Justice at all costs

Bill Browder assumes the mantle of his fallen friend, Sergei Magnitsky, as he ferrets out fraud and corruption around the world and searches for $230 million in allegedly stolen laundered Russian funds. Despite the risks, this human-rights activist says he can't look the other way.

A sentinel is classically defined as a soldier or guard whose job is to stand and keep watch. By ACFE standards, sentinels choose truth over self without regard to personal or professional consequences. But this choice is seldom straightforward. It isn’t just an idealistic decision to select the ethical road at the intersection of right and wrong. And it’s rarely a celebration with awards and recognition.

Choosing truth for many whistleblowers means losing their jobs, forfeiting friendships and relationships, financial ruin and deteriorating health. They decide to risk everything for the possibility of justice.

Scores of sentinels have taken the stage at the ACFE Global Fraud Conference to share their stories of exposing fraud and corruption at all costs. Some of them have candidly said they’d never do it again but wouldn’t have done it any other way. Whistleblowers like Harry Markopolos, CFE, who reported Bernie Madoff’s Ponzi scheme, and Michael Woodford, the former CEO of Olympus who uncovered that company’s crimes, continue to shine the light in dark places and speak at events around the world. And some, like Kathe Swanson, the former Dixon, Illinois, city clerk who discovered comptroller Rita Crundwell’s $53.7 million embezzlement, have quietly retired and live with the memories of their most harrowing professional days. But not all whistleblowers are still alive to tell their stories.

On Nov. 24, 2008, three representatives from the Russian Interior Ministry arrested Sergei Magnitsky, a Russian tax lawyer and auditor, on tax evasion charges. On Oct. 7 of that year, he’d exposed a complicated $230 million web of tax-refund fraud and graft involving Russian government officials. Ironically, the Interior Ministry officials who arrested him worked for the same officer he testified against.

Magnitsky was held for 11 months in pre-trial detention and was denied medical attention for pancreatitis. He was allegedly tortured in a windowless prison cell that was, at times, flooded with sewage. And he was denied family visits.

On Nov. 16, 2009, Magnitsky died in prison under suspicious circumstances one month after submitting a detailed documentation of the scandal again to Russian investigators. His exact cause of death is still unclear. The prison reported he died of a rupture to his abdominal membrane and then later said it was from a heart attack. An independent autopsy was denied to his family after they saw indications of abuse on his body.

The Moscow Prison Oversight Commission, an independent prison regulator in Russia, determined in a 2011 report that Magnitsky had been falsely arrested and tortured to death by the officers who wanted to conceal their crimes. Dmitry Medvedev, then the Russian president, had requested the investigation. However, as recently as November 2018, Russian government officials totally disagreed with the report’s findings.

Magnitsky’s story didn’t end in a Russian jail, at his funeral or even at his posthumous trial when he was found guilty of tax evasion. Sergei’s story and crusade lives on because of one man’s relentless pursuit of justice.

From hedge fund manager to human rights activist

The global media has characterized William “Bill” Browder as many things. Russian President Vladimir Putin’s public enemy No. 1. Russia’s most-wanted man. Human rights activist. Tireless advocate.

“A senior person at the National Crime Agency in Britain commented to an investigator there, when I was trying to get an investigation opened, that, ‘Browder is a real pain in the ass,’ ” Browder says in an exclusive interview with Fraud Magazine. “I take great pleasure in having people think of me that way because I am very persistent. And what I’ve learned is tenacity and persistence are the distinguishing characteristics between people who succeed and those who don’t."

Tenacity and persistence are traits that have set Browder apart from the crowd for most of his professional life. After the fall of the Soviet Union, he spent his early days as a self-proclaimed capitalist investing in Russia’s new and untouched private market. “My grandfather had been the biggest communist in America, and as I watched these events unfold, I decided that I wanted to become the biggest capitalist in Eastern Europe,” he writes in his New York Times bestseller, “Red Notice: A True Story of High Finance, Murder and One Man’s Fight for Justice.”

Browder’s grandfather was Earl Browder, the head of the American Communist Party in 1932. Insight into the origins of Browder’s professional motivations comes from the second chapter of his book, “How Do You Rebel Against a Family of Communists?”

