The lion’s share of profits are accumulated either by intermediary companies that buy goods produced by the prisoners or returned to the heads of the correctional facilities through kickbacks by companies that purchase the goods directly.
The facility itself receives only a fraction of the profits after factoring in all of its expenses — or, more precisely, all of the federal budget’s expenses.
This is exactly how many industrial enterprises were bought up in the 1990s in Russia.
Back then, trade houses were set up next to Soviet-era plants: the plants would sell goods to the trade houses at incredibly low prices, and the trade houses would then sell the goods at a huge markup.
These plants would gradually slide into bankruptcy, while the trade houses would amass the funds to buy up their shares.
In the penitentiary system, this scheme is used to siphon off and privatize profits, rather than assets.
Alexei Kozlov, a financial expert who served a sentence at a correctional facility in the Tambov region (and the author’s husband), described a scheme involving the production of woolen socks in the region’s Rasskazovsky district.
“All deputy heads of correctional facilities have their own shops, though they do not control them directly. The relatives of these officials lease shops in the facilities’ industrial zones, where the prisoners sew the socks. There is no ‘going market rate’ for production space in correctional facilities, so any price can be set. It’s the relatives who sell the socks and collect the profits.”
“Naturally, it would be more profitable for the correctional facility to produce and sell goods directly. However, then it would be obvious if it was selling the socks at half the market price, and the embezzlement would be exposed. With tolling operations, just as with the leasing of shops, it is difficult to prove the details of the corruption.”
The FSIN’s main argument for this scheme is that the correctional facility does not have the funds to purchase equipment and materials.
But it will never have the funds if it keeps privatizing profits and nationalizing losses.
In other cases, production is not even the objective of the scheme, but merely a screen for expenses.
Under one scheme exposed by Alexei Fedyarov, a retired prosecutor and a coordinator at Russia Behind Bars, correctional facilities receive money to farm land. But the agricultural scheme is fictitious. A visit to the fields is enough to show that.