Testimony of William Browder. Commission on Security & Cooperation in Europe the U.S. Helsinki Commission.

June 23, 2009

”Mr. Chair­man and Dis­tin­guished Mem­bers of the Com­mis­sion, thank you for invit­ing me to appear before you today.

I have been asked to share my thoughts on the rule of law in Rus­sia. Unfor­tu­nate­ly, my own per­son­al expe­ri­ence shaped by fif­teen years of invest­ing in that coun­try con­firms to me that the sit­u­a­tion in Rus­sia is not a pret­ty pic­ture, and it is get­ting worse.

When I first start­ed Her­mitage in the mid-1990’s, my clients would ask me about the Russ­ian hor­ror sto­ries they had heard of share­hold­ers get­ting wiped off cor­po­rate reg­istries, hav­ing assets stolen by crooked man­age­ment or being the tar­gets of cor­rupt gov­ern­ment offi­cials seek­ing bribes. What I was able to tell my investors back then is that while cor­po­rate gov­er­nance was ter­ri­ble, val­u­a­tions were cheap, and investors would make mon­ey as Rus­sia evolved from “hor­ri­ble” to just “bad.” I am here today to tell you that Rus­sia is revert­ing. The investor hor­ror sto­ries that were large­ly fan­tas­tic in the 1990’s are now com­mon­place. The sit­u­a­tion in Rus­sia is going from “bad” back to “hor­ri­ble” ­ and it will be more than just investors who lose out in this process.

If there is one image I want to leave you with today, it is this. In most coun­tries of the world, the spheres of busi­ness exec­u­tives, gov­ern­ment offi­cials and crim­i­nals don’t typ­i­cal­ly over­lap. In Rus­sia, these three groups have become essen­tial­ly indis­tin­guish­able. All too often in today’s Rus­sia, there is no con­tra­dic­tion in some­one being a busi­ness exec­u­tive, senior gov­ern­ment offi­cial and crime boss all at the same time.

Her­mitage Cap­i­tal and Share­hold­er Activism

Speak­ing before you today car­ries on a fam­i­ly tra­di­tion of sorts. My grand­fa­ther, Earl Brow­der, was the head of the Amer­i­can Com­mu­nist Par­ty and appeared before his fair share of Con­gres­sion­al com­mit­tees over the course of his life­time. He had met my grand­moth­er dur­ing his trav­els in the Sovi­et Union, so you could say that Rus­sia and pop­ulist pol­i­tics were in my blood. As the fam­i­ly rebel, how­ev­er, I decid­ed to go to an Amer­i­can busi­ness school and ulti­mate­ly went back to Rus­sia fol­low­ing the col­lapse of the Sovi­et Union to build a business.

I found­ed Her­mitage in 1996 in part­ner­ship with the late Edmond Safra as a way for west­ern investors to invest in the Russ­ian stock mar­ket. The firm ulti­mate­ly grew to become the sin­gle largest for­eign port­fo­lio investor in Rus­sia, with some $4 bil­lion under man­age­ment in 2006, a sub­stan­tial por­tion of which came from U.S. insti­tu­tion­al and indi­vid­ual investors. One of the big rea­sons for the firm’s suc­cess was our strat­e­gy of invest­ing in the stocks of com­pa­nies that were out of favor due to bad man­age­ment, cor­rup­tion, share­hold­er rights abus­es or out­right theft. We would then work to change man­age­ment, stop fraud and defend the inter­ests of minor­i­ty share­hold­ers through share­hold­er activism. If we were suc­cess­ful in improv­ing cor­po­rate gov­er­nance, the mar­ket would ulti­mate­ly rec­og­nize this. As the com­pa­ny came back into favor, its stock price would rise, our investors would prof­it and the Russ­ian econ­o­my would be bet­ter off for hav­ing a more pro­duc­tive, trans­par­ent econ­o­my. For sev­er­al years it was a win-win sit­u­a­tion for every­one except cor­rupt cor­po­rate man­age­ment and their part­ners in government.

Due to weak courts and legal pro­tec­tions, our biggest lever­age was often the bul­ly pul­pit of the press. Since 1996 we waged dozens of high-pro­file pub­lic activist cam­paigns tar­get­ing mis­man­age­ment and cor­rup­tion at some of the largest com­pa­nies in Rus­sia. These includ­ed Gazprom (the state-con­trolled nat­ur­al gas monop­oly), Uni­fied Ener­gy Sys­tems (the nation­al elec­tric­i­ty util­i­ty), Sber­bank (the largest bank in Rus­sia) and Surgut­nefte­gas (the fourth-largest oil com­pa­ny in Russia).

