Turning the tables on Russia’s power elite — the story behind the Magnitsky Act

Open Democracy

The murder of the lawyer Sergei Magnitsky in 2009 looks likely to trigger legislation in the United States which strikes at the heart of Russia’s corrupt power elite. Bill Browder, founder of the Hermitage Fund, moving spirit behind the impending Magnitsky Act, tells the story.

I have my family history to blame for the fact that I ended up working in Moscow. My grandmother was from Russia and my grandfather was the head of the American Communist Party between 1932 and 1945 (he was subsequently persecuted in the 1950’s). So when I was growing up as a teenager and going through my teenage rebellion, I thought the best way of rebelling against a family of communists was to become a capitalist.

I ended up studying economics at the University of Chicago, probably the most right-wing institution in America, and then I enrolled at the Stanford Business School. I graduated business school the year the Berlin Wall came down and as I started contemplating the next stage of my life, I had a personal epiphany: ‘if my grandfather was the biggest communist in America, I should become the biggest capitalist in Eastern Europe’. So I set off to do just that.

After a spell working on the Russian privatisation programme at Salomon Brothers in London, I moved to Moscow in late 1995 to set up the Hermitage Fund, which focused on investing in the newly privatised shares of Russian companies. Over the next few years, the business grew to become the largest investment firm in the country with $4.5 billion. Success was exciting. But this turned to frustration when I realised that the companies I was investing in were essentially ‘non-profit’ entities. They were ‘non-profit’ not because they were giving money to charity, but because the senior managers were stealing the profits.

The Sidanco scandal
The experience that changed my life was dealing with a scandal in the oil company, Sidanco, now a subsidiary of TNK-BP. In 1997, we had an investment worth $100 million in the company. But in 1998, the oligarch who owned Sidanco tried to steal about three quarters of the value of the company through a dilutive convertible bond scheme.

Shocked by the financial and the moral implications of the scheme, I started a campaign to fight it. I set my team of very smart Russian analysts to research the law, document the scam, then put together a simple presentation that we shared with the international and domestic media. A spate of newspaper articles about the scandal caught the attention of the Russian securities regulator, an unusually honest man named Dmitry Vasilyev. Bravely, he decided to regulate, which none of his predecessors had ever had the guts to do. In the spring of 1998, against all the predictions of the Moscow financial community, Vasilyev cancelled the illegal bond issue.

It was scary. There were threats, we had bodyguards. But in the end, it wasn’t quite as hard as we thought. Most importantly, it proved that a ‘nobody’ with a good grasp of the facts could win, even in a battle against one of the toughest oligarchs in Russia. After that, we decided that instead of just waiting until we were victimised, we would start to campaign proactively about ongoing theft in the companies we were invested in.

From that moment, Hermitage began to investigate and publicise corruption in large state-owned companies like Gazprom, Unified Energy Systems, Transneft and Sberbank. This proved easier than we had anticipated. Two features of the Russian landscape made it possible to figure out who was doing the stealing and how. First, a remarkably small number of people benefitted from the stealing. Essentially 22 oligarchs stole approximately 50% of assets of the country, leaving 143 million Russians fuming with anger over that theft. A lot of people with inside knowledge were so furious that they shared everything they knew with us. We filled notebooks with their stories–each more unbelievable than the last.

Second, we were also helped by the fact that Russia is one of the world’s most bureaucratic countries. For any given activity, eight times as much effort will go into documenting it in Russia than any other country. This information is collected in the musty offices of Russian ministries. A lot is publicly available if you know who to ask. So verifying the allegations we heard in the many meetings was generally quite straightforward.

We started doing these forensic investigations when Putin had just come to power. At first, we thought we had his support for our anti-corruption campaigns. Many members of his government were actively engaged with our campaigns. Gestures of support came from Alexander Voloshin, his Minister for Economic Development, German Gref, Head of the Securities Commission, Igor Kostakov, Head of the Governmental Apparatus, Igor Shuvalov and, to a lesser degree, Putin’s Minister of Finance Alexei Kudrin. These were all the pro-Western, English-speaking people within government. It felt very gratifying at the time. We were making money as well as doing good. We genuinely felt we were helping Russia make the transition from ‘horrible’ to ‘bad’.

