The Magnitsky Act or, formally, the “Russia and Moldova Jackson-Vanik Repeal and Sergei Magnitsky Rule of Law Accountability Act of 2012”, is a US law which was passed by the U.S. Congress and signed by President Obama in December 2012. The main intention of the law is to restrict Russian officials thought to be responsible for the death of Sergei Magnitsky from entering the United States and using its banking system. The law is intended to have wider implications, capturing any corrupt officials of any third cuntries who so flagrantly abuse their power as in the case of Sergei Magnitsky.
Sergei Leonidovich Magnitsky died on 16 November 2009 in Moscow Butyrka prison after 358 days in custody, just 8 days before he, according to Russian law, had to be released or charged. Sergei Leonidovich was a Russian accountant and forensic auditor at the Moscow law firm Firestone Duncan. He was said to be the 'go-to guy' among Moscow accountants on all things to do with courts, taxes, fines and civil law. Firestone Duncan was representing the investment advisory firm Hermitage Capital Management which had been accused by the Russian Interior Ministry of tax evasion and tax fraud. Hermitage Capital Management was until recently best known as an activist minority shareholder in Russian state-controlled companies. It had for years tried, quite vocally, to improve the corporate governance and minority shareholder protections in Russia. Hermitage had repeatedly publicized information on corporate and governmental misconduct and corruption within prominent state-owned Russian enterprises, most famously . At the end, the Russian government had enough of this publicity. In November 2005, Hermitage's company co-founder William Browder arrived in Moscow to be told his visa had been annulled. He was deported the next day and has not seen his Moscow home for 10 years. He now lives in London and may consider himself lucky.
In June 2007, Hermitage's Moscow office was raided by about twenty Ministry of Interior officers. The offices of Firestone Duncan were also raided. The officers had a search warrant alleging that Kamaya, a company administered by Hermitage, had underpaid its taxes. This was very strange indeed, as the Russian tax authorities had just confirmed in writing that Kamaya had overpaid its taxes. Sergei Magnitsky was asked by Hermitage to investigate what had happened. In his investigation auditor Magnitsky concluded that the police had given the materials seized during the police raids to organized criminals who then used them to take over three of Hermitage's Russian companies and fraudulently reclaim $230m of taxes previously paid by Hermitage. Magnitsky's audit path implicated police, the judiciary, tax officials and bankers. According to Magnitsky's investigation, the documents that had been taken by the Russian police in June 2007 were passed over to the mob who used them to forge a change in ownership. The thieves then used forged contracts to claim Hermitage owed $1 billion to shell companies. Unbeknownst to Hermitage, those claims were brought before Russian courts where defense lawyers hired by the thieves to represent Hermitage pled guilty on the company's behalf and agreed to the claims, thereby obtaining judgments for debts that did not exist. The resulting $230m tax refund was issued on Christmas Eve of 2007 and paid by the Federal Taxation Service of Russia the next day. It became the largest tax rebate in Russian history.
When Magnitsky in November 2008 alerted the authorities of his findings, he was arrested and imprisoned after being accused of colluding with Hermitage. Held for 11 months without trial, he was denied visits from his family. He developed pancreatitis and acalculous cholecystitis, for which he was given inadequate medical treatment during his incarceration. Surgery was ordered in June, but never performed. On 16 November 2009 Magnitsky died. The prison officials and doctors first stated a "rupture to the abdominal membrane" as the cause of death, later they changed it to “heart attack”. An independent investigatory body, the Moscow Public Oversight Commission, indicated in December 2009 that rather than due to medical negligence, his death was actually a premeditated murder.
Magnitsky had alleged there was a large-scale systematic theft from the Russian state carried out by Russian officials. His case has brought a lot of high profile international attention as it was recognized to encapsulate one of the darker sides of Putinism. In November 2010, Magnitsky was given a posthumous award from Transparency International for integrity. In January 2013, the Russian prosecutors announced that Sergei Magnitsky was being posthumously brought to court on charges of $16.8m tax evasion, the first such posthumous trial in Russia. Bill Browder would be a co-defendant tried in absentia. The trial is to begin on 4 March.
Last week, Sergei Ignatiev, Russia’s central bank governor, due to step down in June, granted a rare interview. Sergei Michailovich Ignatiev is a man who seldom speaks publicly of matters other than the Russian monetary policy. Perhaps that is why he has been able to serve whole eleven years in office. But he quite opened up in an interview with the Moscow newspaper Vedomosti on the topic of illegal capital flight out of Russia. According to Mr Ignatiev, $ 49 billion, or 2.5% of Russia’s GDP, was illegally transferred out of Russia in 2012 alone. More than half of which was, according to the intelligence supplied to Mr. Ignatiev by the Central Bank of Russia, controlled “by one well-organised group of individuals”. Mr. Ignatiev declined to identify any names. What he said was that “this might be payment for supplies of narcotics .?.?. illegal imports .?.?. bribes and kickbacks for bureaucrats .?.?. and avoiding taxes,”. That sounds vague. But it isn’t. In Russia, a single group of people could only operate on this scale with the knowledge of those in power.
The money left Russia as payments made by Russian organisations to non-residents where the stated aims of transfer were “clearly false”. Mostly, the money was transferred to firms, whose sole purpose was to operate as conduits for money transfers and then vanish before they pay taxes. According to Mr. Ignatiev, about half of the 3.9m registered commercial organisations in Russia were inactive and registered solely for such or similar purpose.
Igor Yurgens, a former adviser to Dmitry Medvedev, the President cum Prime Minister of Russia, said that if what Mr Ignatiev said about a “single organised group” was true, “such an operation would not be possible without serious support from law enforcement”. Indeed, Mr Ignatiev hinted that if the Russian law enforcement agencies genuinely tried, the beneficiaries of such operations would be found. The problem of course is that excessive diligence in bank and other supervision seems to be fairly detrimental to one’s health in Russia. Mr. Magnitsky is not the only victim, although probably the most famous one. But even people with a very close link to the establishment fell victim to the well-protected money launderers. Mr Ignatiev’s former deputy in charge of bank supervision, Andrei Andreyevich Kozlov, was shot dead in 2006 after launching a crusade to clean up the banking sector and revoking the licenses of several banks. Mr Kozlov’s successor, Gennady Georgievich Melikyan, deputy governor of the central bank in charge of bank supervision, resigned for unclear reasons in September 2011.
Acquaintances of Mr Ignatiev found his public revelations remarkable. They noted that his decision to speak up about high-level corruption was very probably connected with his forthcoming exit. But still, a brave man is Ignatiev. Schemes described by Sergei Ignatiev are exactly those being investigated now in several jurisdictions in connection with the case of Sergei Magnitsky. So go and do business in Russia, then…