00 SPECIAL REPORT 1 LOOTING WITH PUTIN of the professional advisers as they pursued fees from yet more corporate fi nance deals, highly sought-after tax advice and other consultancy services to westernise the ex-Soviet corporations. Not long after the Big Six accountants had moved into Russia, they were checking the numbers on most of its large companies. After the fall of Arthur Andersen and the merger of Price Waterhouse with Coopers & Lybrand, the Big Six became the Big Four, who now How City of suits joined the Moscow gold rush count the beans in 85 percent of large, ex- Soviet companies. Special Report by Richard Brooks Allowing the big western fi rms to audit Russian companies was presented as an In the wake of the Salisbury nerve agent these global fi rms, a region suddenly thrown essential safeguard against abuse. As former attack, MPs investigating how Russian open to capitalism was another lucrative banker Tom Keatinge, director of the Royal opportunity. And what an opportunity it was. United Services Institute (RUSI), told the Eye, president and allies First, there was the chance to help create the in “frontier markets… the accountancy fi rms have been “hiding and laundering their new economic order – with hundreds of lent large credibility to clients”. But the times corrupt assets in London” concluded it millions of dollars available from the US they found anything untoward were vanishingly government to advise on setting the fi rst rare. was still “business as usual”. wave of privatisations and other “modernising” Given the boast that London’s pre- measures, such as the markets on which the Siphoning of funds eminence as a fi nancial centre is based new privately-held shares would be traded. There was always a risk that audit fi rms on the rule of law, how did the capital Then, in the mid-1990s came the notorious employing many former state inspectors but second wave of privatisations. A new breed of operating under a new commercial model become a magnet for so much dirty oligarch, many of whom had got rich by using would overlook scandal. When the New York money, sustaining corrupt regimes in rigged auctions to snaffl e up the vouchers in Times interviewed some accountants in 2002, Moscow and beyond? state companies originally offered to ordinary one from EY recalled: “A big client is like Russians, took control of the new corporations God… You do what they want and tell you to Part of the answer lies in the at the heights of the country’s economy. do… If you lose [a major] account, no matter network of pukka professionals that how justifi ed you are, that’s the end of a for nearly three decades has helped Party time career.” Under the “loans-for-shares” schemes, these The former boss of the state accounting oligarchs and kleptocrats keep the well-connected men funded ’s regulator commented that the auditors “check funny money fl owing out of the former fi nancially beleaguered government in return that the paperwork was done correctly, but and into London. While for shares bought at farcically low prices. look right past the deeply corrupt heart of the perhaps meeting their own inadequate While the ordinary Russian was fl eeced, it was matter”. That “corrupt heart” was often the party time for this elite circle and their new siphoning off of funds through deals with the standards, every step of the way the professional friends. As one local partner of ’ cronies. Known in accounting jargon accountants and lawyers who have accountancy fi rm Arthur Andersen remarked as “related party transactions”, such deals long presented themselves as the in 1994: “We expect to do very well… They ought to be top of a sceptical auditor’s list of couldn’t make a civilised transition without suspicions. best of the west have signed off the us.” Nowhere was this more critical than at pillaging of the east… Price Waterhouse’s then regional director Gazprom, Russia’s largest energy company and added that life was “very satisfying, because one of the fi rst “voucher” privatisations. It AS THE REST of the world watched the Berlin you know you helped to re-do their entire became an early target for hedge fund wall fall in 1989, rejoicing in the liberation of system”. (Based on information entirely from Hermitage Capital, which under its American millions, the west’s bankers, lawyers and the Central of Russia, his fi rm was soon founder Bill Browder was challenging the accountants smelt money. Whatever the future exonerating the bank for transferring tens of companies he considered were now grossly held for countries east of the iron curtain, it billions of dollars, including money from the underperforming because of this corruption. was sure to involve a monumental fi nancial International Monetary Fund, to a company in In the late 1990s Hermitage discovered shake-up and some very big paydays. Jersey, ostensibly to protect foreign reserves what Browder told the Eye was “enormous By the mid-1990s, the consiglieri and chief but in reality becoming a slush fund for Russian fraud” and wrote a report detailing half a number-crunchers to the world’s fi nancial banking offi cials.) Meanwhile, KPMG’s top dozen scams through which the company’s system, its elite lawyers and accountants, had man sat in an offi ce acquired from the assets had been stripped by “related parties”, all established themselves in the capital of what Communist party and beamed: “This is a huge handing them trillions of cubic metres of oil was now the fractured former Soviet Union. market.” reserves for peanuts – all under the nose of “” law fi rm led Much of it was also very corrupt, as would auditors from PwC (as Price Waterhouse had the way for the lawyers in 1991, by which time have been obvious to the most unobservant become in 1998). the Big Six accountancy fi rms, led by Ernst & accountant or lawyer. Newly privatised When Hermitage, as a Gazprom shareholder, Young (now EY), had also set up shop in companies – most of which by value were demanded an independent inquiry, the Moscow. owned by just a handful of oligarchs – were company insisted it was performed by… PwC. Over the previous decade, back in their own now being run by and for the benefi t of the men In Browder’s view what emerged was a “report countries the beancounters had already become who had cheated their way to owning them. whitewashing the theft of billions of dollars of as much consultants as they were auditors. For But that did not seem to be the prime concern assets”, even though “there was no way they

