Deception

¹ Looting and Murder

Life in Moscow can seem remarkably normal. Middle-class professionals wear the same clothes, drive the same cars, take the same holidays, eat the same food and do the same jobs as millions of their counterparts in cities all round the world. This is especially so in the field of finance. Shares and profits rise on the back of Russia’s oil and gas boom, and the consumption it pays for. Financiers invest; their lawyers handle the details and deal with problems. Serving them is a growing Russian middle class of articulate, confident English-speaking professionals who could easily do the same jobs in New York, London, Frankfurt or Dubai. For many people, especially those who believe Russia is on the right track, the growth of the financial and legal system in Moscow is one of the great grounds for optimism. Other parts of life in Russia, from traffic-clogged big-city streets and corrupt officialdom to terrorism and bubbling civil war along the country’s southern fringe, may be depressing, chaotic, dark and even dangerous, but that world seldom touches the bright, snazzily furnished offices of central Moscow.

In the case of Sergei Magnitsky, however, it did. His name is not well known, though it deserves to be. His story provides a moral and human backdrop to the subsequent chapters on the wiles and ways of Russia’s spies. Aged only 37 when he died in 2009, Mr Magnitsky was part of the first generation of Russians for nearly a century whose lives were unclouded by fear. When Soviet controls over speech, belief and travel withered, he was a teenager. He was well-educated in a way that previous cohorts of Russian students could only dream of. His mind was not shaped by forced study of the perverse doctrines of Marxism–Leninism but by adherence to the crystalline principles of the law. Neither brutalised by Soviet-era conscription nor burdened by compromises of adult life under totalitarianism, he enjoyed the middle-class comforts and certainties that are taken for granted in the West and had been unimaginable in the Soviet Union. He had able colleagues, stimulating challenges and a happy home. His dream, like the half-successful reformers of the Tsarist era a century earlier, was for Russia to be a law-governed state. He was the sort of person who made even sceptics feel that Russia’s long-term future was bright.

Polished and polyglot, Mr Magnitsky was the kind of Russian that readers of this book could easily encounter. You might have a drink with him on a foreign holiday, hear him at a seminar, or find him sitting across the table at a business meeting. In that sense, he is rather like the other Russians covered in this book: the undercover spies in the West. It is easy to imagine him sipping a cocktail in London with Ms Chapman, or strolling the streets of Boston in conversation with Donald Heathfield – her superspy colleague who worked as a management consultant in America. But while these people were pursuing their clandestine missions on behalf of Russia’s spymasters, Mr Magnitsky was involved in another story.¹ It involves colossal sums of money, extraordinary cruelty and impunity for wrongdoers. The cast includes senior members of the FSB, working hand in hand with organised crime and senior state officials.

I will begin by introducing the man who unwittingly brought Mr Magnitsky to his doom, and since then has campaigned untiringly for his cause. William (‘Bill’) Browder is an American-born financier, now with British nationality, who used to be one of the best-known Western investors in Russia. He is an abrasive, mercurial figure, bursting with nervous energy, capable of charm and fury in quick succession. He has a fascinating family background: his grandfather Earl Browder was a leader of the American Communist Party. But it was capitalism not communism that entranced the grandson. He spotted in the 1990s that many outsiders were overestimating the risks of doing business in Russia. Admittedly, the dangers were great: the rule of law was weak, property rights flimsy, political stability uncertain, the economy rocky, and crime and corruption pervasive. But daunting does not mean impossible. The companies and shares on sale were not valueless, just cheap. If the situation improved just a little (or if even perceptions of it did) then the gains to be made were potentially huge. Suppose, for example, that investors reckoned that an ill-run Russian oil company, instead of being worth a mere 1 per cent of a comparable foreign one, was instead worth 10 per cent. That would raise the value of its shares tenfold – meaning a colossal profit for someone who bought before the perception changed.

Mr Browder’s investment company, Hermitage Capital Management, therefore pursued a threefold strategy. First, it bought shares in companies that owned an underlying asset, such as oil, gas or minerals. Second, he talked up Russia as an investment destination, insisting that it was merely ‘bad’ instead of outright ‘horrible’.[9] His third tactic was to highlight abuses of shareholder rights. His sharp-eyed team of analysts pored over company accounts and other documents, looking for evidence of fraud and waste. When they found them, Mr Browder would launch lawsuits, media campaigns and other stunts to seek redress.²

This was well timed. Some Russian companies were already realising that in order to make the most of their stock-exchange listings, they had to pay at least a semblance of attention to outside investors’ interests. From 2000 onwards, Mr Browder’s efforts also coincided with a push from the Kremlin, which disliked the way over-mighty ‘oligarchs’ (politically powerful tycoons) were running the country’s biggest companies in their private interests. The coincidence of interest was short-lived. The Putin regime’s longer-term aim was not to promote good corporate governance and shareholder value, but to seize money and power for itself. But that was for later. For nearly a decade, Mr Browder and Hermitage flourished mightily. Their campaigns brought some quick victories, some slower ones, and sometimes failed altogether, but the hard work and high profile at least helped justify the hefty management charges the investors paid. The ‘Hermitage effect’,³ as the company terms it, received the ultimate accolade in 2002: it was the subject of a Harvard Business School case study.⁴ During the period between Mr Putin’s arrival in office in 2000 and the fund’s moving to London in 2005, the value of Hermitage’s investments rose eightfold; during the whole period of its existence, the increase was thirty-fivefold. Few in the history of finance can boast such a record.

