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From the SelectedWorks of Dmitry Gololobov
2007
The Yukos Money Laundering Case: A Never-Ending StoryDmitry Gololobov, University of Westminster
Available at: https://works.bepress.com/dmitry_gololobov/3/
1
The Yukos Money Laundering Case: A Never-
ending Story
by Dmitry Gololobov*
*Dmitry Gololobov, Juris Doctor, University of Tver (Russian Federation), PhD (Russian Federation), LLM Corporate Finance Law (University of Westminster, School of Law, London), PhD Candidate of Queen Mary College. Member of the Moscow Bar. Deputy Legal Counsel to Rosprom - Yukos Group (1996-2003). General Counsel to Yukos Oil Company (2003-2004). Principal of Gololobov and Co Russian Legal
2
Advisers, London, UK. Email: [email protected]. Tel: +44 (0) 20 7487 3000
1. The Brief Story of Yukos Group
The beginning of the first decade of the twenty first century is famous for its corporate governance and accounting scandals, which finally led to the adaptation of the Sarbanes-Oxley Act in the US and analogous legislation around the world. The events of September 11th 2001 led to the adaptation of the complex, multi-level, international anti-money laundering legislative framework, which has respectively had a great impact on the anti-money laundering regimes worldwide. This adaptation, however, appears to also be capable of generating uninvited money laundering scandals. Before the universal adaptation of internationally recognised principles of the anti-money laundering fight, such scandals could be understood as the logical implication of the non–compliance of the several countries, but now it is evident that grounds for known international corporate failures are much deeper and need to be thoroughly researched.
The notorious Yukos Oil Company1 case, which has been on-going since early 2003, can be taken as a striking example of a new type of corporate disaster, representing a potential danger which has not yet been properly estimated.2
Yukos Oil Company was one of the biggest Russian “virtually integrated holding companies”3 created in the course of large scale Russian privatization and sold to the Menatep Group, in one of the infamous post-soviet “loans for shares” tenders.4
The loans-for-shares programme of 1995 has been widely criticized for
its lack of transparency and for its fraudulent arrangements. Under this
programme, the gems of the Russian economy—most promising
1 Encyclopaedia Britannica, 'Yukos (Russian Company)', (updated 2006) <http://p2.www.britannica.com/eb/topic-1010555/Yukos>, accessed March 14 2007. See also www. yukos.com
2 See also on the problem Dmitry Gololobov, 'Corporate Greenmail and State Blackmail', in P Barrenboim (ed.), Legal Reform, Judicial Reform and Constitutional Economy (Moscow: Tichomirov publishing,, 2004), 179-90.
3 Yuko Iji, 'Corporate Control and Governance Practices in Russia', University College London, School of
Slavonic and East European Studies Working Paper No.33 (2003), 1-37 at 20-29.
4 See on the problem of the “loans for shares” tenders Ira W. Lieberman, 'The Rush for State Shares in the Klondyke of Wild East Capitalism: Loans-for-Shares Transactions in Russia.' Geo. Wash. J. Int'l L. & Econ. , 29 (1995-1996), 737-68, Bernard Black, Reinier Kraakman, and Anna Tarassova, 'Russian Privitization and Corporate Governance: What Went Wrong', Stan. L. Rev., 52 (1999-2000), 1731-82 at 1742-50.
3
companies in the industrial and energy sector—were in fact sold out
to businesses in exchange for minimal loans to the Government.5
Yukos was no exception. Yukos, under Menatep’s control, widely used asset-stripping techniques, as did the majority of Russian production companies sold to oligarchy groups. This allowed the controlling shareholders to enjoy the benefits of non-transparency and transfer pricing, which resulted in excessive profit.6 However, in 2000, under the leadership of Mikhail Khodorkovsky, the core Menatep Group shareholder, the Company changed its strategy and began implementing international standards of reporting and accountability. Within several years Yukos, from being an oligarchic structure, evolved into a favorite of the Russian securities market and companies such as Standard and Poor’s, which rate corporate governance.7 The Company approved its own ADR programme and published annual and quarterly accounts, audited by PWC.8
Figure 1. The General Structure of the Yukos Group
5 United Nations, Russian Capitalism and Money- Laundering (Austria: United Nations publication, 2001) 31 at 7.
6 Merritt B. Fox, 'Corporate Governance Lessons from Russian Enterprise Fiascoes', N.Y.U. L. Rev. , 75 (2000), 1720-80 at 1743-745, Black, Kraakman, and Tarassova, 'Russian Privitization and Corporate Governance: What Went Wrong', at 1769-72, Andreas Heinrich, Aleksandra Lis, and Heiko Pleines, 'Corporate Governance in the Oil and Gas Industry. Cases from Poland, Hungary, Russia and Ukraine in a Comparative Perspective', KICES
Working Papers (2005), 53 at 18-20, Iji, 'Corporate Control and Governance Practices in Russia', at 14-20, Carsten Sprenger, 'Ownership and Corporate Governance in Russian Industry: A Survey', European Bank for
Reconstruction and Development, 70 (January 2002), 1-30 at 11, Bernard Black, 'The Corporate Governance Behavior and Market Value of Russian Firms', Emerging Markets Review, 2/2 (March 2001 2001), 89-108 at 5,9.
7 See e.g., Iji, 'Corporate Control and Governance Practices in Russia', at 30-34, Vincent Barnett, 'Corporate Governance in Russia', Journal of Economic Issues /39.4 (2005), 1073+.
