It is no longer possible to distinguish where organized crime ends and the state begins in Vladimir Putin’s Russia. An extraordinary 17-minute video just exhibited by the anti-corruption website Russian Untouchables shows how an elite crime syndicate headed by a longtime gangster, Dmitry Klyuev, and including active agents of the Russian Interior Ministry and Moscow tax offices, managed to steal close to $1 billion from state coffers in fraudulent tax claims. It was the Klyuev Group that attorney Sergei Magnitsky exposed after one of his clients, Hermitage Capital, was raided and its corporate documents pilfered in order to defraud the Russian state of $230 million in a sham corporate tax refund—a refund which was processed in a single day by the co-conspirators themselves. After Magnitsky exposed it, the Klyuev Group had him framed, tortured, and murdered, then blamed for the crime. The substance of this new video, all obtained through Magnitsky’s relentless legal work and backed by bank, state, and airline records, is both the reason for his death as well as his testament. All the evidence corroborating what Magnitsky uncovered can be accessed at the Russian Untouchables website. What follows is a precis of the film.
Dmitry Klyuev was a petty crook who was hired in 2002 by Igor Sagiryan, the president of Renaissance Capital, one of Moscow’s most prominent investment firms, to act as a “tax advisor who had skills in arranging tax refunds through the Russian court system,” according to another Renaissance executive who testified in court. The scheme involved arranging a refund for a company Renaissance had only recently purchased; it was completed within 6 to 8 months.
Two years later, Klyuev and his lawyer, Andrey Pavlov, tried to steal $1.6 billion in shares from the iron ore company Mikhailovsky GOK. An investigation was launched by the Interior Ministry headed by Major Pavel Karpov, who instead of doing his duty, became an accomplice of his suspect. He and Klyuev went on holiday together to Larnaca, Cyprus four months before the verdict against the latter was announced. Karpov helpfully identified Klyuev’s 41 year-old driver, soon found dead of “heart failure,” as the true mastermind of the Mikhailovsky GOK fraud. Klyuev received a suspended sentence and light fine while his attorney Pavlov was never even indicted.
In August 2006, Karpov and his superior at the Interior Ministry, Lieutenant Colonel Artem Kuznetsov, acting at Klyuev’s behest, arranged the arrest of Fyodor Mikheev, a 36 year-old fertilizer executive from Moscow. Klyuev then asked his enforcer Sergei Orlov to take Mikheev from his prison cell at Petrovka 38 to a country house where Mikheev was held for a $20 million ransom by Orlov and a convicted killer and former sawmill worker, Viktor Markelov. These low-level thugs threatened to gang rape Mikheev’s wife if she went to the police. According to Ekaterina Mikheeva’s testimony, they told her: “[W]ould you like it if you were taken to a country house with many drunken men who would then rape you in a circle?” She went to the authorities anyway, relying on a federal anti-kidnapping task force to free her husband. Orlov and Markelov were arrested. A criminal case was opened against Karpov and Kuznetsov, and Klyuev was questioned. But the case was subsequently dropped, and Orlov and Markelov were freed despite being found holding Mikheev against his will. Mikheev later testified that Orlov had informed him that Karpov and Kuznetsov “were the vengeful sword of the Presidential Administration and they are allowed to take any bribes, and the Prosecutor of the City of Moscow would sign any document they submit to him.” It certainly substantiates Mikheev’s allegation of criminality extending well beyond the Interior Ministry that he himself was then re-arrested and sentenced to 11 years in prison, where he remains today. The Russian magazine Ogonek recounted the details of the Mikheev affair in 2010.
Six months after the kidnapping, the Klyuev Group attempted another tax fraud, this one valued at $107 million and tied to the RenGaz Fund, an affiliate of Renaissance Capital. Klyuev’s lawyer Pavlov alleged that two of RenGaz’s subsidiaries—Financial Investments (Finansovye investizii) and Selen Securities—had been hit with civil judgments, reducing the Fund’s declared profits for its investors by the amount awarded in damages for the 2006 tax year. (You can dial up the phony lawsuits Pavlov filed here.) Thus, Pavlov falsely made RenGaz eligible for a massive refund. He brought in corrupt officials from Moscow Tax Offices 28 and 25 to process the claim and the money was wired to accounts in the Universal Savings Bank, which Klyuev owned. Amazingly, the Russian government has yet to declare the $107 million refund a crime or start an investigation.
In what became standard practice for the Klyuev Group, Klyuev, Olga Stepanova, the head of Moscow Tax Office 28, and Stepanova’s husband, all took a vacation together in Dubai whence they traveled to Geneva, where the Stepanovs held secret bank accounts with Credit Suisse. Klyuev and the Stepanovs returned to Moscow together on the same flight. At roughly the same time, Karpov and Pavlov and Pavlov’s wife all went on their own holiday, a 5-day shopping spree in London, just prior to New Year’s. Pavlov’s wife even noted on her UK Border Agency visa application that she and her husband were traveling with the Interior Ministry officer.