I did not always get on with Mr Browder during my time in Moscow as bureau chief for the Economist from 1998 to 2002. Our disputes may look like ancient history now but they were sharp at the time. In particular, although I admired his energy and brains, I disliked his backing for Mr Putin’s regime. The new government had in my view brought superficial stability, but at far too high a price. Moreover I was unmoved by the plight of foreign investors who had knowingly put their money into companies run by crooks, nincompoops and political cronies, and were then surprised to find that those businesses were run badly. If you buy shares in Russia, you should expect to be defrauded, rather as if you go mud-wrestling you expect to get dirty.

Our sharpest disagreement came in 2003 after I left Russia, when we took opposite sides over the defining issue of the early Putin era. Mr Browder endorsed the arrest of Mikhail Khodorkovsky, then Russia’s richest man, who had defied Mr Putin, not least by turning up tieless to a meeting in the Kremlin – a huge snub in protocol-conscious Russia. Mr Khodorkovsky, an energy tycoon, had also put a large number of parliamentarians on the payroll to bolster his political clout and was planning a deal with a big American oil company in defiance of Kremlin guidelines. He was certainly an obstacle to Mr Putin’s plan to seize the commanding heights of power in Russia. Some thought he might even want to displace Mr Putin from the top job (in his first years in office, the Russian president had seemed a grey and somewhat unimpressive figure). Mr Putin’s vengeance was decisive and ruthless. Mr Khodorkovsky was jailed on flimsy charges and his company Yukos (which had many foreign shareholders) was bankrupted, with its assets disposed of in a dodgy auction where Kremlin cronies bought them cheaply.⁵ I agreed with Mr Browder that Mr Khodorkovsky had in previous years abused the rights of his minority shareholders, and I did not see him simply as a martyr to repression. But I reckoned that the balance between the tycoon’s past misdeeds and later virtues mattered less than the authorities’ flagrant abuse of the courts in a political vendetta.

Mr Browder could afford to discount my criticism. He was making millions. But he was also making more powerful enemies elsewhere: every dollar not stolen as a result of his efforts to stop corporate sleaze dented the income of some corrupt and powerful person. In November 2005 border guards turned him back from Moscow’s Sheremetyevo airport, citing undisclosed national security grounds.⁶ Returning to London, he stayed bullish on Russia, lobbying to overturn the authorities’ decision and insisting that his plight was a mere misunderstanding. But at a summit meeting in St Petersburg in July 2006[10] a journalist raised Mr Browder’s case at a press conference. Mr Putin replied that he had never heard of Mr Browder (which was implausible) but that he could ‘imagine that this person had broken the laws of our country’⁷. At that point, Mr Browder says, he gave up trying to return to Russia: the signal of deep official displeasure was unambiguous and he did not want to share Mr Khodorkovsky’s fate. Behind the scenes he had already begun liquidating his holdings and pulling out his staff. With Mr Browder no longer at the helm in Moscow, investors were asking for their money back; other emerging markets looked more attractive. As it happened, the move was not just prescient but profitable. Shortly afterwards, the world financial crisis broke, and Russian share and bond prices plunged. Mr Browder’s investors escaped without a scratch.

At this stage, the story was just one of many such tales in Russia: the country’s recent history is littered with investors who cross swords with the authorities and lose. The lucky ones negotiate a deal; the unlucky ones are glad to leave the country alive. But in Mr Browder’s case, his enforced absence was just the prologue to a tragedy worthy of Dostoevsky. It involved a mammoth fraud, in which officials stole three companies owned by Mr Browder’s fund and used them to swindle the citizens of Russia. The perpetrators of this crime were not some rogue bunch of junior officials. On the contrary, they were the unit of the Interior Ministry charged with safeguarding their taxpayers’ interests. They worked in cahoots with senior officers of the FSB’s K Directorate, which is supposed to deal with ‘economic crimes’.

Readers may find the term ‘economic crimes’ unfamiliar: in other criminal justice systems it could be rendered as ‘white-collar crime’. But in a Russian context it is redolent of the Soviet era, in which the same KGB department persecuted the black market – the now-forgotten trade in everything from purloined state property to foreign currency, antiques, second-hand goods or sexual services. Even in Soviet days, persecution was mixed with profit. Pay-offs, particularly from the Brezhnev era onwards, were rife. Confiscated goods had a habit of ending up in the dachas of senior officers. Prostitutes found they could stay in business by offering their services free of charge to the right person, or collaborating in entrapment schemes. The difference under capitalism is that the sums involved in corruption now are greater and the means more sophisticated.

An agency such as K Directorate in a Western country would deal with corporate fraud, excise scams, money-laundering and high-level corruption, and all other overlaps between organised criminality and the financial system. Not in Russia. Unfair though this judgement may be to those of its officers who genuinely want to serve the public interest, it has become in most cases a unit for perpetrating economic crime, not fighting it. In late January 2007 Mr Browder seized on a chance personal meeting with Dmitry Medvedev, then the leading presidential candidate, and received a promise of help with his visa. But the actual reaction was a kind of ‘help’ normally seen in gangster movies. In mid February 2007 a senior figure from the Interior Ministry tax-crimes department, Lieutenant Colonel Artyom Kuznetsov, telephoned the head of research at Hermitage in Moscow, requesting an ‘informal meeting’ for a report he said he was writing on Mr Browder’s visa. Depending on how Hermitage ‘behaved’, the visa could be issued, he said: ‘The sooner we meet and you provide what is necessary, the sooner your problems will disappear.’ The company rejected what it (reasonably in a Russian context) reckoned was an extortion attempt. In retrospect, it was probably even more sinister: a ruse to get hold of the company’s documents, as the first stage in a planned looting spree.

