Ir­ish banks en­tan­gled in au­da­cious Rus­sian tax fraud

Pro­ceeds of a crime in­volv­ing a €230m em­bez­zle­ment have trav­elled through Ir­ish ac­counts

The Irish Times - Business - - BUSINESS AGENDA - Colm Keena Le­gal Af­fairs Ed­i­tor PHO­TO­GRAPH: ALEXAN­DER NEMENOV/ GETTY IM­AGES

It is one of the most ex­tra­or­di­nary crimes of Putin-era Rus­sia, has seen the deaths of some of those who have tried to in­quire into it, and has led to new laws in the US and else­where that have added to geopo­lit­i­cal ten­sions. And now some of the stolen pro­ceeds in­volved ap­pear to have trav­elled through bank ac­counts with Bank of Ire­land and AIB.

The plot­ting for the au­da­cious $230 mil­lion Rus­sian tax re­fund fraud, be­gan some­time in April 2007 when mem­bers of a crim­i­nal gang in Rus­sia, in­clud­ing mem­bers of the in­te­rior min­istry, flew to Lar­naca in Cyprus.

Among those who trav­elled were Artem Kuznetsov, then a lieu­tenant colonel in the min­istry, and Dmitry Klyuev, a convicted fraud­ster and owner of the Rus­sian bank, Univer­sal Sav­ings Bank (USB). They trav­elled by pri­vate jet.

In Lar­naca, they met Paven Kar­pov, then a ma­jor in the in­te­rior min­istry, and hus­band and wife lawyers, An­drey Pavlov and Yu­lia May­orova, who trav­elled to Cyprus on Aeroflot.

Ac­cord­ing to a fil­ing by the US gov­ern­ment in a civil case taken in New York in 2015, the fol­low­ing month, May 2007, Olga Stepanova, the head of the Moscow Tax Of­fice No. 28, and her then hus­band Vladlen Stepanov, trav­elled to Lar­naca and met up with the fraud­ster/banker Klyuev.

A month later, on June 4th, 2007, Lt Col Kuznetsov led a 25-of­fi­cer team on a raid of the Moscow of­fices of the Her­mitage fund, one of the largest and most suc­cess­ful in­vest­ment funds in Rus­sia at the time. The of­fi­cers seized the firm’s com­puter server, com­put­ers, records and doc­u­ments. Later the same day the fund’s le­gal rep­re­sen­ta­tives, Fire­stone Dun­can, was also raided.

The items seized in­cluded com­pany seals and tax cer­tifi­cates. Some of th­ese items were then used to fraud­u­lently change the own­er­ship of com­pa­nies linked to the mas­sively valu­able Her­mitage oper­a­tion to a Rus­sian com­pany nom­i­nally owned by a for­mer Rus­sia sawmill op­er­a­tor, Vic­tor Markelov.

The di­rec­tors of the com­pa­nies were also re­placed, so that ex­ec­u­tives with HSBC bank were dis­missed, and their places taken by a num­ber of low-level Rus­sian crim­i­nals.

Although out­ra­geous and ob­vi­ously fraud­u­lent, such ma­noeu­vres, known as “raider” op­er­a­tions, are wide­spread in post-Soviet Rus­sia.

Sham law­suits were brought against the Her­mitage com­pa­nies in Moscow, St Peter­burgh and Kazan (cap­i­tal of Tatarstan), where the com­pa­nies were rep­re­sented by the lawyers Pavlov and May­orova. Full li­a­bil­ity for the claims be­fore the courts were ac­cepted.

As a re­sult, ac­cord­ing to the US gov­ern­ment’s sub­mis­sion, judg­ments to­talling $973 mil­lion were awarded against the Her­mitage com­pa­nies. Th­ese judg­ments were then used to ap­ply for a tax re­fund on the ba­sis that they negated profits made the pre­vi­ous year on which tax had been paid.

The heads of the two tax of­fices that dealt with the claims were Stepanova and an­other mem­ber of the gang, Ye­lena Khim­ina. The tax re­funds sought in De­cem­ber 2007 were for 5.4 bil­lion rubles, or $230 mil­lion. On the same day – De­cem­ber 24th, 2007 – that most of the re­fund claims were re­ceived, they were ap­proved by Stepanova and Khim­ina, ac­cord­ing to the US gov­ern­ment fil­ing.