Z SUP RB MAIN 78 00 SPECIAL REPORT 2 couldn’t have seen [the rip-offs]”. Two decades deputy oil minister at the time of the fi rst sell- later Browder, the outsider with perhaps more off, (now on international insight into post-Soviet corruption than any sanctions lists). In 2005, the same fi rm, along other, recalls this complicity and lack of with PwC, advised on Gazprom’s acquisition curiosity as “the fi rst really stark enabler action of ’s oil fi rm Sibneft – for I saw – and it’s continued”. which the Chelsea FC owner got $13bn – and repeatedly advised Gazprom on fundraisings backed by the accounts that Bill Browder’s OUT OF LATVIA Hermitage fund had said annually were By now tens of billions of dollars were being concealing huge corruption. stolen from the Russian economy – brought to its knees in 1998 in the wake of the Asian PAREX PAIR: Viktor Krasovitsky and Valery Kargin, ‘High risk, high reward’ fi nancial crisis – by those who had effectively whose non-resident bank had Swiss-style It was also which in 2006, aided taken it over. But with the rouble hardly a safe numbered accounts by Ernst & Young, advised the bankers running haven currency, the cash had to be stashed the controversial privatisation of oil company elsewhere. It needed a way out. the Far East. Parex and Baltic were just two Rosneft on the London stock market. Its main The escape route was via a smaller state among scores of “non-resident” set up in asset had been expropriated from , the with its own trading tradition from before Latvia in the 1990s largely to take money out oil company owned by , Soviet times, and which now sought to style of the region. There would soon be a lot more the oligarch imprisoned not long before for itself as a on the Baltic: Latvia. for the accountants to get their hands on. daring to breach the spirit of the 2000 Kremlin Among the scores of aspiring bankers in its deal. As transactions were waved through by capital, Riga, were two businessmen and regulators despite repeated warnings of the former Latvian Communist Youth League THERE MAY BE ROUBLES damage to the integrity of Britain’s fi nancial members who had achieved success as travel AHEAD… markets, Linklaters’ senior Russian partner agents in the late 1980s period of economic There was a subtext to Russian president until 2006, Dominic Sanders, answered : Valery Kargin and Viktor Vladimir Putin’s infamous deal with the concerns about who was behind some of these Krasovitsky. By the time of Latvia’s oligarchs in the summer of 2000, when he companies with the comment that: “Russia is a independence in 1991, they were ready to set clipped their political wings in return for giving high risk, high reward market.” up their own bank, Parex, complete with them their commercial freedom. It was that the In such a climate, with the world’s “light numbered accounts and other Swiss-style money would keep fl owing out of state coffers touch” fi nancial centres careering towards the accoutrements. so long as enough of it headed back his way 2008 fi nancial crisis, propriety was not, it This was also the time that America’s most through a coterie of cronies placed in suitable seems, top priority for either the UK’s aggressive accountancy fi rm Arthur Andersen positions. This remains the essential power regulators, lawyers or accountants. KPMG’s was wading into eastern Europe and the two settlement in Moscow today. then UK boss John Griffi th-Jones (who went on were a perfect match. The fi rm that was helping As opposition activist and former chess to become chairman of the Financial Conduct Enron fi ddle its fi gures was not going to raise champion Garry Kasparov told the British Authority in 2012) captured the self-satisfi ed too many concerns over the fraud and money parliament’s foreign affairs committee recently, mood in a 2006 interview with Financial laundering on behalf of Russian mafi a networks Putin’s cronies were “agents of a rogue Russian and the familiar “related parties” that were criminal regime, not businessmen”. Their soon running through Parex. companies were “the means to launder money and spread corruption and infl uence”. Network of ‘proxies’ One essential feature of the new fi nancial Better might have been expected from the order was a series of large privatisations, often of fi rm that took over Andersen’s Latvian business the companies in which minority stakes had when it folded following the Enron affair in already been sold off. Britain’s fi nest law fi rms 2002, and with it the Parex account. Yet the were again on hand to run the deals, while its Anglo-American fi rm Ernst & Young also beancounters crunched the improbable numbers. looked the other way, while supposedly Linklaters led the legal pack, advising for applying international auditing standards that example on the 2002 fl otation of Lukoil, which CLOSE TIES: Vladimir Putin and founder Oleg required it to speak up about material levels of happened to be 20 percent owned by the Deripaska, now the subject of worldwide sanctions fraud (see Rules of the game: The auditors). Parex was intimately linked with a network of “proxies” who were fronting tens of PAREX: THE WHISTLEBLOWER WHO WAS SILENCED thousands of shell companies for corrupt offi cials and businessmen from Russia, Ukraine, LATVIAN bank Parex is a case study The whistleblower then watched in Kazakhstan and other former Soviet republics. in how, at a critical juncture in the amazement as clean audit certifi cates In 2013, the Eye’s special report Where There’s growth of the eastern European money- were issued for accounts hiding the Muck There’s Brass Plates exposed the extent laundering network, the scandal could abuse for a couple of years. of the UK connection, recounting one case in have been exposed but wasn’t. Finally, Christmas took the scandal which the dirty money – the proceeds of a £60m In 2002, US banker John Christmas to the Financial Services Authority in fraud on the Ukrainian health budget – was run joined the bank as head of international London, since Parex had a bond listed through Parex. relations, persuading investors to on the London market (backed by the By this stage, an American who had been support the bank. After a couple of false accounts). The regulator referred brought into the bank was horrifi ed at what he years, however, he learned that the him to Ernst & Young Global, the fi rm’s found and had already reported the fraud to bank was