This involved the illegal expropriation of Mr Browder’s companies, the theft of $230m from the Russian taxpayer, and the death of Mr Magnitsky, the man who uncovered it. It started on 22 May 2007 when Viktor Voronin, head of K Directorate, and his subordinate Aleksandr Kuvaldin, issued a finding that a company associated with Hermitage called Kameya had underpaid its dividend withholding tax.

This sounds both complicated and trivial, and on the surface it is. Outsiders are ill placed to judge the merits of arguments over corporate taxation, especially when one side declines to present its case in public. Though I find Hermitage’s case convincing, a layman’s view cannot be conclusive and I would not want it given any particular weight. The Russian authorities may have powerful arguments, though they have for whatever reason not produced them. But the facts as presented by Hermitage are these: Kameya, a relatively small company, had paid $135m in taxes in 2006, at a time when Aeroflot, the country’s largest airline, paid $130m, and the best-known brewery paid $131m.[11] It was scarcely shirking its duties as a corporate citizen. Indeed, it was the hefty taxes that Hermitage’s associated companies had paid in past years which had probably marked it as a target for the scam originally.

Regardless of the merits of the dispute itself, what seems to me quite clear is that the FSB’s involvement in a tax dispute was beyond its remit and that its subsequent behaviour, along with that of other state agencies, was a shocking abuse of the system. In a country that claims to abide by the rule of law, the authorities do not automatically triumph in the courts. On paper, Russia’s procedures in contested business tax matters do not seem unusual. The tax authority first queries a payment, then waits for the company’s response; if unconvinced it reissues a tax demand; if the money is still unpaid it turns to the Interior Ministry to enforce it. At that point the taxpayer has the right to a fair hearing and legal representation. In practice (as in so many parts of life in Russia) things are very different. In this case no tax claims were made and none of these procedures was followed. Indeed, on 12 May 2009, in a bizarre coda to the obliteration of Hermitage’s presence in Russia, Kameya received a final tax audit from the federal tax service inspectorate stating that all taxes had been paid in full and none was owed.

On 4 June 2007 a group of twenty-five Interior Ministry officers, led by Lieutenant Colonel Kuznetsov, raided the Hermitage offices in Moscow, with a warrant relating only to Kameya, and seized documents, computers and other materials involving three quite unrelated Hermitage companies: Makhaon, Parfenion and Rilend. On the same day Kuznetsov, also without a warrant, raided an American-owned law firm, Firestone Duncan, which specialises in legal paperwork. He confiscated the statutory documents and seals of the three Hermitage subsidiary companies – in all two vanloads of materials. That was outrageous enough. What was worse was the way the officials behaved during the raid. When a lawyer at Firestone Duncan protested, the visitors beat and arrested him. After paying a 15,000 rouble (roughly $500) fine he was released, and spent two weeks in hospital. His name is still available in news reports of the incident, but I am omitting it at the request of friends who say he fears for his safety.

This was no coincidence. According to Hermitage, all the lawyers associated with the company suffered robberies or break-ins in the two-week period around the raid. By the brusque standards of Russian law enforcement, the raids were not in themselves unusual. The unannounced arrival of masked men toting machine guns, who remove documents and computers from your office, is a run-of-the-mill business risk in Russia, no more unusual than, say, having British health and safety inspectors demanding that you fit new fire doors, or America’s Internal Revenue Service quibbling over allowable business expenses in a tax return. The twist in Russia is that such searches and seizures are often carried out by state officials on behalf of a third party, such as a business rival to the victim. Having identified the source of the persecution, the victim starts negotiating – or if he has good connections himself, considers counter-measures.

Mr Browder, from his exile in London’s Mayfair financial district, was puzzled. Clearly the problem had, as he put it to me, ‘metastasised’. But why? The raid could be revenge by one of the politically influential companies he had chivvied for bad management and impenetrable finances. Or the aim could be simply to derail his campaign to return to Russia. At any rate, he reckoned, it was a headache not a nightmare, particularly as he had largely wound down his operations there anyway. This was a big misjudgement: far from being the vengeance of some disgruntled subject of Mr Browder’s campaigns, the raid was carried out by his erstwhile ally, the Russian state itself. Despite multiple requests and complaints, the authorities did not return the confiscated items. Nor did they explain on what grounds they were holding them.

Hermitage then received a troubling phone call. A bailiff from the St Petersburg Arbitration Court was seeking to enforce judgements to the tune of several hundred million dollars arising out of lawsuits against Hermitage companies. But Hermitage had never heard of these cases. A baffled Mr Browder commissioned Mr Magnitsky, head of the tax and audit department at Firestone Duncan, to investigate. A notable figure in the field of tax law, Mr Magnitsky was an ideal choice. He immediately found that no fewer than ten cases had been lodged in St Petersburg. While a colleague set off for Russia’s second city to find out more about these mysterious lawsuits, Mr Magnitsky began scouring official registries for clues. In October 2007 he made his first breakthrough. While the documents and seals of his client had been supposedly in the custody of Kuznetsov and a colleague, Major Pavel Karpov, they in fact had been used to re-register the companies.

