Caribbean countries has also been popular.

Since 1993 the Antiguan authorities alone have licensed at least a dozen Russian banks, several of which have been associated with the Russian mafia. Earlier this year the British Treasury warned City financial institutions that Antigua had watered down its money-laundering regulations. The world's first internet bank, the European Union Bank, was based in Antigua. Its two Russian founders took off with their depositors' money.

But, by comparison, the City of London is supposed to be the epitome of financial rectitude. Why have British banks failed to spot money-laundering transactions going through their London accounts? In the early 1990s there were none so blind as those who didn't want to see. But money-laundering laws are tougher now, so astute mafia money-launderers often use "respectable" Russian bank accounts to disguise the dirty origins of the money.

In the vital early years of the 1990s, when the embryonic mafia could have been nipped in the bud, governments and law enforcement agencies across the world failed to heed many warnings.

Jeffrey Robinson, an expert on the Russian mafia, has warned in his latest book, The Merger, that the Russian mafia formed alliances with organised crime groups across the world. He says this has created a "wealthy cabal destined to become the most powerful special interest group on earth".