In the 1990s, he experienced almost overnight success as one of the founders of the hedge fund, Hermitage Capital Management. Browder was, at one time, the largest foreign investor in Russia. He experienced the usual highs and lows of volatile economies, but a $900 million loss in his fund in 1998 during the Russian stock market crash-tested Browder’s resolve. Recovering from the disaster would require either giving up on Russia and trying to recoup those losses in a more reliable market or summoning the resolve to prove that investing in Russia could be successful.

“… I had only one choice: to stay,” he writes in his book. “I had to make back all of the money I had lost for my clients. I wasn’t going to leave Russia with my tail between my legs. That was simply not how I wanted to be remembered.”

During this time, Browder and his Hermitage team began looking closely into the last bit of remaining money they’d invested in Russian companies. “We discovered that huge, huge enterprises generated almost no profit, and when we started looking into why … we discovered that the profits were all being diverted and stolen by the Russian oligarchs who were the majority shareholders of those companies,” Browder says. “It was an outrageous situation, which wouldn’t have been tolerated or allowed in any other country. But because it was Russia, which had effectively no rules and no property rights, it was not only tolerated, but it seemed to be going on everywhere.”

After Browder discovered where the profits were going, he set his sights on shining a spotlight on the wrongs he witnessed. “The thing that had the effect on me was being a fiduciary of investors and investing in companies whose shareholders were stealing all of the money. I felt that was a very strong violation of my fiduciary duties, and that’s what motivated me to try to fight back."

Hermitage, through investigations, research and media attention, exposed one company after another for malfeasance. Browder sent shock waves through a controlled and orchestrated market that greatly relied on cooperation between corporate executives and the government.

“We decided that because the [Russian] police weren’t policing, and the government wasn’t regulating, the only tool that we could come up with was to research how the corruption was being done and then naming and shaming through the international media,” Browder says. “And that became our standard approach towards dealing with corruption in Russia.”

Hermitage revealed corporate governance abuse at some of Russia’s largest companies, including Gazprom, UES, Sberbank and Yukos. Then, in 2003, the government arrested oligarch Mikhail Khodorkovsky, the CEO of Yukos and one of Russia’s richest men, and seized his company assets — two unprecedented events in Russia.

Khodorkovsky’s embezzlement, fraud and money laundering charges came at a time when Putin, who had been recently elected president, was setting a new tone for the country and making sure company executives knew who was in charge, and it wasn’t the oligarchs. According to Browder, that meant he, too, was no longer safe from government intervention. His public crusade to expose corruption now included officials with extremely powerful titles and influence. (See “Russia: The President and the Oligarch,” Stratfor Worldview, Dec. 20, 2013.)

In 2005, while Browder traveled from London to Moscow — a trip he’d made more than 250 times — he was held, denied entry and sent back to London. (A former American, he’s now a U.K. citizen.) He later discovered that the Russian government had voided his visa because it saw him as a threat to national security. Though Browder says he was relieved that Russian authorities hadn’t arrested him, he knew he couldn’t stay in London and start his career over. He had to safely extract from Russia $4.5 billion in hedge fund assets and a team of employees, which he eventually did.

Magnitsky’s colleagues wrote in a tribute after his death, “If there was something legally complicated going on in Russia, he [Sergei] was the person who knew how to get to the bottom of it.”

Magnitsky: the whistleblower, the man

Magnitsky worked as an attorney for Firestone Duncan, an American-based law firm in Moscow, when Russia denied Browder’s visa to enter the country. He was the first to investigate a judgment filed against three of Hermitage Fund’s Russian investment companies. And a few months earlier, the Russian Interior Ministry had raided Firestone Duncan as part of a purported tax investigation. More than 25 police officers had seized all the documents related to the fund’s investment companies. Magnitsky’s colleagues wrote in a tribute after his death, “If there was something legally complicated going on in Russia, he [Sergei] was the person who knew how to get to the bottom of it. He calmed us down and said it was likely some type of mistake.”

However, Magnitsky hadn’t discovered a mistake but the Russian government’s deliberate attempt to defame Browder and his hedge fund. According to a Hermitage Capital Management representative in a Fraud Magazine interview, Magnitsky had discovered someone named “Strazhev” who had signed forged claims on behalf of a shell company called Logos Plus, with which Hermitage never did any business. But Strazhev never existed.