However, what we were witnessing was not the reform of the Russian economy, but only a temporary alignment of interests with Putin. We originally thought that Putin was concerned by corruption, when in fact it was only the independent wealth of the oligarchs that he was bothered about. Independence of wealth meant that an oligarch could challenge the president, and that was absolutely not acceptable in his scheme of things. As a result, every time we publicised a scandal at a major Russian company, Putin had an interest in weighing in on our side. Not because he believed in truth or goodness, or was offended by stealing. He just couldn’t tolerate oligarchs who were not reporting to him, and not sharing with him.

Putin’s interests flipped at the end of 2003, when he arrested Mikhail Khodorkovsky. That arrest had an extremely powerful effect on the country’s remaining oligarchs. Just imagine: you are the seventeenth richest oligarch in Russia. You turn on the TV on your yacht moored off the Hôtel du Cap in Antibes, and you see the richest guy in Russia — someone far better than you in all respects — sitting in a cage in a Moscow court. Your natural reaction is, ‘What do I have to do to not sit in a cage?’ In the summer of 2004, one by one, the oligarchs went back to Moscow, met with Putin and asked, ‘Vladimir Vladimirovich, what do we have to do to make sure we don’t sit in a cage?’

Putin’s answer was ‘50%’. I’ve surmised this from dozens of conversations and anecdotes I’ve heard since then. Of course, it could be 40%, or even 60% — I don’t know the exact number. But what I am sure of is that all the guys who said no to that deal ended up being run out of the country, losing all of their assets, or being sent to jail.

How can this amount of money go to Putin without anyone noticing? What needs to be understood about all these Russian oligarchs who are on the Forbes rich list, and who are supposedly worth 10, 15, 20 billion dollars is this: it is not actually all their money. In most cases, the people who are labelled as oligarchs are just extremely wealthy trustees.

For example, there’s a well-known Russian oligarch who owns four enormous mansions in North London. In my business I’ve come across many wealthy people and I can tell you that it is not normal behaviour to have four mansions in one city. In normal circumstances rich people will own a mansion in London, maybe one in the south of France, perhaps one in Miami. But it’s irrational to own four in North London. Unless, of course, three of them don’t belong to you.

As soon as Putin acquired a hefty interest in the assets of these oligarchs, his incentives changed. He was no longer interested in controlling or crushing these guys, since they were no longer independently wealthy. I, on the other hand, hadn’t noticed that the game had changed and had continued exposing the corruption in major Russian companies. In late 2004, and 2005, we launched a major new campaign against the embezzlement at Gazprom (by now, they had stopped stealing assets, but were nevertheless still stealing an enormous amount of the cash). We also went after Surgutneftegas, and we had started a campaign to expose mismanagement at Transneft, the oil pipeline company.

‘A threat to national security’
At this point, instead of going after Putin’s enemies, I was going after his own personal economic interests. I imagine his team analysed how best to deal with me. They probably considered a number of options including arresting me like Khodorkovsky, but the problem with that approach is that they would have become just as much of a hostage to the situation as I would have been. Instead, they came up with a much cleaner way of shutting me down. As I was flying into to Moscow in November 2005, I was stopped at the border, detained for 15 hours, then expelled from the country. Several weeks later, I received an official note from the Russian foreign ministry saying that they had declared me a “threat to national security”. For a little while, I hoped that it was some mid-level corrupt decision that would soon be overturned. Once I realised that it wasn’t a mistake, it was clear that I needed to do everything possible to protect myself and my people. I didn’t assume that I was going to be any better off than Khodorkovsky. At that point I made two important decisions: to get my capital and my people out of Russia as quickly and quietly as possible.

During 2006, we sold all our Russian stocks and got the money out of the country, without anybody noticing. Why didn’t the authorities stop us? It helped that the market was particularly buoyant at the time. We could quietly sell into a rising market without any market impact.

How did we get around the people who had been tasked to go after us? Basically they were just not that competent about executing their evil. There is a very important thing that everyone needs to understand about Russia: the current regime in Russia is criminal, but it is also slow, inefficient and often staffed by C-students from D-universities with no clear motivation.

Our selling turned out to be a very prudent move. On June 4, 2007, some 18 months after my expulsion, 25 police officers raided my office, and 25 more raided the office of Firestone Duncan, our lawyers.