Most of the com­pa­nies we sought to reform were con­trolled by the Russ­ian gov­ern­ment, and in the course of our anti-cor­rup­tion work, Her­mitage stepped on many high-placed toes. In Novem­ber 2005, I was sud­den­ly denied entry at Moscow’s Shereme­tye­vo Air­port and despite promi­nent inter­ven­tion and sup­port both here in the US and in Europe, my visa has not been restored. Regard­less of my being the sin­gle largest stock investor in the coun­try, and despite hav­ing attract­ed bil­lions of dol­lars of cap­i­tal into the Russ­ian econ­o­my over the past decade, the Russ­ian Gov­ern­ment banned me from enter­ing the coun­try in the inter­ests of “nation­al secu­ri­ty, pub­lic order or pub­lic health.”

While work­ing to regain my Russ­ian visa, I had the oppor­tu­ni­ty to approach then First Deputy Prime Min­is­ter ­ and now Pres­i­dent ­ Dmit­ry Medvedev at the World Eco­nom­ic Forum in Davos, Switzer­land in Jan­u­ary 2007. I asked him for help in restor­ing my visa. He asked for my doc­u­men­ta­tion and said he would look into it. Unfor­tu­nate­ly, what hap­pened next was worse than los­ing my visa in the first place.

Com­pa­ny Theft: the Fraud against Hermitage

While it was shock­ing to be effec­tive­ly deport­ed from Rus­sia, the visa denial was only the pre­lude to a sto­ry that sheds light on the shock­ing state of the rule of law in mod­ern Rus­sia. Short­ly after Davos, a col­league received a call from a Lieu­tenant Colonel in the Russ­ian Inte­ri­or Min­istry, Artem Kuznetsov. He said he under­stood that I was seek­ing to return to the coun­try and sug­gest­ed to my col­league that they have an infor­mal meet­ing. Kuznetsov fur­ther explained that the sta­tus of my visa appli­ca­tion would “depend upon how we behaved and what we pro­vid­ed.” We con­sid­ered this request very sus­pi­cious because one nev­er had “infor­mal meet­ings” with police­men, and his ref­er­ence to us “pro­vid­ing” him things appeared to us to be an out­right extor­tion attempt. When we asked for his ques­tions in writ­ing, he refused to pro­vide them, and we nev­er agreed to meet.

Soon there­after, on June 4, 2007, Lieu­tenant Colonel Kuznetsov led a team of 25 Inte­ri­or Min­istry offi­cers on a raid of our Moscow offices. They seized all of our com­put­ers, net­work servers and doc­u­ments ­ in total two van-loads of mate­ri­als. Kuznetsov left the Her­mitage raid mid-way through to join anoth­er raid that was tak­ing place simul­ta­ne­ous­ly at the offices of Fire­stone Dun­can, an Amer­i­can-owned Moscow law firm that advised on Russ­ian legal and account­ing affairs for the Her­mitage Fund. In this raid the Inte­ri­or Min­istry removed files that con­tained the stamps, seals, orig­i­nal arti­cles of asso­ci­a­tion and oth­er statu­to­ry doc­u­ments for the Fund’s Russ­ian invest­ment com­pa­nies. One of our lawyers protest­ed to the Inte­ri­or Min­istry offi­cers that the raid and the seizure of these mate­ri­als vio­lat­ed Russ­ian law. He was tak­en into a con­fer­ence room, beat­en vicious­ly by the offi­cers and arrest­ed. After being hos­pi­tal­ized for two weeks, he was forced to pay a 15,000 ruble fine.

Short­ly after the raid, Kuznetsov went on a “fish­ing expe­di­tion” to try to find where the Her­mitage Fund held its assets in Rus­sia. He vis­it­ed the Moscow offices of Citibank, Cred­it Suisse, HSBC and ING with a list of Her­mitage enti­ties, both for­eign and Russ­ian, and demand­ed that these banks release all of their records relat­ing to them.

