Deception (5 page)

This involved the illegal expropriation of Mr Browder's companies, the theft of $
230
m from the Russian taxpayer, and the death of Mr Magnitsky, the man who uncovered it. It started on
22
May
2007
when Viktor Voronin, head of K Directorate, and his subordinate Aleksandr Kuvaldin, issued a finding that a company associated with Hermitage called Kameya had underpaid its dividend withholding tax.

This sounds both complicated and trivial, and on the surface it is. Outsiders are ill placed to judge the merits of arguments over corporate taxation, especially when one side declines to present its case in public. Though I find Hermitage's case convincing, a layman's view cannot be conclusive and I would not want it given any particular weight. The Russian authorities may have powerful arguments, though they have for whatever reason not produced them. But the facts as presented by Hermitage are these: Kameya, a relatively small company, had paid
$
135
m in taxes in
2006
, at a time when Aeroflot, the country's largest airline, paid
$
130
m, and the best-known brewery paid
$
131
m.
^k
It was scarcely shirking its duties as a corporate citizen. Indeed, it was the hefty taxes that Hermitage's associated companies had paid in past years which had probably marked it as a target for the scam originally.

Regardless of the merits of the dispute itself, what seems to me quite clear is that the FSB's involvement in a tax dispute was beyond its remit and that its subsequent behaviour, along with that of other state agencies, was a shocking abuse of the system. In a country that claims to abide by the rule of law, the authorities do not automatically triumph in the courts. On paper, Russia's procedures in contested business tax matters do not seem unusual. The tax authority first queries a payment, then waits for the company's response; if unconvinced it reissues a tax demand; if the money is still unpaid it turns to the Interior Ministry to enforce it. At that point the taxpayer has the right to a fair hearing and legal representation. In practice (as in so many parts of life in Russia) things are very different. In this case no tax claims were made and none of these procedures was followed. Indeed, on
12
May
2009
, in a bizarre coda to the obliteration of Hermitage's presence in Russia, Kameya received a final tax audit from the federal tax service inspectorate stating that all taxes had been paid in full and none was owed.

On
4
June
2007
a group of twenty-five Interior Ministry officers, led by Lieutenant Colonel Kuznetsov, raided the Hermitage offices in Moscow, with a warrant relating only to Kameya, and seized documents, computers and other materials involving three quite unrelated Hermitage companies: Makhaon, Parfenion and Rilend. On the same day Kuznetsov, also without a warrant, raided an American-owned law firm, Firestone Duncan, which specialises in legal paperwork. He confiscated the statutory documents and seals of the three Hermitage subsidiary companies – in all two vanloads of materials. That was outrageous enough. What was worse was the way the officials behaved during the raid. When a lawyer at Firestone Duncan protested, the visitors beat and arrested him. After paying a
15
,
000
rouble (roughly $
500
) fine he was released, and spent two weeks in hospital. His name is still available in news reports of the incident, but I am omitting it at the request of friends who say he fears for his safety.

This was no coincidence. According to Hermitage, all the lawyers associated with the company suffered robberies or break-ins in the two-week period around the raid. By the brusque standards of Russian law enforcement, the raids were not in themselves unusual. The unannounced arrival of masked men toting machine guns, who remove documents and computers from your office, is a run-of-the-mill business risk in Russia, no more unusual than, say, having British health and safety inspectors demanding that you fit new fire doors, or America's Internal Revenue Service quibbling over allowable business expenses in a tax return. The twist in Russia is that such searches and seizures are often carried out by state officials on behalf of a third party, such as a business rival to the victim. Having identified the source of the persecution, the victim starts negotiating – or if he has good connections himself, considers counter-measures.

Mr Browder, from his exile in London's Mayfair financial district, was puzzled. Clearly the problem had, as he put it to me, ‘metastasised'. But why? The raid could be revenge by one of the politically influential companies he had chivvied for bad management and impenetrable finances. Or the aim could be simply to derail his campaign to return to Russia. At any rate, he reckoned, it was a headache not a nightmare, particularly as he had largely wound down his operations there anyway. This was a big misjudgement: far from being the vengeance of some disgruntled subject of Mr Browder's campaigns, the raid was carried out by his erstwhile ally, the Russian state itself. Despite multiple requests and complaints, the authorities did not return the confiscated items. Nor did they explain on what grounds they were holding them.

Hermitage then received a troubling phone call. A bailiff from the St Petersburg Arbitration Court was seeking to enforce judgements to the tune of several hundred million dollars arising out of lawsuits against Hermitage companies. But Hermitage had never heard of these cases. A baffled Mr Browder commissioned Mr Magnitsky, head of the tax and audit department at Firestone Duncan, to investigate. A notable figure in the field of tax law, Mr Magnitsky was an ideal choice. He immediately found that no fewer than ten cases had been lodged in St Petersburg. While a colleague set off for Russia's second city to find out more about these mysterious lawsuits, Mr Magnitsky began scouring official registries for clues. In October
2007
he made his first breakthrough. While the documents and seals of his client had been supposedly in the custody of Kuznetsov and a colleague, Major Pavel Karpov, they in fact had been used to re-register the companies.

