Shady Business

09.16.13

Fraud and the City: Russia’s Manhattan Money Laundering

Pussy Riot goes to prison while a gang accused of murder and mugging in Mother Russia gets luxury apartments in lower Manhattan. One federal prosecutor is calling Putin out.

Even as the United States and Russia were nearing an agreement over Syria’s chemical weapons, a federal prosecutor was filing papers that effectively accuse the Putin regime of tolerating, if not abetting, an organized gang of government officials and criminals who looted $250 million from the Russian treasury.

The immediate intent of the official complaint filed by U.S. Attorney Preet Bharara on September 10 was to seize several high-end Manhattan properties. The two multimillion-dollar commercial spaces as well as four luxury apartments—these across from where George Washington was inaugurated as our first president—were allegedly purchased to launder proceeds from the Russian gang’s diabolically brilliant scheme involving corporate identity theft and a fraudulent tax refund.

The prosecutor’s effort can be seen as at least a small measure of justice for the 37-year-old Moscow lawyer who died in horrific circumstances after uncovering the massive fraud. The lawyer, Sergei Magnitsky, reported the theft imagining that his government would be sure to act when the victim was the Russian people themselves, even if the crooks allegedly included senor law-enforcement and tax officials.

Instead, Russian authorities put those same law enforcement officials in charge of the investigation. Magnitsky was arrested in November 2008 by some of the very men he had accused. He resolutely resisted all efforts to make him withdraw his allegations against them and their alleged co-conspirators. He had been held without legal proceedings for just short of a year when he died in an isolation cell from causes that were subsequently listed as untreated pancreatitis, rupture of the abdominal membrane, and toxic shock.

“He was beaten by eight guards with rubber batons on the last day of his life,” the main prosecutor’s complaint says. “And the ambulance crew that was called to treat him as he was dying was deliberately kept outside of his cell for one hour and 18 minutes until he was dead.”

Magnitsky’s death was detailed in a report by the Russian Human Rights Council, which declared the arrest illegal in the first place. It was noted that he had lacerations on his wrists from handcuffs he was wearing at the time of his death.

But under what might be called the Putin rules, the only legal action was taken against the dead guy himself. The Russian General Prosecutor’s office put Magnitsky on trial almost two years after his death for the very crime he had reported.

“Magnitsky was charged with tax evasion in the first known posthumous prosecution in Russian history,” the Manhattan prosecutor’s complaint reports.

‘He was beaten by eight guards with rubber batons on the last day of his life.’

Magnitsky was, of course, convicted. The truth threatened to emerge when it became known that the stolen $230 million had gone into a bank that was said to be owned by the alleged leader of the gang. Officials then issued a statement that the gang could only have found reassuring.

“The Interior Ministry stated publically that it could not trace the fraudulent tax refund money because … the relevant documents [from the bank] were burned in a truck crash,” the Manhattan prosecutor notes.

The ministry said that the bank itself could not provide any insight because it had supposedly passed into the ownership of a middle-aged clothing salesman just before it received the looted millions. The salesman had subsequently fallen off a balcony to his death. The ministry named a security guard as a supposed ringleader of the scheme, but it turned out he had died two months before the money was even stolen.

***

There were enough facts uncovered by Magnitsky and others for the Manhattan prosecutor to piece together an account of the actual plot from its inception.

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This November 16, 2012, file photo shows a tombstone on the grave of lawyer Sergei Magnitsky, who died in jail, at a cemetery in Moscow. (Misha Japaridze/AP)

“The $230 Million Fraud Scheme began on or about April 28, 2007, when key members of the organization flew to Larnaca, Cyprus to plan the crime,” the complaint says.

According to the complaint, the man it describes as the true “mastermind of the organization,” Dmitry Klyeuv, arrived on his private jet with Lt. Col. Artem Kuznetsov of the Interior Ministry. They are said to have been joined by Maj. Pavel Karpov of the Interior Ministry, who arrived on a commercial flight with two lawyers. Klyeuv then allegedly met there with two Moscow tax officials. It should be noted that none of those named in the complaint have been convicted, or even charged in Russia. None were available for comment and none have responded to the complaint in Manhattan federal court.

The complaint goes on to say that on June 4, 2007, Kuznetsov led two dozen officers in a raid on the Moscow offices of Hermitage Capital Management. The firm is run by an American-born British citizen named Bill Browder and was the most profitable such foreign financial enterprise in Russia.

The raiders carted away computers as well as corporate seals, charters, registration certificates, and other documents relating to the founding of three of the firm’s companies. Hermitage asked for the return of the materials but was told they were in the custody Karpov.

Hermitage did not imagine that the seals and documents were being used to fraudulently reregister the ownership of its three companies and transfer ownership to a Russian firm owned by a convicted killer who had worked in a sawmill.

The seals and documents were put to further use making sham contracts with sham firms. The sham firms then filed sham lawsuits saying that Hermitage had failed to meet its supposed obligations. The two lawyers who are said to have flown to Cyprus at the plot’s inception now presented themselves as Hermitage’s lawyers.

