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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