Jamison Firestone in London. Photo by Oliver Carroll
On November 16, 2009, lawyer Sergei Magnitsky died while awaiting trial in a Moscow prison. Exactly how he died is unclear, but it seems that he suffered a toxic shock reaction following internal organ rupture. On the day he was to die, Magnitsky had a visibly swollen stomach and was vomiting at three-hourly intervals. The sum total of the medical attention Magnitsky received that day appears to have been a series of psychiatric assessments, and the prescription of a single painkiller.
Magnitsky was officially being held on charges of “tax evasion”, in relation to low-tax investment vehicles he had helped set up for Hermitage Capital Management in the 1990s. Friends and colleagues refute these charges as fabricated and inconsistent. They claim the real reason why he was being held was two-fold: as human pawnage for his client, Hermitage Capital boss Bill Browder, with whom prosecutors were picking the bigger fight; and because Magnitsky had decided to name corrupt Interior Ministry (MVD) officers, who he alleged had used stolen Hermitage companies to defraud the Russian government of $230 million in VAT.
One figure determined to put this side of the story across is Magnitsky’s former employer, Jamison Firestone. An American lawyer originally from Los Angeles, Firestone was one of the pioneers of the swashbuckling era of post-Soviet Russia, jointly setting up his own legal practice in Moscow while still in his mid-twenties. Today, he is based in London, having fled Russia over fears he too was to be targeted over what he describes as “bogus” tax charges. In a two-part interview, openDemocracy associate editor Oliver Carroll spoke to him about the implications of the Magnitsky affair: what it meant for President Medvedev, what it means for Russians, and what it will mean for the law enforcement officers he says were responsible for Magnitsky’s death.
Part two of this interview is published here.
OC: You graduated from law school in 1991 and by 1993 you were in Moscow with your own practice. Why did you choose to start a business in Russia? What kept you there?
JF: Well, I was actually already in business by 1991. I got on a plane as soon as I had taken the Bar exam in New York. So when I did set up my own law firm in 1993, I was aware of the difficulties of setting up businesses in Russia. In setting up the firm, I wanted help other people set up their own business, especially foreigners who were new to the region.
Why Russia? When I first went over there, Russia was the place to be. Gorbachev was beginning a semi-capitalist path. It was all about building the free market, building democracy, and making money in the process. Shortly after I arrived there, Gorbachev was out, Yeltsin was in, and the country got even more free market, even more pro-West. Put simply, it was a time of great opportunity: exciting and romantic.
There were a lot of problems on the way. There were the events of the White House and Ostankino in 1993, where I lost my business partner. We went from this wonderful, exuberant mood to an understanding that the innocence was gone and things weren't all that great. We had the crisis. Now we have the dictatorship of law, which is something quite new ... and hopefully not quite what its authors intended. But I dug in. I like it there: I like the people, the opportunity.
OC: Was it not difficult to practise law in a country where there was limited state authority with regards to tax collection and legal enforcement? Was law in any way meaningful in such an environment?
JF: The problem in the beginning was not that there was a lack of state. The problem at the beginning was that there was a lack of knowledge. New laws were being passed daily, but people had no experience of doing business. No experience of commercial transactions. They were handed a law and had to invent a procedure for it. In essence, you were always first at everything. Now, trying to practise in an area that was very fluid — literally being built around you — was difficult. But it wasn't difficult because of the lack of state. As a matter of fact, it is the presence of a state which is probably the largest problem we have in the law today.
OC: But in the early 1990s there was some pretty horrific criminality going on too. How exactly did organized crime, for example, interact with your profession?
JF: Organized crime actually operated outside of it. What organized crime said was: "you give so and so the factory ... and if you don't, we'll kill you". Organized crime was not always involved in disputes and it did not bother my law firm.
In today's disputes, you see a rather different kind of organized crime ... called the Ministry of the Interior. And what makes them worse than private criminal gangs is a) they're always on the take, and b) they're the people who are supposed to be helping you, not working for criminals. Before, when you were being bothered by bandits, you could go to the police. Now the police are the bandits who are bothering you. Or, at the very least, are working for them.
OC: You hired Sergei Magnitsky. How did you come to know about him? Was he recommended to you?
JF: Sergei was a brilliant employee who we hired from Ernst and Young in Moscow. I knew people who had worked with him.
OC: Can you briefly outline what Magnitsky did for Hermitage Capital? How close was he to Hermitage boss Bill Browder? How much of his time was spent on Browder's work?
JF: They had very little contact at all. Magnitsky was a tax advisor and he dealt with tax arbitration cases. He advised Hermitage on the amount of tax it would have to pay to be in compliance with Russian law.
OC: Was it possible to be 100% compliant with Russian law?