“The claims stated that in 2005 Hermitage companies agreed to sell Gazprom shares to Logos Plus and then reneged on this purported ‘deal,’ causing it loss from unrealized profit. Forged contracts were submitted to support this claim signed by fake persons,” the representative says. “Lawyers on both side of this litigation were hired by Andrey Pavlov. … Lawyers purporting to represent stolen Hermitage companies, Pavlov and his then wife, Yulia Mayorova, presented in court powers of attorney signed by individuals previously convicted for violent crimes.

“They agreed to multimillion-dollar fake claims without raising any objections and the judges, without the consideration of the validity of any documents, ruled in favor of Logos Plus,” the Hermitage representative says. “The criminal group then used the fake contracts and fraudulently procured court judgments to fraudulently obtain $230 million of Hermitage tax payments.”

After Magnitsky’s further discovery, the largest tax refund in Russian history would enter into a funnel of laundered money. “Sergei didn’t start out as an anti-corruption crusader, but when corruption stared him in the face, he felt he had a duty to fight it,” his colleagues wrote in their tribute.

Magnitsky testified against two officers at the Russian State Investigative Committee — the Russian equivalent of the FBI — for their involvement in the tax rebate fraud and shared his findings about the serial nature of the crime perpetrated by the same group with Bloomberg Businessweek. (See “Suspect Lawsuits Target Russian Financial Firms,” by Jason Bush, Bloomberg Businessweek, Nov. 5, 2008.)

“His belief in justice was so strong that he went on to do something many people would be petrified to do,” his colleagues wrote in their tribute. “It was an enormously brave move, and we feared for him that day. Amazingly, Sergei was the only person who wasn’t worried. It was a big relief when he emerged from the Investigative Committee at the end of the day.”

However, his good fortune didn’t last long. On Nov. 24, 2008, just weeks after his meeting with the committee, Russian officials arrested Magnitsky at his home. He was held in detention for 358 days before succumbing to illness and injuries sustained while in custody. Magnitsky had submitted more than 450 documents detailing mistreatment and human rights violations.

“One can never judge the true character of a person until they are faced with extreme adversity,” his colleagues wrote. “Most people, if faced with a far lesser challenge than Sergei, would have given in, and it would have been understandable if he had as well. But for Sergei, his integrity and honor were more important than any physical pain he was suffering. His resolve never faltered no matter how insurmountable the obstacle might have seemed. He did what to most people seems impossible; he battled as a lone individual against the power of an entire state. If we could all only show a fraction of the bravery and fortitude Sergei did, the world would be a much better place.”

Browder says Magnitsky “was very persistent and pedantic about his idealism and really didn’t have a cynical bone in his body. He just believed deep down the law would protect him, and that the law was right. And the idea of perjuring himself or bearing false witness was more painful than any other terrible things they were doing to him.”

Browder has spent the last nine years conducting a global campaign to impose visa bans and asset freezes on individual human rights abusers — particularly those who played a role in Magnitsky’s false arrest, torture and death. The U.S. Russia and Moldova Jackson–Vanik Repeal and Sergei Magnitsky Rule of Law Accountability Act of 2012, known as the Magnitsky Act, was passed with overwhelming bipartisan support.

According to The Washington Post, the law “at first blocked 18 Russian government officials and businessmen from entering the United States, froze any assets held by U.S. banks and banned their future use of U.S. banking systems.” (See “The Magnitsky Act, explained,” by Alex Horton, The Washington Post, July 14, 2017.)

Five additional countries have passed their own versions of the act. The 2016 U.S. Global Magnitsky Human Rights Accountability Act expanded the original Magnitsky Act, so now sanctions apply to 148 individuals and entities suspected of human rights abusers and corruption worldwide. (See the Office of Foreign Assets control sanctions list.)

Browder says he and his team have doggedly investigated where the $230 million tax refund went. He says that every time they discover those banks that received some of the money, they file complaints in the countries of those banks. “If we can’t get justice for torture and murder, at least we can get justice in the West against the people who stole the $230 million that Magnitsky exposed,” he says.

Timeline of traveling millions of Hermitage tax payments.

