PRIVATE BRIEFING DOCUMENT The Hermitage Case: Organized Crime and Legal Nihilism Inside the Russian Government March 2009 PRIVATE BRIEFING DOCUMENT What is Hermitage? It is a joint venture between HSBC and Hermitage Capital Management that invested in Russia on behalf of institutional and individual investors from around the world HSBC Management HSBC Private Bank Hermitage Capital Management (Guernsey) Limited (Guernsey) Limited (Investment Adviser) (Manager) (Trustee) HSBC Private Bank (Global) The Hermitage Fund Investors from… USA Saudi Arabia Belgium United Kingdom Canada Netherlands Switzerland Germany Portugal Canada Hongkong Spain Argentina Lebanon Austria Brazil Israel Hungary South Africa France Italy Oman Mexico Luxembourg UAE Australia New Zealand 2 What is Hermitage? Hermitage was the largest portfolio investor $4 billion under management US$ million 4,500 4,000 3,500 $4,000 3,000 Foreign Portfolio Management Companies 2,500 Assets Under Management 2,000 1,500 1,000 in Russia from 1996 until 2005, with over 500 $1,700 - (November 2005) Source: Bloomberg, Company websites, Hermitage estimates $1,225 Hermitage Capital $1,000 Invested in Russia PRIVATE BRIEFING Prosperity Capital DOCUMENT East Capital $516 Firebird Management $473 DWS Russia Fund $451 MCT Asset Mgmt $354 JPMorgan/Fleming $315 ING Russia Fund $278 Templeton Russia $265 Chalemagne Capital $239 Clariden Russia $220 HQ Rysslandsfond Quorum Fund $187 Kazimir Partners $122 Alfred Berg 3 PRIVATE BRIEFING DOCUMENT Background to the Large-Scale Fraud In 2007, HSBC and Hermitage became the victims of serious fraud by an organized criminal group that stole three Hermitage Fund entities and $230 million of taxes paid by Hermitage to the Russian Government The Fraud against HSBC and Hermitage HSBC PRIVATE BANK HSBC PRIVATE BANK OOO Pluton, (Guernsey) LIMITED (Guernsey) LIMITED (Kazan, Tatarstan) Trustee to Hermitage Fund HSBC Wiped off the Trustee to Hermitage Fund Hermitage Fund Vehicles Shareholder Registry of Re-Registered in the Name Hermitage Fund Vehicles of Pluton in Tatarstan 100% 100% 100% 100% Corporate HSBC MANAGEMENT Corporate Corporate HSBC MANAGEMENT Corporate Director (Guernsey) LIMITED Director Director (Guernsey) LIMITED Director GLENDORA KONE GLENDORA KONE 100% 100% 100% HOLDINGS Corporate Director HOLDINGS HOLDINGS Corporate Director HOLDINGS LTD LTD LTD LTD Cyprus Cyprus Cyprus Cyprus 100% 100% 100% 100% 100% 100% V.Kurochkin V.Markelov V.Khlebnikov General Director General Director General Director General Director General Director General Director OOO RILEND, OOO PARFENION, OOO MAKHAON, OOO RILEND, OOO PARFENION, OOO MAKHAON, OOO RILEND, OOO PARFENION, OOO MAKHAON, Moscow Moscow Moscow Moscow Moscow Mosc ow Novocherkassk Novocherkassk Novocherkassk Intercommerz Universal Bank Universal Savings Bank Savings Bank Hermitage companies Perpetrators paid stole $230 m Budget of $230 m Russian Federation in capital gain taxes to in capital gain taxes from the Russian budget February the Russian budget December 2006 2007 4 PRIVATE BRIEFING DOCUMENT Who were the targets of the fraud? The organized criminal group behind the serious fraud targeted the three Russian investment companies owned by HSBC as trustee for the Hermitage Fund: Rilend, Parfenion and Makhaon The Hermitage Fund HSBC Private Bank (Guernsey) Limited Trustee to Hermitage Fund 100% 100% HSBC MANAGEMENT Corporate Director Corporate Director (Guernsey) LIMITED GLENDORA KONE HOLDINGS LTD HOLDINGS LTD Cyprus Corporate Director Cyprus Russian 100% 100% 100% Entities General Director General Director General Director OOO RILEND OOO PARFENION OOO MAKHAON Moscow Moscow Moscow 5 PRIVATE BRIEFING DOCUMENT Why were Hermitage Fund companies targeted? Because they paid more taxes in 2006 than nearly anyone else in Russia Taxes Paid by Some of the Leading Russian Companies (2006, US$ million) US$ million $300 $272 $250 $232 Capital $200 Gains $190 Tax $233 $158 $150 $135 $131 $130 $103 $100 $71 $57 $50 $42 WHT $39 $0 HermitageHermitage VTB Gazprombank TMK Kameya Baltika Aeroflot Rostelecom AvtoVAZ X5 WimmBill Fund Dann Fund (Russia’s 2nd (banking) (industrial) (Hermitage (beer) (national (fixed-line (Russia’s (national (food Companies largest bank) client) airline) telephone largest auto retail Companies products) monopoly) maker) chain) Source: Corporate Financial Statements 6 PRIVATE BRIEFING DOCUMENT Prelude to the Fraud On 13 November 2005, Hermitage’s founder and CEO, William Browder was refused entry into Russia. His visa denial was based on Mr. Browder being declared a threat to “national security, public order or public health” Persona non grata “The decision to deny entry into the Russian Federation for Mr. William Felix Browder has been made by the competent authorities in accordance with Article 27, Item 1 of the Federal Law No 114FZ” - Letter from the Ministry of Foreign Affairs to the UK Embassy in Moscow, 25 November 2005 Article 27, Item 1 says: “Entry into the Russian Federation can be denied to a foreign national or stateless person if it is in the interest of ensuring the security of the state, public order or public health.” 