“The lawyers purporting to represent the Hermitage Companies appeared in the sham lawsuits and, instead of mounting any actual defense of the claims, acknowledged the validity of the forged contracts and conceded full liability,” the complaint says.

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Alexander Zemlianichenko/AP

The complaint further explains, “These sham lawsuits were not truly contested proceedings, but instead were orchestrated for the purpose of fraudulently obtaining large money judgments against the Hermitage Companies on the basis of the forged contracts.”

As a result, the courts awarded judgments against the Hermitage companies totaling some $973 million. The gang—posing as Hermitage representatives—used the judgments to apply for a refund of the actual taxes that the actual Hermitage had paid on its actual profits. The applications for a total refund of $230 million were approved within a single business day by the offices of the two tax officials who had also flown to Cyprus.

Two months before, a court bailiff had notified the real Hermitage about the lawsuits. Hermitage had retained Magnitsky and other attorneys to investigate. Magnitsky soon discovered the fraudulent ownership switches and decided that Karpov and Kuznetsov of the Interior Ministry were involved. 

Hermitage filed six criminal complaints regarding the corporate identity theft in early December—more than two weeks before the refunds were awarded—that named the two officers. Four of the complaints were either rejected or ignored. One was assigned to Karpov to investigate.

The sixth criminal complaint was not acted upon until February 2008, when the Investigative Committee of the Prosecutor’s office opened a probe of the corporate identity theft. Magnitsky testified, naming Karpov, Kuznetsov, and other officials. Kuznetsov is said to have responded by arranging for a criminal complaint to be lodged against Magnitsky.

Magnitsky kept investigating and discovered the $230 million theft. Hermitage filed another criminal complaint—this related to the refund. Magnitsky again testified, with a result right out of Kafka.

“The Interior Ministry appointed Kuznetsov and his subordinates to investigate the $230 million fraud scheme, although they had been named by Magnitsky as key perpetrators,” the complaint says. “Kuznetsov’s team arrested Magnitsky.”

The authorities also went after the head of the actual Hermitage, Browder, who had already been barred from the country. He was convicted in absentia on tax charges and sentenced to nine years.

Russia issued an international warrant for Browder, but Interpol refused to accept it and ordered all references to him deleted from its database. Britain also refused to deliver Browder.

“We hope that Great Britain heeds the international community’s call and hands us over the people who have violated the law,” Russian Deputy Prosecutor General Aleksandr Zvyagintsev said with a straight face at a press conference.

***

For his part, Browder dedicated himself to securing whatever justice he could for the murdered lawyer.

“They killed a man who worked for me, tortured him to death,” he tells The Daily Beast.

Browder describes Magnitsky as one of Russia’s most brilliant legal minds. But neither Magnitsky nor Browder himself imagined the extent of the corruption in the Putin regime. They figured that surely something would be done about stealing from Mother Russia herself, that, in this instance anyway, the good guys would move against the bad guys

“What we didn’t anticipate was that there would be no good guys,” Browder says.

And the bad guys seemed to be all but untouchable.

“There’s very little to be done I would describe as justice,” he says.

He reasoned that they did have one vulnerability.

“Taking some of that money away,” Browder says. “If they’re willing to kill for money this might hit them where it hurts.”

He went to Washington and repeatedly told a story of corruption and murder such as he himself might have once found beyond imagining. The eventual result was The Sergei Magnitsky Rule of Law Accountability Act, which allows our feds to freeze assets of not just those linked to the lawyer’s murder, but of anyone who is accused by the U.S. of human rights violations. The feds can also deny them entry visas.

The Putin regime was incensed and responded by instituting what it called a “Guantánamo list” barring entry to Russia by Americans accused of human rights abuses. The Russian government also moved to restrict the adoption of Russian babies by Americans.

Browder had struck up a friendship with a former chief of rackets investigations at the Manhattan District Attorney’s office. The friend referred Browder to his former colleagues, who decided the case would be best handled by the feds.

One result was the complaint filed on September 10. Browder describes these targeted Manhattan properties as “just the tip of a huge iceberg.” He figures that this one gang scored more than $800 million via fraudulent tax refunds and other crimes. He says there are “billions and billions” stolen by Russian organized crime and sunk into real estate in New York, as well as in London, Miami, the South of France, Abu Dhabi, and elsewhere. He strives to ensure that the seizures have only just begun.

“All that blood money is at risk,” he says.

The four Manhattan apartments are in a luxury building at 20 Pine Street, directly across from Federal Hall National Memorial, where Washington took the oath as America’s first president. Our present president was in the midst of negotiating with Russia’s president over Syria’s chemical weapons when the Manhattan federal prosecutor ignored politics and went after these properties under what is known as Sergei’s Law.

Russia’s president seems to fancy himself a great statesman. But under Putin rules, Pussy Riot goes to prison while a gang accused of murder and mugging Mother Russia gets apartments in a lower Manhattan building with a concierge, a health club, a roof deck, and a pool.

No wonder Putin gets along with Assad.

Browder pledges to keep after whatever assets he can identify.

“The only way to get justice is to patient and persistent and tenacious,” Browder says.