As this was hap­pen­ing, the own­er­ship of three Russ­ian invest­ment com­pa­nies of the Her­mitage Fund was fraud­u­lent­ly trans­ferred from HSBC, as trustee of the Her­mitage Fund, to an unknown com­pa­ny called Plu­ton based in the Repub­lic of Tatarstan, Rus­sia. The own­er of Plu­ton was a man named Vik­tor Markelov, a crim­i­nal con­vict­ed of manslaugh­ter who had recent­ly served time in Russ­ian prison. In addi­tion to him­self, Markelov appoint­ed two oth­er men, Vly­ach­eslav Khleb­nikov and Valery Kurochkin, a con­vict­ed bur­glar and a con­vict­ed thief, respec­tive­ly, to be the direc­tors of the stolen Her­mitage companies.

So the implau­si­ble hor­ror sto­ry of being “wiped off the cor­po­rate reg­istry” that had been on the minds of my ear­ly investors more than 12 years ago was now com­ing to fruition. A sce­nario that had nev­er occurred dur­ing the “law­less chaos” and “Wild East” of the Yeltsin years was now tak­ing place under the “law and order” regime of Vladimir Putin.

In order to change own­er­ship of a Russ­ian com­pa­ny, one needs to have the orig­i­nal char­ter, cor­po­rate seal and cer­tifi­cate of reg­is­tra­tion of that com­pa­ny. All of these doc­u­ments and seals had been tak­en by the Moscow Inte­ri­or Min­istry dur­ing the raid on our lawyers’ offices in June 2007, and they were in the Inte­ri­or Ministry’s pos­ses­sion when this fraud­u­lent trans­fer took place.

Even before they were ille­gal­ly installed, the new “own­ers” of the Her­mitage com­pa­nies draft­ed sev­er­al fake and back-dat­ed con­tracts with a Russ­ian shell com­pa­ny called Logos­Plus that we had nev­er heard of and nev­er done any busi­ness with. On the basis of these new “unful­filled” con­tracts, Logos­Plus alleged that the Her­mitage com­pa­nies now owed it hun­dreds of mil­lions of dol­lars. Logos­Plus then sued our com­pa­nies in St. Peters­burg Arbi­tra­tion Court, claim­ing huge dam­ages. Nei­ther we nor HSBC were noti­fied of these claims since the reg­is­tered address­es for the com­pa­nies had been fraud­u­lent­ly changed along with the oth­er own­er­ship details. A team of lawyers we had nev­er met appeared in St. Peters­burg claim­ing to rep­re­sent the (for­mer) Her­mitage com­pa­nies in the pro­ceed­ings. These lawyers plead­ed guilty, “ful­ly accept­ing” all of the claims and con­sent­ed to the court’s judg­ment of $380 mil­lion in dam­ages against the Her­mitage companies.

The court pro­ceed­ings them­selves were rid­dled with pecu­liar­i­ties. We lat­er dis­cov­ered that the Logos­Plus claims were filed by an indi­vid­ual using a stolen pass­port. In its com­plaint, Logos­Plus was claim­ing to be the coun­ter­par­ty to a $500 mil­lion stock trade despite hav­ing a char­ter cap­i­tal of only $350. More­over, the unknown lawyers who mate­ri­al­ized in court to act on behalf of our stolen com­pa­nies were rely­ing on forged pow­ers of attor­ney and oth­er doc­u­ments that bore an uncan­ny resem­blance to the mate­ri­als seized by the Inte­ri­or Min­istry in its June 2007 office raids.

At first, the per­pe­tra­tors’ plan appeared to be to get bogus court judg­ments and then use these judg­ments to seize any assets they found. Their hope appeared to be that the asset search­es car­ried out by Lieu­tenant Colonel Kuznetsov at Cit­i­group, Cred­it Suisse, HSBC and ING between June and August 2007 would yield a jack­pot of assets. Unfor­tu­nate­ly for them, all our assets had been moved out of Rus­sia into safe and law­ful juris­dic­tions after my Russ­ian visa was revoked, and the per­pe­tra­tors got noth­ing from us.