lending amounts exceeding its head offi ce, in London. Christmas was assured Ernst & Young in Latvia and London, to no entire capital to “related parties” – companies that “EY have been looking into the allegations avail (see Parex: The whistleblower who was secretly controlled by people connected to you have made”. Not too thoroughly, if at all, it silenced). An investment banker who at the management and shareholders. seems: Christmas says EY’s deputy counsel in time was considering investing in Latvia told On the other side of the balance sheet, London was irritated that the matter had been the Eye he’d steered clear as he “could easily 80 percent of Parex’s deposits were coming brought to him. EY kept vouching for Parex. establish that [Parex] was a money-laundering in from “non-residents”, often through shell In the wake of the 2008 fi nancial crisis the front for the Russians”. companies and representing a cocktail of tax Latvian taxpayer, later helped by the European Ernst & Young’s wilful blindness showed evasion and money laundering. Bank for Reconstruction and Development and how much the beancounters wanted the Christmas outlined the various scams to a the IMF, bailed out Parex at a cost of $1bn. The business – not just from Parex, but a host of partner in auditor Ernst & Young’s local offi ce, “bad bank” successor bank to Parex, Reverta, similar banks sprouting up in Riga. The Eye’s and was amazed when the fi rm neither tackled successfully sued its former owners Valery report identifi ed the Baltic International Bank, the blatant fraud nor dropped the bank as an Kargin and Viktor Karovitsky over improper loans. also audited by Ernst & Young, routing 134 audit client. Instead, when news fi ltered back Refl ecting more than anything EY’s payments on behalf of a UK shell company to Parex via a credit ratings agency he had also indifference to such episodes, the Latvian fi rm’s registered in Birmingham, with Belize shell spoken to, he was summarily sacked and fl ed lead auditor of Parex remains in charge of company owners and accounts that showed no the country fearing for his safety. auditing in Latvia. fi nancial activity whatsoever, out to accounts in 00 SPECIAL REPORT 3

Director magazine. “We’re a small cog in a Roger Munnings, KPMG’s president in with specialist lawyers like Henley & Partners rather successful machine which is the City of Russia during the beancounting goldrush, from helping the super-rich through the immigration London,” he remarked. “Therefore”, he 1996 to 2008, went on to become a director of hoops. The Big Four accountancy fi rms, added, “it is in our interest that the machine two of its major clients, Lukoil and Norilsk meanwhile, set out their stalls as tax advisers to continues to fl ourish.” Nickel. The former, now-sanctioned, has been this elite, ensuring they maximised the tax To continue fl ourishing meant using the at the centre of repeated corruption allegations advantages of their “non-domiciled” status. benefi t of softer regulations in the UK compared but received consistently clean audit certifi cates The serious legal business was in the homes to the US and “persuading the Indians, Arabs, from KPMG. Another Russian ex-KPMG bought with the Russian billions, both illicit Chinese and Russians that London is a safe partner is now the company’s chief executive. and legitimate. When the Eye began examining place to keep their money and an honourable Munnings, meanwhile, also became a member the extent to which British property was owned place in which to do business”. of a UK government working group on trade through tax haven companies, in the relatively By 2008, when Griffi th-Jones had become with Russia and a big cheese in various bodies few cases where the ultimate owners could be KPMG’s European boss, it could boast of 62 like the American-Russian Business Council and tracked down, the Russians were at the top of percent annual growth in Russia. Its rival Big a director of Sistema, the similarly accusation- the pile courtesy of their favoured London law Four fi rms were also cashing in. prone conglomerate that fi rms. The largest fi rm in the region, employed Lord (Peter) In the Eye’s 2015 report Selling by PwC, increased its income in Mandelson. the Offshore Pound, accompanied by an central and eastern Europe, There was always a place on interactive map (www.private-eye.co.uk/ including Russia, from $378m to the Russian non-executive registry), we showed how the exiled former $861m between 2005 and 2008. circuit at the end of senior president of the Bank of Moscow, Andrey Its rival Deloitte, while not giving away actual beancounting service in the region. PwC’s John Borodin, owned the £120m Park Place outside numbers, did reveal that its income from the Heywood, for example, landed a directorship Henley-on-Thames through a BVI company. former Soviet states multiplied fi ve fold in the at Evraz, the mining company part-owned by Land Registry documents revealed that four years from 2005. Roman Abramovich. Stephen Young, the upmarket law fi rm Farrers had acted for him, KPMG partner who had overseen the fi rm’s as it had for the owners of at least 141 PwC’s contortions central and eastern European business for a properties held through 81 anonymously- The contortions PwC would put itself decade, is now a director at the bank that owned offshore companies. Other fi rms had a through for its fees became clear again when assumed the “good” part of Parex, Citadele fi nger in this pie too, including Mishcon de Vladimir Putin sought to confi scate Yukos Banka. Reya (190 properties), Fieldfi sher (144) and from Khodorkovsky on the ostensible grounds (115), though the fi gures are that he had embezzled millions. PwC initially based only on the relatively few cases where a resisted pressure to withdraw ten years’ worth HOME FROM HOME law fi rm is mentioned in Land Registry of clean audit certifi cates, declaring the Reliable estimates of the illicit money bleeding documents. companies’ fi nances above board. But PwC from the Russian economy are hard to come Although just a minority of these would have was itself put under investigation for tax by, but much of it ends up in Britain. been Russian, in 2013 upmarket estate agent offences, had its offi ces raided, and relented Offi cial statistics, the campaigning group (and the tax investigation was dropped). Global Witness reports, show £68bn fl owing A Wikileaks cable in December 2006 from into UK tax havens