Hermitage Files Criminal Complaint in Russia Demanding Investigation Into the Second Massive Tax Rebate Fraud Exposed by Sergei Magnitsky

June 20, 2011

Lawyers acting on behalf of Hermitage Capital filed a new criminal complaint today with the Russian State Investigative Committee demanding the prosecution of officials from Moscow Tax Offices 25 and 28, who had perpetrated the theft of US$107 million through a fraudulent tax refund scheme in 2006.

 

The complaint implicates Olga Stepanova, head of Moscow Tax Office 28, and Elena Khimina, head of Moscow Tax Office 25. They are the same two officials who a year later approved an identical US$230 million fraudulent tax refund. After Russian lawyer Sergei Magnitsky exposed the schemes, he was arrested, tortured, and killed in Russian police custody.

 

A Hermitage Capital spokesman said:

 

“This US$107 fraudulent tax refund case has direct relevance to the case that led the arrest, torture and death in custody of Sergei Magnitsky. If the Russian government is in any way serious about investigating the death of Sergei Magnitsky, or indeed about fighting corruption and instituting the rule of law, they must investigate this crime.”

 

The latest filing shows that between November 2006 and March 2007, Ms. Stepanova and Ms. Khimina approved fraudulent tax refund requests totaling US$107 million from two Russian companies Financial Investments and Selen Securities. These two companies were subsidiaries of Rengaz, an investment vehicle managed by Renaissance Capital. Rengaz had paid the US$107 million in taxes in January 2006. Subsequently, in the spring of 2006, Financial Investments and Selen Securities pleaded guilty to false debts totaling US$525 million in several Russian courts. The false debts and subsequent court judgments were then used to apply for a fraudulent US$107 million tax refund.

 

The investigation by Sergei Magnitsky found that both tax rebate frauds – the $107 million in 2006 and the $230 million in 2007 – were identical. The same forged backdated contracts using the exact same language were submitted to the Russian courts in Moscow and Kazan to create the fake liabilities in both cases. The same lawyer, Andrei Pavlov, presented the fake contracts in court in both frauds. The same plaintiffs, Gennady Plaksin and Alexei Sheshenia signed their names on the collusive lawsuits in both frauds. The same tax officials Olga Stepanova and Elena Khimina approved both fraudulent tax refunds in very short periods of time with no audits taking place. All the money in both cases was channeled through the same small Russian bank, Universal Savings Bank. According to court records, the beneficial owner of this bank was Dmitry Kluyev, a man convicted in the $1.6 billion fraud involving the shares of the iron ore producer Mikhailovsky GOK.

 

In October of 2008, Sergei Magnitsky submitted evidence in an official testimony to the Russian Interior Ministry about the stolen US$230 million. In his testimony, Mr. Magnitsky named a number of police officers involved in the illegal seizure of documents from The Hermitage Fund, which were used to perpetrate the fraud. Later that month, he also shared details of his forensic research on both the $230 million and the $107 million frauds with BusinessWeek in Moscow.

 

One month after his testimony and his BusinessWeek interview, the officers whom he had testified against arrested Mr. Magnitsky. He was tortured for one year in police custody where he died on November 16^th 2009. Russian authorities continue to refuse an investigation into his torture in custody, as well as an investigation into the officials complicit in the tax refund schemes.

 

A Hermitage Capital spokesman said:

 

“The same government officials were involved in perpetrating both crimes in 2006 and 2007. It shows a systematic pattern of embezzlement. Despite the overwhelming evidence, those Russian government officials enjoy absolute impunity for their actions.”

 

Russian authorities have repeatedly refused to launch an investigation into the officials implicated in the $230 million fraud, or to trace the stolen money. In April of 2011, Interior Ministry spokeswoman Irina Dudukina stated that the money could not be traced because the truck carrying all the details from Universal Savings Bank had “exploded.”

 

In June 2008, the Russian Central Bank approved the request of the owners of the Universal Savings Bank to liquidate the bank, despite the criminal complaints filed by Hermitage Capital demanding a halt of the liquidation process in order to investigate the Bank’s role in the US$230 million fraud.

 

The Russian authorities have only prosecuted two ex convicts for their role in the $230 million tax theft. One, Victor Markelov, a sawmill foreman who was convicted of manslaughter in 2001, was named by the Interior Ministry as the “mastermind” of the fraud. He was given the most lenient sentence possible of five years in a collapsed proceeding that heard no evidence. Despite the fact that this was the largest tax refund fraud in Russian history, the Russian government raised no financial claims against Mr Markelov and allowed him to keep assets in excess of US$2 million that he had acquired before the time of the conviction.

 

The other man convicted was Vyacheslav Khlebnikov, an unemployed man previously convicted of burglary was also sentenced to five years in a similar collapsed proceeding hearing no evidence.

 

On the basis of the testimony of these two ex-convicts, the Russian Interior ministry concluded that officials in tax office 25 and 28 were “tricked and misled” and were subsequently absolved of any responsibility for the fraudulent tax rebates. On the eve of the one-year anniversary of Sergei Magnitsky’s death, the Interior Ministry went on to posthumously blame Sergei Magnitsky of perpetrating the fraud that he uncovered.

 

Olga Stepanova, head of Moscow Tax Office 28, was promoted this January to one of the Russian Ministry of Defense’s federal agencies.

 

In January of 2011, Hermitage Capital filed a petition calling on authorities to investigate the theft of the US$230 million, submitting significant documentary evidence that Russian officials and their families had laundered the money through Swiss bank accounts. The Swiss Attorney General has since frozen the accounts belonging to family members of Olga Stepanova, the head of Moscow Tax Office 28, who is the subject of the new criminal complaint.

 

 

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