$230 Mil­lion Tax Rebate: the Fraud against the Russ­ian State

That seemed like it should have been the end of our trou­bles in Rus­sia, but it wasn’t. In late March last year we dis­cov­ered that two new cas­es iden­ti­cal to those in St. Peters­burg had been filed against our Russ­ian com­pa­nies in Moscow and Kazan. Unknown lawyers appeared on our behalf and admit­ted full lia­bil­i­ty to unknown claims aris­ing out of con­tracts we nev­er signed with com­pa­nies we had nev­er heard of. In total, togeth­er with St. Peters­burg, judg­ments total­ing $973 mil­lion were issued against the Her­mitage Fund com­pa­nies in this man­ner. What was par­tic­u­lar­ly dis­turb­ing about this new dis­cov­ery were the dates when the cas­es were filed. They had been filed on Octo­ber 19, 2007 in Moscow and Octo­ber 22, 2007 in Kazan ­ more than a month after Kuznetsov’s asset search had yield­ed no results. It seemed strange and wor­ry­ing that the per­pe­tra­tors would con­tin­ue to be so active fil­ing fake cas­es against our com­pa­nies when it was clear at this point that they would not be able to seize any assets since these com­pa­nies were emp­ty. We did fur­ther inves­ti­ga­tions to try to under­stand what their moti­va­tion was.

The whole sto­ry start­ed to make sense in June 2008 when we received infor­ma­tion regard­ing our three stolen com­pa­nies from the Russ­ian com­pa­ny reg­is­tra­tion data­base. We learned that the per­pe­tra­tors had opened new Russ­ian bank accounts for the three stolen com­pa­nies in Decem­ber 2007. Two of the com­pa­nies set up accounts at Uni­ver­sal Sav­ings Bank (“USB”), and the third com­pa­ny opened an account at Inter­com­merz Bank. Both banks were tiny by any mea­sure. USB had total cap­i­tal of $1.5 mil­lion, and Inter­com­merz had cap­i­tal of $12 mil­lion. Look­ing more close­ly at the banks’ dis­clo­sure state­ments on the Russ­ian Cen­tral Bank’s web­site, we learned that the aggre­gate cus­tomer deposits increased by 623% at USB and 273% at Inter­com­merz short­ly after our stolen com­pa­nies had opened their accounts. What was tru­ly chill­ing were the amounts by which the banks’ deposits had increased. USB’s deposits had grown by $97 mil­lion and Intercommerz’s by $143 mil­lion ­ rough­ly the same amounts that the Fund com­pa­nies paid in cap­i­tal gains tax to the Russ­ian gov­ern­ment in 2006.

In light of this dis­turb­ing coin­ci­dence, we dug deep­er to see if there was any more detailed infor­ma­tion about the spike in deposits at the two banks. We learned that two of our stolen invest­ment com­pa­nies were the largest and sec­ond largest depos­i­tors at USB with a com­bined $91 mil­lion in their accounts, and our oth­er stolen com­pa­ny was the largest depos­i­tor at Inter­com­merz with $139 mil­lion in its account. The size of each of our stolen com­pa­nies’ deposits was exact­ly equal to the amount of tax it had paid in 2006 to the Russ­ian budget.

The whole sto­ry now fell into place. In short, after the straight­for­ward asset seizure failed because our com­pa­nies were emp­ty, the per­pe­tra­tors set out to steal the Russ­ian income tax­es the Her­mitage Fund had paid in 2006. How did they do this? They had obtained the above-men­tioned sham court claims that were exact­ly equal to the 2006 prof­its of the Her­mitage com­pa­nies. Our three com­pa­nies had com­bined prof­its of $973 mil­lion that year, and the fake court claims from Moscow, Kazan and St. Peters­burg totaled $973 mil­lion. By bur­den­ing our com­pa­nies with these new “claims,” the per­pe­tra­tors went back to the tax author­i­ties and filed amend­ed tax returns with addi­tion­al “loss­es” that reduced the com­pa­nies’ prof­its to zero. On the basis of the restat­ed results, the per­pe­tra­tors filed for a refund of the income tax­es that the Her­mitage Fund paid in 2006 ($230 mil­lion). The tax author­i­ties approved the refund on the same day and paid it out to the per­pe­tra­tors in a record two days via the new­ly opened accounts in these tiny Russ­ian banks where there were fur­ther chan­neled abroad via cor­re­spon­dent dol­lar accounts with U.S. banks. With the refund mon­ey deposit­ed in the banks, the per­pe­tra­tors could wire it wher­ev­er need­ed, com­plete the fraud and then cov­er their tracks. Indeed, one of the banks ­ USB ­ has since been liq­ui­dat­ed and has effec­tive­ly ceased to exist.