such as the British Virgin RULES OF THE GAME: the American embassy in Moscow to the US Islands (BVI) and Jersey in the decade to 2016 What the auditors should do State Department revealed why the fi rm might (not all of which will be tainted). But as banker- have abandoned its principles. It noted that turned anti-corruption campaigner Roman COMPANY auditors have long been expected “PwC has allies here – it is the offi cial auditor Borisovich told MPs on the Commons foreign to be watchdogs, not bloodhounds. They of fi rms comprising more than 50 percent of affairs select committee in March, the cash should apply “professional scepticism” and Russian GDP, including giant Gazprom, and “doesn’t sit under a palm tree in the Cayman question suspicious transactions; but they has reached out to many of its clients over the Islands; it is invested in stocks, shares, bonds, can’t be expected to sniff out every fi ddle in a past few days for support.” These clients properties, yachts, planes and reputation large business. included the of Russia and most laundering [eg by funding educational projects Under international rules to which the of the major state-owned banks. This was not a or acquiring high profi le businesses]. It all Big Four fi rms operating in Russia, Latvia and government that a fee-hungry fi rm like PwC comes here…” elsewhere are all signed up, auditors are could stand up to for long. Gazprom’s largest Having reliable and desirable places to put required to obtain “reasonable assurance that foreign shareholder said it showed “a complete the money is critical to the operation of the [a company’s] fi nancial statements taken as lack of backbone”. kleptocracy. In return for buttressing the Putin a whole are free from material misstatement, Nor was this some faraway scandal for regime with special deals for the president’s whether caused by fraud or error”. which the respectable beancounters were not cronies and pet projects, the oligarchs and Among other things, this means that if responsible in their main centres of operations. friends get their safe assets and luxury lifestyles. funds are being used to any signifi cant extent PwC’s boss for the region, John Heywood, was London’s legal establishment, while doubtless corruptly, or if the company is exposing based in London (and in 2006 even became a satisfying itself the regulations do not prevent its shareholders to “material” risk, the non-executive director of the Home Offi ce). fi rms from acting, has ably helped this along. issue should be highlighted. Offshore shell companies are particular “red fl ags” for Russian revolving door ‘Investor visas’ auditors to look out for under the relevant Even in the wake of the fi nancial crisis and The UK government had already rolled out auditing standard, as are the terms on which a later Russian economic dip after sanctions the red carpet with special “investor visas”, fi rst deals are struck with anyone connected with following the 2014 invasion of Crimea, the introduced in 1996 for those with £1m to spare. a company’s managers or owners. A company consultancy and corporate fi nance deals just By 2015, 700 had been granted to Russians, should report these matters comprehensively kept on coming. As the Eye’s Slicker noted and an auditor should check it has done so. earlier this year: “Since 2004, Russian PILE OF CASH: The 120m Park Place, If an audit fi rm is alerted to suspicions companies have raised more than $200bn in near Henley, owned by exiled Bank of about fraud or the misuse of money at a client shares and bonds via the London Stock Moscow president Andrey Brorodin company, it has a duty to investigate (and Exchange”, with London grabbing around 60 if necessary report it to the authorities, as percent of more than 100 stock market well as in its audit report). The same English fl otations alone. Linklaters acted in a quarter judge who characterised the auditor as a of these cases and also on around 30 separate “watchdog” also said: “If there is anything bond issues. Next busiest UK fi rms were calculated to excite suspicion he should Clifford Chance and Allen & Overy. In 2016 probe it to the bottom.” It is a principle the the latter advised Metinvest, controlled by beancounters certainly did not take with them Ukraine’s richest oligarch and close Yanukovych to the former Soviet republics. associate Rinat Akhmetov, on a $2.3bn Beyond the action taken against PwC in restructuring. Ukraine (see PrivatBank: A private dysfunction) An under-reported side-effect was the there is no record of disciplinary action creation of a Russian revolving door, particularly against Big Four auditors in Russia, Latvia or active between the major accountancy fi rms and elsewhere for overlooking money laundering. the country’s leading conglomerates. 00 SPECIAL REPORT 4

Knight Frank stated that Russians were the largest spenders on “prime”, ie £1m+ London property. The following year, Savills reckoned one in 12 buyers of £2m+ houses was Russian. Making a killing In the capital the lawyers were making a killing from the Russians’ arrival on London’s FLY GUYS: most expensive streets. A G200 Gulfstream London law fi rm Macfarlanes helped Sir jet, a favoured oligarch trinket Leonard Blavatnik buy 15 Kensington Palace Gardens, now worth north of £200m, through as introducing party”, offshore law fi rm out of Russia, and elsewhere. a Delaware company. Others advised by the Appleby and EY Isle of Man had arranged a The “Russian Laundromat”, for example, fi rm included the less distinguished Vladimir tax dodge on the purchase of an Airbus 318, featured a clever ruse in which the proceeds of Antonov, a Russian banker who bought a funded by Putin crony and shopping centre corruption on anything from rigged state Notting Hill townhouse in 2009 and was later tycoon , in which a stooge Irish contracts to customs frauds and plundered accused of embezzling €290m from Lithuania’s company provided “passenger transport public service budgets were stripped out of the Snoros bank. After nationalising the bank, the services” to another shell company. country via the small republic of Moldova. Lithuanian authorities successfully sought his The accountancy fi rm that claims to be Fake debts were created between shell extradition from the UK, only to see him fl ee to “building a better working world” did much companies and corrupt Moldovan judges were Moscow in 2015. His UK properties are now the same thing for railway magnate