Russia’s Crime of the Century

If there remains any pretense that justice and rule of law exist in Moscow today, that notion should now be counted as pure fantasy. The case of Sergei Magnitsky — a senior partner at my law firm who was imprisoned, tortured, and murdered after his efforts to shed light on a massive governmental fraud by Interior Ministry officials stealing subsidiaries of my client’s company, the Hermitage Fund, and the $230 million of taxes they had paid — has illuminated the cruelty and criminality of Russian legal enforcement. And new evidence released last week on YouTube as part of the broad campaign seeking justice for Sergei, goes even further — exposing the blatant theft, impunity, and ill-gotten gains of senior Russian tax officials who were complicit in the fraud and subsequent murder of my colleague.

Sergei Magnitsky

The very bureaucrats — government tax officials on modest salaries in Moscow Tax Office 28 — exposed by Sergei three years ago of perpetrating the massive fraud stashed millions of dollars in overseas bank accounts, created offshore companies, and purchased luxury villas in Dubai, Montenegro, and Moscow. Worse still, the Kremlin and Russian President Dmitry Medvedev, in particular, have refused — out of embarrassment, inability, culpability, or incompetence — to review and prosecute what is now overwhelming evidence of this clear crime.

When I opened my law firm, Firestone Duncan, in Moscow in 1993, I was aware of the dangers of doing business in Russia. The stories about “mafia” groups of tracksuited thugs extorting businesses were well known to me. What I never expected was that the Russian mafia would merge with the government; its members are now the same officials who are supposed to be protecting the public.

The story begins in July 2007, when Russian Interior Ministry officers Artem Kuznetsov and Pavel Karpov raided my law offices in Moscow and seized without a warrant two vanloads of documents and corporate seals (imprints that go along with the signature on any signed document in Russia) from companies belonging to my firm’s clients, including the Hermitage Fund, which had once been Russia’s largest foreign investor. At the time, one of my junior lawyers protested that their search was illegal. He was taken into a conference room by the officers and beaten so severely that he was hospitalized for three weeks.

Pavel Karpov and Artem Kuznetsov

A few months later, we learned that the materials seized by the police had been handed over to a criminal group that used them to fraudulently re-register the companies under the name of a frontman, the convicted murderer, Viktor Markelov. Markelov had been recently released from pretrial detention on an unrelated kidnapping and extortion charge involving the same officers, Kuznetsov and Karpov. The seized documents were also used to create $1 billion of fake backdated contracts. Markelov and two other ex-convicts were made directors of the re-registered companies and, through their lawyers, pleaded guilty in several regional courts to $1 billion in these fake liabilities. We learned this from a bailiff in the St. Petersburg court who called our office looking for hundreds of millions of dollars of assets to satisfy those claims.

At this point, Sergei got involved. He started investigating the scheme and, after a few weeks, pieced the story together through court records, registration files, and bank statements. He prepared a number of very detailed criminal complaints against the police officers and perpetrators involved in the massive fraud. These complaints were filed with the most senior Russian law enforcement authorities on Dec. 3, 2007. The police did nothing.

Three weeks later, on Christmas Eve 2007, the stolen firms under Markelov’s name applied for a refund of $230 million in taxes that the Hermitage Fund companies had paid one year earlier. It was the largest tax refund in Russian history — and it was granted in one day by Olga Stepanova, head of Moscow’s Tax Office 28, and her colleague in Moscow Tax Office 25, Elena Khimina. The money was then wired to a small Russian bank, Universal Savings Bank, owned by another convicted criminal, Dmitry Kluyev. The money then left Russia through the Austria-based Raiffeisen bank and was later funneled through Citibank and JPMorgan Chase.

We were shocked by the theft of the Hermitage companies and the fake court judgments, but when we discovered the $230 million refund, we knew something was spectacularly wrong. It wasn’t just a crime against Hermitage — it was also a massive crime against the Russian state. Something had to be done. Sergei, in particular, was adamant that criminal complaints be filed with every single law enforcement agency in Russia. His logic: Even if there were a few bad apples in the system, surely once the Russian leadership realized that hundreds of millions of dollars had been stolen from state coffers, then the “big guns” would be rolled out to arrest the corrupt officials and criminals involved. Sergei volunteered to give a sworn testimony to the Russian State Investigative Committee about the collaboration of Russian police and tax officials with organized criminals in stealing millions from taxpayers.

