Sergei Magnitsky discovered a huge Russian tax fraud — $230 million had been stolen from the Russian government, said his ex-boss, William Browder of Hermitage Capital Management, a former major investor in Russia.
In life, Sergei Magnitsky was a modest Moscow tax lawyer with a dogged determination to track financial wrongdoers.
More than four years after his death, he is part of a spiralling banking crisis that has swept up Russian money launderers, Cypriot citizens and their increasingly desperate government in a tornado that could take down the tiny island state, and suck in already wobbly countries in the eurozone.
Cyprus is struggling to stave off bankruptcy with a $13 billion (10 billion euro) bailout that lenders insist must be tied to taxes on Cypriot bank accounts — touching off fury on the island and in Russia, whose high-rollers use it as a tax haven. On Wednesday Cyprus pleaded for an alternative loan from Moscow, so far without results.
Some of Cyprus’s bailout woes may be linked with Magnitsky’s quest for justice, said his ex-boss, William Browder of Hermitage Capital Management, a former major investor in Russia, who hired him to probe murky Russian tax refunds in the mid-2000s.
“Sergei discovered a huge Russian tax fraud,” said Browder in a telephone interview. “He found that $230 million was stolen from the Russian government. But we knew there would be no accountability, so we followed the money ourselves.”
Magnitsky said he had found a “web of corruption” spun by Russian tax officials who allegedly masterminded the biggest Russian tax heist of the century.
With the help of international police and journalists, he traced $135 million in laundered funds, $31 million of it washed through Cyprus.
But after blowing the whistle to the Russian authorities in 2008, Magnitsky was himself arrested, jailed, and died in custody in November 2009 at the age of 37.
Documents obtained by Browder allegedly proved Magnitsky was beaten to death in prison, as well as denied treatment for a serious medical condition. But Russia dismissed the charges, and is instead pursuing a rare posthumous case against Magnitsky, as well as Browder, for tax fraud. The trial is due to begin March 22.
Browder’s lobbying efforts for Magnitsky launched financial investigations in several countries, and the passage of a U.S. bill to deny travel and investment access to Russians accused of involvement in Magnitsky’s death. Meanwhile, an international campaign continued.
“We wrote to police and prosecutors in all jurisdictions alerting them to the laundered money,” Browder said. “A number of them opened criminal cases. Cyprus steadfastly refused.”
He presented documents alleging that five Cypriot banks had received money from a Russian “criminal gang” linked with high ranking officials in Russia’s spy agency and interior ministry. In December, as Cyprus was in tough bailout talks with its European neighbours, it said it had launched an investigation.
By that time Browder had extended his campaign to alert lawmakers in the Netherlands, Finland and Europe’s economic powerhouse, Germany, that Cyprus had stonewalled on the case.
“They wrote to their finance ministers and it became a political issue in Europe,” he said.
A report leaked to the German weekly Der Spiegel by the foreign intelligence service estimated that Russians, including 80 oligarchs, had deposited more than $26 billion in Cypriot banks: outpacing the island’s $23 billion GDP.
Suspicions of money-laundering and criminal activity made Cyprus’s bailout more harrowing. European lenders questioned why they should rescue rich Russian tax evaders, and demanded that the pain be shared through a 10 per cent tax on savings in Cypriot banks. On Tuesday, the island’s lawmakers rejected the offer, and the government redoubled efforts for a Russian loan.
“Cyprus is a tax haven,” said Dev Kar, lead economist for Global Financial Integrity in Washington, and a former IMF official. “Foreign deposits in Cypriot banks are much larger than domestic ones. Two-thirds are foreign and one-third domestic.”