8 Sergei A. Porshakov, 'Recent Corporate Governance Trends in Major Russian Companies an Update of the National Report: "Corporate Governance and Economic Growth in Russia"', Corporate Governance in Russia
and Transitional Economies T, /1 (2004), 19 at 2-3, Heinrich, Lis, and Pleines, 'Corporate Governance in the Oil and Gas Industry. Cases from Poland, Hungary, Russia and Ukraine in a Comparative Perspective', at 20, Diana Yousef-Martinek, Raphael Minder Knight, and Rahim Rabimov, 'Yukos Oil: A Corporate Gvernance Success Story', The Chazen Web Journal of International Business, (2003 2003), 1-11.
Group MENATEP
YUKOS Oil Company
Yukos-Moscow
(Management
Company)
Yukos RM (Management Company)
Yukos EP (Management Company)
Marketing and Refining
Approx. 63% of
shares
Oil and Gas Production
Yukos Finance BV
Other overseas
assets
4
9
The Yukos case is known as a complex and ambiguous composition of fraud, tax evasion, and other criminal cases, launched against several Yukos shareholders, managers and employees.10 The backbone of the case is the money laundering charges brought against the organized criminal group, which allegedly comprised of the Company’s top managers and was headed by the former core shareholder and CEO, Mikhail Khodorkovsky. Khodorkovsky and his allies have been charged with the laundering of approximately 27 bn. US dollars; the approximate equivalent of the Company’s profits over a four-year period.11 Some commentators think that the Yukos case is a reflection of the general problems of partisan and predatory privatization in Russia:
Privatization did create the property owners in the Russian Federation—
masses of small shareholders without any power to influence decisions
over the enterprises they “own”. It also produced few “new Russians”,
who have acquired enormous wealth by skillfully taking advantage of the
weaknesses of the transition period, including the lack of transparent and
clear rules and diminished law enforcement capacities of the State. In the
absence of appropriate rules to regulate or mechanisms to monitor the
developments, the market-oriented transformations, particularly
privatization, stimulated an unprecedented rise in the legalization of
criminal assets and property acquired by unlawful means.12
9 Iji, 'Corporate Control and Governance Practices in Russia', at 21. See also http://www.yukos.com/About_us and Malcolm S. Salter, 'Oao Yukos Oil Company', (Harvard Business School, 2001), 1-28 at 9.
10 S Fortescue, Russian's Oil and Barons and Metal Magnates (New York: Palgrave Macmillan, 2006) 233 at 121-30, Leon Aron, 'The Yukos Affair', American Enterprise Insitutes for Public Policy Research (2003), 10, Peter Clateman, 'Further Legal Observations on the Yukos Affair', Johnson's Russia List (Moscow, 2004), 1-10, Peter Clateman, 'Summary and Analysis of the “Statement on the Form of the Indictment Presented to Platon Lebedev”', <http://www.cdi.org/russia/johnson/7462-9.cfm.>, accessed February 10 2007.
11 See Robert Amsterdam and Dean Peroff, 'White Paper on Abuse of State Authority in the Russian Federation - the New Politically Driven Charges against Michail Khodorkovsky', Robert Amsterdam Blog (Amsterdam & Peroff, 2007), 78. Roman Ukolov, 'The Case of Yukos: Trial Three', Nezavisimaya Gazeta, July 8 2005, Jorn Madslien, 'Russia's Money Laundering Charges', <http://news.bbc.co.uk/1/hi/business/1431684.stm>, accessed April 12 2007, Anonymous, 'Yukos Bosses to Face New Charges ', The Independent, Jan 17 2007 p. 19, Catherine Belton, 'Khodorkovsky Faces Fresh Charges Yukos ', Financial Times, Feb 6 2007 p. 6. An alternative point of view: Rustam Bayrulin, 'X-Day', (updated February 5, 2007) <http://prigovor.com/info/37613.html>, accessed February 10 2007.
12 United Nations, Russian Capitalism and Money- Laundering at 6.
5
The factors and circumstances leading to the collapse of Yukos are manifold, and can be analyzed from different angles. Yukos defenders, amongst whom are prominent politicians, lawyers and analysts, clearly see a political motivated element to the case, arguing that Yukos individuals have been prosecuted and the Company is facing liquidation exclusively because of Khodorkovsky’s political and public activities.13 Others consider Khodorkovsky to be a mere criminal who headed Russia’s most powerful and dangerous “corporate criminal group”.14 The moderate analysts see in the Yukos collapse, a culmination of Putin’s fight against oligarchs, in his quest to strengthen a weak Russian state, and the clash between different influential Kremlin groups, struggling for oil revenues. These moderates nevertheless recognize the element of selective treatment in the Yukos/ Khodorkovsky case.15
The core question in the Yukos story is how a company with accounts audited by one of the biggest auditing firms, with shares listed on international stock exchanges, considered a paragon of the Russian corporate governance and transparency, has become involved in a money laundering scandal of unprecedented magnitude: to the sum of 27 bn. US dollars.
2. The Yukos Case: The Timeline and the Consequences
The Yukos case began effectively in 2003 when the political thrust of the case was highlighted by a report titled ‘The State Versus the Oligarchy” published by the
13 See e.g., Mikhail Delyagin, 'The Yukos Case as a Mirror on the “Dictatorship of Squalor', (Moscow: Institute for Globalization Issues, 2005), 16, Sabine Leutheusser-Schnarrenberger, 'The Circumstances Surrounding the Arrest and Prosecution of Leading Yukos Executives-Doc 10368 Addendum', (Committee on Legal Affairs and Human Rights - Parliamentary Assembly- Council of Europe, 2005), 14, Yury Schmidt, 'The Khodorkovsky Case: A Defense Attorney's Standpoint', Political Persecution of Mikhail Khodorkovsky <http://www.supportmbk.com/documents/schmidt_standpoint.cfm>, accessed December 15 2006, Platon Lebedev Press Center, 'Us State Department Details Human Rights Concerns of Yukos Case', Platon Lebedev
Press Center (2007).
