by Edward Lucas
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 $1.3bn 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 $230m 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.
Between 3 and 11 December 2007 Hermitage had submitted no fewer than six lengthy complaints detailing the theft of the companies. Two went to the chief prosecutor – who promptly passed them to Major Karpov. Unsurprisingly, no action followed. Two went to the department of the Interior Ministry that deals with internal corruption issues. It declined to take action, with the Kafkaesque justification: ‘We are unable to open an inquiry into an investigator when such an inquiry is requested by the target of the investigator’s current work.’ One went to the St Petersburg branch of the Russian State Investigative Committee, which replied that it could find nothing amiss. The sixth went to the same body’s federal offices, which opened a low-level inquiry on 5 February. That delay cost the Russian taxpayer $230m.
The robbers now had their loot. But they were still at risk of being found out. The fraud was not an elegant one. Whether from carelessness or complacency, the phoney documentation was littered with mistakes. Moreover Hermitage was firing salvoes of official complaints inside Russia, and was running an effective PR campaign abroad. It was time for a criminal case against the pesky foreigners to scare them into silence.
The authorities had to try to prove that Hermitage had done something wrong. If the evidence did not exist, it must be invented. On 26 February, Karpov, Kuvaldin and two of Kuznetsov’s other subordinates flew to the provincial city of Elista, capital of Kalmykia. This republic is one of the poorest and oddest places in Russia, Buddhist by religion and long ruled by a chess-mad despot called Kirsan Ilyumzhinov. Like many investors in Russia, for tax purposes Hermitage had established its investment subsidiaries there.n As a ‘Free Economic Zone’ – one of eleven in Russia – the republic was an onshore tax haven, with an 11 per cent tax rate on corporate profits, against 35 per cent in Moscow. Hermitage also used another tax break aimed at promoting the employment of disabled people. In 1996 it had hired four such staff, nominated by the Kalmykian authorities, for the undemanding task of sending press clippings on a monthly basis.9 Investigators in Elista had on several occasions, most recently in 2004, started looking at Hermitage’s tax affairs, each time ruling that no crime had taken place. The law offered little scope for further pursuit: the deadline for collecting tax debts had expired. But in 2008 the visitors from Moscow had little difficulty in persuading their Elista colleagues to reopen a case and to transfer the investigation to the Russian capital. They summoned a local investigating officer back from vacation. Witnesses interviewed in the FSB office in Elista readily agreed to change their story, saying that Hermitage had never actually paid them. (Hermitage has produced payment orders to support its position.)
Whether or not Hermitage’s conduct in all this was flawless, average, or questionable is not the point here. Nothing in its activities, in any legal system imaginable, would carry sanctions including the criminal prosecution, arbitrary imprisonment, or physical abuse leading to death of one of its lawyers. Yet that is just what happened. On 5 May 2008 Kuznetsov initiated a criminal case against not Hermitage itself, but its lawyers, claiming they did not have genuine powers of attorney to represent their client: in effect, he was saying that the only person who could legally represent the company was the person who stole it. That marked a grim step to lawlessness. A lawyer is an officer of the court, bound to do his professional best to make his client’s case clearly and convincingly. It is a sure sign of a rotten legal and political system when lawyers are punished for the crime of representing their clients. When I tried to explain this case to a friend, he asked in innocent puzzlement: ‘Why didn’t they call the police?’ That question highlights the gulf between the way Russia works and the standards expected in the West. In this case, the criminals were the police, as Mr Magnitsky discovered when he tried to find out what had happened to his complaints against Kuznetsov and Karpov. Far from being independently investigated, these had been forwarded to the men themselves. On attending the Investigative Committee offices in Moscow to give a deposition, he was surprised to see Kuznetsov there – officials explained this by saying that he was ‘assisting’ them.
Meanwhile Hermitage lawyers filed fifteen more complaints, with every relevant law enforcement and regulatory agency. Mr Browder and his colleagues were sure that the episode would be dealt with properly once higher authorities became aware of it. As ardent advocates of the rule of law in Russia, Prime Minister Putin and President Dmitri Medvedev surely could not ignore evidence that their officials had defrauded taxpayers of $230m? But Mr Magnitsky’s work had the opposite effect. Having already threatened Hermitage lawyers with criminal charges in May, in August 2008 the fraudsters ordered a police raid on the offices of four law firms working for Hermitage.o The lawyers at the firms also received summonses, in violation of a Russian law that specifically prohibits lawyers being subject to questioning by the criminal justice authorities for anything relating to their dealings with clients. Undeterred, Mr Magnitsky in October 2008 filed a comprehensive dossier to the State Investigative Committee. If Mr Putin’s claim to have created a ‘dictatorship of law’ in Russia counted for anything, it should make it possible to challenge abuses such as this. But the truth is that the law in Russia is a trap for the brave, not a weapon for the weak. By challenging the authorities in court, you leave yourself open to their retribution. The idealistic Mr Magnitsky was about to learn this the hard way.
The next stage of intimidation came when the authorities opened criminal cases against the two Hermitage Fund lawyers who had reported the police involvement in the $230m theft. These men, Eduard Khairetdinov and Vladimir Pastukhov, and some colleagues, promptly went abroad. Had Mr Magnitsky followed suit he would be alive today. On 12 November 2008 Kuznetsov and his three subordinates were instructed to investigate possible criminal conduct by Hermitage’s lawyers. On 24 November 2008 four law enforcement officers came to Mr Magnitsky’s home and arrested him in front of his wife and two children. All applications for bail were peremptorily turned down. Russian media have reported that he was planning to go abroad, citing plane tickets to Kiev reserved in his name. But these were booked only by phone, by an unidentified male voice, and never collected. Booking bogus tickets is a tactic commonly used by Russian criminal justice authorities wanting to plant ‘evidence’ that a suspect is plannin
g to flee. The FSB statement said Mr Magnitsky had applied for a visa for the UK. The British consulate in Moscow denies that any such application was made.
The denial of bail meant that Mr Magnitsky never saw his children again; indeed he never heard their voices, as telephone calls to his family were denied. His contact with his loved ones was limited to snatched glimpses at brief and farcically unfair court hearings. Only once, a month before his death, was he allowed a brief meeting with his wife and mother. He died in jail just under a year after he was arrested, eight days before the expiry of the maximum limit for pre-trial detention.
The initial reason given was ‘rupture to the abdominal membrane’, which was later replaced with ‘heart failure’. A fairer assessment would have been death by torture. Mr Magnitsky had been kept in abominable conditions.10 The authorities ignored his complaints and repeatedly denied him medical attention, even when he was in great pain with life-threatening ailments. His body showed signs of direct physical abuse in the final hours of his life. Squeamish readers may wish to skip what follows.11
Mr Magnitsky was initially locked up in a detention centre, in an unheated cell with an unglazed window, and with just four beds for the eight prisoners. The lights burned round the clock. He was shifted from cell to cell sixteen times, with his belongings often going ‘missing’ amid the move. Here he describes life after court hearings for those in custody:
Prisoners [arriving back] are not taken to their cells immediately and are instead held in a prison box for 3–3.5 hours. Not once have I been returned to my cell earlier than 23:00. This prison box is 20–22 m2, it has no windows or ventilation and may hold up to seventy people at the same time and this means that there is neither any room to sit nor even to stand. Many of the prisoners smoke in the prison box and this makes it very difficult to breathe . . . the time in between hot meals can be up to 38 hours (from 18:00 the day before the visit to court when a prisoner receives a hot meal to 8:00 when breakfast is served on the day after the visit to court).