Such chicanery may seem puzzling to outsiders who live in a world where courts offer redress, the media highlights official wrongdoing, and elected representatives are able to take up grievances. A Western policeman who steals a company document risks losing his job and would probably face prosecution. Anyone trying to use the stolen document would be guilty of attempted fraud and face criminal charges too. But for all its outward signs of normality, Russia offers none of these routes to justice, which is why crimes involving stolen corporate documents are common. Possession is nine-tenths of the law – or all of it. The result is corporate raiding, Russian style. In the West, this technique involves brainy and ruthless investment bankers who swoop on a company to dislodge a dozy management team. The Russian equivalent involves a powerful bit of the state machinery stealing a company from its owners. This often starts with a raid in which company documents are confiscated by officials, and then end up in the hands of the raiders who use them to change the company’s ownership. The victims may negotiate a settlement where they stay on as managers. At worst they are lucky to escape with their lives. Something on these lines seemed to be happening, although the motive was puzzling. The perpetrators had gone to some lengths to loot a pestilential foreigner’s assets, presumably in the belief that the effect would be lucrative or at least punitive. But it was neither. With its investments wound down, Hermitage thought it had little to lose, and needed care little for the wrath of Russian officialdom.

While Mr Browder and his colleagues pondered this puzzle Mr Magnitsky prepared criminal complaints implicating Kuznetsov and Karpov. He also discovered a new twist: the new owner of the Hermitage companies was a previously unknown firm called Pluton, registered in the provincial republic of Tatarstan. It was not the sort of outfit that would normally engage in high finance. The owner was a former sawmill employee called Victor Markelov who had served a jail sentence for manslaughter. His fellow directors were two other ex-convicts.[12] All three had been released from jail early. Though odd by Western standards, such developments are not unusual in Russia, where ex-convicts, as well as drunks and tramps, often feature in corporate frauds. For a modest financial or liquid consideration, they will sign whatever papers are required, providing a fig leaf of disguise for the perpetrators at modest cost.

By this stage Hermitage had lost its companies, but the fraudsters had not gained anything except to drive Mr Browder out of Russia. But the next stage of the swindle was to change that. It involved a lawsuit, based on forged backdated contracts purporting to show that the Hermitage companies had promised to sell a large quantity of Gazprom shares. Claiming that the companies had then reneged on the deal, the claimants (three previously unknown firms) sued for a startling $1.3bn in damages for foregone profits. The supposedly broken contracts could hardly have been flimsier. They were littered with inaccuracies. They referred to bank accounts that were opened only subsequently. They used inaccurate addresses. A power of attorney – a document rarely used in the West but an essential part of any business transaction in Russia – was dated four months before the company concerned had come into existence. One of the claimants identified himself using a passport that later turned out to be stolen. In evidence, they presented a mixture of forged documents and copies of materials seized in the raids. In any legal system worthy of the name, the investigators who took custody of these documents should have safeguarded them, not let them fall into the hands of fraudsters.

With proper legal representation, these ludicrous cases would have been easy to win. But the stolen Hermitage companies did not have proper lawyers. In a complaint to the Russian chief prosecutor, Yuri Chaika, Hermitage says of its supposed representatives that it:

Instead of defending their clients against the preposterous allegations of non-existent breaches of bogus contracts, backed by palpably phoney evidence, the lawyers simply accepted full liability. The judges in the cases showed a striking lack of curiosity about the proceedings. For example: if the two parties agreed, why had it been necessary to go to court at all? Rather than ask such uncomfortable questions, they immediately ruled that the companies had to pay the damages sought. Having gained his victory, Lieutenant Colonel Kuznetsov then approached some of the biggest banks in Moscow. He produced a narrowly drafted warrant giving him the power to locate any assets belonging to Kameya – but demanded details of all assets belonging to Hermitage. Some complied either fully or in part, prompting furious complaints from Hermitage. Only the Duch bank ING, to its credit, bluntly declined, pointing out that the warrant bore no relation to the information sought.

At any rate, the assets were phantom and the search for them a sideshow. The real victim, the Russian taxpayer, was moving into sight. The fraudsters’ henchmen, now posing as the legal owners of the company, used the judgment to argue that its past profits were now illusory, and the tax paid on them must be refunded. On 24 December 2007 they filed amended tax returns for 2006. These argued that as the new court judgments had wiped out the Hermitage companies’ taxable profits in that year, they were therefore entitled to a refund of the $230m in capital gains taxes these companies had paid. This was a striking and substantial claim that in any normal tax system would have been subject to thorough and lengthy scrutiny. Making the Russian tax authorities disgorge even the smallest and simplest refund is mind-bendingly slow and difficult. But thanks to the patronage of the FSB and other powerful institutions (the Interior Ministry and the upper reaches of government), the claimants won agreement for their refund – thought to be the largest single such payment in Russian financial history – from the two tax authorities concerned in a single day.[13]

The payment was premature: one of the court judgments did not even come into effect until 11 January. Even the simplest checks by the tax authorities would have shown that the transaction was fraudulent. Although two officials of the tax authorities gave sworn statements that they had made all possible and necessary checks before authorising the transactions, it is hard to square this with reality. Russian bureaucrats are known for many things, but not for a happy-go-lucky attitude to paperwork, nor for working extremely quickly. If the statements from the officials are to be believed, they made a series of extensive and complex checks with other state agencies, and received completely satisfactory replies, all in the space of a few hours in late December when Russia is shutting down for its lengthy New Year festivities.

