Theft of $230m from the Russian budget

The corruption and thefts Sergei Magnitsky discovered and testified about is described in detail below and in a short video.

See a short video about the $230 mln. corruption and theft exposed by Sergei Magnitsky

The theft of $230 million occurred in two stages.  In the first stage Ministry of Interior officers Kuznetsov and Karpov helped to steal three companies owned by one of Sergei Magnitsky’s clients, the Hermitage Fund. In the second stage, the stolen companies were used to rob the Russian Government budget of 5.4 billion rubles ($230 million).

Stage 1 of the $230 mln theft: Stealing 3 Hermitage Fund Companies

In the first stage of the theft, in June 2007 a group of Ministry of Interior officers led by Lt. Col. Artem Kuznetsov raided the Moscow offices of American-owned law firm Firestone Duncan where Sergei Magnitsky worked and without a warrant confiscated the statutory documents and seals of three companies owned by Hermitage Fund. Hermitage Fund was a client of Sergei’s law firm. At the time, it was the largest foreign portfolio investor in Russia and also one the largest taxpayers in the country. The Interior Ministry refused to return the statutory documents and seals despite several requests and complaints. In October 2007 several months after the raid, Sergei discovered that while the documents and seals of his client were in the custody of officers Artem Kuznetsov and Pavel Karpov at the Moscow Branch of the Ministry of Interior, these materials had been used to fraudulently re-register his client’s companies into the name of a convicted killer, Victor Markelov.  Documents and seals that were supposed to be safe in Ministry of Interior custody were used to steal his client’s companies.

Stage 2 of the $230 mln theft: Using the stolen companies to steal $230 million from the government.

In the second stage of the theft, between July and December 2007, the criminal group sued the companies that they had stolen using forged agreements and relying on documents seized in the police raids. In the courts, the lawyers hired by the criminals supposedly to “defend” the stolen companies, simply accepted full liability under the fake lawsuits.  Corrupt judges who had been chosen not to ask uncomfortable questions immediately ruled that the stolen companies had to pay around $1 billion in damages.

Sergei Magnitsky discovered the sham awards in the middle of October 2007, conducted an investigation and helped to prepare criminal complaints implicating Lt.Col. Artem Kuznetsov and Major Karpov as being involved in the misappropriation of Hermitage Fund companies and the creation of $1 billion of fake judgments against them. This sum matched the amount of profits the Hermitage Fund had declared and paid in Russian taxes on in 2006 before these companies were stolen.

On 3 December 2007, Hermitage lawyers using the information discovered by Sergei Magnitsky, acting on behalf of the trustee of Hermitage Fund, HSBC, filed three 255-page criminal complaints with Russian General Prosecutor Chaika, head of the Investigative Committee of the Prosecutor’s Office Bastrykin, and head of the Internal Affairs Department of Interior Ministry Draguntsov requesting to open a criminal investigation into the misappropriation of Hermitage Fund companies and detailing the role of Lt Col Kuznetsov and Major Karpov in seizing the corporate documents and enabling the theft of the companies.

Had these complaints been swiftly and properly investigated, the second stage of the fraud would have been prevented and the Russian people and Russian budget would not have lost 5.4 billion rubles (US$230 million.) However, the complaints were not swiftly investigated.  An investigation of Hermitage’s application was opened only on 5 February 2008, which gave the criminal group all the time they needed to move ahead with their plan and use the stolen companies to rob the government.

On 24 December 2007, Markelov and his accomplices filed a fraudulent amended tax return for 2006 saying that all the profits declared by the Hermitage Fund were cancelled by these new court judgments and  asked for a refund of the US$230 million in taxes these companies had paid under their legitimate owners. With the help of corrupt partners in the Tax Service whose actions were covered by the corrupt Interior Ministry officers, 5.4 billion rubles (US$230 mln) was refunded to the criminal group in 1 day.

Even though the criminals had successfully stolen the money, the opening of the investigation on Hermitage’s request threatened to expose the fraud and the Interior Ministry officers’ involvement. For this reason, three weeks later, two of Lt Col Kuznetsov’s subordinates Droganov and Tolchinsky, Major Karpov and officer Kuvaldin of the Federal Security Service (known as FSB, Russian intelligence service) flew to the Russian republic of Kalmykia and pressured local investigators to reopen a criminal tax investigation which was initiated by FSB in 2004 and closed for lack of crime in 2005. There was no legitimate reason for this case, in fact the statute of limitations for collecting tax debts had already expired, but this didn’t stop the corrupt Interior Ministry officers who were able to quickly move the case to their control in Moscow in order to threaten and intimidate Hermitage executives and their lawyers. On 5 May 2008, Lt Col Kuznetsov signed a report to also initiate a criminal case against the Hermitage lawyers who reported his crimes in complaints filed on behalf of Hermitage Fund. Lt Col Kuznetsov falsely claimed that the lawyers did not have genuine powers of attorney.

In the meantime, Hermitage lawyers discovered that these complaints naming officers Kuznetsov and Karpov for abuses were forwarded for investigation to officer Karpov himself and therefore there was no progress in the investigation of the perpetrators who stole Hermitage Fund companies. On 5 June 2008, Sergei Magnitsky went to give his testimony under the case opened to investigate that theft and seek to progress that investigation. While testifying, he was informed by the investigator that Lt Col Artem Kuznetsov had been appointed to conduct the investigation!  This meant that officer Kuznetsov was now responsible for investigating himself and his criminal accomplices.

By July 2008 Sergei discovered and assembled the evidence about the second stage of the theft and how Russian tax authorities paid $230 million to the criminals. Based on these findings, Hermitage Fund lawyers filed 6 more complaints with government and law enforcement bodies in Russia requesting an investigation of the $230 mln theft perpetrated jointly by officials and criminals.