JF: Absolutely. All these people who say it was impossible to comply with Russian law are lying.
OC: Well, there were cases where it was clearly be problematic. In some admittedly extreme circumstances, for example, salary roll taxes could reach 99 percent and profit taxes 70%....
JF: Well this wasn’t the case here. This was a plain vanilla thing. Corporate profits tax before 2001 was 35%. And different Russian regions lowered local taxes as a means to attract investment. Kalmykia was one of about 11 of these regions in Russia. Many companies, both foreign and domestic, moved parts of their business to these regions to take advantage of the favorable tax regimes.
Sergei Magnitsky at an office party. Picture: Jamison Firestone
OC: Was there anything untoward about advising company relocation to these regions?
JF: No. And that is not what Magnitsky was ever charged with.
OC: What was Magnitsky charged with?
JF: You can't really tell as it changed over time and never really made sense. Initially, they alleged that Sergei was a director of a Hermitage company that had underpaid its taxes. This was false on two accounts. First, company records clearly show he had never been an officer or principal. Second, tax records show clean audits all the way through — no taxes owed, and certainly no tax claim.
As time went on and facts conspired against the prosecution, official charges “evolved”, becoming ever more difficult to understand. Facts became irrelevant. By the time Sergei died, it kind of looks like he was being charged as being a “shadow director”: that he was both Browder’s boss and and managing HSBC from behind the scenes. I say “kind of looks like” since the charges never made any sense, legally or factually.
OC: There was an issue with Gazprom shares, though, wasn’t there?
JF: Well, when Sergei died and his death became a scandal, the Interior Ministry came up with an entirely new explanation of their case: that he had illegally acted for Hermitage in buying up 2% of Gazprom. This allegation was never raised against Sergei at any point in the investigation.
I guess they thought the spin sounded better than their original case. Factually and legally, however, it wasn’t [better]. First, Hermitage never owned anywhere near 2% of Gazprom. Second, there was never anything illegal about Hermitage owning Gazprom shares. You see, while the so-called 1997 “Gazprom” decree forbade foreign companies from buying Gazprom shares direct, it did not prohibit foreign investors owning Gazprom shares through Russian companies. Nearly 25% of all Gazprom shares were held by foreign investors, and there were more than a thousand such investors. Gazprombank, JP Morgan, UFG / Deutcshe Bank, and virtually every other Russian investment bank marketed these Gazprom structures to their foreign clients.
What happened to Magnitsky was not about Kalmykia, Gazprom, or underpaying taxes. It was about covering up a theft of government money by Interior Ministry officers. Sergei had given witness testimony against two MVD officers who had used Hermitage documents in their possession to steal three Hermitage companies, which were then used to steal $230 million from the Russian government. Sergei testified against them. They wanted to silence the witness, so they fabricated a case against him and arrested him one month later.
OC: Just for the record, do you dispute the other line of the state prosecutor's case, i.e. that Magnitsky-Browder circumvented a clause in the tax law, which saw them reduce their tax burden by taking on disabled staff?
JF: They absolutely did set up companies with disabled staff. But they were also absolutely within the law in doing so and – here’s the important part – the amount of tax savings made was minuscule. Hermitage paid half a billion dollars in taxes, 235 million of which were subsequently stolen by Interior Ministry officers, and saved just 3.3 million through this scheme ...
OC: From my understanding, the reduction on corporate taxes was 50%. In other words, together with the discount for locating the company in Kalmykiya, the tax bill was reduced to 5.5%. We're talking about tax on profit, of course.
JF: I can’t remember the exact reduction as a percent, but you shouldn’t dispute setting up the company in Kalmykiya. This was a legitimate strategy used by many other companies at the time. It was done in full compliance with the law at that time. And when Hermitage cashed out in 2006 it paid some $500 million in profits tax, at the full rate of 24% and with no reductions. The Kalmyk structures were long gone by this point.
OC: Was there any moral question about using disabled workers in the way they did? Were they actually working employees?
JF: These were legitimate people who didn’t have jobs and who were able to work. Look if the government comes to you and says "hire some disabled people, we'll give you a tax break, because we're interested in taking care of disabled people", what do you do? Do you hire them or not? It seems to me that it is a win-win for all concerned. You also shouldn’t forget that the local tax authorities have never to this day questioned the tax paid. There is still no tax claim. Not one penny owed. As a matter of fact, the authorities' last position was that Hermitage had overpaid tax.
