Mercury Rising 鳯女

Politics, life, and other things that matter

Hermitage, GT Group, and offshore tax havens

Posted by Charles II on November 28, 2012

A huge fraud, $230M, was committed in Russia against the Hermitage group. Jerome Taylor, The Independent:

What [auditor Sergei] Magnitsky uncovered was as follows. In late 2007 Russian police raided the offices of Hermitage Capital Management, a multi-billion pound investment fund set up by the British businessman Bill Browder, ostensibly looking for information on an investor. During that raid company seals and corporate certificates were taken into evidence. Over the following months those seals were used, with the complicity of corrupt court and tax officials, to transfer ownership of a Hermitage subsidiary and apply for a tax rebate. On December 24th 2007, tax officials signed off on a 5.4 billion rouble ($230m) rebate. The money was wired to Universal Savings Bank, a little known bank that was quickly liquidated following the transfer.

The Russian police admit that the crime took place but they have pinned the blame on a retired sawmill worker, a burglar and two others who died suddenly in the immediate months following the fraud.

Russia’s unwillingness to prosecute the real perpetrators of the scam has not stopped Mr Browder from using his own tenacity, resources and a team of disaffected Russian business experts to uncover new details through their own investigations. The results are published regularly on the website, a prominent gathering point for Russians who are angered by corruption in their homeland.

Today, Jerome Taylor and Cahal Milmo report that another witness has died suddenly:

A Russian supergrass who was helping Swiss prosecutors uncover a multi-million pound money laundering scheme used by corrupt Russian officials has died in mysterious circumstances outside his Surrey home, The Independent can reveal.

Alexander Perepilichnyy, a wealthy businessman who sought sanctuary in Britain three years ago after falling out with a powerful crime syndicate, collapsed outside his mansion on a luxury private estate on the outskirts of Weybridge. He was 44-years-old and was in seemingly good health.

The Independent has learned that Mr Perepilichnyy was a key witness against the “Klyuev Group”, an opaque network of corrupt Russian officials and underworld figures implicated in a series of multi-million pound tax frauds and the death in custody of the whistle-blowing Moscow lawyer Sergei Magnitsky. He is the fourth person to be linked to the scandal who has died suddenly.

One of the companies involved in the scandal was set up by Geoffrey Taylor/GT Group (the original article, from Barrons, is here, but most of it is behind a paywall):

The business magazine Barron’s reported that late last month documents emerged out of London that linked a shell company called Bristoll Export, registered in New Zealand by GT Group, to a scandal that some commentators claim has the potential to be Russia’s Watergate.

It centres on Russia’s largest tax fraud, which occurred on Christmas Eve, 2007, when Moscow tax officials approved a same-day refund of $US230 million to a gang masquerading as representatives of Hermitage Capital, once the largest portfolio investor in Russia.

The money was funnelled through accounts at Citibank, JPMorgan Chase and Credit Suisse via a series of shell companies, one of which was allegedly Bristoll Export.

One of our posters, X, has drawn attention to a post over on by Richard Smith on Naked Capitalism that discusses how the GT Group is involved in half of the shell companies unearthed by the Guardian in its expose on offshore havens, which I mentioned a couple of days ago (here and here).

My question is what does it mean? Creating these shell companies is legal. If I suddenly had a brainstorm and wanted to incorporate in a hurry, I might use one. They are just tools. Knocking out a busy beaver like Geoff Taylor might inconvenience the crime figures, arms smugglers, and former Massachusetts governors/presidential candidates who use these tools, but someone else would take their place very quickly. What would seriously inconvenience these people would be a requirement that companies actually follow the rules of incorporation, like for example, having one person serve as the head of no more than, say, half a dozen companies, that the companies have annual meetings and file annual reports. Even so, there are a lot of legitimate businesses that might scream about that (don’t ask me to explain, but there are small businessmen who have complex business structures to protect themselves from liability).

This is one of those situations which excites the conspiratorially-minded, since it’s very likely that the owners of these shell companies include arms smugglers, Russian mafia, porn site operators, offshore poker sites, drug cartels, and the CIA. But that’s like saying that burglars and locksmiths both have lockpicks.

2 Responses to “Hermitage, GT Group, and offshore tax havens”

  1. Dickeylee said

    To slay this Hydra you need to go to the heart of this matter, the laws, even the legality, of incorporation. To be able to shield ones self from liability is at the heart of our problem. Citizens United then is truly Alice in Wonderland material…

    • Charles II said

      I don’t think it’s the shield from liability per se which is, after all, far from absolute. It only covers conduct normal to the operation of a business, and it doesn’t prevent the corporation from being sued for damages. For large ventures, a cap on liability has to be established. One can argue that the shareholder value of a corporation (assets-liabilities) is not a large enough cap, since corporations can declare bankruptcy to avoid judgment. But who–especially among smaller investors– would invest in a company if the company’s bad conduct could result in your house being seized?

      Many of the bad things corporations do don’t even have to do with liability. For example, if a news corporation slants its coverage to suit its advertisers or its owners, that’s not something they could be sued over. Or lobbying for corporate advantage. Or accepting corporate development binds and tax advantages to locate a factory somewhere. Or taking advantage of eminent domain to get a city to condemn private property, as happened in CT. All of these things are perfectly legal even if individuals are liable for the conduct of a corporation.

      I think the real problem is more complex. First, the courts are controlled by conservatives. It’s that which means that as a practical matter it’s hard to pierce the corporate veil and extend liability to the officers and shareholders. Second, corporations have too many resources compared to most individuals, making it impossible to get a fair trial. Third, conservative judicial activism in rulings like Citizens United have perverted the meaning of person to grant rights to corporations that were never intended to be granted. It’s these accumulated advantages which give corporations near-impunity, and they can be solved only through reform of the courts and through legislation to level the playing field. I think it would be fair, for example, to require that corporations employ no greater financial resources in defending themselves than plaintiffs expend in suing them.

      Think about what that reform alone would mean.

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