Exactly two years after his death in a dank, frigid, rat-infested cell, Sergei Magnitsky has become a byword for the byzantine world of state-sanctioned corruption, money laundering and violence endemic in some of Russia’s political and economic elites. The brazen tactics of his persecutors seem to horrify everyone —except the Russian government, who has not held anyone involved accountable except Magnitsky himself. The tactics are also on display in the persons involved in the Proxy Platform: the Moldovan fraudsters, the offshore registration agents who feign ignorance, and the organized criminals and corrupt politicians who launder their money. In fact, some of the same companies identified in the Proxy Platform were involved in the spiriting away of funds from the Russian treasury in the Magnitsky case.
Magnitsky, a Russian lawyer, approached Moscow investigators in the winter of 2007 to alert them that a company he represented had been stolen by a convicted criminal. Authorities opened no investigation. In Summer 2008, he furnished seven government agencies with evidence that the largest tax refund in Russian history had not only been a fraud, but had been perpetrated under the auspices of the country’s police, judicial institutions, bankers, auditors and tax officials and helped by the Russian mafia. His documentation revealed that with the help of Interior Ministry employees, officials from two Moscow tax bureaus, and 11 judges, a convicted killer had literally “stolen” ownership of Hermitage Capital Management, the company he represented, and on its behalf fraudulently claimed the largest tax refund in Russia’s history: US$230 million. The money had been approved in one day, on December 24, 2007. Magnitsky also provided documentation saying that this was not an isolated incident.
Instead of being hailed for his detective work and commitment to transparency, the 37-year-old whistleblower was charged with perpetrating the crime he uncovered and thrown in jail. He died 358 days later in what his diaries described as a freezing, dark and fetid cell after being subjected to numerous beatings intended to force a confession of complicity. Pleas for treatment for chronic health conditions like pancreatitis and gallstones went unanswered.
By then, millions had already entered the global financial system through bank accounts and shell companies in Cyprus, the British Virgin Islands and Switzerland. The men and women who Magnitsky identified as the perpetrators bought expensive cars and properties worth millions of dollars in Dubai, Montenegro and Moscow, according to documents provided by Hermitage. The authorities did nothing.
“Most governments in the world are set up to collect taxes and then provide services to the population,” Hermitage CEO Bill Browder told the Organized Crime and Corruption Reporting Project (OCCRP). “The Russian government is set up to collect taxes from people and then have officials steal that tax money. This goes up to the highest levels of government, to the cabinet ministers, and possibly even higher.”
Since he founded Heritage in 1996, Browder has taken an “activist approach” in exposing corruption to improve an emerging economy’s investment climate. He led campaigns for transparency at Russia’s largest state-owned bank Sberbank, in the oil and gas company Surgutneftegaz, and at Gazprom, the largest extractor of natural gas in the world and the largest Russian company. This strategy helped the company become the largest portfolio investor in the country, but irked then-President Putin’s administration, who made Browder a persona non grata in November 2005, saying he was a “national security risk.”
The feeling is mutual.
“A more comparable situation would be talking about doing business with the Cali drug cartel,” he says. “It’s the same level of criminality, violence, and malfeasance inside the Russian government that goes on in the major South American drug organizations.”
kuznetsovOn June 4, 2007, dozens of Interior Ministry officers led by Artem Kuznetsov and Pavel Karpov raided London-based Hermitage’s Moscow office, carting away a server, seven computers, and five boxes of documents. On the same day, they raided the office of the Firestone Duncan, a small Moscow-based law firm that worked mainly in auditing and business law. They confiscated enough paperwork to fill two vans and injured an employee so badly that he spent two weeks in the hospital.
Browder said the raid was illegal because it was not in Kuznetsov’s jurisdiction. “It is like the Washington D.C. Metropolitan police raiding your offices on a tax case, when the IRS [Internal Revenue Service] has no tax claims,” he told OCCRP.
“The pretext [of the raid] was an investigation into tax evasion into one company in particular,” Browder said. “After we were raided, we asked the tax authorities we were responsible to and they said our companies were fully in compliance with the law.”
He alleges officials trumped up charges to get access to confidential company paperwork including corporate seals, charters and certificates of registration for their investment holding vehicles.
Four months and six lawsuits later, the firm learned that it no longer owned three of its Russian holding companies, Browder said.
In October, the holding companies lost six court cases with damages amounting to almost US$1 billion —but Hermitage didn’t find out that the cases even existed, let alone that they lost them, until bailiffs contacted the firm seeking to collect on the judgment.