The Russ­ian Government’s Response

So the two-pronged scam worked in one area and failed in anoth­er. The per­pe­tra­tors weren’t able to steal the assets from us based on the fake court claims, but they were able to steal $230 mil­lion from the Russ­ian gov­ern­ment by fil­ing amend­ed tax returns on behalf of our stolen com­pa­nies. What makes this sto­ry even more shock­ing is that we filed six 255-page crim­i­nal com­plaints with the Russ­ian author­i­ties in ear­ly Decem­ber 2007, sev­er­al weeks before the tax fraud took place, and they did noth­ing to stop it. Two com­plaints were sent to the Russ­ian Gen­er­al Pros­e­cu­tor, two to the Russ­ian State Inves­tiga­tive Com­mit­tee and two to the Inter­nal Affairs Depart­ment of the Inte­ri­or Min­istry. There was enough infor­ma­tion to pre­vent the fraud and indict a num­ber of peo­ple behind it if the Russ­ian gov­ern­ment had acted.

Instead of doing any­thing to save the Russ­ian state from this high­ly sophis­ti­cat­ed and orga­nized loot­ing, two of our com­plaints were thrown out imme­di­ate­ly; two were returned to the same Inte­ri­or Min­istry offi­cials we were com­plain­ing about (essen­tial­ly, they were being asked to “inves­ti­gate them­selves”); and one was thrown out for “lack of any crime com­mit­ted.” Only one com­plaint was tak­en seri­ous­ly. It was tak­en up by the Russ­ian State Inves­tiga­tive Com­mit­tee in ear­ly Feb­ru­ary 2008, but before it could get any trac­tion, the case was trans­ferred to the South­ern region of the Moscow dis­trict of the State Inves­tiga­tive Com­mit­tee (the low­est pos­si­ble lev­el of the Com­mit­tee) and by June 2008, a senior Inte­ri­or Min­istry offi­cial who had been named in the com­plaint, Lieu­tenant Colonel Kuznetsov, had joined the “inves­ti­ga­tion” team (again, essen­tial­ly to “inves­ti­gate him­self”). We were lat­er not sur­prised to learn that this inves­ti­ga­tion was closed in Octo­ber 2008 due to the “absence of a crime.”

The reac­tions from oth­er “inter­est­ed” arms of the Russ­ian gov­ern­ment have been equal­ly per­plex­ing. As for the Tax Min­istry, the author­i­ties in Moscow who approved the fraud­u­lent $230 mil­lion refund have stat­ed they were mis­led and sup­pos­ed­ly only learned about the fraud in Feb­ru­ary 2009, despite the com­plaints we had filed with them in 2008 request­ing that they inves­ti­gate the fraud. We wrote about the $230 mil­lion fraud to the Russ­ian Audit Cham­ber (the body respon­si­ble for over­see­ing the prop­er dis­burse­ment and safe­keep­ing of state funds), but they respond­ed it was out­side the scope of their offi­cial respon­si­bil­i­ties. We alert­ed all nine­teen mem­bers of Pres­i­dent Medvedev’s Anti-Cor­rup­tion Com­mis­sion about it, but we received no sub­stan­tive response. We wrote to the Russ­ian Gen­er­al Pros­e­cu­tor, the Russ­ian State Inves­tiga­tive Com­mit­tee, the Min­is­ter of Finance, the Min­is­ter of the Inte­ri­or, the Head of the Fed­er­al Tax Author­i­ty, the Head of the Fed­er­al Secu­ri­ty Ser­vice (FSB) and the President’s office in the Krem­lin. Again, we received no sub­stan­tive response. It appeared that not a sin­gle Russ­ian offi­cial was inter­est­ed in look­ing into how $230 mil­lion had dis­ap­peared from the Russ­ian treasury.

Retal­i­a­tion by the Inte­ri­or Ministry

Incred­i­bly, the only seri­ous response by the Russ­ian author­i­ties to this mas­sive fraud against the Russ­ian state has been to attack Her­mitage exec­u­tives and the lawyers in Rus­sia who are defend­ing the Her­mitage Fund and ulti­mate­ly to blame some of the vic­tims ­ HSBC and Her­mitage ­ for the fraud itself. These cas­es appear for all intents to be a crude form of retal­i­a­tion against Her­mitage for shin­ing light on the $230 mil­lion fraud against the Russ­ian government.