7 PRIVATE BRIEFING DOCUMENT Prelude to the Fraud At the World Economic Forum in Davos on 28 January 2007, Mr. Browder appealed directly to Dmitry Medvedev (the current President of Russia) to issue him a new visa ? 8 PRIVATE BRIEFING DOCUMENT Call from the Interior Ministry On 17 February 2007, Artem Kuznetsov, a Lieutenant Colonel of the Moscow Interior Ministry, called Hermitage about a pending application for a Russian visa Transcript of telephone conversation between Vadim Kleiner and Artem Kuznetsov February 17, 2007 “We were notified by the Immigration Service that the CEO of your company wishes to visit our country and asked if we had any response. Before I reply, I wanted to come by your office and talk, show you some papers, ask a few questions. I can’t tell you my questions over the phone – unfortunately it’s not so simple as that. My answer will depend upon how you behave, what you provide, et cetera. If you are Lieutenant Colonel Artem Kuznetsov interested in meeting, that’s fine. If not, no problem. It’s up Moscow Interior Ministry to you. The sooner we meet and you provide what is Department of Tax Crime necessary, the sooner your problems will disappear.” 9 PRIVATE BRIEFING DOCUMENT Office Raids On 4 June 2007, 25 officers of the Moscow Interior Ministry, led by Lieutenant Colonel Kuznetsov, raided the Moscow office of Hermitage and office of its Moscow-based lawyers, Firestone & Duncan Led by Lieutenant Colonel Artem Kuznetsov Hermitage Moscow Office Firestone Duncan, Hermitage’s Lawyers 10 PRIVATE BRIEFING DOCUMENT Raid on Firestone Duncan Office During the search of Firestone Duncan, Victor Poryugin, a lawyer with the firm, tried to stop the seizure of unrelated documents. He was taken into a conference room, punched repeatedly in the throat and face, then arrested and fined 15,000 rubles Victor Poryugin attempts to Hospitalized Was Was Was fined stop the beaten up arrested 15,000 for 2 weeks confiscation of Rubles unrelated documents belonging to other clients 11 PRIVATE BRIEFING DOCUMENT What was taken in the raids? The Moscow Interior Ministry seized servers, computers and numerous confidential files, in addition to four key corporate items for the three Hermitage Fund entities Servers Confidential Documents Key Corporate Items Seized (for the Hermitage companies Rilend, Parfenion, Makhaon) 1. Corporate Seals Computers 2. Original Charters 3. Original Certificates of Registration with State Registrar 4. Original Certificates of Registration with Tax Authorities 2 Van-Loads of Materials Source: The raid was made under the pretext of an investigation into tax payment records by Kameya, a company owned by a Hermitage client and unrelated to Rilend, Parfenion and 12 Makhaon. Kameya has been audited by the Russian tax authorities who have confirmed that Kameya paid all taxes in full and that there are no outstanding tax claims against Kameya. PRIVATE BRIEFING DOCUMENT What happened next? On 20 September 2007, the registry records of the stolen Hermitage Fund companies were fraudulently changed to show an unknown company from Kazan named “Pluton” as the new owner. The lawful owner, HSBC, was wiped off the registry Corporate Registry Corporate Registry May 2007 September 2007 HSBC PRIVATE BANK OOO Pluton, (Guernsey) LIMITED (Kazan, Tatarstan) Trustee to Hermitage Fund 100% 100% Corporate HSBC MANAGEMENT Corporate Director (Guernsey) LIMITED Director GLENDORA KONE 100% 100% 100% HOLDINGS Corporate Director HOLDINGS LTD LTD Cyprus Cyprus 100% 100% 100% General Director General Director General Director General Director General Director General Director OOO RILEND, OOO PARFENION, OOO MAKHAON, OOO RILEND, OOO PARFENION, OOO MAKHAON, Moscow Moscow Moscow Moscow Moscow Moscow 13 PRIVATE BRIEFING DOCUMENT How could they transfer ownership? In order to change the ownership records in the corporate registry of a Russian company, one needs a legal confirmation of a change of ownership and originals of four key corporate documents What is necessary to change the ownership of a Russian company? 1. 2. Legal Confirmation of Key Corporate Items Seized by the the Change of Interior Ministry on 4 June 2007 Ownership 1. Corporate Seals 2. Original Charters 3. Original Certificates of Registration with State Registrar 4. Original Certificates of Registration with Tax Authorities 14 PRIVATE BRIEFING How did the perpetrators fabricate a DOCUMENT legal confirmation