by Nomad
Part One
Part Two
Part Two
In this final installment of the series, we examine how foreign investor Browder was about to find out that Russia could be a very dangerous place to do business. In many ways, it was, for opportunity hunters of the West, to be the end of the fantasy of Russian reform.
In this final installment of the series, we examine how foreign investor Browder was about to find out that Russia could be a very dangerous place to do business. In many ways, it was, for opportunity hunters of the West, to be the end of the fantasy of Russian reform.
By November 2005, Russian official had just about had enough of William Browder's crusade to clean up corruption. Officials in Moscow decided to demonstrate to this upstart from the West, this shareholder activist, who held all of the cards.
End Game
Returning from a business trip, Browder was denied re-entry at the Moscow airport. He suddenly found himself in the ridiculous position of having to do business in Russia as an exile. It was the beginning of the end with his love affair with Russia and his admiration for Putin.
After a decade of successful investments in Russia, Browder was blacklisted by the government and was officially listed as a "threat to national security." The reason for this, The Economist wrote, was actually because Hermitage had interfered with the flow of cash to "corrupt bureaucrats and their businessmen accomplices".
Browder exiled himself to London and was forced to pay $230 million tax bill.
In June 2007, the endgame began. As the head of the law firm representing Hermitage, Jamison Firestone later told reporters, dozens of police officers "swooped down on the Moscow offices of Hermitage and its law firm.
Hermitage offices were raided and removed documents and company files. When one employee protested that the actions were illegal, he was assaulted by the officers and ended up in the hospital for a couple of weeks. It wasn't just a show of force designed to intimidate. The Russian tax officials charged Browder in absentia with failing to pay a debt, which he claims he knew nothing about.
This kind of thing happens much more often than you'd think. The Moscow Times reported earlier this year:
As activist Alexei Navalny and others have discovered to their dismay, allegations of fraud, tax evasion and similar economic crimes have become the Kremlin's favored means of controlling the nation. They are also amongst the most common tools for "raiding," the theft of assets through spurious legal claims.
Browder sent his attorney Jamieson Firestone and a Russian accountant and auditor, Sergei Magnitsky to investigate what exactly was being done in his name.
According to what the pair quickly learned, subsidiaries of Hermitage were seized on bogus charges allegedly with help of corrupt law enforcement and judges. The corporate registration documents of three Hermitage subsidiaries were now in private hands, as the investigators learned.
Furthermore, these hijacked companies were, according to court documents, were used in a $230 million tax fraud scheme- the biggest known tax fraud in Russian history.
According to Maria Shao, who wrote a piece on Browder for Stanford Graduate School of Business. criminals used the documents to steal ownership of three companies from Hermitage and to arrange sham court judgments against them.
The Death of the Investigating Accountant
Now comes the twist.
In November 2008 Magnitsky was arrested and charged with the very tax fraud he himself had discovered. On November 16, 2009, after eleven months in pretrial detention, the 37-year-old Magnitsky died.
The official cause of Magnitsky's death was ruled as pancreatitis. Human rights groups — including the Kremlin's human rights commission — concluded he had been beaten and denied medical care. According to the Kremlin’s human rights council, Magnitsky was beaten to death in prison. (Trauma is one possible causes of pancreatitis.) Putin himself claimed that Magnitsky died of heart failure.
However the accountant died, Putin and many other government officials can rest a little easier knowing a dead man can tell no tales.
The case became a cause célèbre. A year later, on the anniversary of Magnitsky's death, the U.S. Senate, the British House of Commons, the Canadian and German Parliaments, and other legislative bodies hosted public meetings.
British Prime Minister David Cameron has officially recognized Browder’s complaint about Magnitsky. The European Parliament’s Foreign Affairs Committee voted 50–0 for the EU to blacklist 60 Russian functionaries who were involved in the torture and death of Magnitsky and the fraud he uncovered.
Two years later, Congress enacted the 2012 Magnitsky Act, which barred Russian human rights abusers from entering the U.S. In a move some saw as petulance and a misreading of the seriousness of the allegations against the Russian authorities, President Putin's response was to ban all American citizens from of Russian orphans.
(That didn't stop some Republicans from comparing Vladimir Putin favorably against their own president.)
