Russia's Crime of the Century

How crooked officials pulled off a massive scam, spent millions on Dubai real estate, and killed my partner when he tried to expose them.

If there remains any pretense that justice and rule of law exist in Moscow today, that notion should now be counted as pure fantasy. The case of Sergei Magnitsky -- a senior partner at my law firm who was imprisoned, tortured, and murdered after his efforts to shed light on a massive governmental fraud by Interior Ministry officials stealing subsidiaries of my client's company, the Hermitage Fund, and the $230 million of taxes they had paid -- has illuminated the cruelty and criminality of Russian legal enforcement. And new evidence released last week on YouTube as part of the broad campaign seeking justice for Sergei, goes even further -- exposing the blatant theft, impunity, and ill-gotten gains of senior Russian tax officials who were complicit in the fraud and subsequent murder of my colleague.

Sergei Magnitsky

The very bureaucrats -- government tax officials on modest salaries in Moscow Tax Office 28 -- exposed by Sergei three years ago of perpetrating the massive fraud stashed millions of dollars in overseas bank accounts, created offshore companies, and purchased luxury villas in Dubai, Montenegro, and Moscow. Worse still, the Kremlin and Russian President Dmitry Medvedev, in particular, have refused -- out of embarrassment, inability, culpability, or incompetence -- to review and prosecute what is now overwhelming evidence of this clear crime.

When I opened my law firm, Firestone Duncan, in Moscow in 1993, I was aware of the dangers of doing business in Russia. The stories about "mafia" groups of tracksuited thugs extorting businesses were well known to me. What I never expected was that the Russian mafia would merge with the government; its members are now the same officials who are supposed to be protecting the public.

The story begins in July 2007, when Russian Interior Ministry officers Artem Kuznetsov and Pavel Karpov raided my law offices in Moscow and seized without a warrant two vanloads of documents and corporate seals (imprints that go along with the signature on any signed document in Russia) from companies belonging to my firm's clients, including the Hermitage Fund, which had once been Russia's largest foreign investor. At the time, one of my junior lawyers protested that their search was illegal. He was taken into a conference room by the officers and beaten so severely that he was hospitalized for three weeks.

Pavel Karpov and Artem Kuznetsov

A few months later, we learned that the materials seized by the police had been handed over to a criminal group that used them to fraudulently re-register the companies under the name of a frontman, the convicted murderer, Viktor Markelov. Markelov had been recently released from pretrial detention on an unrelated kidnapping and extortion charge involving the same officers, Kuznetsov and Karpov. The seized documents were also used to create $1 billion of fake backdated contracts. Markelov and two other ex-convicts were made directors of the re-registered companies and, through their lawyers, pleaded guilty in several regional courts to $1 billion in these fake liabilities. We learned this from a bailiff in the St. Petersburg court who called our office looking for hundreds of millions of dollars of assets to satisfy those claims.

At this point, Sergei got involved. He started investigating the scheme and, after a few weeks, pieced the story together through court records, registration files, and bank statements. He prepared a number of very detailed criminal complaints against the police officers and perpetrators involved in the massive fraud. These complaints were filed with the most senior Russian law enforcement authorities on Dec. 3, 2007. The police did nothing.

Three weeks later, on Christmas Eve 2007, the stolen firms under Markelov's name applied for a refund of $230 million in taxes that the Hermitage Fund companies had paid one year earlier. It was the largest tax refund in Russian history -- and it was granted in one day by Olga Stepanova, head of Moscow's Tax Office 28, and her colleague in Moscow Tax Office 25, Elena Khimina. The money was then wired to a small Russian bank, Universal Savings Bank, owned by another convicted criminal, Dmitry Kluyev. The money then left Russia through the Austria-based Raiffeisen bank and was later funneled through Citibank and JPMorgan Chase.

We were shocked by the theft of the Hermitage companies and the fake court judgments, but when we discovered the $230 million refund, we knew something was spectacularly wrong. It wasn't just a crime against Hermitage -- it was also a massive crime against the Russian state. Something had to be done. Sergei, in particular, was adamant that criminal complaints be filed with every single law enforcement agency in Russia. His logic: Even if there were a few bad apples in the system, surely once the Russian leadership realized that hundreds of millions of dollars had been stolen from state coffers, then the "big guns" would be rolled out to arrest the corrupt officials and criminals involved. Sergei volunteered to give a sworn testimony to the Russian State Investigative Committee about the collaboration of Russian police and tax officials with organized criminals in stealing millions from taxpayers.