The best lawyer in town
What the real purpose of the raid was unclear until we got a strange call from the bailiff of the St Petersburg Arbitrage court in October 2007. He said he had a couple of hundred million dollars of judgments against our Russian investment holding companies. This seemed very strange to us because we had never been to court and the companies were empty. Surprised and shocked, we turned to Sergei Magnitsky to find out what was going on.

Sergei was the head of the tax practice at Firestone Duncan, a US law firm that specialized in Russian corporate and tax law. Everybody who dealt with him understood that he was the kind of guy who could interpret law better than anybody else in Moscow. He was simply an extremely competent lawyer.

After a short time investigating, Sergei presented us with a number of disturbing details. First, he discovered that our three investment holding companies had been stolen— the seals and documents seized during raids on our offices had been used to fraudulently transfer the ownership of the companies to a new company called Pluton in Tatarstan.

Second, he discovered that Pluton was owned by a convicted killer named Viktor Markelov, who had been let out of jail early, presumably in order to put his name on the forged documents. Thirdly, and most incredibly, Sergei discovered that contracts had been forged to support a billion dollars worth of fake claims against out companies. Our companies had been taken to court without our knowledge — because we no longer owned them — and the new owners had instructed three corrupt lawyers to plead guilty to the $1 billion of fake liabilities.

Normally, if a judge sees two parties in a big-money lawsuit agreeing with each other in the first five minutes of a hearing, he or she would ask the obvious question: ‘Why are you in court? Why didn’t you settle before? Why are you wasting the court’s time?’ The judges here showed no such curiosity, and immediately awarded a billion dollars of damages against our empty investment holding companies, based on obviously forged contracts.

After securing $1 billion of fake court judgments, the same police officers who raided our office proceeded to raid all our banks in Moscow, looking to seize a billion dollars in assets to satisfy the fake claims. We started getting panicked phone calls from our bankers, saying, ‘The police are here, they’re asking for all your documents. What’s going on? What have you done?’ We were much less nervous than the bankers, because we had no assets left in Russia.

We started suing the perpetrators all over Russia to reverse the fake judgments, return the stolen companies and reveal who was behind the whole scam. Some of our cases worked, many didn’t. Once we had recovered from the initial shock of being victimised, I took some pleasure from the fact that these guys spent all this money and effort – it was a hugely time-consuming exercise – and looked as if they would get nothing. Sergei’s response was less upbeat. ‘This is not the end of the story. Russian stories don’t end this way’, he said.

We asked Sergei to continue investigating. He started sending information requests all over Russia to all sorts of different government agencies. Every few weeks, we saw how our companies would be registered and reregistered to different tax offices. At one point, when they were registered to the Khimki tax offices, just outside Moscow, Sergei sent off a request for information. There was one employee at Khimki who, like the bailiff of the St Petersburg court, wasn’t entirely in on the scam. So when Sergei wrote an information request, the person replied very helpfully that our stolen companies were indeed registered there, and had opened up bank accounts at a bank called ‘Universal Savings Bank’.

This was strange, we thought. Why would our stolen companies, with a billion dollars worth of fake liabilities, need a bank account? We checked the website of the Russian Central Bank, which shows aggregate information for each bank in Russia. To our surprise, we found that the bank had just $1.5 million in total capital. In other words, it wasn’t really a bank, it was a tiny holding company designed for money laundering purposes. We also noticed that immediately after the accounts were opened for our stolen companies, deposits at the bank spiked to $230 million. This was precisely the amount of taxes we paid the Russian state the previous year. And once we realised the purpose of the exercise was no longer to steal our money, but to steal the taxes that we paid to the Russian government, we were able to get a much clearer picture of the whole scam.

When Sergei started to look at the bank deposit records in more detail, he noticed a similar spike in deposits at the same bank a year earlier. In that case, they involved the accounts of two former affiliates of Renaissance Capital, a prestigious Moscow investment bank. He then discovered that the owner of Universal Savings Bank, Dmitry Kluyev, had a past conviction for a major fraud at Mikhailovsky GOK, an iron ore manufacturer in central Russia. It also emerged that one of the senior executives of Renaissance Capital had worked with Kluyev to engineer other large tax refunds from as early as 2002.

