The Times: Hermitage alleges fraud in high places in Moscow

October 19, 2009

In a let­ter Her­mitage Cap­i­tal accus­es senior gov­ern­ment offi­cials of con­spir­ing with a crim­i­nal gang to steal £235 million.

Fraud­sters oper­at­ing with­in the Russ­ian Inte­ri­or Min­istry and the Moscow Tax Author­i­ty have stolen 11.2 bil­lion rou­bles (£235 mil­lion) from the state bud­get, accord­ing to a com­plaint filed today with the Accounts Cham­ber of the Russ­ian Federation.

In a let­ter to Sergei Stepashin, the chair­man of the cham­ber and head of Russia’s anti-cor­rup­tion com­mit­tee, Her­mitage Cap­i­tal, a British-based hedge fund man­ag­er that for­mer­ly was the biggest for­eign port­fo­lio investor in Rus­sia, accus­es senior gov­ern­ment offi­cials of con­spir­ing with a pri­vate crim­i­nal gang to steal the money.

Lead­ing offi­cials in the Moscow Tax Author­i­ty cov­ered up crimes involv­ing bil­lions of rou­bles embez­zled from the state bud­get, Her­mitage alleges in its let­ter, which names indi­vid­u­als, accus­es them of cov­er­ing up the fraud­u­lent activ­i­ty and urges the Accounts Cham­ber to investigate.

Evi­dence uncov­ered by Her­mitage, the com­pa­ny stat­ed in its let­ter to Mr Stepashin, point­ed to “an organ­ised crim­i­nal group com­prised of pri­vate indi­vid­u­als and gov­ern­ment offi­cials”. The frauds “would not have been pos­si­ble with­out the direct involve­ment of offi­cials” from the Moscow Tax Author­i­ty, Her­mitage wrote.

The alleged cov­er-up emerges from a lengthy inves­ti­ga­tion by Her­mitage of a series of com­plex events that began when the hedge fund’s offices in Moscow were raid­ed in May 2007 by offi­cials of the Inte­ri­or Min­istry, under the pre­text of a tax inves­ti­ga­tion. Doc­u­ments and com­pa­ny seals were seized in the raids and offi­cial papers were used to steal three Her­mitage sub­sidiaries, the hedge fund claims.

An elab­o­rate scam ensued in which Vic­tor Markelov, a sawmill employ­ee and con­vict­ed mur­der­er, became the reg­is­tered own­er of the com­pa­nies, which were then found liable for almost $1 bil­lion in a bogus law­suit and court case. The feigned own­er­ship of the “bank­rupt­ed” Her­mitage com­pa­nies was then used to claim the refund of $230 mil­lion in tax­es paid by Her­mitage. With­in two days of the claim the mon­ey was paid into accounts of Uni­ver­sal Sav­ings Bank, an obscure Moscow insti­tu­tion, owned, accord­ing to court doc­u­ments, by Dmit­ry Klyuyev but liq­ui­dat­ed in June 2008.

Since then, Her­mitage says it has found evi­dence that the Trea­sury has lost a fur­ther $240 mil­lion in phoney tax rebates. How­ev­er, com­plaints to a host of insti­tu­tions, includ­ing the office of the Pros­e­cu­tor-Gen­er­al, the Inte­ri­or Min­istry, the Finance Min­is­ter, the Cen­tral Bank and the Fed­er­al Tax Ser­vice failed elic­it a response, and Her­mitage and Bill Brow­der, its chief exec­u­tive, were accused of tax eva­sion. Her­mitage claims that the firm’s Moscow lawyers were harassed, arrest­ed and beat­en up.

In April, the Gen­er­al Pros­e­cu­tor Office con­vict­ed Markelov as the mas­ter­mind behind the frauds and theft of $235 mil­lion from the Russ­ian state bud­get. No co-con­spir­a­tors were found. How­ev­er, Her­mitage says that it has found doc­u­men­tary evi­dence that two senior tax offi­cials lied in sworn state­ments to a court con­cern­ing their approval of the request for tax rebates by the stolen Her­mitage companies.

The frauds against the Russ­ian state were exten­sive and went beyond Her­mitage, the fund man­ag­er alleges. In July, Her­mitage began legal action in New York to secure the release of bank doc­u­ments that it believes will show that com­pa­nies and indi­vid­u­als linked to Renais­sance Cap­i­tal, the invest­ment bank led by Stephen Jen­nings, a New Zealan­der known as the “Kiwi oli­garch”, may have had con­nec­tions to fraudsters.

Doc­u­ments filed in the New York court sug­gest that Her­mitage has found evi­dence that invest­ment vehi­cles con­trolled by Renais­sance Cap­i­tal were used in a near-iden­ti­cal scam to the Her­mitage fraud, using the same courts and the same bogus lit­i­ga­tion, and that the same lawyers and indi­vid­u­als appeared in the court cases.

Renais­sance said that it had no knowl­edge of any tax fraud until informed of it by news organ­i­sa­tions last autumn. “Any sug­ges­tion that Renais­sance was involved in a 2006 tax fraud is whol­ly false,” the bank said.

Arti­cle by Carl Mor­tished World Busi­ness Edi­tor was pub­lished in The Times.

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