“On in­for­ma­tion and be­lief,” the US Gov­ern­ment said, the claims “amounted to the largest known tax re­funds in Rus­sian his­tory”.

Two days af­ter the re­pay­ments were ap­proved – De­cem­ber 26th – the money was paid from the Rus­sian Trea­sury to bank ac­counts in the name of the Her­mitage com­pa­nies that were, in fact, con­trolled by the crim­i­nal gang. What hap­pened there­after was that the funds flowed through an enor­mously com­plex web of bank ac­counts and off­shore com­pa­nies. A lot of the money ended up in the West. Some of it, it now ap­pears, may have flowed through Ire­land.

In Oc­to­ber 2007, Her­mitage learned about the law­suits taken in St Peters­burgh. Among those act­ing for Her­mitage who be­gan to in­ves­ti­gate was Rus­sian lawyer Sergei Mag­nit­sky. By De­cem­ber crim­i­nal com­plaints were filed nam­ing in­te­rior min­istry of­fi­cers Kuznetsov and Kar­pov. But the re­ac­tion of the au­thor­i­ties was a fur­ther cause for concern.

In one in­stance, Kar­pov was as­signed to in­ves­ti­gate. In May 2008, his in­te­rior min­istry col­league Kuznetsov ap­proved a crime re­port against two Her­mitage lawyers who had filed com­plaints against him. The lawyers fled the ju­ris­dic­tion.

In Novem­ber 2008, the in­te­rior min­istry ap­pointed Kuznetsov to in­ves­ti­gate the Her­mitage tax fraud even though he had been named by Mag­nit­sky as a key per­pe­tra­tor. On Novem­ber 24th, 2008, Kuznetsov’s team ar­rested Mag­nit­sky. A num­ber of other Her­mitage lawyers, who the min­istry wanted to ar­rest, fled the ju­ris­dic­tion.

“Mag­nit­sky was kept in pre-trial de­ten­tion for al­most one year,” ac­cord­ing to the US gov­ern­ment sub­mis­sion. “He died on or about Novem­ber 16th, 2009, in Ma­trosskaya Tishina Prison, in Moscow, Rus­sia.” He was 37 years old.

Ac­cord­ing to re­ports on his death, on the day he died he was beaten by eight guards with rub­ber ba­tons, and the am­bu­lance crew that were called for him was kept out­side his cell while he lay dy­ing, for one hour and 18 min­utes. They were let in when it was too late.

Bo­gus di­rec­tors

By this time Markelov, the sawmill op­er­a­tor, had pleaded guilty to the $230 mil­lion tax fraud. One of the bo­gus di­rec­tors ap­pointed to the Her­mitage com­pa­nies also pleaded guilty to the crime. In their rul­ings the courts found that the tax of­fi­cials had been fooled and were not com­plicit in the crimes. An­other of the bo­gus di­rec­tors was found dead in Borip­sol, Ukraine.

In 2012, fol­low­ing lob­by­ing by Her­mitage founder, Bill Brow­der, the US gov­ern­ment in­tro­duced the Mag­nit­sky Act, which tar­geted those in­volved in the Her­mitage crime. Among those named were Kar­pov, Kuznetsov, Khim­ina, and Stepanova. The law re­stricted the travel of those named, and tar­geted their as­sets.

Mean­while, Brow­der has been on the trail of the stolen money. While he set out to es­tab­lish the fi­nal des­ti­na­tion of the $230 mil­lion, what he has stum­bled upon, in his own view, is the pipe­line through which com­min­gled funds from not just the Her­mitage fraud but other in­stances of gross Rus­sian cor­rup­tion, have flowed into the West.

When the $230 mil­lion tax re­fund was paid out, some of the money went into USB, the bank owned by Klyuev. The bank went into vol­un­tary liq­ui­da­tion in 2008. The Rus­sian In­te­rior Min­istry has stated pub­licly that it can­not trace the pro­ceeds of the Her­mitage fraud, as the rel­e­vant doc­u­ments from UBS “were burned in a truck crash”, ac­cord­ing to the US gov­ern­ment.

