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Sergei Magnitsky was an auditor in Russia with the firm Firestone Duncan. One of their clients was a firm called Hermitage Capital Management, an investment advisory company operating in Russia. Over the years, Hermitage had come upon information of corruption and misconduct in Russian state-owned businesses which they passed on to the press. Hermitage was founded by American Bill Browder.
In 2005, Russia deported Browder after revoking his visa as a “threat to the state.” In June 2007, the Moscow offices of Hermitage were raided by officials of the Russian Interior Ministry. The offices of Firestone Duncan were also raided after allegations that Kamaya, a company administered by Hermitage, had underpaid its taxes. The odd part of the story is the fact the Russian tax authorities had just reported that Hermitage overpaid its taxes. In October 2007, Browder received notice of a court case against one corporate client claiming they owed taxes in hundreds of million dollars. Browder, not being able to investigate the charges himself since he was banned from Russia, gave that task to Magnitsky.
Magnitsky came to the conclusion that the Interior Ministry officials had turned over corporate documents of three firms administered by Hermitage to Russian organized crime figures and that they used these documents to illegally seize these companies who then perpetrated a tax fraud that would cost the Russian government and companies $230 million. The forgery of documents claimed that Hermitage owed about $1 billion to a series of shell companies. Along the way in the Russian courts, unknown to Hermitage, the claims were validated against Hermitage. Magnitsky determined that instead of being guilty of fraud, Hermitage was the victim of a massive fraud and he pointed the finger at the Russian judicial system, tax authorities, and organized crime.
The new owner was discovered to be Victor Markelov, based in Tatarstan, and a convicted murderer who earned an early release from prison. The fake debt was used to make the Hermitage companies look unprofitable and due a $230 million tax refund. Based on Magnitsky’s investigation, Hermitage contacted the Russian authorities who opened a criminal investigation against… Magnitsky.
In November 2008, Magnitsky was arrested and put in prison in Moscow. Under Russian law, a person can be held for up to a year in prison without a trial. During his stay in prison, he developed several ailments for which he received inadequate or no medical care. Eight days before he was to be released, Magnitsky died of pancreatitis, or so it was originally reported. The official cause of death was reported as a cranial injury suffered while in prison. The death of Magnitsky caused an international uproar over Russian prison conditions and more than 20 Russian prison officials were fined, arrested, or demoted. In all, more than 60 Russian individuals were implicated in the arrest, imprisonment and death of Magnitsky.
The EU was the first to act when they banned the entry of these 60 individuals into EU-member countries. Canada followed suit and revoked the visas of several Russians. Finally, the United States passed the Justice for Sergei Magnitsky Act, introduced by Senator John McCain (R-AZ), which also banned entry into the country by anyone named in the criminal investigation of Magnitsky’s death.
Russia was quick to promise retaliation for these moves claiming that the actions of the West violated a presumption of innocence and interference in their internal affairs. Then in 2012, Russian authorities decided to try Magnitsky for tax evasion posthumously, and also charged Bill Browder with evading taxes of $17 million. Both were eventually found guilty. In response, the United States passed another law which authorized the President to impose travel restrictions and financial sanctions on any Russian citizen, official or company that violated human rights in Russia. Putin again vowed retaliation and followed through in December 2012 when he signed into law a prohibition against Americans from adopting Russian orphans.
Browder continued to be a world leader when it came to accusations of Russian corruption. However, he is not totally clean either. In 2013, Russian authorities charged him with violating another law which prohibited foreign ownership in Gazprom, the state-owned energy giant. Hermitage apparently attempted to purchase $70 million in shares in the company by using Russian shell companies incorporated in Russia. He was also accused of trying to gain access to Gazprom’s financial reports.
Browder later admitted that he sought influence in the company, but denied any wrongdoing. He claimed his attempts were an investment in the Russian economy and a desire to expose fraud and corruption within the company. As for the shell companies, he said it was common practice to use Russian subsidiaries to take advantage of tax loopholes and that other investors regularly used the technique. He passed it off as Putin further retaliating for passage of the Magnitsky Act. He has also been arrested in Spain and detained in Switzerland and Cyprus after making accusations that officials in those countries have been corrupted by the Russian government.
This feeds into the account of alleged collusion between Russia and the Trump campaign. When the Magnitsky Act was being considered, the chief proponent behind its passage was Bill Browder who had the ear of John McCain and Ben Cardin (D-MD). Secretary of State Hillary Clinton openly opposed passage of the law. While the law was being considered, Congress asked the State Department to deny visas and seize the assets of those who were to be sanctioned. Clinton refused. At the time, Bill Clinton had been invited to Russia to give a speech on June 29, 2010 for which he was paid $500,000. The Russian officials who extended the invitation to Clinton were among those targeted in the bill. (Note: this trip to Russia by Bill Clinton resurfaces later in two different contexts. Stay tuned)
Meanwhile, the DOJ had brought charges against a Russian holding company- Prevezon- which was based in Cyprus- for laundering money through purchasing real estate in the US, especially New York City. Browder alleged the laundered money was part of the $230 million pilfered from Russia. In 2013, Russian lawyer, Natalia Veselnitskaya, hired an American law firm- BakerHostetler- to represent Prevezon. To counter claims that the money was laundered and that it had nothing to do with Magnitsky’s investigation, the law firm hired Fusion GPS to dig up dirt on Browder. Fusion GPS was later found to be the firm that hired former MI6 agent Christopher Steele who created the infamous dossier on Trump. The implications are obvious: Fusion GPS was being paid to dig up dirt on Trump through Russian sources of Steele while also indirectly working for the Russian government through an American law firm.
Next: Boris Nemtsov and Final Analysis