Sergei testified against officers Kuznetsov and Karpov on Oct. 7, 2008. The next month, on Nov. 24, he was arrested by three subordinates of Kuznetsov under a case opened by Karpov. He was thrown behind bars at the Interior Ministry's detention center on Petrovka Street in Moscow, where they tortured him to force him to withdraw his testimony and sign a false confession saying he was the one who stole the $230 million.

The case against Sergei was assigned to Maj. Oleg Silchenko of the Interior Ministry. Silchenko transferred Sergei between detention centers in secrecy; refused to allow Sergei contact with his wife, mother, and children; denied all his legal requests; and put emotional and psychological pressure on him to retract his testimony against officers Kuznetsov and Karpov. Sergei, however, continued while in detention to insist on his testimony while in detention -- evidence that exposed the partnership between government officials and organized crime. But Silchenko did not investigate Sergei's evidence. Silchenko was working together with Kuznetsov -- who had been assigned to this investigation by senior Russian Interior Ministry brass -- to cover up the theft of the $230 million

Oleg Silchenko

The more Sergei insisted on his testimony in sworn statements and in court, the more pressure Silchenko applied to him. He was put in a cell with eight inmates and only four beds so the detainees had to sleep in shifts. In December 2008, he was put in a cell with no heat and no windowpanes -- he nearly froze to death. Later, he was moved to another cell with no toilet, just a hole in the floor where the sewage overflowed.

After six months of this treatment, Sergei -- who went into detention a healthy 36-year-old man -- had lost 40 pounds. He developed pancreatitis and gallstones and needed medical attention. In July 2009, Sergei was moved to Butyrka, a maximum-security facility that had no medical facilities. At Butyrka, Silchenko repeatedly denied medical care to Sergei, hoping that it would break him. Sergei remained defiant and continued to write complaints about his innocence and the pressure applied to him. But nearly one year after his arrest, on the night of Nov. 16, 2009, he became gravely ill. He was transferred to the intensive-care wing of Matrosskaya Tishina detention center, but instead of receiving medical attention, he was put in a straitjacket, chained to a bed, and left by himself in an isolation cell for one hour and 18 minutes while doctors waited right outside the door until they were certain he was dead.

On the eve of the one-year anniversary of Sergei's death, the Interior Ministry called a news conference to announce the findings of Silchenko's investigation. The entire highly sophisticated $230 million tax fraud conspiracy was pinned on two minor criminal participants, Markelov and one other frontman who turned themselves in and "confessed" to the crime, and who in turn named three dead men as their accomplices. The two confessors were tried in secret hearings and were given the minimum sentence of five years. They were not asked about the stolen money or their connections with officers Kuznetsov and Karpov.

In the news conference, the Interior Ministry announced that Sergei had masterminded the fraud. He was accused of organizing the very conspiracy to which he had alerted the government. The government's sole evidence of Sergei's guilt was the hearsay of the two convicts who "confessed" to their role in the crime and who Sergei had asked authorities to arrest in early December of 2007 before any money was stolen.

Furthermore, Interior Ministry officials stated that according to their findings, the tax officials were innocent and were themselves victims of the crime. They had simply been tricked into refunding the money. They went on to say that the bank that received the stolen funds was owned by another dead person. To cap it all they announced that the stolen government money could not be found -- a truck transporting the records had apparently crashed and exploded. Karpov, Kuznetsov, and Silchenko were credited with "solving" the case of the stolen $230 million. The Russian government promoted and decorated them with the honor of "Russia's Best Investigators." And the criminals were now safe to enjoy the proceeds of their crime. Enjoy them they did.

But Sergei's friends -- outraged by the Russian state's continued efforts to vilify the whistle-blower while protecting the corrupt -- continued to pursue an independent investigation in hopes of bringing to justice those responsible for the tax fraud and Sergei's untimely death. Through the work of nearly 100 sources inside and outside Russia, we now have a much clearer picture of the economics behind this crime. Three weeks after approving the fraudulent refund, the entire top management of Moscow Tax Office 28 began buying multimillion dollar properties at the Kempinski Palm Jumeirah -- a luxury hotel and housing complex on an artificial palm-shaped island off the coast of Dubai. The Kempinski properties were paid for by three tax officials using the same bank account at Credit Suisse. The head of Moscow Tax Office 28 also bought a $20 million avant-garde house in Moscow's most exclusive neighborhood, Rublevskoe Shosse, designed by Moscow's most famous architect, Alexei Kozyr, and a $700,000 beach house in the seaside town of Bar in Montenegro.