Yury then bribed to enforce judgment on them, the subject of a worldwide freezing order, Korotchenko’s G200 Gulfstream in 2012. This resulting in vast payments to the local which he unsuccessfully appealed through the was funded by cash from the account of a UK Moldiconbank (whose auditor Grant Thornton good offi ces of Mishcon de Reya. Like other limited liability partnership at Latvian bank might also be thought to have questions to fi rms, Macfarlanes didn’t act only for Russians; ABLV. As the Eye demonstrated, the LLP was answer). The bank would then transfer the it also helped Malaysian fi nanciaer Jho Low fi ling fl agrantly bogus accounts, which a couple money to banks in Latvia, by now happily a buy a £35m Mayfair townhouse through a BVI of clicks on Companies House records would member of the EU. company using funds that US prosecutors now easily have established. The OCCRP identifi ed $13bn going through say were looted from his country’s development PwC was hardly more fastidious when its the most active bank, Trasta Komercbanka, fund, 1MDB “private wealth services” division approached between 2011 and 2014, which was about Mayfair Alistair Tulloch is another Appleby in 2017 with “several potential clients, twenty times the size of the bank’s balance sheet of the Russians’ personal favourites. He has who consider using IoM for their aircraft at any given time. In accounting parlance, this worked for Igor Shuvalov, the former Russian structures”. One of PwC’s clients was Vitaly was certainly a “material” amount. The arrival deputy prime minister and close Putin ally (and Malkin, of whom Appleby said: “Like many of money via an obscure Moldovan bank for no one of many insiders reported to have benefi ted Russian billionaires, Mr Malkin has a lively apparent reason should have raised more red from Gazprom’s generosity) in Shuvalov’s biography”. This featured “close connections to fl ags for Trasta’s auditor than a Communist purchase of two Whitehall apartments for the Kremlin”, “alleged involvement in criminal party parade day. But neither EY, auditor of £11m, among others. activities” and “misappropriate allocation of accounts up to the end of 2011, nor its successor Such high profi le buyers were the tip of a funds” going back to the Yeltsin years, and KPMG, drew attention to it. multi-billion pound iceberg. The large majority alleged rake-offs on a debt deal with Angola. of properties ulitmately owned by people from (Malkin also incidentally led a delegation of Repeated warnings the former Soviet republics were held by lesser Russian senators to Washington in 2012 to KPMG was now dominating Latvian “non- known but still important individuals. argue against the Magnitsky Act, banning from resident” bank auditing, signing off the In 2016 Eye 1411 revealed the declarations the US Russians thought to have been involved numbers for several major money-laundering of interest of Russian parliamentarians to in human rights abuses. The new law was outlets, including other prominent players in include such properties as a 250m2 apartment named after lawyer Sergei Magnitsky, who the Russian Laundromat such as the local arm owned by Putin’s “business ombudsman”. The uncovered a $230m tax fraud using companies of Ukraine’s PrivatBank, Baltikums Bank and properties were usually acquired by people stolen from Bill Browder’s Hermitage business, ABLV. whose declared income was in the low and was subsequently killed while in Russian ABLV had picked up the lion’s share of fi ve fi gures (sterling equivalent), meaning the custody.) Parex’s business following its 2009 demise. It purchases might be thought likely to have been The incorrigibility of the Big Four was also involved in channelling proceeds of the made with illicit funds. In each case there was accountants in keeping their ultra-rich clients Magnitsky fraud and had been audited by EY evidently no legal or regulatory impediment as far away from a tax bill as possible became until 2015. International money-laundering standing between the London lawyers and their clear in a second Panama Papers leak this year. monitors had issued repeated warnings that fat conveyancing fees. Despite the public outcry following the earlier Latvian banks posed a serious risk, but these Of the £4.2bn of UK property estimated by leaks, KPMG was seen to be setting up a appear to have fallen on deaf beancounting ears. Transparency International last year to have scheme for oil billionaire Michel Litvak, a It was only when regulators and law been acquired from “suspicious wealth” (based resident at London’s One Hyde Park, to shift a enforcers took belated action for their own on the tiny fraction of corruption already company holding some of his interests from the reputational reasons that the auditors timorously publicly reported), a big chunk will have come Bahamas to Cyprus. EY meanwhile was raised any concerns. Earlier this year KPMG from the ex-Soviet states – signed off by an helping previously unheard of businessman admitted that Rietumu Bank, fi ned in evidently accommodating legal system. Mikhail Tsukerman deal with a clampdown on and Latvia for money laundering, might not be highly opaque bearer shares by shifting his a “going concern” because Latvian fi nancial assets into a BVI company. authorities had now banned banking for HOW TO SPEND IT, If this was what the elites were now doing offshore shell companies. This meant shutting TAX-FREE with their wealth once they had got it out of the the accounts of two thirds of its corporate For any self-respecting oligarch, luxury doesn’t region, a pressing question remained. With customers. Somehow, over the 15 years KPMG just mean a prestigious London address. It money laundering out of the former Soviet means trinkets, too, and a private jet has long Union having been widely recognised for a been one of the most popular. couple of decades, how were even those with Last year’s Paradise Papers, obtained by the the most dubious money still able to get it into Süddeutsche Zeitung and shared by the places like Britain in the fi rst place? International Consortium of Investigative Journalists, revealed that those who were already super-rich were especially keen to get BOUNTIFUL LAUNDERETTES their planes into the EU without paying VAT, The answer was that a group of intensely for which purpose the Isle of Man, in cahoots corrupt banks had simply carried on regardless, with accountancy fi rms PwC and EY, offered thanks to