Moscow’s Long, Corrupt Money Trail

Michael Weiss

March 21, 2014 at 10:06 PM

Vladimir Dzhabarov, the First Deputy Chairman of the International Affairs Committee of Russia’s Federation Council (which is styled as a senate but functions as a claque for the Kremlin), was sanctioned this week by both the European Union and the United States for his role in rubber-stamping Vladimir Putin’s invasion and annexation of the Ukrainian peninsula of Crimea. Yet Dzhabarov’s name is also familiar to anti-corruption campaigners in Russia—not just for his work for the country’s security services but also for his apparent connections to a Moscow-based investment firm allegedly tied to a series of complex frauds perpetrated years ago and subsequently uncovered by whistleblowing attorney Sergei Magnitsky.

Magnitsky, a 36 year-old tax lawyer, was arrested by the very government agents he implicated in the frauds, then murdered in prison in 2008. Four years later, a U.S. law bearing his name was passed by Congress banning and sanctioning Russian officials credibly accused of gross human-rights violations. Dzhabarov was not punished by that law, although his former position with the accused company and his personal connections to sanctioned individuals raised eyebrows in the Russian press.

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Dzhabarov was a member of the FSB’s Department “K,” or its financial counter-intelligence division . From 2006-09, he was also the First Vice President at Renaissance Capital, a Moscow-based investment firm, which the 36 year-old Magnitsky claimed was involved in a six-long-year long conspiracy by an organized crime syndicate and Russian government officials to defraud the nation’s taxpayers. Renaissance Capital denies it had any part in any tax frauds; in 2009, the bank’s deputy chief executive Hans Jochum Horn told the New York Times that any illegal transactions involving Renaissance subsidiary companies took place after those companies had been sold off to new owners.

Magnitsky claimed in 2008 that criminals tied to Renaissance Capital, who were allegedly working in lockstep with tax and law enforcement agents, stole some $470 million by orchestrating illegal and complex tax refund schemes. After bringing his evidence to the attention of federal prosecutors as well as the Russian press, Magnitsky was himself arrested for the crime he exposed by the very assailants he had named, according to then-President Dmitry Medvedev’s own independent investigation. Magnitsky was then tortured and murdered in pretrial detention in Moscow in 2009. Last year, in spite of an intense global furor over his wrongful persecution and death, Magnitsky’s corpse was put on trial in Russia and found guilty — a perversion of justice not seen during the Stalinist Great Terror. None of the men and women Magnitsky named as the true culprits has ever been properly investigated or brought to book. Some have gone on to receive state honors or job promotions. One, who is on the U.S. sanctions list, has even tried to bring costly civil litigation in the United Kingdom.

As part of his sweeping investigation, Magnitsky claimed that in 2001-2002, Igor Sagiryan, the former president of Renaissance Capital, had supposedly commissioned named a fellow named Dmitry Klyuev to arrange a series of tax refunds through the corrupt Russian court system. This seconding of a known mobster to a seemingly legitimate financial institution was confirmed by Yuri Sagaidak, a former KGB general who was at the time the vice president of Renaissance Capital, in Russian court testimony.

The Klyuev Group, which U.S. Senator John McCain in 2012 urged President Obama to use an executive order to sanction wholesale as a “dangerous transnational criminal organization,”concocted its first nine-figure refund scheme in 2006, according to Magnitsky and others. The conspirators allegedly included the heads of Moscow Tax Offices 28 and 25, Olga Stepanova and Elena Khimina, respectively; Klyuev’s own attorney, Andrey Pavlov; and an Interior Ministry official, Major Pavel Karpov, who had previously investigated Klyuev for attempting to steal $1.6 billion worth of shares of a profitable Russian iron ore company. (Klyuev received a two-year suspended sentence in that case.)