14 Vladimir Perekrest, 'What Is Mikhail Khodorkovsky Behind Bars for (Part 1)', <http://prigovor.com/info/37302.html>, accessed December 14 2006, Vladimir Perekrest, 'What Is Mikhail Khodorkovsky Behind Bars for (Part 2)', <http://prigovor.com/info/37303.html>, accessed December 14 2006, Vladimir Perekrest, 'What Is Mikhail Khodorkovsky Behind Bars for (Part 3)', <http://prigovor.com/info/37304.html>, accessed December 14 2006, Vladimir Perekrest, 'What Is Mikhail Khodorkovsky Behind Bars for (Part 4)', <http://prigovor.com/info/37322.html>, accessed December 14 2006, Vladimir Perekrest, 'What Is Mikhail Khodorkovsky Behind Bars for (Part 5)', <http://prigovor.com/info/37306.html>, accessed December 14 2006, Vadim Volkov, 'Standard Oil and Yukos Cases', Pro et Contra, /Sept-Oct. (2005), 66-91, Alexey Krutilin, 'Criminal Alphabet of Yukos', Yukos Case
Chronology <http://prigovor.com/info/37657.html>, accessed March 10 2007, David Schor, 'The Yukos Affair: Rectifying the Past or Polluting the Future?' <http://www.thebirchonline.org/schor.htm>, accessed February 14 2007.
15 WPS Russian Media Monitoring Agency, 'Chubais About Yukos Case and Todays RSPP Meeting ', WPS Russian
Media Monitoring Agency. (2003), E. Shamseeva, 'Yukos’s Affairs and the Yukos Case', <http://bd.english.fom.ru/report/map/shamseeva/ed032836>, accessed March 5 2007, Peter L. Clateman, 'Yukos Affair, Part VII: Review of the Criminal Sentence and Appeal', (Johnson's Russia List, 2006), 1-29.
6
Council for National Strategy.16 The report was openly aimed at oligarchs who were accused of privatisation by theft, impoverishment of the nation, the “creation of a system of anti-national values” and high treason (by appealing for help to outside countries and “representing outside interests”). They were also accused of forcing through “oligarchic modernization”, and ultimately of trying to acquire a dominant position in the state.17
The real confrontation between Yukos and the State, represented by the General Prosecutors Office, started on 2 July 2003 when Khodorkovsky’s personal friend and the GEO of the Menatep Group, Platon Lebedev, was arrested.18 The arrest of Lebedev was widely interpreted as a “warning” to Khodorkovsky to leave Russia. However, Khodorkovsky did not leave, instead making desperate attempts to mitigate the attack on Yukos and his allies. He travelled to the US, aiming to persuade high ranking US politicians to intervene, and he made a hectic tour around the main Russian regions, meeting the governors.19 Putin's allies viewed such an undertaking as a political gesture and Khodorkovsky was arrested in Novisibisk and charged with various counts of fraud and tax evasion.20 His hearing lasted for approximately a year, and regardless to the efforts of numerous lawyers, he and his friend Lebedev were sentenced to 8 years detention in Chita, Siberia, the furthest region in Russia.21 Lawyers have since filed several applications with the European Court of Human Rights (ECHR), which have yet to be decided.22
In July 2003, the Ministry of Tax and Levies initiated an extraordinary audit of Yukos’s books, as a result of which Yukos was hit with a claim for $3.5bn.23 The same action was repeated over three times in three subsequent years, totalling a claim of
16 For more details see Mikhail Delyagin, 'The Yukos Case as a Mirror on the “Dictatorship of Squalor', (Moscow: Institute for Globalization Issues, 2005), 16.
17 Wojciech Kononczuk, 'The "Yukos Affair", Its Motives and Implications', Prace OSW /CES Studies (Warsaw: Centre for Eastern Studies, 2006), 58 at 39.
18 Fortescue, Russian's Oil and Barons and Metal Magnates at 121-23. Khodorkovskytrial.Com - Press Center for Mikhail Khodorkovsky, 'Timeline of Events', <http://www.khodorkovsky.info/timeline/>, accessed March 3 2007.
19 Fortescue, Russian's Oil and Barons and Metal Magnates at 123-26.
20 See on the Putin-Khodorkovsky clash, Anonymous, 'The Tycoon and the President', Economist.com (2005), 5, Catherine Belton, 'The Arrest That Proved a Turning Point', The Moscow Times, October 25 2006 p. 1, Alexey K Pushkov, 'Putin and His Enemies', The National Interest, /Winter (2004), 52,. Anonymous, 'Kremlin Vs. Yukos: Oil Company Caught in Kremlin Sights', Russian Life /Sept.-Oct. (2003).
21 Anonymous, 'Russian Oil Tycoon Gets Nine Years' Jail', The Birmingham Post (England), June 1 2005 p. 8. BBC News, 'Yukos Ex-Chief Jailed for 9 Years ', BBC News (2005), Platon Lebedev and Alexei Pichugin Defense Lawyers on Behalf of Mikhail Khodorkovsky, 'Constitutional and Due Process Violations in the Khodorkovsky/Yukos ', (Defense Lawyers on behalf of Mikhail Khodorkovsky, Platon Lebedev and Alexei Pichugin, 2004), 1-25.