the continuing approval of their the perfect tax avoidance schemes. Neither auditors. Their activities emerged in some beancounter seemed too fussy who they detail in a series of “laundromats”, exposed by worked for. the Organised Crime and Corruption Reporting UP CLOSE: EY’s Jim Turley has a word with Eye 1457 exposed how, with “EY Moscow Project (OCCRP) from 2014, operating Putin puppet Dmitry Medvedev 00 SPECIAL REPORT 5 had been checking the books, these conclusion that FBME basically had presented no concerns. fulfi lls the requirements set out by PRIVATBANK: The two worst offending the Cyprus regulator and is in A PRIVATE DYSFUNCTION Latvian banks were eventually shut principle in compliance with EU down: Trasta by the Latvian standards.” This was the THE nationalisation of Ukraine’s largest authorities and the European considered opinion of the commercial lender, PrivatBank, in December Central Bank in 2016; and ABLV Frankfurt branch of the fi rm, 2016 showed how auditors from PwC had more earlier this year, after a run on the which also happened to count as or less given up getting to the fi nancial truth. bank triggered when US authorities a big client FBME’s European After Ukraine’s corrupt former president blackballed it. ABLV, the US “correspondent bank” (ie its Viktor Yanukovich was deposed in the spring Treasury said, had “institutionalised conduit into major markets such of 2014, new incumbent Petro Poroshenko money laundering as a pillar of the as the US), – itself set about a clean-up of the country’s banking bank’s business practices” – not this year heavily fi ned for money- system that cost around 80 what might be hoped for under the laundering failures. lenders their licences. nose of serious auditors. Or as Bill With the International Browder mused when speaking to Chemical weapons Monetary Fund calling the Eye: “If these banks are being fi n a n c i n g for the shut down by the regulator and Then, immediately after the US of Ukraine to sort out they’ve been audited for 10 years Treasury labelled FBME an systemically–important before that by Ernst & Young [and institution of “primary money- banks like PrivatBank, others], then – what the fuck?” laundering concern” the following the central bank began to Over the couple of decades year, the bank’s lawyer Hogan look a little more closely that it wasn’t preventing these Lovells brought EY in to say that at the books. PrivatBank banks from laundering ex-Soviet its anti-money laundering policies defended itself fi ercely, money with abandon, EY was were “in line with the applicable pointing out in September growing very close to Moscow. requirements”, even though it had 2016 that on international accounting standards, Jim Turley, EY’s worldwide trawled through hundreds of “related-party lending stood at 17.7 percent at chairman until 2013, and later his transactions with money- the end of 2015, as confi rmed by a PwC audit”. successor Mark Weinberger co- laundering links to everything Within weeks Latvia-based reporter chaired Russia’s foreign from Syrian chemical weapons Graham Stack had obtained the bank’s loan investment advisory council with fi nancing to cyber crime. While it book and concluded that almost all the bank’s prime minister and Putin puppet presented the report as evidence of lending was to related parties. The bank Dmitry Medvedev. Steve Varley, its research into its clients, it also was quickly found to be insolvent and was the boss of the UK arm of EY, MOSCOW GOLD showed the depth and scale of the nationalised. which was also doing nicely out of PROSPECTORS: PwC’s corruption running through the Some of the loans were to genuine the corporate fi nance business Ian Powell, KPMG’s bank, which should never have businesses linked to PrivatBank shareholders, coming from Russia, was an eager Roger Munnigs and allowed a reasonable auditor to but more than half had no identifi able businesses. Most of these were owned by companion of prime minister Steve Varley of EY sign it off for years. David Cameron on a trade visit in By 2014, with the exception of offshore shell companies, while a chunk of loans headed directly to tax haven shell 2011. This aimed to smooth over the lingering Deutsche Bank, major banks had stopped companies. awkwardness of the 2006 murder in London of dealing with FBME and the dodgier Latvian On the other side of the balance sheet, Alexander Litvinenko in the interests of future banks. They recognised that the risk of no less suspiciously, around a quarter of the business, and the delegation included the chair incurring large fi nes was now too great (as bank’s corporate deposits came from just fi ve of the London Stock Exchange and partners HSBC’s $1.9bn penalty in 2012 in the US over limited liability partnerships registered at a from Magic Circle law fi rms Eversheds and its global money-laundering failings had service address in Enfi eld, north London. All Allen & Overy. shown). The same could not be said for the are owned by two BVI shell companies and accountants and lawyers who had suffered no fi led accounts at the UK’s Companies House Sanctions-breaking racket such punishment and, as the RUSI’s Tom showing funds worth less than 1 percent of Perhaps as a result of the belated regulatory Keatinge told the Eye, have still “not had the their real deposits at PrivatBank. interest in the likes of Trasta and ABLV banks, same ‘come to Jesus’ conversation”. This LLP structure, backed by offshore some seriously questionable money began Trouble did in fact arrive in the region’s shell companies and dodgy accounts, and heading to even more dubious locations for a most troubled country, Ukraine, when the Kiev with no sign of real business, was exactly the full spin. And here, too, the beancounters were government nationalised its largest bank, sort the Eye had exposed in 2013 and which instrumental. PrivatBank, after the launderette within it put a the least curious auditor should have looked In Malta in 2014, KPMG helped 32-year- $5.5bn hole in the balance sheet. PwC was into. PwC evidently did not. old Iranian Sayed Ali Sadr Hasheminejad, banned from auditing banks in the country Based on a report from corporate currently charged in the US over a large after an investigation found that 95 percent of intelligence fi rm Kroll, the National Bank sanctions-breaking racket in the US, set up the bank’s loans were made to parties related to earlier this year confi rmed that “PrivatBank Pilatus Bank. KPMG