Sergei testified against officers Kuznetsov and Karpov on Oct. 7, 2008. The next month, on Nov. 24, he was arrested by three subordinates of Kuznetsov under a case opened by Karpov. He was thrown behind bars at the Interior Ministry’s detention center on Petrovka Street in Moscow, where they tortured him to force him to withdraw his testimony and sign a false confession saying he was the one who stole the $230 million.

The case against Sergei was assigned to Maj. Oleg Silchenko of the Interior Ministry. Silchenko transferred Sergei between detention centers in secrecy; refused to allow Sergei contact with his wife, mother, and children; denied all his legal requests; and put emotional and psychological pressure on him to retract his testimony against officers Kuznetsov and Karpov. Sergei, however, continued while in detention to insist on his testimony while in detention — evidence that exposed the partnership between government officials and organized crime. But Silchenko did not investigate Sergei’s evidence. Silchenko was working together with Kuznetsov — who had been assigned to this investigation by senior Russian Interior Ministry brass — to cover up the theft of the $230 million

Oleg Silchenko

The more Sergei insisted on his testimony in sworn statements and in court, the more pressure Silchenko applied to him. He was put in a cell with eight inmates and only four beds so the detainees had to sleep in shifts. In December 2008, he was put in a cell with no heat and no windowpanes — he nearly froze to death. Later, he was moved to another cell with no toilet, just a hole in the floor where the sewage overflowed.

After six months of this treatment, Sergei — who went into detention a healthy 36-year-old man — had lost 40 pounds. He developed pancreatitis and gallstones and needed medical attention. In July 2009, Sergei was moved to Butyrka, a maximum-security facility that had no medical facilities. At Butyrka, Silchenko repeatedly denied medical care to Sergei, hoping that it would break him. Sergei remained defiant and continued to write complaints about his innocence and the pressure applied to him. But nearly one year after his arrest, on the night of Nov. 16, 2009, he became gravely ill. He was transferred to the intensive-care wing of Matrosskaya Tishina detention center, but instead of receiving medical attention, he was put in a straitjacket, chained to a bed, and left by himself in an isolation cell for one hour and 18 minutes while doctors waited right outside the door until they were certain he was dead.

On the eve of the one-year anniversary of Sergei’s death, the Interior Ministry called a news conference to announce the findings of Silchenko’s investigation. The entire highly sophisticated $230 million tax fraud conspiracy was pinned on two minor criminal participants, Markelov and one other frontman who turned themselves in and “confessed” to the crime, and who in turn named three dead men as their accomplices. The two confessors were tried in secret hearings and were given the minimum sentence of five years. They were not asked about the stolen money or their connections with officers Kuznetsov and Karpov.

In the news conference, the Interior Ministry announced that Sergei had masterminded the fraud. He was accused of organizing the very conspiracy to which he had alerted the government. The government’s sole evidence of Sergei’s guilt was the hearsay of the two convicts who “confessed” to their role in the crime and who Sergei had asked authorities to arrest in early December of 2007 before any money was stolen.

Furthermore, Interior Ministry officials stated that according to their findings, the tax officials were innocent and were themselves victims of the crime. They had simply been tricked into refunding the money. They went on to say that the bank that received the stolen funds was owned by another dead person. To cap it all they announced that the stolen government money could not be found — a truck transporting the records had apparently crashed and exploded. Karpov, Kuznetsov, and Silchenko were credited with “solving” the case of the stolen $230 million. The Russian government promoted and decorated them with the honor of “Russia’s Best Investigators.” And the criminals were now safe to enjoy the proceeds of their crime. Enjoy them they did.

