Cyprus link to ‘universally condemned’ Russia tax fraud case

Police last week raided the Nicosia offices of the law firm representing the Hermitage Fund, embroiled in the largest fraudulent tax rebate case in Russian history, the Cyprus Mail has learned.

On Friday, two senior Russian interior ministry officials along with local police officers searched the Nicosia offices of a leading law firm.
According to Hermitage, an investment fund and asset management company specialising in Russian markets, police interrogated the law firm’s employees and “left a 41-point request for corporate documents”.

Hermitage said the raid was conducted under the legal assistance request to Cyprus from Russia, where the Russian interior ministry is advancing new posthumous criminal proceedings against Sergei Magnitsky and in absentia against William Browder, co-founder of the Hermitage Fund and leader of the ‘Justice for Sergei Magnitsky’ campaign.

Magnitsky, a 37-year-old Russian accountant, died in jail in 2009 after he exposed huge tax embezzlement by a criminal gang – the ‘Klyuev group’ – involving high ranking officials in the Russian interior ministry and its internal intelligence service, the FSB.

“It is remarkable that the law enforcement authorities in Cyprus, a country that is a member of the European Union, would agree to become directly involved in assisting the Russian officials in a case that has been universally condemned around the world,” Browder told the Mail in an email.

According to Hermitage, assisting in the raid were two police officers from the Economic Crime Investigations Office. The same officers, Hermitage said, are in charge of investigating Hermitage’s complaints about Cyprus’ role in a $230 million fraud scheme and laundering of proceeds through Cyprus, in which the Russian interior ministry had been implicated.

But government sources knowledgeable about the Russian request for legal assistance denied it is related to the Magnitsky case.
Rather, the sources said, the request concerns an ongoing investigation by Russian authorities into various companies’ acquisition of Gazprom shares. The Russians have made similar requests to other countries, they added.

Specifically, Russian authorities are investigating the purchase of Gazprom shares by entities registered in the Russian Federation but thought to be acting on behalf of companies registered abroad.
The suspicion is that in this way certain companies – the ultimate beneficiaries of the Gazprom stock – registered outside Russia, benefited by avoiding paying the higher rate for the shares required of offshore entities.

Asked to clarify, the same sources said that, this request aside, Russian authorities have to date not asked Cyprus for legal assistance in relation to the Hermitage/Magnitsky case.

Countering, Hermitage dismissed the explanations on the Cypriot side as disingenuous. They said for example that one of the Russian officials participating in Friday’s raid was Artem Ranchenkov.

Ranchenkov happens to be one of the Russian interior ministry officials who have blocked efforts of Magnitsky’s mother to challenge the posthumous proceedings and identify those who benefited from her son’s death.

“There are just too many connections to the Magnitsky saga to claim that these are separate cases and that thus there is no conflict of interest,” sources close to Hermitage told the Mail.

What’s more, Hermitage said that while they did acquire equity in Gazprom back in 1996, they did so through their Cyprus subsidiaries in Russia.

The reason is that until January 2006 non-Russian companies could not buy Gazprom shares.
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lso, Russian-based entities who obtained stock in Gazprom were required to pay a high rate of tax to the Russian government.

Conversely, companies registered in Cyprus who might want to do the same after 2006 would be subject to Cyprus taxation, which effectively came to zero on such transactions.

“So the Cypriot contention that the raid is linked to Gazprom is just a smokescreen,” Hermitage said.

Last Friday’s raid in Nicosia would seem to echo the events of June 2007, when dozens of Russian police officers swooped down on the Moscow offices of Hermitage and its law firm, confiscating documents and computers. Three Hermitage holdings companies were seized on what the company’s lawyers insist are bogus charges.

Hermitage says the owners and directors of the companies were subsequently changed, the courts were used to create fake debts allowing for the taxes to be refunded, and the money was laundered through banks.

Effectively the Cypriot directors of these companies were defrauded when powers of attorney were forged.
Under the new proceedings, Russian investigators are accusing Magnitsky and Browder of organising the $230 million fraud that the two claim to have uncovered and reported.

Since 2007, when Hermitage discovered the fraud against its three Russian and two Cypriot companies, it has filed criminal complaints seeking the investigation of the role of Russian government officials in the fraud. The criminal complaints were filed in Russia on December 3 2007, and in Cyprus on 5 June 2008.

In July 2012, lawyers for Magnitsky’s former employer, the UK-based Hermitage Capital investment fund, submitted evidence to Cyprus’ attorney-general.

As reported by the EU Observer, the papers, including copies of financial transfers show that $31 million of the tax money was moved out of Russia using five Cypriot banks: Alpha Bank, Cyprus Popular Bank, FBME Bank, Privatbank International and Komercbanka.

The Council of Europe has issued two reports on the Hermitage and Magnitsky case, finding that the Russian proceedings against them were politically-motivated, discriminatory, and abusive, and as such legal assistance to Russia must be refused by member states.
UK authorities, who have received Russian legal assistance requests, have refused them as contrary to UK’s public policy.

“In contrast to other countries and international bodies, Cyprus seems to be wilfully ignoring the international condemnation of this case and working directly with the Russian perpetrators to go after their victims abroad,” commented Browder.

Under Article 12 of the Mutual Legal Assistance Treaty between Russia and Cyprus, Cyprus can refuse the provision of legal assistance to Russia where it contradicts fundamental public policy principles.

Heritage noted that Cyprus, as a member of the Council of Europe, and a signatory to the European Convention on Mutual Assistance in Criminal Matters which contain safeguards for refusing legal assistance in politically-motivated cases, should be urged to do so now.

Asked why Russian authorities are making the move now, Browder suggested it’s likely due to a dozen law enforcement agencies around the world have recently frozen more than $40m “of the real culprits’ money and the Russians are desperately trying to create an obstacle and distraction from the real investigations.”