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May 29 2013 | 12:52pm ET
Once the largest foreign investor in Russia, Hermitage Capital Management's William Browder is now a wanted man in the country, which barred him from entering it in 2005. Russia accuses Browder of tax fraud, and recently tried—and failed—to have him tracked by the international policing agency Interpol. But Browder says that Russia is after him because he's a whistleblower, uncovering evidence that the huge fraud was actually perpetrated by corrupt government officials who tortured Hermitage's lawyer to death to silence him.
Browder, an American-born British citizen, recently spoke with FINalternatives Senior Reporter Mary Campbell about the case and his campaign for justice for the late Sergei Magnitsky.
What happened to Hermitage Capital in 2007?
In 2007, our offices in Moscow and the offices of our American law firm were raided by the Moscow Interior Ministry. They seized all of our corporate documents, which were then used to fraudulently re-register our companies and then fraudulently apply for a $230 million tax refund from the Russian government—taxes that we paid to the government in the previous year. It was the largest tax refund in Russian history and it was granted in one day on Christmas Eve in 2007.
The recent leak of tax-haven documents by the the International Consortium of Investigative Journalists revealed information related to the Hermitage case.
After committing the tax rebate fraud, the criminal group then attempted to destroy the evidence by liquidating our stolen companies. They first sold the stolen companies to a British Virgin Islands company called Boily Systems, and then Boily applied to liquidate our stolen companies.
Once we discovered the transfer to Boily, our lawyers wrote to Commonwealth Trust Co., the company-formation agent in the British Virgin Islands, to determine who stood behind Boily and what was going on. Unfortunately, Commonwealth Trust stonewalled us at every step of the way.
While this was going on, our lawyer, Sergei Magnitsky, had been arrested and was sitting in jail after testifying against some of the police officers who were involved in the crime. What we have since discovered from the leaked documents is that the management of Commonwealth Trust were apparently looking for elegant ways not to tell us what was really going on. Had we known the information earlier, it might have helped us expose the corruption behind his false imprisonment and get Sergei Magnitsky out of this terrible situation. And as a result of his incarceration and the fact that we couldn't get him out, he ended up being tortured and killed in pre-trial detention on Nov. 16, 2007.
In your opinion did BVI company know there was something questionable about Boily and its transactions?
We alerted them to all the facts about the theft of our companies and about the role that their client was playing in the cover-up of the fraud. In spite of that, they chose not to help us and to block us in terms of providing information.
The other important element was their link to one of the key individuals who received some the proceeds from the crime that Sergei Magnitsky discovered. As we later learned, some of the $230 million found its way back to a Russian individual named Vladlen Stepanov, the ex-husband of the Russian tax official who authorized the illegal tax refund in 2007. In 2010, we found out that two companies that were owned by Stepanov received approximately €8 million into accounts at Credit Suisse Private Bank Zürich. It turns out that one of those companies was set up by Commonwealth Trust, and we also learned that Commonwealth Trust offered a written declaration to Credit Suisse that the company wasn’t involved in money laundering.
You said the tax havens are implicated in this case, but they're not your main target.
Our main aim is to prosecute the people who were involved in the false arrest, torture and death of Sergei Magnitsky. However, anyone who profited from the crime he discovered or those who were enabling them should also face consequences for their involvement.
What progress have you made in your campaign?
We originally targeted prosecutions in Russia, but that became impossible when the Russian government explicitly exonerated and protected all the people involved. Therefore, it became clear to us that we should seek justice outside Russia.
There are now two main facets to the campaign. One is to seek visa sanctions and asset freezes on the people who played a role in the Magnitsky affair. The second is to trace the money that was stolen and to make sure the people who stole that money see that money confiscated.
The U.S. Magnitsky Act is a very strong first step in the political side of the equation; however, it's only a first step because Europe is a very crucial part of our campaign and we need to implement the same sanctions in Europe.
In terms of tracing the money, we have been able to trace $135 million out of the $230 million to eight different jurisdictions, and have written to the police and prosecutors in those countries. There are now six different countries that have criminal investigations opened into the money laundering: Lithuania, Latvia, Estonia, Cyprus, Switzerland and Moldova.
Has pursuing this case become your full-time activity?
No, I'm still running a hedge fund; I'm basically working two full-time jobs. We run the Hermitage Global Fund, which is an emerging-market long/short equity fund. It has done pretty well; we're up about 8% this year with almost zero net exposure to the market.
But you no longer invest in Russia.
Definitely not. As somebody who truly knows Russia, I can say that Russia is an un-investable country.
Basically, you have a country where the entire apparatus of the state is used to steal money. Anyone who blows the whistle on government corruption risks death. There is also no way of assessing the probabilities of whether you'll be able to take your money out at any point, and there's no way to assess the other non-financial dangers that would come from trying to protect your money if they do try to steal it.
What kind of support do you have within Russia?
If you could sit people down in their living rooms without any fear of being overheard, we would probably have overwhelming support for our cause in Russia. However, because President Vladimir Putin has made it his single most important national policy to cover up the murder of Sergei Magnitsky, most people would be afraid to publicly support us because they don't want to get into trouble themselves.
Why is this case so important to Putin?
Well, because we've found the Achilles heel of the regime. They like to steal money in their own country and they like to keep it safely in the West. By challenging the safety of their money in the West, it creates a catastrophic downside for them.
Do you see any hope for change in Russia?
I don't think that a criminal regime is going to change itself. I believe that there are enormous cracks which are emerging in the way in which Russians view the regime and I think that if oil prices were to drop another $20, there would be a real potential pressure for regime change, and if they were to drop $40, I think that Putin would quickly be ousted by his own people.