Once HSBC and Her­mitage began to file com­plaints spelling out the fraud and iden­ti­fy­ing some of the key per­pe­tra­tors to the Russ­ian author­i­ties, the Inte­ri­or Min­istry began to retal­i­ate ­ first, against myself and my col­leagues at Her­mitage. Short­ly after com­plaints were filed in Decem­ber 2007 alert­ing the author­i­ties to the mas­sive fraud under­way, rep­re­sen­ta­tives of the Moscow Inte­ri­or Min­istry trav­elled to Kalmykia, a region in south­ern Rus­sia, where the Her­mitage Fund had invest­ment com­pa­nies in 2001 and where I had served as a direc­tor. These Inte­ri­or Min­istry offi­cers called a senior inves­ti­ga­tor of the Kalmyk Inte­ri­or Affairs Depart­ment back home from vaca­tion and instruct­ed him to open two cas­es alleg­ing tax offences in 2001 (this is despite the fact that there was no legal basis for these claims and the applic­a­ble statute of lim­i­ta­tions had expired in 2004).

The cas­es were opened on Feb­ru­ary 27, 2008, and my name was added to the Nation­al Search List in Rus­sia. The legal process of open­ing an offi­cial inves­ti­ga­tion that can typ­i­cal­ly take up to two months tran­spired in a sin­gle day. The local inves­ti­ga­tor lat­er con­firmed to my Russ­ian lawyer that the rea­son he was asked to open the inves­ti­ga­tion was to enable the Inte­ri­or Min­istry to place me on the nation­al and inter­na­tion­al search lists, includ­ing the Inter­pol ‘Red Notice’ search system.

Sim­i­lar steps were tak­en against my Her­mitage col­league, Ivan Cherkasov, who served as the gen­er­al direc­tor of a local invest­ment com­pa­ny on behalf of a Her­mitage client. Here, the Inte­ri­or Min­istry has sanc­tioned an inves­ti­ga­tion alleg­ing that this com­pa­ny under­paid div­i­dend with­hold­ing tax, despite the fact that the com­pa­ny had con­duct­ed reg­u­lar quar­ter­ly audits and the Russ­ian tax author­i­ties had con­firmed in writ­ing that the tax­es were paid in full. Indeed, in the course of a sub­se­quent statu­to­ry tax audit, the tax author­i­ties dis­cov­ered the com­pa­ny had actu­al­ly over­paid its tax­es and was owed a refund of 3.8 mil­lion rubles. Nonethe­less, this Inte­ri­or Min­istry inves­ti­ga­tion remains “ongo­ing,” and Cherkasov also is on the Russ­ian Nation­al Search List. Inte­ri­or Min­istry inves­ti­ga­tors have issued pub­lic state­ments to the Russ­ian press that their objec­tive is to issue arrest war­rants for us and to do so in absentia.

The retal­ia­to­ry attacks were not iso­lat­ed sim­ply to Her­mitage exec­u­tives but were also tar­get­ed against the lawyers in Rus­sia act­ing on behalf of the Her­mitage Fund. The intim­i­da­tion and harass­ment began last year, when on the night of August 20, 2008, the Moscow offices of four law firms rep­re­sent­ing HSBC and the Her­mitage Fund were raid­ed by Inte­ri­or Min­istry offi­cers. In addi­tion to con­fi­den­tial client files, the offi­cers seized orig­i­nal pow­ers of attor­ney that our lawyers were going to use in court the fol­low­ing day.

The addi­tion­al expe­ri­ences of two of our Russ­ian lawyers, Sergey Mag­nit­skiy and Eduard Khayret­di­nov, are par­tic­u­lar­ly illus­tra­tive. Short­ly after Mag­nit­skiy tes­ti­fied about the role of Inte­ri­or Min­istry offi­cers in the fraud, he was arrest­ed. Short­ly after Khayret­di­nov filed com­plaints on behalf of HSBC and the Her­mitage Fund impli­cat­ing Inte­ri­or Min­istry offi­cers, a retal­ia­to­ry crim­i­nal case was opened against him.

