Tax scam points to complicity of top Russian officials

Financial Times

Two Moscow tax departments at the centre of a tax rebate scam worth hundreds of millions of dollars continued to disburse huge sums long after similar schemes were uncovered by Sergei Magnitsky, the whistle-blowing lawyer who died in jail after making his allegations.

Revelations that the tax rebate scams continued well after Magnitsky’s death raise questions about the level of official protection the fraudulent rebate operations enjoyed. In total, the fraud looks to have cost the Russian treasury more than $800m from 2006 to 2010.

Magnitsky was jailed on separate tax fraud charges in 2008 soon after he alleged a circle of interior and tax ministry officials had conspired to defraud the Russian government via a $230m rebate involving company seals and charters belonging to his former employer, Hermitage Capital, that were seized in a police raid. His death a year later – he would have turned 40 last Sunday – spurred international outrage, causing the US government to draw up a visa blacklist for officials involved in his detention.

The lawyer had also blown the whistle on a set of rebates worth $109m in 2006. These went to companies which previously had belonged to a subsidiary of the Moscow investment bank Renaissance Capital. Renaissance has said it had nothing to do with the rebates and had already sold the companies at the time.

Both those cases involved the same two Moscow tax inspectorates, numbers 25 and 28. But according to an investigation by newspaper Novaya Gazeta and financial records reviewed by the Financial Times, those same two departments were disbursing large sums via questionable rebates as recently as 2010.

The latest refunds – which at $370m (Rbs11bn) dwarf the previous sums – were granted by the same tax officials within two or three days after application in 2009 and 2010 to a string of apparent front companies. Soon after they received the money, according to records, those companies were re-registered using similar addresses.

Of these rebates, $187m went to companies that held accounts at a Moscow bank, Benefit, that has links to USB, the bank whose accounts were used in the other two scams, documents show. Benefit declined to comment. USB filed for voluntary liquidation in June 2008 soon after Hermitage first made allegations about potential tax fraud in a letter to the president’s anti-corruption committee.

Hermitage Capital Management, the investment fund that employed Magnitsky, argues that the scale of the rebates, the speed with which they were approved (within a few days) and the fact they continued after his death are an indication that they were shepherded by senior officials in the government. In a statement on Thursday it accused the FSB, the successor to the KGB, of helping to organise the $230m rebate Magnitsky revealed in 2008. The FSB did not immediately respond for comment.

But the scams may go even higher. Novaya Gazeta’s report, which was published last week, gathered record traffic online and some believe it could present a fresh scandal for the Russian government just as it seeks to shore up its standing following a wave of protests this year.

A senior executive at a Moscow investment bank said the fact that the rebates were granted in all cases – from 2006 to 2010 – in a matter of days indicated this was a scam that had to involve very senior officials. “If you go to the tax office and try to get a $1,000 tax refund it would take months and months. And here you have people that got more than $100m within a few days. This is absolutely incredible.,” the executive said.

Anatoly Serdyukov, the current defence minister, headed the tax service from 2004 to 2007, and many of the officials involved in the rebates have followed him to defence. Mr Serdyukov’s closest deputy, Mikhail Mokretsov, succeeded him in running the federal tax service until he, too, left to join him in the Defence Ministry, in 2010.

A former aide to Vladimir Putin, Andrei Illarionov, last week published an open letter to Alexei Kudrin, Mr Putin’s former finance minister, questioning what role the federal Treasury under Mr Kudrin’s watch may have played in the affair. Mr Kudrin said in a statement that treasury officials had had no role in deciding whether to grant tax rebates, and pointed out that more than 8,000 VAT rebates for more than Rbs100m were made every month.

The revelations that the scams continued long after Magnitsky was jailed also cast huge doubt on attempts by the interior ministry to turn the tables on the anti-corruption lawyer last year by alleging that Magnitsky was himself the mastermind of the earlier $230m tax rebate.

The Russian police’s criminal investigation into the $230m scam had stopped with the jailing of a former sawmill worker and a convicted thief for allegedly carrying it out, while four others it claimed were involved are all now dead.

Russia’s federal tax service says the heads of inspectorates 25 and 28 were deceived by this group of criminals in the $230m scam and had erroneously granted the refunds. But “if they were deceived in 2007, how is it they were still signing off on similar schemes,” said Roman Anin, Novaya Gazeta’s chief investigations reporter.

Most of the refunds uncovered in the Novaya Gazeta investigation were granted by inspectorate number 28 headed by Olga Stepanova, whose family bank accounts were targeted in a Swiss prosecutors’ probe last year. That probe was opened after suspicious transactions, first disclosed in a report in Barron’s Online, appeared to show that accounts in Credit Suisse held by Ms Stepanova’s husband received $10.9m shortly after Ms Stepanova granted the $230m tax rebate in 2007. Her husband has claimed he earned the money in tunnel construction work.

