A $230 million fraud - and a trail of death that just keeps growing

With its sweeping vistas of the Persian Gulf and central location in the Middle East’s glitziest city, Dubai’s Palm Jumeirah is one of the most exclusive patches of real estate in the world. Created in the shape of a palm tree, the artificial archipelago is home to the cream of a city already bulging with the super wealthy. It’s not the kind of place you might expect a lowly Moscow tax official with a declared family annual income of $38,000 to own a $3 million beach front villa. How could someone with a comparatively low-level civil service job become so wealthy?

That is the question Swiss prosecutors are currently probing as part of a complicated investigation into an alleged Russian money laundering scheme through Swiss bank accounts that began when a whistle blower handed them a damning dossier of evidence at the start of this year. The whistle blower, Alexander Perepilichnyy, died two weeks ago suddenly at the age of 44. But the investigation continues.

The origins of this tale, which sounds like a KGB era thriller but is in fact a depressingly real indictment of modern day Russia, can be traced back to a cold jail cell in Burtyrka Prison in November 2009 where Sergei Magnitsky, a pioneering Moscow lawyer lay dying.

Magnitsky, a charismatic and forensically bright father of two, had been hired by the British based investment fund Hermitage Capital Management to investigate a monumental tax fraud which had been carried out against them. Nine months earlier he pointed the finger of blame at a network of Interior Ministry officials and Russian underworld figures expecting his revelation to be the start of a sustained police investigation into how $230million in Russian taxpayers’ money was squirrelled away in one of Russia’s largest declared frauds.

Instead he was arrested by the very men he had accused. Over the months he was held in increasingly brutal conditions and was refused vital medication. On 16 November he slipped into a coma and died.

Magnitsky’s death could have been just another name in a long list of prison fatalities. Instead it lit a fire that rallied those seeking to end the culture of corruption and impunity among government officials in Russia and has caused diplomatic rifts that have reverberated around the world.

What Magnitsky uncovered was as follows. In late 2007 Russian police raided the offices of Hermitage Capital Management, a multi-billion pound investment fund set up by the British businessman Bill Browder, ostensibly looking for information on an investor. During that raid company seals and corporate certificates were taken into evidence. Over the following months those seals were used, with the complicity of corrupt court and tax officials, to transfer ownership of a Hermitage subsidiary and apply for a tax rebate. On December 24th 2007, tax officials signed off on a 5.4 billion rouble ($230m) rebate. The money was wired to Universal Savings Bank, a little known bank that was quickly liquidated following the transfer.

The Russian police admit that the crime took place but they have pinned the blame on a retired sawmill worker, a burglar and two others who died suddenly in the immediate months following the fraud. The people Magnitsky named, meanwhile, were promoted and the Interior Ministry later launched a posthumous investigation of Hermitage’s own lawyer, accusing him of being the real mastermind behind the fraud. The tax officials who signed off on the deal, the Russian government insisted, were innocent pawns tricked into enabling the fraudulent request.

In a twist that could come straight out of a spy novel, the Interior Ministry admitted earlier this year that records from Universal Savings Bank which police could have used to uncover what happened to much of the money were destroyed in a truck that crashed and exploded in 2008.

But Russia’s unwillingness to prosecute the real perpetrators of the scam has not stopped Mr Browder from using his own tenacity, resources and a team of disaffected Russian business experts to uncover new details through their own investigations. The results are published regularly on the website RussianUntouchables.com, a prominent gathering point for Russians who are angered by corruption in their homeland.

For much of the first two years, Mr Browder’s investigation team primarily concentrated on the officials who organised Magnitsky’s detention. But a little over a year ago they announced that a Russian businessman had come to them with new details of how some of the stolen money was laundered.

According to a piece published in April in the US business weekly Barron’s, the whistle blower was part of a network who had helped the tax officials who signed off on the Hermitage scam hide millions of pounds in Swiss bank accounts in the immediate aftermath.

Hermitage have never named who the super grass was but The Independent has learned that he was Mr Perepilichnyy, a seemingly healthy 44-year-old business magnate from Surrey who died outside his home two weeks ago.

What Perepilichnyy brought to the table was a game changer in that it called into question the Interior Ministry’s insistence that the tax officials had been honestly duped employees. He handed over records from two secret accounts at a Credit Suisse branch in Zurich. They showed that in the months after the fraudulent Hermitage tax claim was approved by the Moscow tax bureau run by Olga Stepanova, her husband Vladlen received $10.9m through a shell corporation registered in Cyprus. The Swiss accounts were also used to make payments for a villa in Montenegro and a palatial mansion in Dubai’s Palm Island. Two more condos in the same Dubai development were bought for of Stepanova’s tax office deputies, Olga Tsareva and Elena Anisimova.

Further enquiries by Hermitage, meanwhile, revealed that the Stepanova family lived in a sprawling avant garde mansion designed by the feted Russian architect Alexei Kozyr in one of Moscow’s most exclusive districts. This from a family who had filed declared income returns that averaged out at $38,000 a year.

When the details were first revealed earlier this year it caused a storm in sections of the Russian press. Swiss prosecutors, meanwhile, announced that they were opening an investigation and had frozen assets inside the Credit Suisse accounts until the matter was resolved.

Mrs Stepnova has always refused to speak to the press. Her husband gave an interview to a Russian radio station in which he insisted that the Dubai properties were bought with his own legitimately gained money and that he was divorced from his wife – though he admitted still regularly travelling to Dubai with her. Asked why he thought his financial situation had been published he blamed Alexander Perepilichnyy, saying he had been in charge of investing on his behalf.

Mr Perepilichnyy’s early demise will inevitably mean he will no longer be able to bring any new evidence to the table. But those with knowledge of the investigation believe he had already handed over what he knew. Swiss prosecutors are confident that his death will not derail their work. Their investigation has only just begun.