The funds started to travel though a se­ries of Rus­sian banks. Some of the money went to a bank in Moldova in the names of two com­pa­nies there. Money went to banks in Latvia and Switzer­land, in­clud­ing to ac­counts of off­shore com­pa­nies in fact owned by Stepanov, the then-hus­band of Stepanova. The cou­ple are also un­der­stood to have bought prop­erty in Dubai worth mil­lions of dol­lars.

“The tax re­turns for Stepanov and Stepanova from 2006 to 2009 re­port an aver­age com­bined an­nual in­come of just $38,381,” the US gov­ern­ment’s court sub­mis­sion notes.

Money went from Banco Di Economii in Moldova to an ac­count in Switzer­land in the name of Preve­zon Hold­ings, a com­pany reg­is­tered in Cyprus.

Some of this money was wire-trans­ferred through New York and was the sub­ject of the court case based on the US gov­ern­ment com­plaint re­ferred to above. Some of the money lodged to the Preve­zon ac­count trav­elled on to Hol­land, and was used to buy com­pa­nies there that owned prop­erty in Ger­many.

More of the money trav­elled through an in­ter­me­di­ary called Castle­front LLP, a UK com­pany, which had an ac­count with Es­to­nian bank AS Sampo. Castle­front was in turn owned by a Bri­tish Vir­gin Is­lands com­pany called Ire­land & Over­seas Ac­qui­si­tions, a com­pany linked with a num­ber of com­pa­nies linked to the money-laun­der­ing maze un­cov­ered by Brow­der. The com­pany does not ap­pear to have any par­tic­u­lar link with or in­ter­est in Ire­land, de­spite its name.

Some of the stolen money trav­elled through ac­counts in Switzer­land in the name of a com­pany called Quar­tell Trad­ing. Im­por­tant in­for­ma­tion about the role played by the com­pany was re­vealed when a Rus­sian fi­nancier, Alexan­der Perepilichny, moved to the UK and made im­por­tant dis­clo­sures.

In 2012 he col­lapsed and died while out jog­ging in Sur­rey and there were dis­puted re­ports about a mys­te­ri­ous plant-based poi­son, known to cause car­diac ar­rest, be­ing found in the stom­ach of the healthy 44-year-old.

Some of the money that went to Preve­zon was in­vested in prop­erty in New York, which was sub­se­quently tar­geted by the US gov­ern­ment un­der its money laun­der­ing laws. The case was set­tled last year, for $6 mil­lion, with both sides claim­ing vic­tory. Sim­i­lar cases in France, Switzer­land, Spain, Cyprus, the Baltic States, Bel­gium, the Nether­lands, Poland and Lux­em­bourg have seen ap­prox­i­mately $40 mil­lion be­ing frozen.


Her­mitage has now writ­ten to act­ing Garda Com­mis­sioner Don­all O’Cualain ask­ing that trans­ac­tions in­volv­ing Ir­ish ac­counts be in­ves­ti­gated.

“The con­nec­tion of the sus­pected money laun­der­ing on the Ir­ish ac­counts to the Mag­nit­sky case means that a thor­ough in­ves­ti­ga­tion of the mat­ters set out in this re­port is plainly in the pub­lic in­ter­est,” the re­port to Garda HQ stated.

It out­lines trans­ac­tions to and from a Bri­tish Vir­gin Is­lands com­pany called Son­afin Com­mer­cial Com­pany Ltd, which had an ac­count with UKIO Bankas in Lithua­nia. The Son­afin ac­count is be­ing in­ves­ti­gated by the Lithua­nian au­thor­i­ties and is, ac­cord­ing to Her­mitage, “used by the Klyuev Or­gan­ised Transna­tional Money Laun­der­ing Net­work”, the “pipe­line” that Brow­der be­lieves is used to bring the pro­ceeds of cor­rup­tion in Rus­sia into western banks and prop­erty.

The re­port to Garda HQ high­lights trans­ac­tions to­talling $1.7 mil­lion to Son­afin from the AIB ac­count of Ir­ish com­pany Ip­sos Cen­tral East­ern Europe Ltd, which was at the time, 2008, in­volved in mar­ket re­search in Rus­sia.