It may be illustrative to imagine what would have happened if such a fraud were attempted in a Western country. Mr Browder would have immediately secured a court order preventing the fraudsters using the property they had acquired. Even a whiff of official involvement in a crime of this scale would alert the media (and the blogosphere). Lawmakers would ask questions; bodies that represent business would make complaints too; and anti-corruption agencies would take a hard look at the behaviour of the officials concerned. None of these mechanisms works properly in Russia. On paper, the state is accountable in all these ways, but in practice using them is mostly useless – and in some cases actually dangerous.

Between 3 and 11 December 2007 Hermitage had submitted no fewer than six lengthy complaints detailing the theft of the companies. Two went to the chief prosecutor – who promptly passed them to Major Karpov. Unsurprisingly, no action followed. Two went to the department of the Interior Ministry that deals with internal corruption issues. It declined to take action, with the Kafkaesque justification: ‘We are unable to open an inquiry into an investigator when such an inquiry is requested by the target of the investigator’s current work.’ One went to the St Petersburg branch of the Russian State Investigative Committee, which replied that it could find nothing amiss. The sixth went to the same body’s federal offices, which opened a low-level inquiry on 5 February. That delay cost the Russian taxpayer $230m.

The robbers now had their loot. But they were still at risk of being found out. The fraud was not an elegant one. Whether from carelessness or complacency, the phoney documentation was littered with mistakes. Moreover Hermitage was firing salvoes of official complaints inside Russia, and was running an effective PR campaign abroad. It was time for a criminal case against the pesky foreigners to scare them into silence.

The authorities had to try to prove that Hermitage had done something wrong. If the evidence did not exist, it must be invented. On 26 February, Karpov, Kuvaldin and two of Kuznetsov’s other subordinates flew to the provincial city of Elista, capital of Kalmykia. This republic is one of the poorest and oddest places in Russia, Buddhist by religion and long ruled by a chess-mad despot called Kirsan Ilyumzhinov. Like many investors in Russia, for tax purposes Hermitage had established its investment subsidiaries there.[14] As a ‘Free Economic Zone’ – one of eleven in Russia – the republic was an onshore tax haven, with an 11 per cent tax rate on corporate profits, against 35 per cent in Moscow. Hermitage also used another tax break aimed at promoting the employment of disabled people. In 1996 it had hired four such staff, nominated by the Kalmykian authorities, for the undemanding task of sending press clippings on a monthly basis.⁹ Investigators in Elista had on several occasions, most recently in 2004, started looking at Hermitage’s tax affairs, each time ruling that no crime had taken place. The law offered little scope for further pursuit: the deadline for collecting tax debts had expired. But in 2008 the visitors from Moscow had little difficulty in persuading their Elista colleagues to reopen a case and to transfer the investigation to the Russian capital. They summoned a local investigating officer back from vacation. Witnesses interviewed in the FSB office in Elista readily agreed to change their story, saying that Hermitage had never actually paid them. (Hermitage has produced payment orders to support its position.)

Whether or not Hermitage’s conduct in all this was flawless, average, or questionable is not the point here. Nothing in its activities, in any legal system imaginable, would carry sanctions including the criminal prosecution, arbitrary imprisonment, or physical abuse leading to death of one of its lawyers. Yet that is just what happened. On 5 May 2008 Kuznetsov initiated a criminal case against not Hermitage itself, but its lawyers, claiming they did not have genuine powers of attorney to represent their client: in effect, he was saying that the only person who could legally represent the company was the person who stole it. That marked a grim step to lawlessness. A lawyer is an officer of the court, bound to do his professional best to make his client’s case clearly and convincingly. It is a sure sign of a rotten legal and political system when lawyers are punished for the crime of representing their clients. When I tried to explain this case to a friend, he asked in innocent puzzlement: ‘Why didn’t they call the police?’ That question highlights the gulf between the way Russia works and the standards expected in the West. In this case, the criminals were the police, as Mr Magnitsky discovered when he tried to find out what had happened to his complaints against Kuznetsov and Karpov. Far from being independently investigated, these had been forwarded to the men themselves. On attending the Investigative Committee offices in Moscow to give a deposition, he was surprised to see Kuznetsov there – officials explained this by saying that he was ‘assisting’ them.

Meanwhile Hermitage lawyers filed fifteen more complaints, with every relevant law enforcement and regulatory agency. Mr Browder and his colleagues were sure that the episode would be dealt with properly once higher authorities became aware of it. As ardent advocates of the rule of law in Russia, Prime Minister Putin and President Dmitri Medvedev surely could not ignore evidence that their officials had defrauded taxpayers of $230m? But Mr Magnitsky’s work had the opposite effect. Having already threatened Hermitage lawyers with criminal charges in May, in August 2008 the fraudsters ordered a police raid on the offices of four law firms working for Hermitage.[15] The lawyers at the firms also received summonses, in violation of a Russian law that specifically prohibits lawyers being subject to questioning by the criminal justice authorities for anything relating to their dealings with clients. Undeterred, Mr Magnitsky in October 2008 filed a comprehensive dossier to the State Investigative Committee. If Mr Putin’s claim to have created a ‘dictatorship of law’ in Russia counted for anything, it should make it possible to challenge abuses such as this. But the truth is that the law in Russia is a trap for the brave, not a weapon for the weak. By challenging the authorities in court, you leave yourself open to their retribution. The idealistic Mr Magnitsky was about to learn this the hard way.