The scale of the crime and the coverup is truly astounding. It directly involves the Russian deputy interior minister, the deputy general prosecutor, the head of the economic counterespionage unit of the secret police, the heads of Moscow Tax Offices 25 and 28, and a dozen judges, as well as hundreds of functionaries throughout the system. But the Kremlin has shown little willingness to prosecute this case. Instead, Medvedev has tried to deflect attention away from it and portray Sergei's case as an important investigation of Russian prison conditions after a possible death in detention due to "negligence."

As this farce plays out, Medevedev continues to make reassuring statements that he is serious about fighting corruption, that the rule of law is sound, and that international investors have nothing to fear in Russia. It is clear that the Kremlin is prepared to let things lie. But around the world, governments, activists, and independent civilians are speaking up. In 2010, Sergei was posthumously awarded Transparency International's Integrity Award. In Russia, too, there is overwhelming public support to launch an official independent investigation into his case. Russia's leading human rights activist, Lyudmila Alexeyeva, head of the Moscow Helsinki Group, filed a criminal complaint in March of 2010 against officers Silchenko, Kuznetsov, and Karpov, as well as their subordinates, for Sergei's torture and murder. Valery Borschev, head of the Moscow Public Oversight Commission, a Moscow NGO that focuses on prisoners' rights, said that Sergei was kept in torturous conditions and killed to cover up the crime he exposed.

Western governments have begun taking steps to contain this corruption inside Russia. The European Parliament recently passed a resolution calling on EU member states to impose visa sanctions and asset freezes on the Russian officials responsible for the tax fraud, Sergei's death, and the coverup. And on April 15, U.S. Rep. James McGovern reintroduced the Justice for Sergei Magnitsky Act to the House of Representatives to effectively do the same.

It is imperative for both Russia and the United States that this bill be passed. There will be no progress in Sergei's case -- or for Russian justice as a whole -- unless the West forcefully sanctions the corruption and cronyism gripping Russia today. Measures such as the EU resolution and the Justice for Sergei Magnitsky Act would put effective "soft" pressure on Russian officials to clean their own house. This would not weaken U.S.-Russia relations but redefine and strengthen them.

The U.S. government has a duty to its people to keep Russian lawlessness from reaching its shores -- or those of friendly nations, such as the United Arab Emirates. Russia and the United States are bound by numerous treaties, the success of which presupposes a level of honesty and integrity of the officials and legal systems of both countries. Sergei's case -- more precisely, Medvedev's unwillingness, or perhaps inability, to bring the perpetrators of this massive government conspiracy to justice -- demonstrates the fallacy of the supposition. It is dangerous to U.S. interests to be forced to rely on and to grant comity to information, decisions, and requests made by foreign officials who are abusing the implicit trust that these treaties rely upon.

This case has the potential to be Russia's Watergate: The evidence unearthed by Sergei would expose the graft and cronyism that is corroding Russia's core. Acting upon it would not only cleanse the system of a score of corrupt officials but would set a new standard of expected behavior and send a message to Russians that the president would support them if they fight corruption. But left ignored, Medvedev's war on corruption and any pretense of rule of law in Russia are but a sham.



The Coming Arab Renaissance

Forget Gamal Abdel Nasser. The time for Arab unity is now.

Arabs are learning to solve their own problems. For the first time in more than 500 years, the convulsions rippling across the Arab world cannot be blamed on Ottoman conquest, European imperialism, American hegemony, or Israeli bullying. As unpredictable as the current situations in Bahrain, Egypt, Libya, Yemen, and other Arab states remain, we must remember that having had perhaps the worst possible leaders, their societies will very likely be better off in the medium and long term because their governance is for the first time becoming an inclusive arena -- both nationally and regionally. The smartest thing the West can do is to help them help themselves.

From the time that Gamal Abdel Nasser took hold of Egypt in 1954 to Muammar al-Qaddafi's charismatic coup in Libya in 1969, a generation of leaders came to power riding the wave of anti-colonial Arab sentiment. But decades of post-colonial entropy and decay have culminated in collapse. The Arab world is now graduating from anti-colonial to anti-authoritarian revolutions.

Beyond the toppling of corrupt regimes and the formation of new political orders, a new Arabism is coalescing, one that is truly pan-Arab in that it has little need for the insecure nationalism of the Nasserite era. It derives its strength instead from genuinely trans-Arab phenomena such as satellite television channels and the younger generation's demand for more accountable governance. These movements are truly borderless, with Al Jazeera largely equal opportunity in its shaming of Arab autocrats -- with the notable exception of Bahrain's -- and young activists training together across the region to successfully foment the current uprisings. As Al Jazeera director-general Wadah Khanfar declared at the recent TED conference in California, "The youth … are guarding the transformation.… These people are much more wiser than not only the political elite, [but] even the intellectual elite.… The youth in the Arab world are much more wiser and capable of creating the change than the old -- including the political and cultural and ideological old regimes." Indeed, Al Jazeera, long shunned in the West, is finally being acknowledged as a force for openness, debate, and progress. American households are demanding, and getting, the channel via DirecTV.