22 For example Yukos Oil Company v. Russia (No. 14902/04)', (Eur. Ct. H.R., 2004), Lebedev v. Russia, Application No. 4493/04 (November 25, 2004) - Final Decision as to the Admissibility', (Eur. Ct. H.R., 2006), Platon Lebedev Press Center, 'European Court of Human Rights Rules to Hear Part of a Complaint against Russia Filed by Platon Lebedev', Platon Lebedev Press Center (2006).
23 Ministry for Taxes and Duties of the Russian Federation, 'Resolution # 14-3-05/1609-1 to Hold the Taxpayer Fiscally Liable for a Tax Offence', (updated April 14, 2004) <www.yukos.com>, accessed March 1 2007.
7
approximately 27 bn. US dollars.24 The Government decided to organize a forced sale of Yukos’ main production unit, Yganskneftegas, in December 2004.25 The management, who flew out of the country under pressure from the prosecutor, undertook an unprecedented attempt to block the action by filing a Chapter 11 application with the US bankruptcy court in Houston. The Court initially issued a TRO, prohibiting Russian companies and western banks from participating in the questionable auction for several years, but finally the application was declined.26 In spring 2006, Yukos’ western creditors commenced the liquidation procedure.27 By June 2007, the majority of Yukos’ assets had been sold on auction and had been acquired mainly by the state-owned companies of Gazprom and Rosneft.28
Dissatisfied with the fact that Khodorkovsky’s first term in prison would be coming to its mid-point in October 2007, enabling him to ask to be released on payroll, Kremlin “hawks” arranged for a second group of charges to be brought against Khodorkovsky and his allies. These charges are known as “The Second Khodorkovsky case” or “The Money-Laundering Case”.
Figure 2. Diagram of the Yukos case
24 Tim Osborne, 'Testimony before the Senate Foreign Relations Committee "Democracy on the Retreat in Russia"', (The Senate Foreign Relations Committee web site, 2005), 22 at 2-4, Steven M. Theede, 'Written Testimony before the Senate Foreign Relations Committee', [Written Testimony], <http://www.senate.gov/~foreign/testimony/2005/TheedeTestimony050217.pdf>, accessed March 5 2007, Yukos Oil Company, 'Incremental Tax Assessed on Yukos Vs. Yukos Financial Perfomance', in Yukos (ed.), (Moscow: YUKOS Oil Company, 2004), 5.
25 Osborne, 'Testimony before the Senate Foreign Relations Committee "Democracy on the Retreat in Russia"', at 5-6.
26 Bill Condie, 'Yukos Bankruptcy Move Thrown out by Us Judge', The Evening Standard February 25 2005 p. 46, Kurt A. Mayr, 'A Tale of Two Proceedings: "Turnabout Is Fair Play" In the Yukos U.S. Bankruptcy Cases', American
Bankruptcy Institute Journal 25/6 (2006), 1-5.
27 Catherine Belton, 'Banks Want Yukos Ruled Bankrupt', The Moscow Times.com (2006), Theede, 'Written Testimony before the Senate Foreign Relations Committee',
28 Mosnews, 'Rosneft Buys Its Own Shares at Yukos Bankruptcy Auction for $7.6bln', (2007), Catherine Belton, 'BP Pulls out of Yukos Auction', FT.com (2007).
Organised Criminal
Group
“First” Khodorkovsky
& Lebedev Case
Administrative and Civil
General Fraud
Taxes, Embezzlement & Money Laundering
CRIMINAL
Personal Taxes
THE YUKOS CASE
Cases of the
managers and
employees
Money Laundering
Overseas
“Second”
Khodorkovsky &
Lebedev Case
Cases of the managers and
employees
Yukos Corporate
Tax Evasion
8
29
The complexity of the Yukos case could be seen from the following figures: the total number of exclusively personal criminal cases, launched against managers, employees or affiliated persons of the Company has exceeded one hundred,30 the overall number of the individuals, charged or prosecuted – more than 60,31 the number of court cases in different jurisdictions,32 including Russia, has already exceeded 500,33the number of individuals on the Interpol search list is 15.34 The case is also famous for the biggest tax claim sum in recent Russian history and the biggest laundered amount of funds.35
29 The diagram prepared on the basis of the following sources: Krutilin, 'Criminal Alphabet of Yukos', Russian
Federation v. Mr. M.B.Khodorkovsky, Mr. P.L.Lebedev, A.V.Kraynov (Judgement), (Meshchansky District Court of the city of Moscow, 2005), Anonymous, 'Khodorkovsky Crimes', Russian Life (2006), 5. Amsterdam and Peroff, 'White Paper on Abuse of State Authority in the Russian Federation - the New Politically Driven Charges against Michail Khodorkovsky'. Clateman, 'Further Legal Observations on the Yukos Affair', Clateman, 'Summary and Analysis of the “Statement on the Form of the Indictment Presented to Platon Lebedev”', Peter Clateman, 'Legal Obeseravations on the Yukos Affair: Part V', Johnson's Russia List (2005 ), 1-11, Defense Lawyers on Behalf of Mikhail Khodorkovsky, 'Constitutional and Due Process Violations in the Khodorkovsky/Yukos ', Osborne, 'Testimony before the Senate Foreign Relations Committee "Democracy on the Retreat in Russia"', Anonymous, 'The Criminal Analysis of the Action Committed by the Shareholders and Managers of the Menatep-Rosprom-Yukos Group in the Course of Its Business Activity', Kompromat.RU (Moscow, 2003).