The next stage of intimidation came when the authorities opened criminal cases against the two Hermitage Fund lawyers who had reported the police involvement in the $230m theft. These men, Eduard Khairetdinov and Vladimir Pastukhov, and some colleagues, promptly went abroad. Had Mr Magnitsky followed suit he would be alive today. On 12 November 2008 Kuznetsov and his three subordinates were instructed to investigate possible criminal conduct by Hermitage’s lawyers. On 24 November 2008 four law enforcement officers came to Mr Magnitsky’s home and arrested him in front of his wife and two children. All applications for bail were peremptorily turned down. Russian media have reported that he was planning to go abroad, citing plane tickets to Kiev reserved in his name. But these were booked only by phone, by an unidentified male voice, and never collected. Booking bogus tickets is a tactic commonly used by Russian criminal justice authorities wanting to plant ‘evidence’ that a suspect is planning to flee. The FSB statement said Mr Magnitsky had applied for a visa for the UK. The British consulate in Moscow denies that any such application was made.

The denial of bail meant that Mr Magnitsky never saw his children again; indeed he never heard their voices, as telephone calls to his family were denied. His contact with his loved ones was limited to snatched glimpses at brief and farcically unfair court hearings. Only once, a month before his death, was he allowed a brief meeting with his wife and mother. He died in jail just under a year after he was arrested, eight days before the expiry of the maximum limit for pre-trial detention.

The initial reason given was ‘rupture to the abdominal membrane’, which was later replaced with ‘heart failure’. A fairer assessment would have been death by torture. Mr Magnitsky had been kept in abominable conditions.¹⁰ The authorities ignored his complaints and repeatedly denied him medical attention, even when he was in great pain with life-threatening ailments. His body showed signs of direct physical abuse in the final hours of his life. Squeamish readers may wish to skip what follows.¹¹

Mr Magnitsky was initially locked up in a detention centre, in an unheated cell with an unglazed window, and with just four beds for the eight prisoners. The lights burned round the clock. He was shifted from cell to cell sixteen times, with his belongings often going ‘missing’ amid the move. Here he describes life after court hearings for those in custody:

This is a standard tactic in the Russian (and before that the Soviet) jail system, to weaken a prisoner’s resistance. Later he was put in a cell that was flooded with sewage – this extract is from his prison diary on 9 September 2009:

Throughout his ordeal, Mr Magnitsky made complaints and requests – over 450 in total – on everything from the denial of hot water for washing to demands to meet his family, phone his children, and have medical attention. That is more than one for each day of his imprisonment. They, and his jail diary, make poignant reading.

The reason for the ill-treatment was simple. The authorities wanted Mr Magnitsky to switch sides. If he would retract his testimony against the police officers, and instead give evidence confessing that he was responsible for the fraud and implicating Mr Browder, he could go free. Such tactics were familiar in the Soviet era, when political prisoners were told that they would never see their families again, or that their children would be sent to orphanages, if they did not incriminate their fellow-dissidents. It is shocking to find the same approach in 2009 in a country that is a signatory to the European Convention on Human Rights and is a member of the Council of Europe.

Each time Mr Magnitsky refused to cooperate, the authorities worsened his conditions. By June he had lost 40lb (18kg). He began to experience severe abdominal pain. After an initial stay in an overcrowded and squalid detention centre, Mr Magnitsky had been transferred to the ‘Sailor’s Rest’ prison (Matrosskaya tishina in Russian) where conditions were marginally less bad, with a mere three prisoners to a 16m² cell. Medical services were better there too. On 1 July an ultrasound examination diagnosed ‘calculous cholecystitis’, an illness caused by untreated gallstones (choleliths, in medical terminology). The symptoms include pain, anorexia, nausea, vomiting and fever. The prison doctors prescribed a further examination and surgery in a month’s time. But a week before that treatment, Mr Magnitsky was transferred to the notorious Butyrka prison, which has no ultrasound machine and none of the surgical or medical facilities required for his treatment. The ostensible reason for his move was renovation works, though an independent investigation later established that these never took place. In any case it is unclear why Mr Magnitsky, already seriously ill, should be one of the handful of inmates needing to be moved. Questioned later by independent investigators, the prison director, Ivan Prokopenko, said he did not consider Magnitsky sick, remarking: ‘Prisoners often try to pass themselves off as sick in order to get better conditions. We are all sick. I, for instance, have osteochondrosis.’¹²

On 9 August Mr Magnitsky demanded a meeting with Mr Prokopenko, complaining that his health was at risk because of ill treatment. On 11 August he followed it up with a second complaint demanding immediate medical attention. On 19 August his lawyers complained again, both to Mr Prokopenko and to the chief investigator in the case, Oleg Silchenko, demanding an ultrasound examination. On 25 August, after Mr Magnitsky had spent a sleepless night in agony, the lawyers made an urgent complaint demanding a medical examination and surgery for cholecystitis and pancreatitis – the latter disease resulting from lack of treatment of the former. Following a meeting with Silchenko, on 13 October 2009, Mr Magnitsky wrote the following witness statement:

