A sad chain of events, worthy of a classic Cold War thriller, has revealed the disturbing connection between sophisticated financial fraud, geo-politics and international laws.
In 2007, Sergei Magnitsky received death threats following his discovery of a tax fraud worth £144m, the most substantial in Russian history. The allegations of fraud made by Magnitsky implicated police officers, politicians, judges and individuals connected with the Russian organised-crime underworld. During the following year, Magnitsky was arrested by the very police officers he publicly named as being involved in the tax fraud. One year later, Magnitsky was found dead in a Russian prison cell, having been mistreated and denied medication.
The great rebate scam
At the time of exposing the tax fraud, 37-year-old Magnitsky was employed by a British-based investment fund, Hermitage Capital Management. Now his work is the focus of an increasingly bitter international dispute involving dozens of foreign officials.
In 2008, Magnitsky was imprisoned in connection with unrelated tax fraud charges shortly after he made allegations that a cabal of Russian tax officials had attempted to defraud the Russian government by means of a tax rebate in the sum of $230 million involving the use of company charters and seals belonging to Hermitage Capital Management, which were confiscated in the course of a police raid.
Remarkably, the two tax departments at the centre of that murky affair were still distributing large sums, through authorising highly dubious rebates, as recently as 2010. The latest rebates are vast when compared with the previous contentious rebates and were granted by the same tax officials within two or three days of the application.
The Russian front
The recipients of the rebates were a host of, what appear to be, front companies. Soon after the rebates were made, those companies were re-registered using similar addresses.
It has become increasingly clear that the allegedly fraudulent practices at the heart of this story continued for many months and years after Magnitsky’s arrest. In total, it is estimated that the fraud will have cost the Russian treasury more than $800 million between 2006 and 2010. The scale of the fraud and the period over which it occurred have lead many commentators, including Hermitage Capital Management, to suggest that it simply could not have happened without the complicity of some very powerful individuals in Russia.
In an even darker twist some have even gone as far as to indicate that the FSB, the successor to the KGB, have had significant involvement in the orchestration of the $230 million rebate, which Magnitsky first unearthed in 2008.
The Russian police’s criminal investigation into the $230 million scam ended when a former sawmill worker and a convicted thief were jailed for allegedly masterminding and perpetrating the fraud. The improbability of the court’s findings together with the paucity of evidence has caused many to question the whole investigation. Four other individuals, which the police claimed were involved in the fraud, are all now dead.
UK tax fraud
One commentator has stated that: “This is the system in a country where there is no rule of law, and nothing is going to change the system because the people who run it think they are in the right.”
Mark Kenkre, a legal director at Cobbetts and co-head (with Arun Chauhan) of the fraud and risk services team, commented that: “In the UK the likelihood of fraud occurring, on the scale discovered by Magnitsky, is slim. Nevertheless, tax fraud is a very real threat to the UK economy and its many trading partners, affecting everyone from small business to global corporations and governmental bodies”.
HM Revenue and Customs states simply that: “tax fraud is when someone pays too little tax or wrongly claims a tax repayment by acting dishonestly. Tax fraud is not about negligence; it must be a deliberate act.” The National Fraud Authority has recently released its third Annual Fraud Indicator, which details the impact of fraud across the UK economy.
Figures have been revised down to £20.3 billion a year, the reduction being largely attributable to a decrease in fraud against the UK’s taxation system. However, abuse of the taxation system still makes up the majority of fraud against the public sector, totalling £14 billion a year.
Fraud against central and local government costs the UK £2.5 billion and £2.2 billion respectively. The abuse of benefits and the tax credits system stands at £1.6 billion a year.
“The NFA estimate of fraud against the public sector is a composite of indicators. It draws on published estimates of fraud against the tax and benefits systems and the National Health Service; supplemented with illustrative top down estimates of other areas of spend including fraud against grants, procurement, payroll; and fraud against local authorities,” says the report.