Not only was Hermitage unaware that their firms had been in court and lost cases, but their stolen companies had been represented by lawyers they had never hired and no one at the firm had ever heard of. “They were not legitimate lawyers because in each of the cases, they immediately pled guilty to the fake liabilities,” said Browder.
Hermitage was especially perplexed by the repeating cast of characters in the six lawsuits. Lawyer Andrei Pavlov served as counsel to the plaintiff in one case and as a lawyer for the defense in another. His wife, Yulia Mayorova, served as the defense counsel in another case. And, said Browder, one person listed as a plaintiff actually didn’t want to sue them at all—but his passport had been stolen and his name used.
“As soon as they got the judgments, the police led by Kuznetsov [who organized the raid on Hermitage’s and Firestone Duncan’s offices], went and raided all of the banks looking for our assets,” said Browder. But Hermitage liquidated its assets shortly after Browder had been banned entry into Russia.
“So we thought that was the end of the story,” said Browder, “But it turns out that there was a second act to this crime.”
Big Spikes at Small Banks
Magnitsky knew that the firm could not have entered a plea before the court unless its ownership had changed, and he realized that the firm had somehow changed its registered trustee in Russia from British bank HSBC to a company no one had ever heard of called Pluton. Pluton was registered in the province of Tatarstan and 100 percent owned by convicted murderer Viktor Markelov.
The only way this could have happened, Magnitsky reasoned, was if the new owner had the company registration information, seals and letterhead stolen by the police several months earlier.
On Dec. 3 and Dec. 10 2007, Magnitsky went to the authorities with this information. The police referred the case to the same authorities who raided Hermitage and Firestone Duncan several months prior, who did not investigate his claims.
It was in the summer of 2008 that Magnitsky finally understood why this network of criminals could have been interested in owning companies whose assets had been totally liquidated. Magnitsky began contacting Russian registration offices, announcing that Hermitage’s holding companies had been stolen, and requesting that officials freeze the accounts.
“In a country like Russia, no matter how evil the people are, not every single person is involved in the scam,” he told OCCRP. “So there was somebody from the registration office in Khimki (a suburb of Moscow), where at some point our companies were registered, who wrote back to Sergei [Magnitsky] saying our companies had been registered here and had bank accounts at the newly opened Universal Savings Bank.”
Universal Savings Bank (USB) was at the time the 924th largest bank in Russia, with a paltry sum of US$1.5 million in capital. It is owned by fraudster Dmitry Kluyev, who was convicted in 2006 of illegally acquiring shares in an iron ore production company, Hermitage alleges. Magnitsky discovered another account opened in the name of the company at Intercommerce Bank, the 424th largest bank in the country.
He then noticed two instances in which deposits in the banks spiked dramatically, which led him to realize that two of Moscow’s tax offices, Office 25 and 28, where Hermitage’s holding companies had been re-registered to following the police raid, had a history of making tax refunds under similar circumstances.
Using a public database which provides information on large transactions, he found evidence that the two offices made deposits to both banks totaling US$230 million, exactly the amount Hermitage paid in taxes in 2006. Then he kept digging. According to Magnitsky’s calculations, the tax offices had stolen almost half a billion dollars from fake tax refunds from 2006 until the end of 2007.
Finding a Pattern
Enter Renaissance Capital, a prominent Russian investment bank. Renaissance, like Hermitage, realized large capital gains in 2006 because Putin repealed a law mandating that only Russian companies could hold shares of Gazprom. Both Renaissance and Hermitage made a mint selling their shares, and Renaissance had to pay US$108 million in deferred taxes. Magnitsky examined their transactions with USB and Intercommerce Bank via the same database and found deposits in both banks totaling US$107 million, almost exactly the amount Renaissance paid in taxes.
The thieves who stole Hermitage, Magnitsky realized, had fudged false, back-dated contracts in which Hermitage ending up owing US$974 million, exactly the company’s profits in the 2006, to a string of shell companies. They weren’t trying to get Hermitage to pay. Rather, this fake loss would have meant that the company netted zero profit, making it eligible for a full refund of the 5.4 billion rubles, or US$230 million, they had paid to Russian tax authorities.
The thieves then filed paperwork to amend the original statements provided by Hermitage in order to get the tax money into their own pockets.