Together, the Klyuev Group allegedly stole $107 million from public coffers—and therefore from the Russian people—using dummied-up registrations for companies that formerly belonged to a Renaissance subsidiary, Rengaz Holdings Limited. The Group then allegedly used these companies to file bogus refund claims in Kazan and Moscow. All the money was duly refunded thanks the accomplices in the Moscow tax offices, according to the investigative website Russian Untouchables, then wired to accounts at the Universal Savings Bank, an institution which Klyuev owned and operated. Then Klyuev, Stepanova and Stepanova’s husband Vladlen Stepanov all went on holiday together to Dubai, as plane records obtained and published by Russian Untouchables demonstrate. From there, Klyuev and the Stepanovs traveled to Switzerland, where the husband-and-wife team reportedly kept deposits at Credit Suisse in the names of their offshore shell companies. They all returned to Moscow on the same flight. Karpov, Pavlov and Pavlov’s wife, Yulia Mayorova, meanwhile, took a five-day trip to London. Mayorova’s visa application with the U.K. border agency attested to their joint travel plans.

The Klyuev Group’s next caper was still more ambitious. According to court documents filed stateside by William F. Browder, the owner of Hermitage Capital, another Moscow-based investment fund, the same cabal reportedly met in April-May 2007 in Larnaca, Cyprus where each member was assigned a task in stealing more than double their last haul: $230 million. On June 4, 2007, according to Browder and others, Lt. Col. Artem Kuznetsov, an accomplice of Karpov’s, raided Hermitage Capital’s offices and allegedly stole the documents of three of the fund’s companies and their corporate seals. These limited liability companies—Parfenion, Rilend and Mahaon—were then re-registered in the name of Viktor Markelov, another Russian hood who had been convicted of manslaughter in 2001 and was now a member of the Klyuev Group. From here, the script for the Hermitage Fraud followed almost exactly from the Renaissance one a year earlier, as the Parliamentary Assembly for the Council of Europe has noted. Viktor Markelov allegedly with the legal help of Pavlov, Klyuev’s attorney, used the same Kazan and Moscow courts, and the same fraudulent legal templates, to submit a bogus $230 million refund request at Tax Office 25 and Stepanova’s Tax Office 28. This refund—the largest in Russian history—was processed in a single day on Christmas Eve 2007. The money was apparently once again paid into Klyuev’s Universal Savings Bank, and the gang once again took trips overseas. Karpov, Pavlov, and Pavlov’s wife vacationed in Istanbul on New Year’s Day 2008. Days later, the Pavlovs flew to Dubai where they met Klyuev, Stepanova and Stepanov. The husband-and-wife accountancy team reportedly drew on funds from their Swiss bank account to buy $6 million worth of luxury real estate in artificial archipelago Palm Jumeirah. And please keep in mind that, according to Russian Untouchables, the Stepanovs’ combined declared income in 2008 was just under $40,000.

Everyone else in Klyuev’s operation was also reportedly well remunerated. Lt. Col. Kuznetsov, whose “official” annual salary was about $10,000, is named by Russian Untouchables as having $3 million in assets, many of them registered in the name of his mother and father.

In early November 2008, the Russian edition of Businessweek, drawing on Magnitsky’s meticulously compiled investigation, connected the dots, showing how the Klyuev Group had allegedly honed their trade in first carrying off the Renaissance Capital fraud in 2006. Days after that article appeared, the Stepanovs left Russia for Dubai (presumably to one of their new condos), as their travel records show. Then, on November 20, 2008, Igor Sagiryan, the president of Renaissance Capital who had first hired Klyuev seven years earlier, and Vladimir Dzhabarov, his fellow Renaissance executive—and now a U.S.-sanctioned Russian senator—hopped a flight to Dubai together. Three days later, on November 23, 2008, the Stepanovs and Sagiryan came back to Moscow on the same plane. The following day, Magnitsky was arrested at the behest of Lt. Col. Kuznetsov.

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In an article published in Russian Forbes in 2012, Igor Sagiryan denied that by traveling to Dubai with Dzhabarov, another Renaissance Capital executive, mere days after the exposure of the Hermitage fraud, allegedly by a group headed by one of Sagiyran’s own employees, that he was in any way involved in any wrongdoing. It also apparently mattered not that Stepanovs were already in Dubai, and that Sagiryan flew back to Moscow on the same flight as they:

Digging up his schedule for 2008, Sagiryan told Forbes that he really was on that flight, but he is not acquainted with Stepanova and her husband. Sagiryan said he flew to Dubai together with his friend Dzhabarov, who at that time was the first vice president of Renaissance Capital, to take a vacation and also to inspect how his restaurant Ping Pong was doing, which had just opened at that time (a restaurant with such a name exists today in The Dubai Mall). “I am accused of crimes only on the basis of the fact that I happened to be on the same plane as these people,” he stated.