But Sergei’s friends — outraged by the Russian state’s continued efforts to vilify the whistle-blower while protecting the corrupt — continued to pursue an independent investigation in hopes of bringing to justice those responsible for the tax fraud and Sergei’s untimely death. Through the work of nearly 100 sources inside and outside Russia, we now have a much clearer picture of the economics behind this crime. Three weeks after approving the fraudulent refund, the entire top management of Moscow Tax Office 28 began buying multimillion dollar properties at the Kempinski Palm Jumeirah — a luxury hotel and housing complex on an artificial palm-shaped island off the coast of Dubai. The Kempinski properties were paid for by three tax officials using the same bank account at Credit Suisse. The head of Moscow Tax Office 28 also bought a $20 million avant-garde house in Moscow’s most exclusive neighborhood, Rublevskoe Shosse, designed by Moscow’s most famous architect, Alexei Kozyr, and a $700,000 beach house in the seaside town of Bar in Montenegro.

The scale of the crime and the coverup is truly astounding. It directly involves the Russian deputy interior minister, the deputy general prosecutor, the head of the economic counterespionage unit of the secret police, the heads of Moscow Tax Offices 25 and 28, and a dozen judges, as well as hundreds of functionaries throughout the system. But the Kremlin has shown little willingness to prosecute this case. Instead, Medvedev has tried to deflect attention away from it and portray Sergei’s case as an important investigation of Russian prison conditions after a possible death in detention due to “negligence.”

As this farce plays out, Medevedev continues to make reassuring statements that he is serious about fighting corruption, that the rule of law is sound, and that international investors have nothing to fear in Russia. It is clear that the Kremlin is prepared to let things lie. But around the world, governments, activists, and independent civilians are speaking up. In 2010, Sergei was posthumously awarded Transparency International’s Integrity Award. In Russia, too, there is overwhelming public support to launch an official independent investigation into his case. Russia’s leading human rights activist, Lyudmila Alexeyeva, head of the Moscow Helsinki Group, filed a criminal complaint in March of 2010 against officers Silchenko, Kuznetsov, and Karpov, as well as their subordinates, for Sergei’s torture and murder. Valery Borschev, head of the Moscow Public Oversight Commission, a Moscow NGO that focuses on prisoners’ rights, said that Sergei was kept in torturous conditions and killed to cover up the crime he exposed.

Western governments have begun taking steps to contain this corruption inside Russia. The European Parliament recently passed a resolution calling on EU member states to impose visa sanctions and asset freezes on the Russian officials responsible for the tax fraud, Sergei’s death, and the coverup. And on April 15, U.S. Rep. James McGovern reintroduced the Justice for Sergei Magnitsky Act to the House of Representatives to effectively do the same.

It is imperative for both Russia and the United States that this bill be passed. There will be no progress in Sergei’s case — or for Russian justice as a whole — unless the West forcefully sanctions the corruption and cronyism gripping Russia today. Measures such as the EU resolution and the Justice for Sergei Magnitsky Act would put effective “soft” pressure on Russian officials to clean their own house. This would not weaken U.S.-Russia relations but redefine and strengthen them.

The U.S. government has a duty to its people to keep Russian lawlessness from reaching its shores — or those of friendly nations, such as the United Arab Emirates. Russia and the United States are bound by numerous treaties, the success of which presupposes a level of honesty and integrity of the officials and legal systems of both countries. Sergei’s case — more precisely, Medvedev’s unwillingness, or perhaps inability, to bring the perpetrators of this massive government conspiracy to justice — demonstrates the fallacy of the supposition. It is dangerous to U.S. interests to be forced to rely on and to grant comity to information, decisions, and requests made by foreign officials who are abusing the implicit trust that these treaties rely upon.

This case has the potential to be Russia’s Watergate: The evidence unearthed by Sergei would expose the graft and cronyism that is corroding Russia’s core. Acting upon it would not only cleanse the system of a score of corrupt officials but would set a new standard of expected behavior and send a message to Russians that the president would support them if they fight corruption. But left ignored, Medvedev’s war on corruption and any pretense of rule of law in Russia are but a sham.