Once again the Untouchables were feeling threatened, therefore, in August 2008, they sent police to search the offices of four lawyers working for four different law firms. They also sent the lawyers summonses for questioning in violation of the law that prohibits questioning lawyers about their clients. Soon, the Untouchables initiated criminal cases against the two Hermitage Fund lawyers who had reported their abuses and involvement in the $230 million theft. The lawyers had to stay in exile for fear for their liberty and safety.

On 7 October 2008, Sergei Magnitsky even though he had seen his colleagues attacked and chased out of the country, decided to testify about the criminal role of Lt.Col. Artem Kuznetsov and Major Karpov. He did this because he felt that it was outrageous and wrong that law enforcement officers would steal from their own people and their own government, and then persecute lawyers who reported these corrupt acts.

It was then the corrupt Interior Ministry officers decided to silence Sergei Magnitsky.

On 12 November 2008, Lt.Col. Artem Kuznetsov and his three subordinates – Krechetov, Droganov and Tolchinsky – were appointed by Deputy Head of Interior Ministry’s Investigative Committee Oleg Logunov to investigate the retaliatory criminal case against Hermitage. On 24 November 2008, Lt Col Kuznetsov’s subordinates came to Sergei Magnitsky’s home and arrested him in front of his wife and two children.

Click here to learn how Sergei Magnitsky was tortured and killed in pre-trial detention.

US$230 fraud against Russian people discovered by Sergei Magnitsky

• Complaint on the theft of three Hermitage Fund investment companies by Interior Ministry Officers Kuznetsov and Karpov and their accomplices, filed with the Investigative Committee of the General Prosecutor’s Office (Bastrykin) (3 December 2007)
• Complaint on the theft of three Hermitage Fund investment companies by Interior Ministry Officers Kuznetsov and Karpov and their accomplices filed with the Investigative Committee of the General Prosecutor’s Office (Bastrykin) (10 December 2007)
• Complaint filed with the Investigative Committee of the General Prosecutor’s Office (Bastrykin) on the absence of an investigation into the theft of the Hermitage Fund companies (26 February 2008)
• Application by Hermitage Capital to the Russian Presidential Anti-Corruption Committee about the abuse of office by Interior Ministry officials and the theft of the Hermitage Fund’s investment companies (28 May 2008)
• Complaint on the theft of $230 million of taxes earlier paid by the three investment companies of the Hermitage Fund and the absence of any investigation into the theft of the Hermitage Fund’s companies, filed with the Investigative Committee of the General Prosecutor’s Office (Bastrykin) (23 July 2008)
• Complaint on the theft of $230 million of taxes paid by the three Hermitage Fund investment companies and the absence of any investigation into the theft of the Hermitage Fund’s companies by the Interior Ministry officers and their accomplices, filed with the General Prosecutor’s Office (Chaika) (23 July 2008)
• Complaint on the unwillingness to investigate the theft of the Hermitage Fund’s investment companies and large-scale fraud, filed with the General Prosecutor’s Office (Chaika) (21 July 2008)
• Complaint by Hermitage Capital to the General Prosecutor’s Office on the illegal persecution of their lawyers who reported the Interior Ministry officers’ complicity in the $230 million theft (10 November 2008)
• Complaint to the General Prosecutor’s Office on the illegal persecution of their lawyers who reported the Interior Ministry officers’ complicity in the $230 million theft (27 October 2008)

3 December 2007. Complaint on the theft of three Hermitage Fund investment companies by Interior Ministry Officers Kuznetsov and Karpov and their accomplices, filed with the Investigative Committee of the General Prosecutor’s Office (Bastrykin).
On 3 December 2007, three weeks prior to Russian officers’ embezzling $230 million from the Russian state budget, the Hermitage Fund filed applications with the Investigative Committee of the General Prosecutor’s Office to open a criminal case into the theft of its three investment companies and the complicity in the theft of Interior Ministry Officers Kuznetsov and Karpov. Similar applications were filed with the Russian General Prosecutor’s Office and the Head of the Internal Affairs Department of the Interior Ministry. These applications notified Russian law enforcement agencies of the facts Hermitage discovered about the theft of its companies and dozens of fraudulent multi-million dollar judgments issued against these companies for the recovery of non-existent debts. The applications described in detail the fraudulent scheme and named the officers and judges who enabled the theft, as well as their accomplices, including convicted killer Victor Markelov, as well as attorneys Andrey Pavlov, Yulia Mayorova and Ekaterina Maltseva.
[Download this document in PDF]

10 December 2007. Complaint on the theft of three Hermitage Fund investment companies by Interior Ministry Officers Kuznetsov and Karpov and their accomplices filed with the Investigative Committee of the General Prosecutor’s Office (Bastrykin)
Application by the Hermitage Fund with the Investigative Committee of the Russian General Prosecutor’s Office requesting the opening of criminal proceedings in relation to the misappropriation of the Hermitage Fund’s investment companies and the complicity of Interior Ministry officers in the theft.
[Download this document in PDF]

26 February 2008. Complaint filed with the Investigative Committee of the General Prosecutor’s Office (Bastrykin) on the absence of an investigation into the theft of the Hermitage Fund companies
Complaint filed on behalf of the Hermitage Fund with the Head of the Investigative Committee of the Russian General Prosecutor’s Office, protesting the lack of progress in the investigation of previously filed complaints about the theft of the Hermitage Fund companies, the fabrication of judicial decisions and the complicity of Interior Ministry Officers Kuznetsov and Karpov in the thefts.
[Download this document in PDF]