Forbes was told at Renaissance Capital that the company did not send either Sagiryan or Dzhabarov on a “business trip to Dubai as representatives of the company on those dates.”

At least Sagiryan and Dzhabarov can now seek R&R in sun-bathed Crimea—all without leaving Russian Federation territory.

Once its deeds and personnel became famous, thanks to independent press investigations, the Klyuev Group tried to blame low-level subordinates for the entire $230 million heist. First it named Viktor Markelov, the convicted killer who had also helped with kidnapping and extortion in a prior Klyuev-headed criminal plot, as the mastermind behind the whole conspiracy. (Markelov was sentenced to five years in 2009.) Then it suggested a security guard who had actually died two months before the crime had taken place was the man responsible. The Russian Interior Ministry played its part in the attendant coverup dutifully, alleging that Klyuev had actually sold Universal Savings Bank before it had taken any deposits from the tax theft. The buyer was evidently a clothing salesman named Semyon Korobeinikov—except that (whoops), he too had died in 2008 after taking a nasty tumble off a balcony.

The Interior Ministry exonerated all the tax officials in Stepanova’s office, claiming they had been “tricked” by the real fraudsters into issuing a $230 million in a single day. The ministry followed this corker up by suggesting that all of Universal Savings Bank’s records were now unobtainable Why? They’d been blown up in a truck accident in central Mosco—electronic file-keeping clearly not having occurred to the good tellers at USB.

Despite this, Magnitsky kept giving evidence, bravery that landed him first in Matrosskaya Tishina, then in Butyrka prison. But he ran out of time. He suffered from gallstones and acute pancreatitis (which went untreated despite numerous documented complaints) and was subjected to subhuman incarceration conditions (pane-less windows in the dead of winter, overflowing sewage from broken toilets, etc.). Only when his health declined so severely, on November 16, 2009, was he transferred back to Matrosskaya Tishina in an ambulance, then thrown into an isolation cell, handcuffed to a radiator and beaten with truncheons until he was dead. The official cause of death was given as “heart failure,”a finding which a host of governmental and non-governmental watchdogs, in Russia and abroad, have debunked.

A report published by the Parliamentary Assembly at the Council of Europe in November 2013 remarked on the uncanny parallels between the Renaissance and Hermitage cases by way of refuting the absurd claim that Magnitsky himself had stolen the $230 million.

Karpov, Kuznetsov, Stepanova and Khimina were all sanctioned under the U.S. Magnitsky Act in April 2013. In September that year, the U.S. Department of Justice, via New York’s Southern District Court, issued an order to forfeiture of properties purchased in New York using the purloined tax money from the alleged Hermitage theft. The order corroborated Magnitsky’s evidence and the timeline of the Klyuev Group’s activities as described above.

Last year, a now-retired Karpov attempted to sue Browder in a London High Court for what Karpov claimed was a systematic campaign of defamation. To wage this suit, Karpov retained the services of PHA Media, an expensive British public relations firm headed by the former editor of the now-shuttered News of the World tabloid, as well as Olswang, a white-shoe law firm specializing in libel. Karpov alleged that he was honor-bound to protect his “substantial reputation in the jurisdiction of England and Wales.” And this is how my friend Nick Cohen, a columnist at the Observer, described Karpov’s characterization of his non-role in this enormous tragedy: “He had nothing to do with Magnitsky’s death, nor was he involved in prosecuting him. As for his conspicuous consumption, he bought his cars and properties before the Hermitage fraud.”

As it happens, not long before this case was brought to trial, I asked both PHA Media and Olswang via email whether or not their client was paying what I could only imagine were hefty retainers for only the finest in British media and legal representation, or whether this lowly and wrongfully accused ex-cop from a foreign land had somehow managed to obtain these services pro bono. Neither the flacks nor the lawyers would confirm their fee arrangements with Karpov.

The High Court, however, was unimpressed. In a landmark ruling in October 2013, Justice Simon threw out the entire case, arguing that Karpov’s “connection with this country is exiguous and therefore there is a degree of artificiality about his seeking to protect his reputation in this country.”

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Moscow’s Long, Corrupt Money Trail