I believe that [Interior Ministry Lieutenant Colonel Artyom] Kuznetsov and other law enforcement officers in conspiracy with him could be involved in the theft of Rilend, Makhaon, Parfenion and the subsequent theft of 5.4bn roubles from the State Treasury and were extremely interested in suppressing my activity relating to assisting my client in investigating the circumstances connected with these criminal offences. This was the reason for my unlawful criminal prosecution being carried out by investigator Silchenko. I believe that with Silchenko’s participation or with his tacit approval, inhuman conditions were created for me in the detention centre, which humiliate human dignity. While in custody, I have been transferred five times to four different detention centres. I am tired of counting the cells to which I have been transferred innumerable times. I am denied medical assistance. On many occasions, for artificial and unjustifiable reasons, my mother’s and wife’s visits were prohibited, as well as telephone conversations with my little children. While in custody, situations have been created for me where I was deprived of the right to have a weekly shower, to watch television, to use a refrigerator, and simply to live under normal conditions, to the extent they can be ‘normal’ in a detention centre. I am convinced that such intolerable conditions are being created for me with my investigators’ full knowledge. I am convinced that the only possibility to stop this humiliating treatment is for me to accept false accusations, to incriminate myself and other persons.[16]

Far from being intimidated by his treatment, on 16 October 2009 Mr Magnitsky reiterated his allegations in greater detail. That sealed his fate. On 12 November another farcical pre-trial hearing brought a curt dismissal of his appeal for bail, on the grounds that the time to file it had elapsed. This was a big psychological blow, perhaps aggravating his physical woes. By 13 November he was vomiting constantly, with a visibly swollen stomach. Even at that stage, a simple medical intervention could have saved his life. On 16 November Mr Magnitsky was transferred from Butyrka to the ‘Sailor’s Rest’ for ‘emergency medical treatment’. But the doctor there prescribed only a painkiller. When that failed, he had Mr Magnitsky put in a straitjacket and referred him for psychiatric evaluation. Eight guards from a special disciplinary squad arrived. They handcuffed the dying man, beat him with rubber batons and took him to an isolation cell, where he lay handcuffed on the floor by the side of a bed. He was found dead an hour and a half later by a doctor and nurse who had been kept waiting outside his cell for one hour and eighteen minutes.

Around this time, Mr Browder’s staff in London started receiving terse, threatening text messages in Russian on their mobile phones. Copies they have supplied to me make chilling reading. One read: ‘What is more frightening, I don’t know… death or prison?’ A later one used a quote from The Godfather to try to intimidate the recipient: ‘If history tells us anything, it is that anyone can be killed. Michael Corleone.’ One after his death said mockingly: ‘A lawyer dies in investigative detention, in the framework of an interesting criminal case. An emblematic case. Paid-for articles won’t work. Extradition etc.’

Even in Russia, where public opinion is hardened to news of official misconduct, Mr Magnitsky’s death caused a public outcry. He was not some marginal figure from the political opposition, nor an investigative journalist who had clearly been asking for trouble, neither was he from the country’s troubled and violent southern fringe, where many Russians think tough treatment by the authorities offers the only hope of quelling terrorist insurgencies by violent Islamist extremists. Mr Magnitsky fell into none of these categories: he was just a middle-class Russian lawyer trying to do his job. Belatedly, some of the wheels in the system began to turn. Pressure groups and official watchdogs made the first moves. Within weeks an independent group, the Moscow Public Oversight Commission, blamed his death on ‘psychological and physical pressure’. One member termed it ‘premeditated murder.’¹³ The Moscow Helsinki Group, headed by Lyudmila Alekseyeva, the doyenne of the Soviet dissident movement, submitted a powerfully argued criminal complaint. It said that the death

As pressure grew, Mr Medvedev ordered an official investigation. He signed a law prohibiting the detention of suspects in tax crime cases. Though twenty prison officials, including the deputy head of the federal prison service, were fired, nineteen of them had nothing to do with the Magnitsky case. The only figure directly involved in the case was Major-General Anatoli Mikhalkin, who had headed the Interior Ministry’s tax crimes department in Moscow, and had been named by Mr Magnitsky in one of his complaints. The official reason for his dismissal was ‘retirement’. On 25 June 2010 the internal security department of the MVD started an investigation into Kuznetsov, following an appeal by Mrs Clinton. It has brought no result. On the contrary, several of the people directly involved in the case have received medals and promotions. Kuznetsov moved from the Moscow City tax crimes office to a job in the federal economic-security division of the MVD. Karpov also moved to a job at the federal level. An official inquiry by the Investigative Committee exonerated Silchenko, the investigator ultimately responsible for Mr Magnitsky’s death, of all wrongdoing. One week before the anniversary of his death, the MVD held an annual awards ceremony recognising the thirty ‘best investigators’ among its million-plus officers. Five of the awards went to people directly involved in the Magnitsky case, including Silchenko and Karpov. Growing international condemnation of the case has brought largely ineffective and token responses in Russia. A commission set up by Mr Medvedev’s Human Rights Council said that Silchenko ‘bears serious responsibility for [Mr] Magnitsky’s death’ and that he might have died as a result of a beating by medical orderlies.¹⁴ A report by the State Investigative Committee in July 2011 accepted that Mr Magnitsky died because of failures in his medical care. But the Interior Ministry said it saw ‘no reason’ to investigate the action of its officials. Instead Russian prosecutors said they would reopen the case against Mr Magnitsky (oddly, cases against dead people can be tried in Russia). They even summoned his mother as a witness.