Ms Stepanova stepped down from her post following a review, according to the federal tax service, though her defenders argue she was simply acting on orders from above. “The entire tax system works with these rebate schemes,” one person familiar with Ms Stepanova told the FT.

“This is the system in a country where there is no rule of law, and nothing is going to change the system because the people who run it think they are in the right.”

After she left her job at the tax office Ms Stepanova was quickly shunted to a new post in the defence ministry, where she worked in a department overseeing the Russian government’s Rbs20tn military upgrade plan. Ms Stepanova left that post this year and she could not be contacted.

According to the tax service the rebates issued in 2009 and 2010 are being investigated by the interior ministry’s economic crimes department. But those who have investigated them in the past have struggled to establish who is behind them.

The former head of the Federal Tax Service’s anti-corruption department, Sergei Vasilenko, told the FT he had resigned his post because his efforts to propel a broader investigation into the 2009-2010 tax rebates by tax office number 28 were blocked. He confirmed Novaya Gazetya’s findings.

Mr Vasilenko, a former colonel in the Russian special forces, was hired to take on the newly created post in mid-2010. His investigation, he said, found that companies that received rebates of more than Rbs100m often had just two employees and many shared the same warehouse address where there was little evidence to be found of any goods.

Mr Vasilenko forwarded his findings to investigators at the Russian Interior Ministry, but nearly two years later the investigation has not progressed, he said. He believes that is because “very senior officials” were involved in granting the rebates.

The Rebates

2009 and 2010: Moscow tax inspectorates 25 and 28 allegedly grant more than Rbs11bn ($370m) in VAT rebates to companies that appear to be front organisations, according to an investigation by Novaya Gazeta and financial records reviewed by the Financial Times. The investigation centres on companies that received more than Rbs100m within the space of a few days, while most other tax rebates took several months to be processed, according to records.

In one example, on Feb 26 2009, after Magnitsky’s jailing, a company called OOO Avrora applied to Moscow tax inspectorate 28 for a VAT rebate worth Rbs500m ($14.2m at the time). The application was approved by March 3 and the Federal Treasury transferred funds to the company’s account on March 4.

Avrora made a second application to inspectorate number 28 for a further Rbs503m ($16.2m at the time) on May 28 2009 and the request was approved by the next day, with funds hitting its account in Benefit Bank three days later.

Avrora was first registered in 2006 and its director named as Andrei Kalinin, company records show. This Andrei Kalinin is mentioned in several court decisions as a notorious founder of shell companies. He was later replaced by a man named Pavel Pestryakov, who was director of the company at the time it received the Rbs1bn in tax rebates. No other records of Mr Pestryakov could be found, nor could he be reached for comment.

A woman named Yulia Gorskaya became director of the company in January 26 2010. Police reports, cited by Novaya Gazeta and seen by the FT, say Ms Gorskaya is also a well-known front who is frequently drunk; she lives in a village in the depths of the Russian countryside in Ryazan. Ms Gorskaya could not be reached for comment.

On the same day as she became director, Avrora was re-registered at a new address in Tver: Belyakovsky Lane, 46, office 33a.

In a second example, a company called Apiteks applied to inspectorate number 28 for a Rbs500m (then $15.7m) tax rebate on July 22 2009. Its application was approved on the same day and the very next day the Federal Treasury had transferred the funds to Apiteks’ account in Benefit Bank, according to records seen by the FT.

As soon as July 29 2009, Apiteks applied to inspectorate 28 for another Rbs502m and the federal treasury transferred funds to its account in Benefit in the space of two days.
Apiteks’ director up to February 2009 was reached by Novaya Gazeta. He told the paper on condition of anonymity that the company had been sold as an empty shell and had not conducted any activity. In February 2010, after the firm had received the VAT rebate, it was re-registered at the same address as Avrora in Tver and Yulia Gorskaya was appointed its director, too, company records show.

2006 and 2007: A total of $109m in questionable profit tax rebates was granted by Moscow tax directorates number 25 and 28 to companies that had previously belonged to a subsidiary of Renaissance Capital in 2006. The money was paid into accounts held in Universal Savings Bank (USB), Hermitage has alleged in filings in a New York court. No criminal investigation has been opened. Renaissance has made clear it had no involvement with the companies at the time of the rebates.

Hermitage has alleged in a letter to Russia’s prosecutor-general that a further Rbs3bn ($100m) was paid by Moscow tax directorates 25 and 28 through similar rebate schemes through front companies into accounts with USB between 2006 and 2008. No criminal investigation has been opened.

Hermitage and Magnitsky also claimed that $230m was granted by Moscow tax directorates 25 and 28 in same-day profit tax rebates on December 24 2007 to companies that were using stamps and seals that had formerly belonged to Hermitage Capital Management and had been seized in police raids. Two men, a former sawmill worker and a convicted thief, have been jailed for carrying out the crimes following a criminal investigation.

Total: $810m in suspicious rebates

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