Sergey Mag­nit­skiy is a legal and account­ing advis­er with Fire­stone Dun­can. In the course of his work defend­ing the Her­mitage Fund, Mag­nit­skiy uncov­ered the infor­ma­tion about the theft of the Her­mitage Fund com­pa­nies and the fraud­u­lent tax refund that formed the foun­da­tion of crim­i­nal com­plaints filed by HSBC with the Russ­ian author­i­ties on Decem­ber 3, 2007, July 23, 2008 and Octo­ber 27, 2008. Mag­nit­skiy also gave three for­mal wit­ness state­ments to the Russ­ian author­i­ties detail­ing the fraud against the Russ­ian gov­ern­ment and demon­strat­ing how it was pos­si­ble only with the doc­u­ments seized by the Moscow Inte­ri­or Min­istry dur­ing its office raids. In par­tic­u­lar he high­light­ed the involve­ment of Inte­ri­or Min­istry Lieu­tenant Colonel Artem Kuznetsov who had led the raids. Six weeks after giv­ing his last state­ment to the author­i­ties, in the ear­ly morn­ing hours of Novem­ber 24, 2008, Inte­ri­or Min­istry offi­cers raid­ed Magnitskiy’s home and arrest­ed him. He has since been trans­ferred to Matrosskaya Tishi­na deten­tion facil­i­ty, where more than six months lat­er his case still has not been brought to tri­al. At a hear­ing in Moscow on June 15, 2009, Magnitskiy’s deten­tion was fur­ther extend­ed until Sep­tem­ber 15, 2009, and he has been refused bail. Lieu­tenant Colonel Kuznetsov, impli­cat­ed in wit­ness state­ments by Mag­nit­skiy, has been assigned to the Inte­ri­or Min­istry team inves­ti­gat­ing Magnitskiy’s case. Sim­ply put, Mag­nit­skiy is now the Inte­ri­or Ministry’s hostage.

Eduard Khayret­di­nov, a for­mer judge and now a lawyer in pri­vate prac­tice, has been a mem­ber of the Moscow City Bar since 1992. Fol­low­ing his reten­tion by HSBC to act on behalf of the Her­mitage Fund com­pa­nies, Khayret­di­nov filed more than 30 com­plaints on their behalf set­ting forth the theft of the Her­mitage Fund com­pa­nies and the fraud against them, ques­tion­ing the legit­i­ma­cy of actions tak­en by law enforce­ment offi­cials includ­ing Lieu­tenant Colonel Kuznetsov. Short­ly after these com­plaints were filed, Lieu­tenant Colonel Kuznetsov autho­rized the open­ing of a crim­i­nal case against Khayret­di­nov, alleg­ing that he had used a forged pow­er of attor­ney from HSBC when fil­ing the com­plaints, despite sworn affi­davits from HSBC direc­tors con­firm­ing to the court that Khayret­di­nov was their prop­er attorney-in-fact.

In a fur­ther act of intim­i­da­tion, a Kazan-based Inte­ri­or Min­istry offi­cer demand­ed Moscow-based lawyers act­ing for HSBC, includ­ing Khayret­di­nov and Vladimir Pas­tukhov, appear for ques­tion­ing as wit­ness­es in Kazan. This sum­mons vio­lates Russ­ian law (includ­ing Arti­cles 23 and 48 of the Russ­ian Con­sti­tu­tion, and Arti­cle 8 of the Russ­ian Law on Lawyers) which pro­hibits ques­tion­ing of lawyers regard­ing details of cas­es to which they pro­vide legal assis­tance. More­over, they con­sti­tute a breach of the Basic Prin­ci­ples on the Role of Lawyers adopt­ed by the Unit­ed Nations.

These recent acts of intim­i­da­tion against our lawyers under­score the degree to which legal nihilism has now over­whelmed the last ves­tiges of the rule of law in Rus­sia. Lawyers in Rus­sia now fear for their per­son­al safe­ty due to the attacks and harass­ment they will face in the nor­mal course of rep­re­sent­ing clients. Being a lawyer in Rus­sia is one of the most dan­ger­ous jobs in the world, and the expe­ri­ences of our lawyers ­ in par­tic­u­lar, Sergey Mag­nit­skiy, Eduard Khayret­di­nov and Vladimir Pas­tukhov ­ demon­strate why this is truer now than ever before. These men have been tar­get­ed because they had the courage to speak out against cor­rupt Inte­ri­or Min­istry offi­cers with­out whose com­plic­i­ty it would have been impos­si­ble to car­ry out a mas­sive fraud against the Russ­ian government.