At this point, in October 2008, Sergei did two things. First, he went to BusinessWeek magazine and described the whole on-going tax refund scheme involving Kluyev, Universal Savings Bank and Renaissance, in order to get the information into the public domain. Second, he testified against Artem Kuznetsov and Pavel Karpov, the two Interior Ministry officers who had raided our offices and illegally seized the company seals and statutory documents.

A modern Russian hero
A month later, Artem Kuznetsov sent three of his subordinates to arrest Sergei Magnitsky. They put him in pre-trial detention, and began to torture him in an attempt to get him to withdraw his testimony. We know what they did, because Sergei recorded it all in harrowing detail. We know, for example, that they put him in cells with 14 hardened criminals and 8 beds. That they left the lights on 24 hours a day. That they threw him into a cell in the middle of winter with no heat and no window panes. That they put him in a cell with just a hole in the floor, where sewage would bubble up. That they would regularly deprive him of food for up to 36 hours. That they cut him off from his family.

The criminals expected Sergei to break, like so many ‘soft’ professionals jailed before him. They expected that he would eventually sign a document saying that it was Hermitage who had stolen the money. What they didn’t realise was that Sergei was an extremely tough man, with huge integrity and no desire to perjure himself. They didn’t realise they were up against a modern day Russian hero, who put his own principles and his belief in the law before his physical comfort.

As the year wore on, Sergei’s health got worse and worse. He lost 20 kilos. He developed very serious stomach pains and was diagnosed with pancreatitis and gallstones. He was prescribed an operation, which was scheduled for 1 August 2009. A week before his operation, however, the investigator in charge of his detention, Oleg Silchenko, abruptly moved him to Butyrka, well-known to be one of the toughest prisons in Russia. Most significantly for Sergei, it had no medical facilities whatsoever. At Butyrka, Sergei’s health completely broke down. He went into constant, unbearable pain. He wrote twenty different requests for medical attention to all different branches of the judicial, law enforcement and penal systems in Russia. Every one of his requests was either ignored or outright rejected.

On the night of 16 November 2009, Sergei’s condition became critical. Only then did they move him to a prison with an emergency room. However, when he arrived, he wasn’t treated, but was put into an isolation cell and chained to a bed. Eight riot guards with rubber batons then entered the cell and beat him until he was dead. He was 37 years old.

I learned about Sergei’s death the next morning. It’s impossible to describe what it feels like to know that someone has been taken hostage and tortured to death in your place. The grief I felt then and still feel now is beyond words. On that day, I made a vow to myself and to Sergei’s memory to use whatever time, resources, and energy I have to make sure that the people who did this to Sergei do not get away with it. I resolved that Sergei’s death would not go down as another meaningless death, but one that changes the course of Russian history.

A campaign is born
Well before Sergei’s death, while he was in detention, we tried to do everything we could to get him out of jail. Our first attempt was to prepare a crisp 100-page PowerPoint presentation on the case, and show to any journalist or Western government official willing to listen. But while it helped many of them to understand the case better, and many journalists agreed to write about it, we often found that Russian authorities would lie outright to journalists, who felt obliged to tell both ‘sides’ of the story.

It was like describing a rape and the stories would come out saying: ‘On the one hand she was raped, on the other hand, the rapist said that she deserved to be raped because she was wearing a short dress…’. The full offensiveness of what the Russian government was doing didn’t come out. We were fighting with people who had the full legitimacy of a sovereign government and had no qualms about telling barefaced lies.

As we got more and more frustrated that nobody really understood what was happening to us and to Sergei, one of the young guys on our team had an idea. He said ‘YouTube is becoming popular. Why don’t we make a movie about it and publish it on YouTube?’. In October 2009, we did just that, releasing Hermitage Reveals Russian Police Fraud on YouTube. It went viral and made a huge impact, even on people who already knew our case perfectly. We had bypassed the lies of the Russian government. More importantly, we were able to get all the details out in a clear narrative.

Once the film was released, Russians started coming to us in droves with all kinds of information. Remarkably, even some of the key participants in the crime have begun to share information with us. As with the Syrian army, people can smell which way the wind is blowing. They understand that when this regime changes, which eventually it will, the first tribunals will be the Magnitsky tribunals. Much better do the right thing now, and be treated with some leniency later.