Then you have the question of procedure. In a normal working system — say the UK or the US — what happens when the tax authorities have a problem with you is that they will follow a pre-determined course. They will say: "You used an exemption in taxation that we're questioning. We think you owe more. We think this is the amount of tax that is at issue. Plus penalties, fines, whatever. And we'd like you to pay it". You would then say: "No, we think we were entitled to use these exemptions". Then you would go to court. You would litigate. And you would win or lose. If you win, it's over. If you lose, you pay. If you lose and have to pay, the authorities could then go on to consider whether your use of those exemptions was criminal or not. In other words, did you deliberately mislead on material facts? Did you know full well that you shouldn’t have used those things? That’s how a normal legal process works.
In our case, none of this happened. All you have is a few crooked Interior Ministry officials deciding there should be a tax case against Sergei. These are the same Interior Ministry officials who raided our office, took all my client’s documents, used the documents to transfer the companies to a convicted killer with whom they had a working relationship, and used the companies to steal from their own government. The same officers who Sergei testified against one month before his arrest. You really have to question the whole validity of a case where the tax authorities have not made any tax claims and when Sergei is arrested by the same officers he accused of theft.
OC: With the UK and US examples you mention, you have a sophisticated, elaborated, clear and mostly tested tax code and legal system. In the Russia of the 90s and perhaps even in the last decade, you didn't. It was a work-in-progress tax system. And, as you have said yourself, a work-in-progress legal system ...
JF: Look, they have no arguments. First of all, this case was brought against Hermitage long after the statute of limitations for any claim had expired. Second of all, it was brought without a tax claim. It's a completely bogus, non-sensical thing. The Hermitage companies had audits year after year, and they have never been questioned to this day.
OC: Why was it that Browder was targeted? Did he realize he was such low-hanging fruit?
JF: It wasn't a matter of low-hanging fruit. Browder was targeted to steal his companies. He was identified and blacklisted because of his particularly annoying strategy of stopping majority shareholders from self-dealing. A strategy that was profitable for minority shareholders, and unprofitable for the politically-connected majority shareholders.
This whole case is actually a really simple thing to understand. You have a criminal gang within the Interior Ministry, who are in the business of taking companies that had previously held Gazprom shares, stealing those companies and getting tax refunds. The gang used a particular scheme, particular tax inspectorates, particular judges and particular contracts to get the refunds. They did it for something like ten other companies owned by Renaissance Capital. As a matter of fact, it seems the entire scheme was cooked up by a former Renaissance Capital partner called Dmitry Kluyev.
Sergei Magnitsky exposed the two officers — Kuznetsov and Karpov — who were directly involved in the crime. He then filed an official complaint, saying: "look, there's a criminal cell inside the Interior Ministry that consists of two police officers with a history of working with a convicted killer. Out of all the millions of criminals in Russia, this same killer also became the director of the stolen Hermitage companies. I'm testifying against him, and also identifying the same two Interior Ministry officers who had all the company documents and seals at the time (and who therefore appear to be involved in stealing these companies and transferring them to the killer)”.
Within one month, these same Interior Ministry officers had Sergei arrested.
OC: You have presumably sent complaints off to the relevant structures -the prosecutor's office and, perhaps the Presidential Administration. Have you received any significant feedback?
JF: We’ve sent complaints, but have received no helpful replies. Look, when you look at why our complaints aren't successful, it is pretty obvious. We file complaints about the theft and Magnitsky testifies against two Interior Ministry officers. He is immediately arrested by one of them, who transfers the case for further investigation to his close colleague in Interior Ministry: Major Oleg Silchenko. Silchenko then has Magnitsky under arrest and tortures the guy for nearly a year.
The only thing Magnitsky ever says to him is: "its Kuzetsnov, Karpov and the convicted killer Markelov”. So while Magnitsky is saying "its Kuzetsnov, Karpov and the convicted killer Markelov", Hermitage is busy filling its complaints about the theft and Sergei’s arrest. Who do those complaints about the theft go to? Major Silchenko. And what does Silchenko do? Yes, he sends the convicted criminal Markelov back to prison, but he also ignores Sergei’s testimony and chooses not to investigate his fellow officers Kuznetsov and Karpov.
What’s more, on the very day that he sends Markelov back to prison, Silchenko moves Sergei — by this point extremely ill — into the much harsher regime of the Matrosskaya Tishina prison. There, at least, doctors schedule him an operation. But two weeks before he is due the operation, Silchenko throws the last die, and moves Sergei to Butyrka prison, which has no medical facilities. So Kuznetsov and Karpov are free, the convicted killer is in prison, and Sergei is dead within four months.
Sergei's arrest, when you look at it for what it really is, is the silencing of a witness. His problem was that he identified two Interior Ministry officers as criminals.
OC: So what you are saying is that Magnitsky's time in prison had absolutely nothing to do with Browder?
JF: If Magnitsky had never exposed the fraud and named the officers, he never would have been arrested.
Part two of the interview is published here.