Impli­ca­tions for U.S. Policy

While this sto­ry of offi­cial cor­rup­tion may sound com­plete­ly unbe­liev­able, it is unfor­tu­nate­ly not unusu­al in mod­ern Rus­sia. The theft of com­pa­nies via these tac­tics (office raids, forgery, false con­tracts, fraud­u­lent court judg­ments, attach­ment orders) has become so com­mon that those who per­pe­trate these frauds are now known in the Russ­ian ver­nac­u­lar as sim­ply “raiders.” Every day small busi­ness­men, landown­ers and even large Russ­ian com­pa­nies are the tar­gets of raiders, and the prob­lem has become so endem­ic that Pres­i­dent Medvedev specif­i­cal­ly referred to it in a speech in Feb­ru­ary 2008, call­ing for “real instru­ments to pre­vent raider activ­i­ty.” In this case, raiders have tak­en this prob­lem to a new and absurd extreme by “raid­ing” the Russ­ian state itself and so far get­ting away with it.

How should the U.S. gov­ern­ment react to this?

Under­stand the Nature of the Russ­ian State. The Unit­ed States needs to rec­og­nize that Rus­sia is not a func­tion­ing state as we under­stand it here in the West. Too often, the cor­ri­dors of pow­er in Rus­sia are pop­u­lat­ed by indi­vid­u­als who wear the uni­form or have the title of a pub­lic offi­cial, but who in fact pur­sue pri­vate inter­ests by crim­i­nal means. As a result, the deci­sions of the Russ­ian gov­ern­ment are not made with the same inter­ests or con­sid­er­a­tions as the Unit­ed States. The Unit­ed States should not rely on the “good will” of the Russ­ian gov­ern­ment or trust that diplo­ma­cy as prac­ticed between civ­i­lized nations will be effec­tive in deal­ing with Russia.

Rec­og­nize Russ­ian Inter­ests. The Russ­ian lead­er­ship has repeat­ed­ly stat­ed its desire to be treat­ed as an equal by the Unit­ed States. Fur­ther­more, influ­en­tial Russ­ian busi­ness­men and gov­ern­ment offi­cials cov­et their abil­i­ty to access the West and the priv­i­leges their wealth and pow­er can obtain here. U.S. pol­i­cy should be to deny access to the West to any mem­ber of the Russ­ian gov­ern­ment or busi­ness com­mu­ni­ty whom it sus­pects of cor­rup­tion or orga­nized crime. Fur­ther­more, the full arse­nal of the U.S. Treasury’s anti-mon­ey laun­der­ing pow­ers should be brought to bear to ensure the pro­ceeds from Russ­ian orga­nized crime and pub­lic cor­rup­tion do not enter the U.S., and in the instances where such funds are already here, such assets should be seized and frozen.

Rus­sia Press­es “Reset” Before the West Does. Rus­sia needs to demon­strate a true com­mit­ment to fight­ing cor­rup­tion and purg­ing its pub­lic bureau­cra­cy of crim­i­nals before the Unit­ed States press­es the reset button.

Con­tin­u­ous­ly Empha­size Rule of Law via Indi­vid­ual Cas­es. The Unit­ed States can empha­size the impor­tance of the rule of law by con­tin­u­ous­ly bring­ing indi­vid­ual cas­es, such as Hermitage’s ­ where cor­rupt gov­ern­ment offi­cials are work­ing in league with orga­nized crime ­ to the atten­tion of the Russ­ian gov­ern­ment. While many unpleas­ant things can hap­pen in the Russ­ian legal sys­tem when the world is not watch­ing, the Russ­ian author­i­ties are much more sen­si­tive when under the scruti­ny of their West­ern partners.

Uphold and Pro­tect Inter­na­tion­al Law Enforce­ment Insti­tu­tions. Requests for inter­na­tion­al arrest war­rants sub­mit­ted to Inter­pol and oth­er inter­na­tion­al law enforce­ment bod­ies by coun­tries such as Rus­sia, where the rule of law is defi­cient, should be sub­ject to a more rig­or­ous review process and a pos­si­ble veto before being imple­ment­ed. The effec­tive­ness of Inter­pol as a crime-fight­ing orga­ni­za­tion should not be com­pro­mised by Russ­ian or oth­er offi­cials who may attempt to use its resources to harass and retal­i­ate against their oppo­nents ­ polit­i­cal, com­mer­cial or otherwise.

Pro­tect Lawyers. In coun­tries where the law works, lawyers are not impris­oned for defend­ing their clients and for speak­ing out against police cor­rup­tion. The Unit­ed States should insist Rus­sia abide by the Unit­ed Nations Basic Prin­ci­ples on the Role of Lawyers, ensur­ing that lawyers are able to con­duct their work with­out gov­ern­ment inter­fer­ence or polit­i­cal persecution”.

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