Meanwhile, the perpetrators were getting rich. Official Russian documents show that cars and real estate worth $3m were registered to Kuznetsov, his wife and his pensioner parents in the period between the raid on Firestone Duncan and Mr Magnitsky’s death. An investigation by Hermitage claims that Olga Stepanova, a senior official in the Moscow tax inspectorate, her subordinates and their families suddenly gained $43m in offshore property and other assets following the phoney tax refund.¹⁵ Nobody has established so far that this has anything to do with the Magnitsky case. But there would be those who would find the coincidence striking. Nor is it proved where the bulk of the money stolen from the Russian taxpayer went. Mr Browder’s investigators believe that the finger points to the higher reaches of the FSB, and still more senior figures in the Interior Ministry, in the tax authorities and in the prosecutors’ office.

Had they known five years ago the result of their scheming, the perpetrators would surely have decided to pick another target. It is hard to see now what will stop Mr Browder’s formidable campaign against the sixty people he accuses of benefiting from the fraud, or of complicity in Mr Magnitsky’s death.¹⁶ The European Parliament has voted to ban them from the European Union; Canada’s parliament has proposed a similar resolution and it has passed in the Netherlands. More than twenty American senators have backed legislation banning these individuals from the United States, provoking a furious response from the Russian authorities.

While Mr Browder has shed his reputation as a grandstanding wheeler-dealer for that of an inspirational leader of a moral crusade, the Russian authorities’ response to the case has been a textbook study in how not to handle a tricky issue. As in so many episodes, from the mysterious apartment-block bombings in 1999¹⁷ to the looting of Yukos, they have made their case spectacularly poorly, with a mixture of paranoid silence, bluster and deceit. The best place to test all these claims would be in court, with proper lawyers on both sides and a fair judge in the middle. That does not seem likely to happen. Overall, while some officials have condemned Mr Magnitsky’s treatment, others have implied that he deserved it, and others still have made counter-allegations. When, prompted by Mr Browder’s researchers, the Swiss authorities opened a money-laundering investigation into accounts at Credit Suisse, the bank that handled many of the transfers benefiting those implicated in the case, the Russian authorities launched a clumsy attempt to summons Mr Browder for questioning in Moscow (understandably, he has declined to go). Credit Suisse says it is co-operating with the investigation.

The genesis, course and aftermath of this case exemplify the weakness of the bits of the Russian system that should constrain the powerful and protect the innocent. Appeals to politicians either went unanswered or brought ineffective responses. Russian voters clearly care about the case and believe that an injustice was done. But the political system offers no way to resolve their concern. Attempts to use the parts of the state machinery that offer redress to wronged citizens got nowhere. Civil-society organisations tried to raise the case, but without success. The media barked – bravely in some cases – but could not bite. Only external pressure, belatedly, has inconvenienced the people behind the fraud and murder, who are now (in some cases) unable to travel freely to the West.

The case is a concentrated episode in a much wider story: the ex-KGB’s abuse of power, including murder and looting. The FSB – its main successor organisation – has tried and trusted tools for intimidating individuals and for misusing the instruments of state power to create an alternative reality, in which the innocent are the guilty and justice serves the state’s interest, not the public one. The FSB acts as the Russian regime’s enforcers, punishing the brave and bullying the cowardly in order to head off any credible political or economic challenge. In return, it has a licence to loot, using both the tools of espionage and a veneer of legality in which criminal actions have the force of law. It has placed its trusted officers in parts of the state apparatus that are supposedly independent: public, governmental, or judicial bodies. Hermitage researchers are convinced, for example, that Kuznetsov, nominally an official of the Interior Ministry, is in fact an FSB officer, making sure that his masters’ interests are served there; also in the FSB, they believe, are the people in the Moscow city tax department who supervised the bogus refund (which was by no means the first of its kind). The ultimate blame for Mr Magnitsky’s death reaches even higher than those named here. At the head of the scam, says Hermitage, were top Russian officials including a government minister with a close friend who is a senior official. An analogy comes from the real-estate business: the most senior official is the ‘landowner’; he cuts in a ‘property developer’ to construct the scam, who then buys in whatever brain and muscle-power is needed. The profits from this ‘project’ pay off any troublesome outsiders.

The system that perpetrated the crimes described in this chapter is the epitome of the Russian state machine today. The story of Sergei Magnitsky is not just a human tragedy; it is a political parable. His fate may help calibrate the reader’s moral compass in the pages ahead, which deal with events past and present outside Russia. The people responsible for his death in prison are the heirs of the Soviet KGB, and colleagues of Russia’s present-day spymasters.

Many find it easy to be blasé about Russian spies. Espionage is a grubby business always and everywhere. Spies’ political masters in many countries deploy them for bad reasons as well as high ones. Why are the Kremlin’s lot worse than anyone else’s? For all its undoubted flaws, Russia today is not a totalitarian superpower with ambitions for world domination. Its intelligence agencies are decades away from the mass murderers of the old KGB. Even the Cold War did not deserve the moral clarity that some of its Western protagonists liked to maintain. Indeed, as I myself show in later chapters, cynicism and incompetence blot the record of British and American intelligence in Eastern Europe. For all these reasons, many would argue, it is surely time to grow up, and keep the tiresome but ultimately anachronistic phenomenon of Russian espionage in proper proportion?

A proportionate response is indeed merited. But it should be tougher, not softer, than the West’s current stance. As Sergei Magnitsky’s story shows, the dark threads of murder and mayhem that started with Lenin’s Red Terror after the Bolshevik revolution in 1917 continue to the present day in the heart of Russia’s bureaucracy, with officials swindling their own taxpayers out of a fortune, and then killing the man who tried to expose their misdeeds. The next chapters explain the origins of the corrupt autocracy that rules Russia’s mafia state, its aims, and then its activities in our midst.