Next followed the theft from Hermitage Capital, a caper that was plotted from Cyprus in 2007 by all the key figures in the Klyuev Group. (I wrote about the case for World Affairs in the January/February 2012 issue.) Again, the evidence of a criminal fraternity is overwhelming. Kuznetsov flew to Larnaca on Klyuev’s private jet; Karpov and Pavlov and Pavlov’s wife traveled on the same flight to Larnaca a few days later. Stepanova and her husband arrived next. From here, each member of the syndicate was assigned his task, the Untouchables video and website shows. Kuznetsov and Karpov, backed by 25 Interior Ministry agents, raided Hermitage Capital in Moscow on June 4, 2007, stealing the fund’s corporate documents and seals. The documents were then used to re-register three Hermitage companies in the name of Viktor Markelov, the man who had kidnapped Fyodor Mikheev in league with Karpov and Kuznetsov a year before. These companies were transferred to Stepanova’s Tax Office 28 and Tax Office 25, run by her subordinates, and accounts were opened in Klyuev’s Universal Saving Bank. Pavlov performed the same trick he’d used in the RenGaz affair, claiming that a civil judgment against the re-registered Hermitage companies made Hermitage eligible for a colossal rebate. He even used the same courts and the same plaintiffs in the fabricated civil judgment as he had in the earlier fraud. $230 million was wired from Tax Offices 28 and 25 into the Universal Savings Bank accounts in a single day.
The gang then celebrated their triumph. On New Year’s Day 2008, Karpov, Pavlov and Pavlov’s wife traveled to Istanbul and returned to Moscow together four days later. Pavlov and his wife then went to Dubai to join the Stepanovs and Klyuev. The Stepanovs subsequently made four down payments from their Credit Suisse accounts on $8 million worth of properties at the Kempinski Hotel and Residences Palm Jumeirah. (In April 2011, the Swiss government froze the Stepanovs’ Geneva accounts.)
Magnitsky explained to Businessweek that all these thefts had the same perpetrators and were responsible for hundreds of millions in stolen money from the Russian government. He testified against everyone involved and fingered Karpov and Kuznetsov for the Hermitage theft.
After being identified publicly, Stepanova and her husband fled Moscow for Dubai. They were soon followed by Igor Segariyan, the president of Renaissance Capital who years earlier had arranged Klyuev’s first tax scam using the firm’s corporate holdings. Segariyan traveled with another Renaissance executive, Vladimir Jabarov, a former general with the FSB, the KGB’s successor agency.
The cover-up of the Hermitage crime commenced. The Stepanovs and Segariyan flew back to Moscow on the same flight. The next day, Kuznetsov had Magnitsky arrested and his files confiscated.
Magnitsky was tortured in custody, denied visits from his family and deprived of badly needed medical treatment, all in order to get him to withdraw his testimony against the Klyuev Group. The Interior Ministry first blamed the entire conspiracy on Markelov, the low-level murderer and kidnapper of Mikheev. This didn’t pass the Russian media’s sniff test, so two more fall guys were named, the last being a 53 year-old security guard who had died two months before the $230 million was stolen.
Klyuev was now widely identified in the press as the mastermind of the Hermitage scam and the owner of Universal Savings Bank. So he sold the bank to a clothing salesman who had the misfortune, like other patsies associated with this crew, of dying in 2008 by falling off a balcony.
The Interior Ministry exonerated Olga Stepanova and her subordinates, claiming that they had been “tricked” into issuing the refunds. Yet as to how these officials collectively became $43 million richer when their state salaries were in the $10,000 range was apparently uninteresting to Russia’s largest domestic crime agency. As for the stolen money, alas, it was lost forever because, as the Ministry claimed, the truck carrying all the Universal Savings Bank records blew up.
On November 16, 2009, after suffering horribly from severe pancreatitis, Magnitsky was taken to Matrosskaya Tishina prison where he was handcuffed and beaten to death by eight riot guards in an isolation cell. His official cause of death was—what else?—“heart failure.” A year later, the Interior Ministry blamed Magnitsky for the Hermitage tax fraud.
Russia’s independent newspaper Novaya Gazeta and the Financial Times found earlier this year that after framing and killing Magnitsky, the Klyuev Group went on to recoup an additional $400 million in bogus refunds, all sanctioned by Stepanova’s Tax Office 28. The new bank had the same registered address as the Universal Savings Bank Klyuev sold off.
After the Magnitsky affair became a cause célèbre in Russia, and the subject of countless international news articles, Stepanova, whose family constructed a $28 million mansion just outside of Moscow, resigned from her post only to be appointed by a new federal agency created by former Russian President Dmitry Medvedev to furnish Russian police and military with new equipment.
Major Karpov and Oleg Silchenko, the Interior Ministry senior investigator who alleged and purported to “investigate” Magnitsky’s guilt, were given top state honors for their police work on the anniversary of their victim’s death. This, despite the fact that Karpov and his family were shown to have amassed assets worth at minimum $1.3 million and the state’s own Public Oversight Commission, which examined Magnitsky’s treatment and demise in prison, found that “the circumstances that have led to the death of detainee Magnitsky cannot be viewed separately from the course of the investigation of the criminal case.” To date, no one actually associated with the Klyuev Group or the conspiracy to rob the Russian taxpayer and railroad Magnitsky has yet been brought to justice.
For this reason Congress is now set to pass the Sergei Magnitsky Rule of Law Accountability Act, which would impose visa bans and asset freezes against the 60 individuals credibly named in the conspiracy. (In the bill’s Senate version there’s a universal clause that applies not just to the one case or to Russia but to all future perpetrators of “gross violations of human rights” from any country in the world.) The White House contends that the impetus behind the act is obsolete, as the State Department has already—quietly—imposed sanctions on a select group of Magnitsky conspirators, although their identities have not been named. The public naming and shaming of human rights violators is the gravamen of the entire legislation, which is why the Russian Foreign Ministry is especially apoplectic about this bill inevitably becoming a law.
Senator John McCain this week wrote to President Obama asking him to invoke Executive Order 13581, which imposes sanctions against transnational criminal organizations, against the Klyuev Group.