This led to the formation of a group called the Russian Untouchables, a loose aggregation of Sergei’s friends, colleagues, clients and relatives. They put together a series of four more videos on the Russian Untouchables YouTube channel. These videos, now viewed by 2.4 million people, mostly Russian, challenged the way that people thought about the crime.

Normally, if an official government body makes statements and somebody else contradicts those statements, who are you going to believe? Most likely, the official government body. What these videos did was publish all the evidence, tell the story, and say, ‘Who do you want to believe now? A bunch of criminals who are wearing uniforms with documentary evidence proving their guilt, or the people who have been victimized by these criminals?’ People believed us.

Chasing justice
Even though we had all the evidence, and the Russian public was now firmly on our side, getting justice within Russia was always going to be a tall order. From the moment Sergei died, we could see that a coordinated cover-up was at work.

Every arm of the Russian government was working to exonerate the people involved. The Interior Ministry issued documents claiming Sergei died of natural causes, with no signs of violence, and that nobody had been aware that he was ill. They ignored the fact that he filed 450 complaints about his mistreatment and detention.

As time went on and the Russian government did everything possible to hide the truth, we realised that if there were no chance of justice inside Russia, we would have to pursue it outside the country. And how could we do that? Here we made a simple, but important discovery. What happened to Sergei was not an ideological crime, as in the Soviet days. It was not a crime of religious intolerance. It was a crime of money. Once you understand this, you also understand the perpetrators’ motivation. As with other financial crimes of officials, the aim was to steal money in Russia and then to spend it outside the country — in the south of France, in Knightsbridge, in New York City.

Shortly after Sergei died, in April 2010, I was in Washington having a breakfast meeting with a man named Jonathan Winer, who was formerly the U.S. deputy assistant Secretary of State for International Law Enforcement. I talked to him about the lack of justice in Russia and the fact that all these people spend their money in the West. He said, ‘That’s straightforward enough. We have an executive order in the United States that was signed during the Bush administration, Executive Order 7750, which allows the State Department to ban corrupt foreign officials from coming in to the US. You should use this as your tool to ban these people from coming into America’.

My next meeting was with the head of the Russia desk at the State Department, Kyle Scott. ‘Would it be possible to invoke Executive Order 7750 on the following 60 people…’ I asked him. His reaction was not only disappointing, but extremely rude. ‘Even if what you say is true,’ he began, ‘we have so many important strategic issues to deal with Russia that I seriously doubt that this would be a policy that we would ever consider’. I was offended by the implication that what I was saying might not be true. But I was even more offended that he couldn’t, or wouldn’t see the significance of this story.

My next meeting was with Senator Benjamin Cardin, then chairman of the US Helsinki Commission. I had testified before the Commission 9 months earlier, while Sergei was still alive. Cardin was deeply troubled that Sergei died on his watch. When I explained to him what had happened at the State Department he replied ‘Let’s see if they treat a US Senator in the same way’.

Cardin wrote to Hillary Clinton, saying ‘Dear Madam Secretary, please invoke Executive Order 7750 against the following officials’. He posted the letter on his website along with a list of 60 Russian officials complicit in the Magnitsky case. It was just a letter, but it lit up the Moscow sky.

His list, published and republished across the Russian press, sent shock waves through the Russian population. People were excited. So many earlier atrocities had not even been mentioned, let alone acted upon by Washington. Then all of a sudden, a powerful US Senator was calling the Secretary of State to ban criminal Russian officials from coming into the country.

Without knowing exactly what conversations took place, we know the gist of it. Russia’s Foreign Minister Sergei Lavrov got in touch with the US Secretary of State: ‘I thought we were resetting our relations with you?’ It seems the Secretary of State assured him that the reset was still in place, and that nothing like this would ever happen.

After that, Senator Cardin, along with Senator McCain and Congressmen McGovern, Wolf and various others, put together something called the Justice for Sergei Magnitsky Act of 2010. This piece of legislation would not just ban visas, but also freeze assets and name the names of people who were involved in Sergei’s arrest, torture and death. Then all sorts of other victims started coming forward, people associated with activists Natalya Estemirova and Anna Politkovskaya, people from Yukos and many others. While agreeing that it was a powerful piece of legislation, they all asked if it could be broadened to include these other murderers.

