Magnitsky documentary suggests fraud, collusion between Russian officials, police detectives

The Washington Post

By Kathy Lally and Will Englund

MOSCOW — Shortly before the Russian government was defrauded of $230 million in 2007, the officials who approved the whopping tax refund at the heart of the scheme traveled to a sunny Mediterranean resort with the police who would later investigate the theft.

This wasn’t their first trip abroad together, nor was it the first or last scheme that would be traced back to the same set of tax officials and police, along with a banker who handled the proceeds of the thefts. Their relationship, newly revealed in travel records provided to The Washington Post, illustrates a level of collusion at the heart of the Russian government that allows corruption to flourish despite repeated official promises to vanquish it.

The 2007 case, unveiled by a Russian lawyer named Sergei Magnitsky, has become widely known. Magnitsky’s death in custody in 2009 has prompted the U.S. Congress to take up a bill named in his honor that would impose sanctions on Russian officials connected to his death, freezing their assets and prohibiting visas.

Russian authorities have said the tax officials were tricked into approving a fraudulent return. The prospect of U.S. sanctions has infuriated the Russian government, which has vowed to retaliate if the law is passed.

But it had not been clear until now how close the Russian officials entangled in the Magnitsky case were to each other — that they were part of a tight group that traveled together to European capitals in between repeated multi-million-dollar scams.

“It’s about murder, it’s about corruption, it’s about a lack of rule of law, and it has come to represent a lot of what is wrong in Russia,’’ David J. Kramer, president of Freedom House in Washington, said, referring to Magnitsky’s death.

So far, the Russian tax officials and police detectives have been promoted instead of punished, even as they amassed great personal wealth on official yearly salaries of $10,000 and less. They have been protected despite a protracted campaign by Magnitsky’s employer, William Browder, founder of Hermitage Capital, one of the companies used in the tax-fraud scheme.

Browder’s persistence in pursuing his own investigation has rallied powerful advocates behind him, including Sen. Benjamin L. Cardin (D-Md.) and Sen. John McCain (R.-Ariz.). Kramer said that Browder’s efforts have revealed a level of official impunity that would otherwise have remained hidden.

McCain was present Tuesday when Browder presented the results of his latest investigation, distilled into a 17-minute video called “The Magnitsky Files: Organized Crime Inside the Russian Government.” The documentary, supported by stacks of documents that were also made available to The Post, asserts that the close-knit circle of tax officials, police and criminals stole at least $337 million between 2006 and 2007 in schemes involving fraudulent tax refunds. The $230 million Hermitage scheme was preceded by a similar fraud that netted $107 million and a failed attempt to extort $20 million that left the victim who refused to pay serving a jail sentence.

In April the Novaya Gazeta newspaper reported that unusually large rebates were issued in 2009 and 2010 by the same tax offices involved in the Hermitage case, amounting to an additional $370 million or more, suggesting the refund scheme persisted beyond the Hermitage case.

On Tuesday, McCain wrote to President Obama, asking him to designate the circle of officials, dubbed the Klyuev group, as a criminal organization abusing global financial systems through extortion, money laundering and theft. Such a designation would result in the freezing of their assets and making it impossible for them to conduct business in dollars anywhere in the world.

According to the documentary and the documents, the key players knew each other from previous tax-refund cases, and from vacations in Cyprus, Dubai, Istanbul, Switzerland and London.

In late 2006, for instance, a company called Rengaz Holdings obtained a $107 million tax refund and deposited the money in Dmitry Klyuev’s Universal Savings Bank. That deal was handled by Klyuev’s lawyer, Andrei Pavlov, and approved by Olga Stepanova, the tax official in charge of Tax Office No. 28, according to documents unearthed by Magnitsky and provided by the Hermitage investigation. All three would later be involved in the Hermitage case.

On New Year’s Day 2007, with the money disbursed, Stepanova and her husband, Vladlen, flew to Dubai, where Klyuev joined them two days later, according to flight records. They then traveled to Switzerland, and all three returned to Moscow on the same flight on Jan. 16, 2007.

The lawyer, Pavlov, and his wife, Yulia, along with police investigator Pavel Karpov, chose London, instead, flying there together Jan. 1.

At the end of April they were off once more, this time to Cyprus. Klyuev and another police investigator, Artyom Kuznetsov, flew on the banker’s private jet on April 28. On the April 30, Karpov and the Pavlovs arrived on a commercial flight and stayed until May 5. Stepanova and her husband followed May 8 and stayed for six days. Klyuev was still there when they arrived. The two police officers, Karpov and Kuznetsov, would soon be running the investigation that landed Magnitsky in jail.

On June 4, 2007, Kuznetsov led a police raid on Hermitage, which had been the largest foreign investor in Russia. Hermitage was founded by the American-born Browder, who had antagonized the authorities in a campaign for business transparency. He was barred from the country at the end of 2005 and has run the business from London since. Police seized company records and seals. Those documents were used when three affiliated firms were re-registered later that year, one of them in the name of Viktor Markelov, an ex-convict and associate of Klyuev. The stolen companies then claimed a $230­ million tax refund based on what they said were business losses.

The refund was approved Dec. 24, 2007, and on the same day, the money was deposited in Klyuev’s bank. On New Year’s Day 2008, according to the documentary and documents, Karpov and the Pavlovs flew to Istanbul for a three-day holiday. On Jan. 5 the Pavlovs flew from Moscow to Dubai, along with Stepanova and her husband. They stayed there for 12 days, during which time, the investigation discovered, the couples bought at least $4 million worth of property.

Written questions sent to the Russian Investigative Committee last week about the possibility of opening an investigation into the Hermitage allegations had not been answered as of Tuesday. The Interior Ministry has exonerated the officials named by Hermitage and has not made them available for interviews.
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