In 2009, a lawyer named Sergei Magnitsky died in a Moscow jail after uncovering the biggest known tax fraud in Russian history—a theft of $230 million from the national treasury. The case has touched off a diplomatic row, with the U.S. imposing sanctions on Russian officials accused of having a role in Magnitsky’s death and Moscow retaliating on Dec. 28 by barring Americans from adopting Russian orphans.
Now about that $230 million. 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.
Magnitsky’s associates, though, keep looking for the cash. An investigation spearheaded by his former client, Hermitage Capital Management, a London-based investment fund, has traced $134 million through bank 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.
In the Magnitsky case, Hermitage accuses government officials of stealing from taxpayers, and the Kremlin has made no apparent effort to recover the money. “That’s the most awful thing—it is our money,” says Roman Anin, a reporter at the Moscow newspaper Novaya Gazeta who has worked with Hermitage on its investigation. Russia’s Interior Ministry did not respond to repeated requests for comment.
Hermitage says it has evidence—including some banking records that it provided to Bloomberg Businessweek—suggesting that a total of $1 billion has been looted from the treasury in similar schemes over the past five years. “We knew that in Russia the system is built on this kind of corruption. Now we have documentary proof,” says Hermitage’s chief executive officer, William Browder.
Once one of the biggest champions of investing in Russia, the U.S.-born Browder has been on a campaign against corruption in that country ever since his own run-in with the Russian state. In 2004, Browder began complaining about alleged corruption within Gazprom, the state-controlled oil and gas giant in which Hermitage was a major investor. The next year, at the end of a trip abroad, he was refused reentry to Russia. The authorities told Browder in a letter that the decision was based on a law governing “orderly travel” to and from the country, but provided no further explanation. Browder kept running Hermitage from London. (He later moved the firm there, where it now invests in emerging markets worldwide.)
In 2007, Interior Ministry officers raided Hermitage’s Moscow office, carting away boxes of records and other items. Hermitage asked its legal counsel, the Moscow-based firm Firestone Duncan, to follow up. Magnitsky, an associate at the Russian-American firm, was assigned the case. He determined that someone had created fake documents—which could only have been done using corporate seals and other material taken in the raid—indicating that Hermitage had suffered hundreds of millions in losses, making it eligible for a tax refund. A total of $230 million in refunds was authorized on Christmas Eve 2007 by two local offices of the Tax Ministry, according to the 2009 court ruling against the former sawmill worker convicted in the fraud.
Hermitage told the government of Magnitsky’s conclusion. Soon after, Magnitsky was arrested and jailed. The government said last year that it had filed tax-fraud charges against Browder and against Magnitsky posthumously.
Bank records obtained by Hermitage show the refund money was transferred on Dec. 26, 2007, to accounts at Moscow banks. The records show that at least $97 million went to USB, a bank that appeared to have little other business. According to its Russian Central Bank registration, USB had just $1.5 million in capital. Wire-transfer records obtained by Hermitage show that at least $134 million of the total $230 million was quickly moved abroad.
As the money crossed national borders, it was converted into foreign currency—dollars, usually—which meant it had to pass, if only for a split second, through a correspondent bank in New York. Hermitage’s lawyers successfully petitioned U.S. courts to force the New York banks to turn over records of these wire transfers. Hermitage obtained additional banking records through court complaints it filed in Russia and in Austria, where USB’s main correspondent bank was located. These and other records reviewed by Bloomberg Businessweek show that as the money exited Russia it was split up and transferred to accounts in Moldova, Cyprus, the Baltics, Hong Kong, and elsewhere. The accounts were held by dozens of companies based in such far-flung locales as the British Virgin Islands, New Zealand, Panama, and the Seychelles. The records show that millions landed in accounts held by USB’s former owner, Dmitry Klyuev, or by the ex-husband of Olga Stepanova, who headed one of the tax offices that approved the refund.
A big break in the case came from Alexander Perepilichnyy, a Russian living in Britain who once worked with Vladlen Stepanov, Stepanova’s ex-husband. Browder says Perepilichnyy approached Hermitage in 2010 with records of Swiss bank accounts held by Stepanov. The records show that money from the accounts was used in 2008 to purchase luxury real estate in Dubai for Stepanova and two of her deputies, as well as a seaside villa in Montenegro. Hermitage alerted Swiss authorities, who opened an investigation in March 2011. Last November, Perepelichnyy, 44, collapsed and died outside his home near London. Police say they are still investigating the cause of his death. Bloomberg Businessweek could not locate either Klyuev, Stepanova, or her ex-husband.
In an interview last year with the Moscow newspaper Vedemosti, Klyuev said he had done nothing illegal. Russian news agency Interfax last year published excerpts of a report by government security services saying that Stepanova and one of her deputies had left the country by car and had not returned. Vladlen Stepanov placed an advertisement last year in a Russian newspaper, saying that Swiss authorities had frozen bank accounts containing proceeds from his legal business activities. Stepanov wrote in the ad that he had divorced Olga Stepanova in the 1990s but continued to travel abroad with her.
Hermitage has worked closely with reporters in Eastern Europe and the former Soviet Union who uncovered details on the Magnitsky case while researching other stories. “We united our efforts because this is an international case,” says Anin of Moscow’s Novaya Gazeta. “Every single dollar stolen from the Russian budget was laundered in other countries.” Journalists investigating money laundering in Eastern Europe got files from a prosecutor showing that much of the tax refund had been funneled through Moldova. In a report published in Novaya Gazeta, the journalists said they located a dilapidated, unmarked building in the Moldovan capital of Chisinau that was listed as the headquarters of a company that received $26 million of the stolen money and then transferred it to bank accounts in other countries. The journalists’ investigation was coordinated by the Organized Crime and Corruption Reporting Project, a nonprofit group based in Bucharest. The group turned over records of bank transactions to Hermitage, which made copies available to Bloomberg Businessweek.
Switzerland, Cyprus, Latvia, and Lithuania account for $118 million of the $134 million that has been traced so far, according to the bank records provided by Hermitage. Law enforcement authorities in all four countries say they have opened money-laundering investigations.
Sifting through hundreds of thousands of wire transfers has been a slog for prosecutors. “The money generally is split up among several companies. Some of the money, after being transferred, goes back to the original account and then is transferred somewhere else,” says Donatas Puzinas, a Lithuanian prosecutor. “It’s quite complex analytical work.”
Some of the money could be returned to Russian taxpayers if other governments conclude that it was laundered. Authorities in Lithuania and Switzerland confirmed that they had frozen some bank accounts pending the outcomes of their investigations. There is little evidence that Russia has tried to retrieve the money. Prosecutor Puzinas says Lithuania’s investigation was opened at Hermitage’s request. Authorities in Cyprus, Latvia, and Switzerland declined to say why they launched their probes, but all three acted shortly after Hermitage lodged formal complaints.
Browder says the Kremlin has protected those who carried out the theft because officials, including at least one cabinet minister he declines to name, profited financially from it. “The system will never turn on its own people,” he says.