The Arab League's backing of a no-fly zone in Libya and its ongoing consideration of peacekeeping forces for Palestine and Lebanon are striking examples of a meaningful transnational Arab political sphere coming into being. Even ruthless intrusions like Saudi Arabia's sending of forces into Bahrain to suppress the swelling street protests are evidence that Arabs cannot continue simply to rejoice in their neighbors' suffering and instead see their collective stability on the line.

The next great step toward a new Arab renaissance will come through physically overcoming the region's arbitrary political borders, most of which derive from European colonial callousness. As the European Union itself demonstrates, the only way to achieve genuine collective security and a political-economic order greater than the sum of its parts is to physically build it.

The Arab realm's last period of borderless coexistence was under Ottoman suzerainty, but despite their inchoate rule the Ottomans also built vital infrastructural linkages such as the Hejaz Railway, which traveled from Istanbul to Medina and even had an offshoot to Haifa on the Mediterranean Sea. Today, the Hejaz rail line lies in tatters due to lack of investment and rigid border policies.

Yet no greater step could be taken to alleviate Arabs' economic and political woes than investment in cross-border infrastructure. A new pan-Arab rail network could connect Tripoli to Cairo to Amman to Baghdad, and Damascus to Dubai. Remember that the stunningly massive granite columns and marble baths of the majestic Roman port city of Leptis Magna (just east of Tripoli in present-day Libya) were largely imported overland on roads all the way from Aswan in ancient Egypt. (There was, then, something sensible to Qaddafi's symbolic bulldozing of Libya's border fence with Egypt in 1974.) More pipelines and canals could connect oil-rich and low-population states with poor, heavily populated ones. Where borders are straight and arbitrary, these fluid and deliberately curvy lines -- railways, pipelines, and water channels -- will be the necessary and natural consequence of the opening of Arab societies to the logic of globalization.

The recent launch of the New Palestine Party -- whose explicit platform is to implement the Rand Corporation's proposal for an infrastructure "Arc" to unite the West Bank and Gaza into a viable and independent state -- is a visceral reminder of how fundamental territorial realignments must be made to overcome political division and economic stagnation. Independence without infrastructure is futile.

It is important to emphasize that the Arab world is to a large extent not the Third World. Some oil-rich Arab countries are among the wealthiest societies on Earth, and Arab states together possess all the capital -- financial and human -- necessary to build themselves up without major outside assistance. Saudi Arabia and other Gulf Cooperation Council (GCC) members such as Qatar and the United Arab Emirates could easily finance the Palestinian Arc project through the proposed Arc Development Bank, literally paving the path for a two-state solution. They could also underwrite the trans-Arab transport corridors necessary to stimulate broad-based Arab economic development, much as they have already pledged an estimated $3 trillion toward their own infrastructure projects in the coming decade leading up to Qatar's hosting of the 2022 World Cup.

Arab politics are modernizing even if not immediately democratizing. Each government will by necessity become more accountable, with more active political parties, civil society, and independent business forces seeking opportunities to represent themselves and their constituents. This new Arabism deserves strong Western support. Its goals are secular: jobs, education, women's rights, and good governance. If Europe and the United States play their relations with emerging leaders in government, the private sector, and civil society correctly, they can be more certain to have good ties with whoever prevails in future elections. Furthermore, as Hurriyet columnist Mustafa Akyol argues in a provocative new book titled Islam Without Extremes, these new secular young Arabs claiming a political voice can be Islamist without succumbing to political Islam. But unless the West buttresses the goals of these new secular Arabs through foreign investment and technical assistance, political Islam will continue to thrive among the marginalized underclass.

There is no doubt that a borderless new fraternal Arab realm has not yet suddenly come to pass. The GCC countries can't agree on where to locate their common central bank, and "friendship bridges" between countries like Qatar and Bahrain or Qatar and the UAE have been undermined by Saudi suspicions. Indeed, most Arab regimes have not felt this vulnerable since independence.

But that is precisely what makes this moment ripe for revisiting what Arab states even mean in the first place. Arabs' geopolitical future is best understood as an archipelago of cities and oases from North Africa's Mediterranean coast curving north to Beirut and southeast across the Arabian Peninsula to Oman. Egyptian scholar Halim Barakat has argued that the Arab world should be viewed as "a single, overarching society rather than a collection of several independent nation-states." Not for centuries has that possibility been as true as today.