After enough of these approaches, Cardin and McCain re-launched the bill as the Sergei Magnitsky Rule of Law Accountability Act, and added another clause to include all other gross abusers of human rights around the world. This went viral in Washington, and in a very short space of time, some 39 Senators had signed up as co-sponsors of the bill. This sent the Obama administration into a state of panic, since it was going to really upset their reset policy. They wrote to all of the senators who had co-sponsored the legislation and pleaded with them to back down. ‘You really don’t need this legislation’, they said. ‘We’ve decided to ban the Magnitsky killers from coming into America’. But when the Senators asked the State Department who exactly had been banned, they were told: ‘We can’t tell you that, it’s classified’. They then said, ‘How many people have you banned?’. And they said, ‘We can’t tell you that either, it’s also classified’.

‘How about asset freezes?’

‘We don’t think that’s the right policy.’

‘What about other cases?’

‘We can’t tell you that. That’s classified.’

Cardin and his 38 co-sponsors concluded that this was not a satisfactory response, and decided they would push the legislation forward. Even then, the administration tried to block it through Senator Kerry. As chair of the Senate Foreign Relations Committee, Kerry decides the committee’s agenda, Unless the legislation is approved by his committee, it does not go to the floor of the Senate. Kerry stopped the bill for about a year.

Meanwhile, a debate was under way about Russia’s bid to join the World Trade Organisation. Accession would bring the need to repeal the Jackson-Vanik amendment, which had been in place since Soviet times. Jackson-Vanik, which used trade sanctions to pressure the Soviets into letting Jews emigrate, was probably the most important piece of human rights legislation ever to have been enacted. The US administration had made a promise to the Russian government and to US businesses that they were going to repeal it. We knew they couldn’t do anything without a vote in Congress.

As soon as they began asking Congress to repeal Jackson-Vanik, I joined a number of people in Washington to remind the senators about Sergei Magnitsky’s story. We all asked a simple question: ‘How can you repeal the most resonant piece of human rights legislation at a time when Putin is falsifying elections, torturing his opponents and trampling over human rights, unless you have a piece of modern and relevant legislation to replace it with?’ And we told them there was already a piece of legislation to replace it — the Magnitsky Act.

In the end, Senators Cardin, Wicker, McCain and Lieberman laid down a marker in which said that they would block the repeal of Jackson-Vanik unless the Magnitsky Act was passed at the same time. Kerry had no choice but to put it through the Senate Foreign Relations Committee, which he did last month.

So there is now a strong likelihood that the legislation will be passed in both Houses of Congress. There’s a lot of politics about timing, but one thing is clear: there’ll be a near unanimous vote when it happens. Nobody will vote against it. And if it is passed by Congress, it will be signed by the President, even though he may not want to. This is election year, and he would lose all Russian-American votes and probably a lot of others too if he were to veto a piece of legislation banning Russian torturers and murderers from coming to America. In a close race, he doesn’t need to do that.

European implementation
The US is not the only country where this issue has resonated among elected politicians. The Dutch Parliament voted unanimously, calling on their government to implement the Magnitsky sanctions in Holland. The British Parliament’s back-bench committee called on the British government to impose Magnitsky sanctions. The European Parliament has passed three resolutions calling on all EU member states to impose sanctions on the Magnitsky killers. In early July this year, the Organisation for Security and Cooperation in Europe, an international body representing parliamentarians from 56 countries, condemned the Russian government’s actions in the Magnitsky case and passed a resolution with a 90% vote calling for Magnitsky sanctions to be imposed in all OSCE countries.

Since this is entirely uncharted territory, it is hard to predict the timing of roll-out of the Magnitsky sanctions. But I feel confident that in the end, most civilised countries will ban the visa and freeze the assets of the Magnitsky killers.

However, these sanctions are not my end goal. They are just an intermediate step. My real wish is that Russia should charge those who killed Sergei Magnitsky with murder. Only then will I and Sergei’s family be satisfied. This is unlikely to happen under the Putin regime. But I don’t think the Putin regime has much of a future. Since they continue publicly to defend the criminals who killed Sergei, his death and the state cover-up may be one of the things that ultimately brings this regime down. buy viagra online unshaven girl https://zp-pdl.com/online-payday-loans-in-america.php https://zp-pdl.com/apply-for-payday-loan-online.php займы на карту