went on to approve its shareholders, some in the most fl agrantly was subjected to a large scale and accounts as auditor. When local regulators dishonest way (see PrivatBank: A private coordinated fraud over at least a ten-year raised eyebrows, the same accountancy fi rm dysfunction). Here was world class blind-eye- period, which resulted in the bank suffering a produced a “compliance” report fi nding turning, yet still those responsible, including loss of at least $5.5bn”. There were multiple nothing suspicious (at around the same time its leading partners during the decade of obvious signs of money laundering: “multiple leading fi nancial services consultant was complicity, escaped any censure. Men such as layering”; “repeated loan recycling”; “very attending Ali Sadr’s wedding in Venice). Local Ian Powell, the UK chairman and board extensive use of special purpose vehicle journalist Daphne Caruana Galizia, who wrote member oveseeing the region from 2008 to companies based in offshore jurisdictions”; all extensively about Maltese corruption (and was 2016, remained untouched. (Powell is now of which should have prompted investigation later murdered), had meanwhile unearthed chairman of another of the Eye’s favourites, by an alert auditor. evidence that Pilatus was a money-laundering outsourcing company Capita). Citing “multiple instances of banking fraud operation, including for funds from the former and false accounting”, the National Bank had Soviet countries. especially harsh words for PwC: “Despite this, Something very similar was going on at the PROTECTION RACKET the accounts of the bank were given a clean exotic FBME bank, mostly active in Cyprus but It was generally left to the media and audit opinion by the auditors of the bank for registered in Tanzania (following a switch from campaigners to expose the operators and all years between 2007 and 2014 and in 2015 the Cayman Islands). Its probity, too, was benefi ciaries of the great launderette. But when a qualifi ed opinion was given only due to being vouched for by KPMG – both by signing they did, a profi t-driven legal establishment [certain technical matters]”. off its accounts and by producing reports would do all it could to silence them. Bill PwC was banned from auditing in Ukraine vouching for it. Browder, for one, got both legal barrels, with and continues to be sued by PrivatBank, but “Based on our audit work,” the fi rm London lawyers used by the Russian state, in none of its partners faced action. So untroubled claimed in a 2013 document addressing money- his words, as “cut out fi gures to sue me”. was the fi rm that the man behind the defective laundering suspicions and fi rst reported by Firstly, in 2012 leading libel fi rm audits was… promoted to a “strategic” role BuzzFeed News, “we came to the overall took up the cause of the former Russian police covering the Baltics and Poland! 00 SPECIAL REPORT 6 offi cer whom Browder had accused of corruptly The only trouble was that the part of the company – was actually very good at what it incarcerating his lawyer, Sergei Magnitsky, and world that saw London as the place to repair a set out to do, which was to act “for the benefi t being involved in his killing. The ex-plod could tainted reputation or pursue a business grudge of its contractors” – ie businesses invariably afford the lawyers’ high six-fi gure (sterling) was not always the cleanest part. Yet its leading controlled by the oligarchs close to Putin, such fees on a paltry police pension because of the players have been able to fi nd London lawyers as and childhood friend help of a bank loan guaranteed by an who have been satisfi ed that anti-money . unidentifi ed “friend”. When the case was laundering rules would not prevent them In 2011, one research institute reckoned thrown out as an “abuse of process”, Browder taking up the cudgels. With pockets far deeper Gazprom was losing almost half its profi ts and Hermitage had to whistle for their costs as than those of their critics, this generally meant through corruption. Yet auditors from PwC, the ex-policeman had now disappeared. its wealthiest fi gures could try to bully their until 2015, said nothing. Instead they continued The same fi rm then weighed in on behalf of a critics into submission. to sign off the books and service the regime. Russian public bankruptcy receiver in a When, for example, the campaigner Roman The fi rm’s worldwide chairman until last year, particularly cynical case. The Moscow Borisovich hosted a “kleptocracy tour” of Dennis Nally, sat down with Gazprom chief authorities had relisted an old Russian London, bussing journalists and others around and Putin favourite Alexei Miller to ask what Hermitage company; Browder was accused of some of London’s smarter and more dubiously his fi rm could do – including long after the asset-stripping it; and a case was brought by acquired addresses, they received a stern Gazprombank that Miller also chairs had been Olswang on behalf of the Russian receiver in the missive from Mishcon de Reya on behalf of the sanctioned following the Crimea invasion. London high court. It was thrown out last year, owner (via a BVI company) of one St John’s Nally’s successor in 2016, Bob Moritz, with the judge criticising the Moscow receiver Wood property. The trip constituted “an stood before a hall of employees at sanctioned for “failure to inform the court of the highly unlawful campaign of harassment” against Sberbank and set out what PwC, which audits political nature of the case that he intended to Andrey Yakunin, son of Putin confi dant and the bank but earns many times more from it in pursue against the Hermitage parties”. Browder ex-railway boss Vladimir. consultancy services, could do for them. Even summed up the episodes thus: “So Sergei The local Ham & High newspaper, unable after the attempted murders in Salisbury this Magnitsky gets killed, I fi ght for justice, the to afford a legal fi ght, had to delete its report of year, PwC and EY were still to be found Russians get mad and then they use the money the oligarch on their doorstep. But others did schmoozing the big Russian corporations, that he was killed over to try to persecute me in stand their ground. When in 2015 Global oligarchs and politicians as sponsors of the St a UK court paying a British law fi rm”. Witness prepared a report on money laundering Petersburg International Forum alongside lead out of Kyrgyzstan, linked to a Surrey mansion sponsor (and