Magnitsky realized this by studying the pattern of Renaissance’s transactions. He discovered that the two biggest depositors, companies called Financial Investments and Selen Securities, were subsidiaries of Renaissance Capital’s Rengaz Holdings, which had sold shares in Gazprom. He noticed the same pattern of fraudulent lawsuits citing forged contracts, registered at the same two Moscow tax offices, using the same group of plaintiffs, lawyers, and defendants, in the same three courts (Moscow, Kazan, and St. Petersburg), to belatedly make their net profits zero for 2006, making them eligible for a US$107 million tax refund, which was then deposited in the same two banks. Kluyev, owner of USB, was even retained by Rengaz as a tax adviser.
There was one critical difference between those transactions and Hermitage’s experience, Browder said. “When all this stuff happened to us we wrote criminal complaints to every possible law enforcement and regulatory and tax agency in Russia. Renaissance has done none of that, ever.”
Renaissance maintains it sold off the holding companies prior to the tax return. Hans Jochum Horn, deputy CEO of Renaissance Group, has repeatedly denied involvement in the affair. And USB voluntarily liquidated its assets in June 2008. The paperwork is missing, lost in a bus crash and explosion, Interior Ministry spokeswoman Irina Dudukina told Barron’s. Dudukina did not answer OCCRP’s repeated phone calls.
But Magnitsky ended up arrested for tax evasion, and locked up without a trial for almost a year. President Medvedev’s Human Rights Committee found in July 2011 that Magnitsky’s arrest was unlawful, that he was regularly beaten and tortured by officials who tried to get him to admit guilt for the crime, and that prison officials told doctors not to treat him. Since the report, no one but two low level officials have been named as responsible in Magnitsky’s death.
In fact, a number of the officials involved in the case wound up with promotions, or moved to the Defense Ministry’s procurement arm.
According to records obtained by OCCRP, between Moscow and Geneva the money traveled all over the world in a veritable chain of shell companies set up by GT Group – a company that was connected to the sale of arms from N. Korea to Iran as well as laundering money for the Mexican Sinaloa Cartel.
The couple used the same Credit Suisse accounts to purchase two apartments valued at US$2 million each at Dubai’s Kempinksi resort for tax office deputies Elena Anisimova and Olga Tsareva. According to bank records, the apartments were purchased using the same bank account Stepanova used.
US$3 million arrived in the accounts on January 3, 2008 via Bristoll Export, a company which had been registered by GT Group in New Zealand. In February, companies incorporated in Cyprus, Moldova, and the United Kingdom sent US$9 million to the Credit Suisse accounts. See detailed information on one of the companies, NOMIREX, which processed US$8 million in its accounts while filing as “inactive” in a separate story.
In May and June 2008, the accounts held by Stepanov and Stepanova sent US$10 million to a shell company called Arivust holding. Records obtained by OCCRP show that through a series of agreements, Stepanov is named as the beneficial owner of the company.
The records also show that Stepanov is the beneficial owner of another company, Aikate Properties, which sent US$2 million to his Swiss account.
Hermitage acquired copies of the Credit Suisse transactions and used them to file a complaint with the bank and the Swiss federal attorney general this spring.
Stepanova remains employed by the Russian government. She resigned from the tax ministry but now works for a new defense agency established by Medvedev that oversees procurement and allocation of police and military equipment to the country’s law enforcement and military agencies.
So do Lieutenant Colonel Artyom Kuznetsov, whose assets were estimated at US$3 million although his official annual salary is about US$10,000; and Russian Interior Ministry investigator Pavel Karpov, whose assets were estimated at US$1.5 million while his yearly pay is also some US$10,000.
Exactly two years after his death, Magnitsky has become a cause celebre for advocates of a more transparent Russia. Hermitage has ceased business dealings in Russia but continues to push Russia on clearing Magnitsky’s name and holding authorities accountable for his death. It filed a complaint with the Russian government with documentation claiming that at least US$470 million was embezzled through various tax frauds. The case has come to symbolize the culture of corruption that is perceived to climb into the highest echelons of government. It has been one of the reasons why Russia’s ranking as one of the riskiest countries to do business in has gone up.
Transparency International ranks Russia as the most corrupt large nation on earth, and the large country most likely to bribe abroad. They also estimate that bribery alone costs Russia US$300 billion annually, the total GDP of Denmark. Bribery “is not even half of the problem,” according to a US House of Representatives Staffer who did not want to be identified because of his frequent work with Russian officials on policy issues including the Magnitsky case.
“What we’re really talking about is a massive orgy of stealing at the very top, in amounts that are just obscene.” He told OCCRP that he believes that the “state treasury is being siphoned off through all kinds of spigots,” which will have heavy consequences on Russia’s economy.
And how is it being siphoned off? With assistance from shell companies like Bristoll, Nomirex and Tormex.