The Dead on Trial
Early last year, Russian officials were still proceeding with the charges against Browder on tax fraud charges.
In addition, Magnitsky was also charged in the case, making it - in a rather surreal turn- the first time in Russian history that a trial was brought against a dead defendant, a man who many believe died in circumstances unquestionably questionable. It was also the moment in Russian history when life under Putin turned distinctly Kafkaesque.
Firestone, the man who with Magnitsky that uncovered the tax fraud in the first place, told reporters
"The reason you have a trial is to have somebody … a defendant gets the chance to defend themselves. And dead people can’t defend themselves, which is why we don’t try dead people in the civilized world."
Paul Stephan, a University of Virginia law professor who is an expert on Soviet and post-Soviet legal systems. told NPR:
It's hard to think that this is not simply a deeply cynical way of doubling down on a very dubious claim — namely that Magnitsky had anything to do with tax evasion."
Amnesty International described the trial as “a whole new chapter in Russia’s worsening human rights record” and a “sinister attempt to deflect attention from those who committed the crimes he Magnitsky exposed.”
The Exile
In March of 2013, the authorities made it clear they were not finished. They announced that Hermitage would be facing other serious charges involving the companies acquisition of Gazprom shares worth $70 million. (Council of Europe's Committee on Legal Affairs and Human Rights looked over those charges and found nothing.)
Rendering a speedy but entirely predictable verdict, on July 11, 2013, a district criminal court in Moscow found Browder guilty in absentia on charges of tax evasion and was sentenced to nine years. Magnitsky too was found guilty - in absentia- but received no prison time. (Therefore, his family can feel relieved that officials have not decided to exhume his corpse.)
In a statement about the verdict, Browder said that the court's ruling
"will go down in history as one of the most shameful moments for Russia since the days of Joseph Stalin".
He went on to say:
"The desperation behind this move shows the lengths that Putin is ready to go and to retaliate against anyone who expose the stealing and corruption he presides over."
Interpol rejected a request by Russia's Interior Ministry, Vladimir Kolokoltsev, to put Browder on its search list and locate and arrest him. The UK, where Browder resides, has no plans to extradite Browder to serve his sentence.
The Shell Game
The hunt for the missing millions continued after Magnitsky's death. Hermitage led the ongoing investigation to track what became of the $134 million. The investigation learned that the sum passed through various accounts and shell companies in at least 17 countries.
Banking records obtained by Hermitage and reviewed by Bloomberg Businessweek show that millions wound up in offshore accounts and real estate owned by Russian officials, their relatives, and the former owner of a Russian bank. Authorities in four of these countries confirm that they have opened money-laundering investigations.
Eventually, the trail of the missing money went cold but on the flimsiest of pretexts. Businessweek reports:
Russian authorities said it couldn’t be found because essential records were destroyed in a truck crash. A sawmill worker and a convicted burglar pleaded guilty to masterminding the heist, which involved filing bogus tax-refund claims. Both got five-year sentences.
Browder, the man who was once a supporter of the New Russia and of its leader, recently told CBS:
“The Russian regime is a criminal regime. We’re dealing with a nuclear country run by a bunch of Mafia crooks. And we have to know that.”
He told Bloomberg:
“We knew that in Russia the system is built on this kind of corruption. Now we have documentary proof."
The Threat
Today Brodwer is a man who must look over his shoulder. In the latest incident in the sordid saga, the UK Guardian reported that Browder has good evidence that, after failing three times to obtain Interpol's arrest warrant, Russian government has "hatched a sensational plot to kidnap him" with the help of "criminal syndicates working with the Kremlin."
According to court document involving the whereabouts of money from the tax fraud, Browder could be the subject of a rendition order by the Kremlin. A witness statement by Browder reads:
“A representative of the US attorney’s office reached out to me and explained that the office had received confidential information that unknown persons were soliciting contributions to a fund intended to hire private investigators to find me and return me to Russia."
According to Browder, the US officials showed him evidence of "a specific, credible threat that the Russian criminal enterprise – likely aided by the Russian government and/or secret police – were planning to kidnap and organize a rendition operation against me abroad.”
Despite the damage the affair to Russia's image, the Browder affair has done considerable damage to any investor who thinks that Russia is still a land of opportunity.
Under the circumstances, doing business in Russia is a very dangerous game.