30 An approximate figure, obtained by the author by calculations. See also Khodorkovskytrial.Com - Press Center for Mikhail Khodorkovsky, 'Timeline of Events', Anonymous, 'The Criminal Analysis of the Action Committed by the Shareholders and Managers of the Menatep-Rosprom-Yukos Group in the Course of Its Business Activity', Kompromat.RU (Moscow, 2003), Krutilin, 'Criminal Alphabet of Yukos'.
31 See Krutilin, 'Criminal Alphabet of Yukos'
32Just one example, PACER list of filings for the case 'In Re Yukos Oil Co.'(Judge: Letitia Z. Clark , Date filed: 12/14/2004,Date terminated: 05/06/2006) contains 244 entry. Available at: https://ecf.txcb.uscourts.gov.
33 Personal calculations of the author. The figure includes separate court hearings on the tax debts of each subsidiary, extradition, criminal and ECHR cases.
34 As of May 1, 2007
35 See General Prosecutors Office of the Russian Federation, 'The Prosecutor General of the Russian Federation Has Completed His Inquiry into the Criminal Action against Mikhail Khodorkovski and Platon Lebedev',
9
The impact of the Yukos on the western and international case law is quite significant. For example, the Yukos case has already led to disputes on the problem of “politically motivated” crimes in contemporary Europe, and the use of financial crime charges for politically motivated prosecution.36 Another example is the contribution, provided by the Yukos Chapter 11 case decision, to American bankruptcy case law.37 This case has actually already been recognised as a benchmark case, concerning the “forum shopping problem”.38 Even more interesting might be the decision of the ECHR on the Yukos “tax story”, which is highly likely to set a new benchmark for ECHR tax cases.39
3. The Money Laundering Legislation of the Russian Federation
It is widely recognized that the period of transition from socialism to capitalism in the Russian Federation appeared to present limitless opportunities for international money laundering.40
Money-laundering in the Russian Federation is closely intertwined with the wide-ranging political, economic and social processes in the country. It has actually become one of the core characteristics of contemporary capitalism in the Russian Federation. 41 It is accepted that, in Russia, it remains incredibly difficult to prosecute alleged criminals due to the lack of appropriate legal frameworks to fight sophisticated financial crimes.42 However, the Yukos case demonstrates the opposing tendency, confirming that Russian anti-money laundering legislation is a valid legal instrument even for combating such sophisticated organized crimes.
[hereinafter “The Summary of the Chargers” ] <http://www.genproc.gov.ru/ru/ news/print.shtml?id=5467>, accessed February 17 2007.
36 See Eur. Parl. Ass., 'Circumstances Surrounding the Arrest and Prosecution of Leading Yukos Executives', (Res. No. 1418: The Parliamentary Assembly, 2005), Sabine Leutheusser-Schnarrenberger, 'Circumstances Surrounding the Arrest and Prosecution of Leading Yukos Executives', (Committee on Legal Affairs and Human Rights. The Parliamentary Assembly., 2004), Khodorkovsky's Defense Team, 'Political Persecution of Mikhail Khodorkovsky , Comments on Mbk's Arrest', Political Persecution of Mikhail Khodorkovsky [Electronic], (updated 2006) <http://www.supportmbk.com/support/comments_legal.cfm>, accessed March 1 2007, Cherno Jobatey and Alexandra Vacano, 'The Yukos Case and Its Consequences - Interview with Sabine Leutheusser-Schnarrenberger', <www.supportmbk.com/pdfs/zdf_sls_7-8-04_engl.pdf >, accessed March 1 2007, David Schor, 'The Yukos Affair: Rectifying the Past or Polluting the Future?' <http://www.thebirchonline.org/schor.htm>, accessed February 14 2007, Amnesty International, 'Russian Federation: The Case of Mikhail Khodorkovskii and Other Individuals Associated with Yukos', (updated 11 April 2005) <http://web.amnesty.org/library/print/ENGEUR460122005>, accessed March 10 2007, Anna Arutunyan and Oleg Liakhovich, 'Amnesty International: Khodorkovsky Not a Political Prisoner', The Moscow News.com (2007), 1
37 Yukos Oil Co. v. Russian Federation (In re Yukos Oil Co.), 320 B.R. 130, (Bankr. S.D. Tex. 2004).
38 See e.g., John Pottow, 'Greed and Pride in International Bankruptcy: The Problems of and Proposed Solutions to "Local Interests"', Mich. L. Rev, 104, (2005-2006), 1899-950, Matteo Winkler, 'Arbitration without Privity and Russian Oil: the Yukos Case before the Houston Court', U.Pa.J. Int'l Econ.L, 27 (1), (2006), 115-53
39Philip Baker, 'Recent Tax Cases From Strasbourg', Tax Journal, 828, (2006), 5.