Such chicanery may seem puzzling to outsiders who live in a world where courts offer redress, the media highlights official wrongdoing, and elected representatives are able to take up grievances. A Western policeman who steals a company document risks losing his job and would probably face prosecution. Anyone trying to use the stolen document would be guilty of attempted fraud and face criminal charges too. But for all its outward signs of normality, Russia offers none of these routes to justice, which is why crimes involving stolen corporate documents are common. Possession is nine-tenths of the law – or all of it. The result is corporate raiding, Russian style. In the West, this technique involves brainy and ruthless investment bankers who swoop on a company to dislodge a dozy management team. The Russian equivalent involves a powerful bit of the state machinery stealing a company from its owners. This often starts with a raid in which company documents are confiscated by officials, and then end up in the hands of the raiders who use them to change the company's ownership. The victims may negotiate a settlement where they stay on as managers. At worst they are lucky to escape with their lives. Something on these lines seemed to be happening, although the motive was puzzling. The perpetrators had gone to some lengths to loot a pestilential foreigner's assets, presumably in the belief that the effect would be lucrative or at least punitive. But it was neither. With its investments wound down, Hermitage thought it had little to lose, and needed care little for the wrath of Russian officialdom.

While Mr Browder and his colleagues pondered this puzzle Mr Magnitsky prepared criminal complaints implicating Kuznetsov and Karpov. He also discovered a new twist: the new owner of the Hermitage companies was a previously unknown firm called Pluton, registered in the provincial republic of Tatarstan. It was not the sort of outfit that would normally engage in high finance. The owner was a former sawmill employee called Victor Markelov who had served a jail sentence for manslaughter. His fellow directors were two other ex-convicts.
^l
All three had been released from jail early. Though odd by Western standards, such developments are not unusual in Russia, where ex-convicts, as well as drunks and tramps, often feature in corporate frauds. For a modest financial or liquid consideration, they will sign whatever papers are required, providing a fig leaf of disguise for the perpetrators at modest cost.

By this stage Hermitage had lost its companies, but the fraudsters had not gained anything except to drive Mr Browder out of Russia. But the next stage of the swindle was to change that. It involved a lawsuit, based on forged backdated contracts purporting to show that the Hermitage companies had promised to sell a large quantity of Gazprom shares. Claiming that the companies had then reneged on the deal, the claimants (three previously unknown firms) sued for a startling
$
1
.
3
bn in damages for foregone profits. The supposedly broken contracts could hardly have been flimsier. They were littered with inaccuracies. They referred to bank accounts that were opened only subsequently. They used inaccurate addresses. A power of attorney – a document rarely used in the West but an essential part of any business transaction in Russia – was dated four months before the company concerned had come into existence. One of the claimants identified himself using a passport that later turned out to be stolen. In evidence, they presented a mixture of forged documents and copies of materials seized in the raids. In any legal system worthy of the name, the investigators who took custody of these documents should have safeguarded them, not let them fall into the hands of fraudsters.

With proper legal representation, these ludicrous cases would have been easy to win. But the stolen Hermitage companies did not have proper lawyers. In a complaint to the Russian chief prosecutor, Yuri Chaika, Hermitage says of its supposed representatives that it:

 

Had no prior knowledge of, or acquaintance with, these lawyers . . . never hired or appointed them and . . . never authorised or ratified their appointment as attorneys or agents of any kind.
⁸

 

Instead of defending their clients against the preposterous allegations of non-existent breaches of bogus contracts, backed by palpably phoney evidence, the lawyers simply accepted full liability. The judges in the cases showed a striking lack of curiosity about the proceedings. For example: if the two parties agreed, why had it been necessary to go to court at all? Rather than ask such uncomfortable questions, they immediately ruled that the companies had to pay the damages sought. Having gained his victory, Lieutenant Colonel Kuznetsov then approached some of the biggest banks in Moscow. He produced a narrowly drafted warrant giving him the power to locate any assets belonging to Kameya – but demanded details of all assets belonging to Hermitage. Some complied either fully or in part, prompting furious complaints from Hermitage. Only the Duch bank ING, to its credit, bluntly declined, pointing out that the warrant bore no relation to the information sought.

At any rate, the assets were phantom and the search for them a sideshow. The real victim, the Russian taxpayer, was moving into sight. The fraudsters' henchmen, now posing as the legal owners of the company, used the judgment to argue that its past profits were now illusory, and the tax paid on them must be refunded. On
24
December
2007
they filed amended tax returns for
2006
. These argued that as the new court judgments had wiped out the Hermitage companies' taxable profits in that year, they were therefore entitled to a refund of the $
230
m in capital gains taxes these companies had paid. This was a striking and substantial claim that in any normal tax system would have been subject to thorough and lengthy scrutiny. Making the Russian tax authorities disgorge even the smallest and simplest refund is mind-bendingly slow and difficult. But thanks to the patronage of the FSB and other powerful institutions (the Interior Ministry and the upper reaches of government), the claimants won agreement for their refund – thought to be the largest single such payment in Russian financial history – from the two tax authorities concerned in a single day.
^m

The payment was premature: one of the court judgments did not even come into effect until
11
January. Even the simplest checks by the tax authorities would have shown that the transaction was fraudulent. Although two officials of the tax authorities gave sworn statements that they had made all possible and necessary checks before authorising the transactions, it is hard to square this with reality. Russian bureaucrats are known for many things, but not for a happy-go-lucky attitude to paperwork, nor for working extremely quickly. If the statements from the officials are to be believed, they made a series of extensive and complex checks with other state agencies, and received completely satisfactory replies, all in the space of a few hours in late December when Russia is shutting down for its lengthy New Year festivities.

It may be illustrative to imagine what would have happened if such a fraud were attempted in a Western country. Mr Browder would have immediately secured a court order preventing the fraudsters using the property they had acquired. Even a whiff of official involvement in a crime of this scale would alert the media (and the blogosphere). Lawmakers would ask questions; bodies that represent business would make complaints too; and anti-corruption agencies would take a hard look at the behaviour of the officials concerned. None of these mechanisms works properly in Russia. On paper, the state is accountable in all these ways, but in practice using them is mostly useless – and in some cases actually dangerous.