• June 4, 2007

Firestone Duncan, the law firm where Sergei Magnitsky worked and Bill Browder and his team had their hedge fund’s company’s incorporation information, is raided by more than 25 police officers from the Russian Interior Ministry as part of an alleged tax investigation.

The police officers confiscate the charters, corporate seals and articles of association of three of the companies under the management of the Hermitage Fund, the hedge fund Browder advised.

• October 2007

Browder’s team receives a phone call from a St. Petersburg bailiff about a judgment against one of the companies whose information was confiscated during the raid.

Magnitsky investigates and discovers that unknown shell companies had sued three Hermitage Fund companies, and somebody had signed the lawsuit papers with a fake name. The Hermitage team also finds that lawyers they didn’t know 1) had appeared in court purporting to represent the Hermitage Fund’s companies 2) didn’t contest the false claims and 3) obtained $1 billion in fake judgments from a St. Petersburg court. Magnitsky also discovers that the three companies had been re-registered from Hermitage’s trustee, HSBC, into the name of a Russian company registered to a convicted criminal.

• December 2007

HSBC and Hermitage Capital submit 255 pages of formal complaints to the head of the Russian Investigative Committee, the Russian general prosecutor and the head of the Russian Interior Ministry Internal Affairs Department.

The complaint outlines the details of their discoveries, including the names of the Interior Ministry policy officers whom they believed were involved. The law enforcement agencies then send the complaints to the Interior Ministry office that Browder and his team had accused of being corrupt. Magnitsky sends out letters to various tax authorities and registration offices in hopes of discovering some information about the stolen companies.

• Dec. 21 and 24, 2007

The “new” company owners file an application for a tax refund for 2006 under the pretext that all the profits declared by Hermitage should be nulled because of the new court judgments against them. They request a tax refund of $230 million — the total the three Hermitage Fund companies paid under their lawful owners. The Moscow tax offices approve the tax refund applications in one day. Two days later $230 million is paid out from the Russian treasury to accounts opened by the “new owners.”

• June 5, 2008

Magnitsky gives his first testimony to the Russian State Investigative Committee describing the fraud against Hermitage and identifying Russian Interior Ministry officers involved.

Later that day, Magnitsky receives a letter from tax authorities in Khimki, a Moscow suburb. The letter explains that the three stolen companies from Hermitage had been re-registered in Khimki, and bank accounts had been opened in their names at two obscure Russian banks. Magnitsky discovers on a Russian central bank website significant increases in deposits made at these two banks after the accounts were opened.

• October 7, 2008

Magnitsky, during a second testimony to the Russian Investigative State Committee, confirms his original testimony and says he believes the same group was involved in the $230 million theft.

• November 24, 2008

Interior Ministry police officers arrest Magnitsky.

• November 16, 2009

Magnitsky dies in prison at the age of 37.

• July 2012

Browder and his team file formal complaints against the Estonian branch of Danske Bank (formerly Sampo Bank) in Estonia, alleging the laundering of some of the proceeds connected to the $230 million from Russia.

Compiled by Mandy Moody, CFE

[See the sidebar “Danske Bank and the $230+ million tax refund” for more information.]

In “Red Notice,” Browder tells the story of what he’d later consider a possible omen. One day while driving to meet a friend in Moscow, he saw a man lying in the middle of the street who was twitching and foaming at the mouth. Browder’s first instinct was to stop his car and attempt to assist the man, which he did.

When the police arrived, they ignored the man and began interrogating the people who’d stopped to provide assistance. According to Browder, they were looking for someone to blame for the man’s injuries and for traffic disruption.

“In that situation, like any normal, good-hearted individual, you see somebody who’s in trouble, you want to help them,” he said. “My Russian driver and other Russians had a different instinct, which was that they knew that anytime you got involved in something like that, you end up in trouble. I thought because I was a foreigner that these same cynical Russian rules wouldn’t apply to me. What I discovered is that even as a foreigner, they did. But … I’m not going to look the other way and I will try to help them. That’s become a big part of my life as a human rights activist.”

Browder will be a keynote presenter at the 30th Annual ACFE Global Fraud Conference in Austin, Texas, June 23-28. He’ll donate his speaker fees to surviving Magnitsky family members.

Mandy Moody, CFE, is the ACFE’s content manager. Contact her at mmoody@ACFE.com.