40 United Nations, Russian Capitalism and Money- Laundering at 1.
41 Ibid. at 21.
42 Ibid. at 7.
10
The development of anti-money laundering legislation in Russia has come through a number of significant obstacles. For a while the Russian Federation was strongly opposing the idea of anti-money laundering legislation and President Yeltsin personally vetoed one of the projects on anti-money laundering laws. Experts think that Russia's general inability to detect and to prosecute money laundering activities was created intentionally, and permitted former members of the Soviet governmental apparatus to legitimize their embezzled funds.43
In 1996, the Russian Federation enacted a new criminal code that criminalized money laundering.48 The Code was a product of both the need to address the changing social, political, and economic conditions of contemporary Russian society, and the need to confront the drastic increase in post-Soviet crime.44 Article 174 of the Russian Criminal Code, entitled "Legalization of Money (Money-Laundering) or of Any Other Assets Acquired Illegally,"49 specifies punishment for financial transactions involving assets that have been acquired by illegal methods.45 Academics understand Article 174 only as a skeletal provision, purporting to criminalize money laundering activities. Stated in another way, "[the CCRF's] primary importance is as a theoretical normative statement... the new code announces the principles under which Russians one day hope to live."46
On July 13, 2001, the Duma, proceeding with the fight against money laundering in Russia, passed an anti-money laundering bill.47 The law, as adopted, came into effect in February 2002.48 This law, which amended the Russian Criminal Code, actually established the general anti-money laundering framework in Russia.49 The
43 Sam Chung, 'Criminalizing Money Laundering as a Method and Means of Curbing Corruption, Organized Crime, and Capital Flight in Russia', Pac. Rim. L. & Pol'y J. , 8 (1999), 617-50 at 623, Ugolovnyi Kodeks Rossiskoi Federatsii [The Criminal Code of the Russian Federation] (adopted June 13, 1996) [hereinafter CCRF] No. 63-FZ, translated in LEXIS, Intlaw Library, Rflaw File, Chung, 'Criminalizing Money Laundering as a Method and Means of Curbing Corruption, Organized Crime, and Capital Flight in Russia', at 628.
44 See William Burnham, 'The New Russian Criminal Code: A Window onto Democratic Russia', Rev. Cent. & E.
Eur. L. , 26 (2000), 365-424.
45 See CCRF art. 174
46 Chung, 'Criminalizing Money Laundering as a Method and Means of Curbing Corruption, Organized Crime, and Capital Flight in Russia', at 629.
47 The FATF Review to Identify Non-Cooperative Countries or Territories concluded, with respect to Russia, that:
'Currently the most critical barrier to improving its money laundering regime is the lack of comprehensive anti-
money laundering law and implementing regulations which meet international standards. In particular, Russia
lacks: comprehensive customer identification requirements; a suspicious transaction reporting system; a fully
operational FIU with adequate resources; and effective and timely procedures for providing evidence to assist
in foreign money laundering prosecutions.' Financial Action Task Force, 'Review to Identify Non-Cooperative
Countries or Territories: Increasing the Worldwide Effectiveness of Anti-Money Laundering Measures', in FATF
Secritariat (ed.), (Paris Cedex: FATF, 2000), 24 at 9.
48 The Federal Law N 121-FZ of August 7, 2001, on Amending Legislative Acts of the Russian Federation in Connection with the Enactment of the Federal Law on Countering the Legislation of Earnings Received in an Illegal Way (Money Laundering).
49 The Act was later amended several times and found its development in the decrees of the President, act of
Government and regulations of the FIU and the Central Bank.
11
core characteristics of this framework, pertaining to the definition of money laundering and key elements of offenders’ liability, are the following:
1) The current legislation defines the offence of money laundering as: 'the performance, for large amounts and with the aim of giving a legal appearance to their possession, use and disposal, of financial and other transactions with monetary funds and other assets which are known to have been acquired by other persons through criminal means (with the exception of the offences defined in articles 195, 194, 198 and 199 of this Code).50' This definition is valid for both offences of money laundering, incorporated in the Russian Criminal Code: Article 174 (when the laundering operations are conducted by a person who has not been involved in the predicate offence) and Article 174.1 (when the laundering operations are conducted by the same person, who committed the predicate offence)51
2) The definition of laundering offences in the Russian Criminal Code remained rather broad since the notion of 'crime' under Russian law includes all criminal offences irrespective of their gravity.52The previous definition did not make the offence dependant on the purpose of disguising the criminal origin of the money. However, the words 'through illegal means' were replaced by 'through criminal means', which meant that only criminal offences (offences defined by the Russian Criminal Code) may be regarded as giving origin to illicit funds.53
3) In application to money laundering offences the Criminal Code contains the word 'knowingly', which also restricts the possible application of the articles 177-174.1. Essentially, this means that the offence must have been committed intentionally, negligence not being sufficient.54
4) According to experts, article 6 of the Law containing reporting provisions is rather comprehensive in nature. It covers almost all activities commonly associated with money laundering.55
In giving general assessment to the Russian anti-money laundering framework, experts have pointed out that the definition of the offence seems to meet minimum standards set by the Strasbourg Convention,56 and the
50 Tax crimes exception.
51 CCRF, art. 174 and 174.1.
52 It further excluded offences defined by articles 193, 194, 198 and 199 of the Criminal Code, i.e. the failure to repatriate funds in accordance with exchange control regulations, avoidance of the payment of taxes and customs duties (smuggling, however, remains a money laundering offence).
53 Markus Schaer, 'New Russian Money Laundering Legislation', Int'l Bus. Law., 29 (2001), 369-73 at 369-70.
54 Chung, 'Criminalizing Money Laundering as a Method and Means of Curbing Corruption, Organized Crime, and Capital Flight in Russia', at 633.
55 Ibid. at 634.
56 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (Nov 8, 1990) CETS No. 141.
