Bill Browder accuses Russian corporate raiders of $230m fraud 

By Philip Aldrick

Russian corporate raiders with contacts reaching high into the upper echelons of the nation’s law enforcement agencies have been accused of robbing the state of hundreds of millions of dollars in a sophisticated fraud uncovered by the activist US investor Bill Browder. 

The gang, one of a burgeoning group notorious for stripping companies of their assets, had originally targeted Mr Browder’s hedge fund Hermitage Capital Management but, after failing to seize any of the $376m (£190m) it was after, directed its attention to recovering tax paid by the company. 

In an elaborately constructed scheme, the raiders took control of three Hermitage subsidiaries, won fake lawsuits and filed fraudulent tax returns to reclaim the $230m of capital gains tax Hermitage paid in Russia in 2006. Within a month of filing the falsely amended returns, Russian authorities had paid out the money and an ornate cover-up had begun. 

Mr Browder’s allegations of institutional corruption strike at the heart of Russia’s corporate minefield and further expose the difficulties of conducting business in a country already under fire for its treatment of multinational oil giants Royal Dutch Shell and BP.

Comment: TNK-BP shows pitfalls of doing business in Russia

Hermitage alleges that a senior Russian police officer at the Interior Ministry aided by other law enforcement officials, all suspected to be connected to the Russian mafia, initially tried to steal $376m from the company before switching their attention to securing a fraudulent tax rebate. The Interior Ministry is equivalent to the Metropolitan Police.

Through a series of office raids conducted last year on unproven grounds of tax avoidance, the police officer seized the official seal, original charter and original certificates of registration for three Hermitage subsidiaries – Rilend, Parfenion and Makhaon. Unknown to Hermitage, he then allegedly used the documents to move the companies into new ownership.

In October, and unknown to Hermitage, the three “stolen” companies pleaded guilty in a St Petersburg arbitration court of failing to pay contractual fees to a company called Logos Plus. The judge ruled that $376m was owed. Hermitage only discovered the ruling three months later.

Hermitage alleges that the fraudulent cases were designed to provide legal authority for the seizure of up to $500m of cash and assets the gang believed was held in its bank accounts. However, the hedge fund had already moved all its money offshore because of concerns about political interference.

When the gang discovered there was nothing in the accounts, it launched another set of false lawsuits in Moscow and Kazan which resulted last November in awards against Rilend, Parfenion and Makhaon totalling $973m – exactly the same as their combined 2006 profit. By using these fake liabilities to eliminate the profits, the “stolen” companies’ new owners were able to reclaim the $230m of tax Hermitage had paid.

Information available from the Russian central bank shows that Rilend, Parfenion and Makhaon deposited exactly $230m with two small local banks by January 1 this year, even though Hermitage insists there were no assets in the companies. The funds were then dispersed and ownership of the three “stolen” companies was passed to a British Virgin Islands company that last month filed for their liquidation.

Hermitage alleges that the cover-up gathered pace once it started pressing the authorities to investigate the alleged theft of taxpayers’ money.

Five of six official complaints filed by Hermitage to the authorities were rejected and the one that did get traction was last month assigned to the very police officer who remains a principal subject of investigation. On June 25, the Universal Savings Bank, one of two lenders that received the deposits from Rilend, Parfenion and Makhaon, filed for voluntary liquidation.

Mr Browder, one of Russia’s largest foreign investors, has now written personally to President Dmitry Medvedev and spoken with finance minister Alexei Kudrin as well as the 19 members of the recently-formed Anti-Corruption Council to request they take up the case.

Hermitage believes that the individuals involved are senior members of Russia’s leading law enforcement agencies, who worked in collusion with people in the tax ministry and judiciary. “We operate in many developing countries but we have never seen anything as sophisticated as this,” a spokesman said. “It’s like something out of a detective novel.”

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/07/25/cnrussia125.xml

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