The Ir­ish com­pany is part of the French-head­quar­tered Ip­sos group, and its deputy chief ex­ec­u­tive Lau­rence Sto­clet has de­scribed the claim in the Her­mitage re­port as “bizarre”. The com­pany will co-op­er­ate with any in­quiry, she said, but it was not in­volved in money laun­der­ing.

Bank records

The re­port also cites the Lithua­nian bank records of Son­afin as show­ing 10 trans­fers to­talling £1.4 mil­lion dur­ing 2008 go­ing to the Bank of Ire­land ac­count of Di­a­mond In­no­va­tions In­ter­na­tional Sales, a Dublin sub­sidiary of the Sand­vik group in Swe­den, which spe­cialises in min­ing and tool­ing. A re­quest for a com­ment from that com­pany met with no re­sponse.

Her­mitage wants the au­thor­i­ties to in­ves­ti­gate th­ese al­leged trans­ac­tions to see whether they ac­tu­ally oc­curred or whether the names of the Dublin com­pa­nies were be­ing used as part of a money-laun­der­ing oper­a­tion.

A third Ir­ish bank ac­count cited in the re­port is with AIB and was in the name of Celtic Prop­er­ties DOO, a com­pany in Mon­tene­gro that was in­volved in apart­ment de­vel­op­ment there. Ef­forts to con­tact busi­ness­man Vin­cent Coughlan, of Bal­ly­de­hob, Co Cork, who was in­volved in the ven­ture along with the late Jerry Coughlan, also from Cork, were un­suc­cess­ful.

Ac­cord­ing to the Her­mitage re­port, in July 2009 €275,000 was trans­ferred to the Celtic Prop­er­ties ac­count from the Sampo bank ac­count in Es­to­nia of a BVI com­pany called Ever­front Sales LLP, for the pur­chase of an apart­ment in Przno, Mon­tene­gro.

There is no sug­ges­tion in­tended that the sale of an apart­ment was any­thing other than a le­git­i­mate trans­ac­tion from the point of view of Celtic Prop­er­ties.

Ac­cord­ing to the Her­mitage re­port to Garda HQ, the turnover of the Ever­front ac­count in Es­to­nia to­tals more than $1.16 bil­lion. This in­cludes money from the Her­mitage tax fraud and other crimes. The Klyuev money laun­der­ing oper­a­tion “has been op­er­a­tional since at least 2002 and has been used to laun­der and con­ceal pay­ments to Rus­sian gov­ern­ment of­fi­cials, in­clud­ing a close as­so­ciate of Rus­sia’ Pres­i­dent Putin”, ac­cord­ing to the re­port.

In the wake of the US in­tro­duc­ing the Mag­nit­sky Act, the Krem­lin re­sponded by ban­ning the adop­tion of Rus­sia ba­bies by US ci­ti­zens. When the Oireach­tas was con­sid­er­ing in­tro­duc­ing a mea­sure sim­i­lar to the Mag­nit­sky Act here in 2013, the then Rus­sia am­bas­sador warned that there could be con­se­quences for Rus­sian-Ir­ish trade, and a ban on Ir­ish peo­ple adopt­ing Rus­sia ba­bies. The law was never in­tro­duced.

Brow­der thinks Ire­land should look at the mat­ter again. In his view, Vladimir Putin is one of the rich­est men in the world, and much of his wealth is held in the West in the name of nom­i­nees. If the West wants to put pres­sure on Putin, then it should tar­get his money.

“This is Putin’s Achilles hell. He can only be sav­age up to a point, which is the point at which his money is at risk.”

The con­nec­tion of the sus­pected money laun­der­ing on the Ir­ish ac­counts to the Mag­nit­sky case means a thor­ough in­ves­ti­ga­tion of the mat­ters set out in this re­port is plainly in the pub­lic in­ter­est

A Rus­sian flag fea­tur­ing pres­i­dent Vladimir Putin flies above the Krem­lin in Moscow

The grave of lawyer Sergei Mag­nit­sky at the Pre­o­brazhen­sky ceme­tery in Moscow. He died while in pre-trial de­ten­tion.

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