12
Recommendations of the OECD Financial Action Task Force on Money Laundering (FATF),57 and that Russia is moving towards a comprehensive anti-money-laundering regime.58
However, as analysts have noted, in the Russian context, the question of defining the criminalization of money laundering has crystallized the moral issues at stake in implementing international recommendations in this field. The decision on whether or not to integrate forms of economic delinquency common within the Russian business community was liable to radically modify the objectives of anti-laundering and the definition of its targets.59 Favarel-Garrigues points out:
In analyzing the case of Russia, I wish to show that the implementation of
international standards against money laundering does not necessarily
imply a commitment to common values, or even to a common vision of
the objectives of this campaign. The Russian example highlights, on the
contrary, the latitude afforded to states to define the moral issues at stake
in efforts to combat money laundering within their borders, in
accordance with domestic concerns.60
A number of factors support the hypothesis that the anti-laundering
mechanism constitutes a valuable resource in the political management
of the business community. Its instrumentalization is wholly in line with
government action based on the exploitation of the legal vulnerability of
Russian economic and financial elites.61
His assumption, that such a regulatory instrument as money laundering legislation could ultimately be used to crack down on certain personalities and, ultimately, be used to intimidate the business community by centralizing information on bank transactions and institutions,62 has been fully confirmed by the recent Russian criminal cases.63
The core message from this brief overview of contemporary Russian anti-money laundering legislation is that by the date of Mikhail Khodorkovsky arrest and by the time the Yukos case commenced, the core provisions of Russian anti money
57 Schaer, 'New Russian Money Laundering Legislation', at 370.
58 Olga Sher, 'Breaking the Wash Cycle: New Money Laundering Laws in Russia', N.Y.L. Sch. J. Int'l & Comp. L. , 22 (2003), 627-46 at 646.
59 Gilles Favarel-Garrigues, 'Domestic Reformulation of the Moral Issues at Stake in the Drive against Money Laundering: The Case of Russia', International Social Science Journal, 57/185 (2005), 529-40 at 537.
60 Ibid. at 536.
61 Ibid. at 538.
62 Ibid.
63 The following could be taken as an example: the Case of Bank Neftanoi Banki.Ru, 'Linshits Accused of Money Laundering', (updated January 30, 2006) <http://www.banki.ru/news/engnews/?ID=123940>, accessed April 23 2007. The recent scandal pertaining to the application of anti-money laundering regulations in the Russian banking industry also raises the question of using the AML legislation for corruption and preferential treatment. David Nowak, 'Frenkel: Central Bank Dirty', The St. Petersburg Times (2007), Ria Novosti, 'Suspect in Central Banker Murder Alleges CB Money Laundering ', RIA Novosti (2007).
13
laundering legislation had already been enacted. Of course, the legislation had not been developed enough in several important aspects, such as: comprehensive customer identification requirements, a suspicious transaction reporting system and an operational FIU with adequate resources, but the main elements were in place and generally complied with the main international guidelines.64 The “backbone” provisions were in place and found the reflection in case law.65
4. Principles of the Khodorkovsky/Yukos Money Laundering Case
It is quite important to note that “The Yukos Money Laundering Case” has, actually, two dimensions. The first is criminal, stemming from “The First Khodorkovsky Case”, when he was charged with, amongst other charges, the organization and management of a network of shell companies, designed and used exclusively for the purpose of corporate tax evasion.66 This element migrated from the First Case to the Second Khodorkovsky/Yukos Money Laundering Case, where the organization and management of the shell companies’ network (offshore and onshore) was assessed as an episode of organized criminal activity, involving fraud and money laundering.67
The second dimension of the Yukos case only deals with the taxation of Yukos as a corporate group. The claims of the Ministry of Tax and Levies, amounting to 27 bn. USD, are based on the assumption that the same network of shell companies, which was allegedly used for laundering funds, was used for corporate tax evasion.68 So, the money laundering charges and corporate tax claims originate from the same source – the Yukos corporate group structure and tax optimization schemes.
In the Yukos case, the prosecutors have actually created a completely new concept in Russian criminal law – the “criminal corporate group”: a corporate
64 The FATF Progress Report on Non-Cooperative Countries and Territories published on 1 February 2001 concluded, with respect to Russia, that it intended to introduce the new AM legislation to the Duma by March 2001. In October 2002, the FATF removed four countries, including Russia, from the NCCT list.
65 See The Resolution of the Supreme Court of the Russian Federation Plenary Session of 18 November 2004 N
23 “On the court policy on the illegal entrepreneurship and legalization cases”, available at: Law of Russia in
English / System GARANT (http://www.garant.ru/nav.php?pid=286&ssid=89&mv=1)
66 See Russian Federation v. Mr. M.B.Khodorkovsky, Mr. P.L.Lebedev, A.V.Kraynov (Judgement), Jr. Sanford M. Saunders, A. John Pappalardo, and Maria P. Logan, 'Analysis of the Criminal Charges against, and the Trial of, Mikhail B. Khodorkovsky and Platon Lebedev', (Members of Khodorkovsky/Lebedev International Defense Team, 2005), 25, Clateman, 'Summary and Analysis of the “Statement on the Form of the Indictment Presented to Platon Lebedev”', General Prosecutors Office of the Russian Federation, 'Text of the Official Indictment ', (Moscow: General Prosecutors Office of the Russian Federation, 2004).
67 See the Summary of the Chargers and Russian Federation v. Mr. M.B.Khodorkovsky, Mr. P.L.Lebedev,
A.V.Kraynov (Court Decision), (Meshchansky District Court of the city of Moscow, 2005).
68 See Yukos Oil Company, 'Incremental Tax Assessed on Yukos Vs. Yukos Financial Perfomance', Yukos Oil Company, 'Tax Slides Update', YUKOS Oil Company (2005), 9, Artem Rodionov, 'A Look at Khodorkovsky and Lebedev's Taxes', Kommersant Russia's Daily Online (2005), Reuters News Service, 'Pricewaterhouse Faces Claim in Yukos Case', The Wall Street Journal, December 26th 2006 p. A2, Anonymous, 'Yukos Bosses to Face New Charges '.
