Two years after employees of the Harvard Institute for International Development (HIID) were accused of misusing government grant money while working in Russia, University officials confirmed this week that federal prosecutors have launched an investigation into those charges.

"They have an investigation going on," said Anne Taylor, Harvard's general counsel. "We have cooperated with the investigation."

The United States attorney's office in Boston is conducting the investigation, which The Crimson has learned could lead to a civil case against Harvard and criminal charges against HIID employees Professor of Economics Andrei Schleifer '82 and legal expert Jonathan R. Hay.

Prosecutors are demanding boxes of documents and asking questions of the principal players. But they have yet to indict either Harvard or any of its affiliates, sources close to the investigation told The Crimson this week. The sources speculated that this investigative stage may continue for up to a year.

The probe centers on HIID's work in Russia earlier in the decade, when its experts were hired to help the emerging democracy adapt to a capitalist economy. During these years, Harvard worked closely with pro-Western Deputy Prime Minister Anatoly Chubais.

HIID received millions of dollars from the American government to advise Russian President Boris N. Yeltsin--a contract that was terminated in 1997 when reports of wrongdoing surfaced.

Several years ago the government began to question how much Schleifer and Hay, two principal players in the HIID project in Russia, profited personally from their work and intimate knowledge of the Russian economy.

This alleged personal profit involved using inside knowledge of the Russian economy for personal gain, in some cases to guide investments in government bonds.

In the wake of this scrutiny, HIID has restructured its organization, reviewing its management and strengthening its oversight. Harvard has also created a new institute to take over some of HIID's functions, leaving many to question what the controversial institute's role will be in the future.

A Long Way Down

The federally-funded U.S. Agency for International Development (USAID)-- which provided HIID with a $57.7 million grantto work in Russia--accused Hay and Shleifer ofwrongdoing in a letter sent to Harvard on May 20,1997. USAID wrote that Shleifer and Hay had abused"the trust of the United States Government byusing personal relationships, on occasion, forprivate gain."

USAID claimed an investigation into the Russiaproject showed that Hay, employed by Harvard asHIID's general director in Moscow, used governmentresources to further the investments of Shleifer'swife, Nancy Zimmerman. Hay allegedly did so withthe knowledge and approval of Shleifer, HIID'sproject director at the institute's home office inCambridge.

Zimmerman allegedly used HIID and affiliatedgroups--funded by the U.S. government--asfinancial consultants to guide the Russianinvestments of a hedge fund that she ran.

Hay also bought Russian government bonds andprofited personally from them, USAID alleged inthe letter. Hay's girlfriend, Elizabeth Hebert,has also been implicated in some reports.

USAID suspended the last $14 million of the$57.7 million grant to HIID in late May 1997, andthe agency continued its investigation of the twomen and the institute.

Both Shleifer and Hay denied any wrongdoing tomany national newspapers at that time. Neithercould be reached for comment this week.