sanctioned bank) VTB. ‘Kleptocracy tour’ owned through a Belize company by the Browder might have added that all this was deposed president’s son, Maxim Bakiyev, it was Major payday done with the encouragement of the British threatened by Mishcon with “aggravated The continued closeness with sanctioned government. In the same week in September damages and costs” if it published. (It did, and banks was in evidence again in the latest major 2011 that David Cameron – accompanied by nothing happened). payday for the lawyers and accountants: the Allen & Overy, Eversheds and EY – was When offi cial action is taken against the £1bn London fl otation in 2017 of Oleg buttering up Vladimir Putin in Moscow, his kleptocracy, there are yet more fees to be Deripaska’s EN+ group, controller of justice secretary Kenneth Clarke spoke at the earned from fi ghting it. For some London law aluminium giant Rusal (whose chief executive, offi ces of Clifford Chance on the “future of fi rms, few pariahs are untouchable. One of the like an increasing number of top executives, is litigation”. Britain, he said, could be “lawyer most active fi rms is Joseph Hage Aaronson. It a KPMG veteran). While Deripaska used the and adviser to the world”. has challenged European sanctions against money to repay VTB in an apparently state-controlled Russian gas company Rosneft, sanctions-circumventing (albeit legal) manner, which effectively operates as an arm of the Linklaters and KPMG shared in a multi-million RULES OF THE GAME: Putin regime; and against arguably the region’s dollar payday. What the lawyers should do greatest thief-in-offi ce, ousted Ukrainian In their “Moscow Gold” report in May, president Viktor Yanukovich, and his son. MPs on the foreign affairs select committee INTERNATIONAL guidance that the UK’s Law The fi rm achieved a short-lived success in said they would leave it to others to judge Society recommends its members follow asks the latter case on the grounds that the EU had whether the law fi rm had become “entwined in them to do “what lawyers, as guardians of not initially given suffi cient reasons for the corruption of the Kremlin”. Tory MP Tom justice and the rule of law, and professionals sanctions, prompting partner Joe Hage to Tugendhat, who chaired the inquiry, told the subject to ethical obligations, have always claim that “the basis for the sanctions is Eye: “Firms aren’t increasing access to justice if done – namely to avoid assisting criminals or fl imsy”. The private palaces, complete with they’re chasing business in corrupt jurisdictions facilitating criminal activity”. artworks, petting zoo and classic car collection from individuals who banks won’t touch; More specifi cally, lawyers in the UK are – all on a state salary – suggested otherwise. they’re using the law as whitewash”. covered by anti-money laundering laws within At this end of the market, the legal When Theresa May stood in parliament to the 2002 Proceeds of Crime Act, preventing profession has become a business in which announce action against Russia back in March, them processing money and transactions justice is commoditised. The more money a its London embassy could gloat that Gazprom, that they ought to suspect are corrupt. They client has, the more of it he or she can buy. The supposedly sanctioned from raising money are also covered by regulations – updated sons of murdered Maltese journalist Daphne with UK help, had just issued a €750m bond on in 2017 - requiring them to ensure suffi cient Caruana Galizia accused Mishcon de Reya of the London market using a safeguards in their own practice and when having “sought to cripple her fi nancially with company. This was vouched for by PwC’s arm working for particular clients on matters such libel action in the UK courts” (at the same time in the Grand Duchy. as fi nancial or property transactions. as the fi rm’s deputy chairman The parliamentary committee concluded When assessing money-laundering risks, was chairing the freedom of expression charity that “the use of London as a base for the the Law Society warns to consider PEN, supposedly a Caruana Galizia supporter). corrupt assets of Kremlin-connected individuals whether “jurisdictions in which your clients, But keeping the oligarchy going by protecting is now clearly linked to a wider Russian or the benefi cial owners of your clients, are its reputation was all part of a greater legal strategy and has implications for our national based… have defi cient anti-money laundering circus, as London, true to former justice security”. This could only have happened legislation, systems and practice, high secretary Ken Clarke’s wishes, became the arena because many with serious responsibilities for levels of acquisitive crime or higher levels for the kleptocrats’ legal fi ghts. Last year the the rule of law and the proper use of money of corruption [and/or] are considered to be second and third most common nationalities of saw no barrier to pursuing their own riches. ‘offshore fi nancial centres’ or tax havens”. litigants in the commercial courts (behind The system had thus enabled corrupt leaders This covers quite a lot of money coming British) were Kazakh and Russian, with the and their placemen to loot their countries and into the UK, which must mean lawyers have linked country of Cyprus not far behind. reinforce their unsavoury regimes. concluded that these features have not As politicians agonise over the consequent translated into actual money-laundering risk. security threat and ramp up sanctions, they Action against lawyers for breaching these BUSINESS AS USUAL might contemplate the role of the lawyers and rules is relatively rare. Last year, after 500 The never-ending spin cycle – in which a corrupt the accountants to whom they have given such a completed visits by regulators, 151 legal fi rms system is endorsed, its proceeds laundered and free rein. If the launderette is ever to stop were rated “non-compliant” with regulations. its participants guarded – continues. spinning, the most powerful western professional There was enforcement action in just 22 In May this year a markets analyst was fi rms need to be taken off the great fee cycle ■ cases – ranging from expulsion to fi nes and sacked from state-controlled Sberbank for reprimands of solicitors – down from 78 cases venturing the view that Gazprom – reporting Additional reporting by Christian Eriksson two years before. remarkably low profi ts for a near monopoly and Matei Rosca