14
group, created for the purposes of tax evasion and money laundering and managed by a group of individuals recognized as an organized criminal group.69 This situation quite evidently raises the question of how such a group could function for seven years under the supervision of numerous controlling bodies on a federal and regional level, seeing as it was regarded as one of the top taxpayers in the country, it had submitted thousands of pages of different reports and was audited by one of the top international auditing firms. The answer to this question can be found in the course of the analysis of the charges recently brought against Mikhail Khodorkovsky and his allies.
The Yukos/ Khodorkovsky case is known for generating intense publicity, unprecedented in Russia. The General Prosecutor’s Office has itself published several important documents concerning “The First Case” including the Summary of the Judgment.70 When the investigation of “The Second Case” had been finished, the General Prosecutor’s Office published the Summary of the Charges, brought against Khodorkovsky and Lebedev, on its official website.71
69 The concept of an “enterprise” in the United States’ Federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1962, et seq., serves as a useful comparison to the legal concept of an organized group as defined in the Russian Criminal Code. As with Russian Criminal Code’s prohibition of illegal activity by an organized group, RICO too is directed at combating organized crime. In each case, the government must establish a nexus between the alleged criminal activities and some enterprise or organized group. Although the structure of a RICO enterprise can be either a formal, legal entity or an informal association, RICO requires in the first instance that the government allege and prove a structure for the making of decisions, separate and apart from the alleged racketeering activities, with the existence of an enterprise being a separate element, which must be proved by the prosecution. In addition, to prove a criminal association in-fact, the government must prove that “the various associates function as a continuing unit” for a “common purpose of engaging in a course of conduct.” Here too, the concept of an organized group in the Russian Criminal Code is similar to the notion of a RICO enterprise, with its stability requirement echoing RICO’s continuity, and its complicity component mirroring common purpose, as to course of conduct. Sanford M. Saunders, Pappalardo, and Logan, 'Analysis of the Criminal Charges against and the Trial of Mikhail B. Khodorkovsky and Platon Lebedev'. However, in the Yukos case, the organized criminal croup acquired all the companies, including Yukos, and created on their basis the corporate group, assimilated into the group, they also took the managerial positions, drew several managers and employees into the organized croup activity, made the company the production and corporate leader of the Russian industry, almost bought Sibneft and merged with Exxon-Mobile and was ready to take the power in Russia. Perekrest, 'What Is Mikhail Khodorkovsky Behind Bars for (Part 1)', Perekrest, 'What Is Mikhail Khodorkovsky Behind Bars for (Part 2)', Perekrest, 'What Is Mikhail Khodorkovsky Behind Bars for (Part 3)', Perekrest, 'What Is Mikhail Khodorkovsky Behind Bars for (Part 4)', Perekrest, 'What Is Mikhail Khodorkovsky Behind Bars for (Part 5)'. The question is whether Yukos really represented a “corporate organized group” or whether the existence of such a powerful business group was seen by the governing political elite as an imminent threat to its power. Volkov, 'Standard Oil and Yukos Cases'. The Yukos case demonstrates that there is a tendency towards the extensive and aggressive usage of the notorious Russian concept of the “organized group” for the prosecution of those whose prosecution, in other circumstances, would represent a difficult task. Notably, there is a similar tendency growing in the United States, and this is highlighted by Gerard Lynch is his essay on RICO: “..prosecutors have seized on the virtually unlimited sweep of the language of RICO to bring a wide variety of different prosecutions in the form of RICO indictments”. Gerard E. Lynch, 'Rico: The Crime of Being a Criminal Parts I and Ii', Colum. L. Rev., 87 (1987), 661-764 at 662.
70 See General Prosecutors Office of the Russian Federation, 'Text of the Official Indictment ', General Prosecutors Office of the Russian Federation, 'One More Case against Yukos Managment', <http://www.genproc.gov.ru/ru/news/print.shtml?id=4488>, accessed March 5 2007.
71 See the Summary of the Chargers. They have been accused of embezzlement by means of the large-scale
misappropriation under Part 4 Article 160 of the Criminal Code of the Russian Federation and legalization
15
The allegations against Khodorkovsky and his allies have several general characteristics, which follow not only from the Summary of the Charges, but also from the Judgment brought in the first Khodorkovksy case,72 the Decision concerning the episode of the illegal privatization of Apatit,73 arbitration decisions on the tax claims against Yukos,74 and a number of other documents of less importance.75
1) Timing. The organized criminal group headed by Khodorkovsky and his friend Lebedev (later – the head of the Menatep Group) was evidently formed as a group before 1994 when it was involved in the Apatit case. According to the Summary of the Charges the organized criminal group “have also been engaged in criminal activities in the country’s petroleum industry”. Therefore the “Menatep-Rosprom –Yukos” group, due to the vast variety of interests (property, oil production, banking,) can be called a “diversified organized criminal group”. Thus the activities of the criminal group lasted from approximately 1993 until 2003 (probably even longer, as the management allegedly controlled by Khodorkovky left the Company and flew to London in October –November 2004).76
2) General information on the criminal activities. The prosecutors understand the whole story of the Mentap-Yukos-Rosprom Group as a continuous process of criminal activities focused on the misappropriation of privatized assets77 and obtainment of illegal profit from the misappropriated assets by means of tax evasion and money laundering schemes.78 Even salaries and annual bonuses paid to the employees and managers have been announced as a form of bribery:
(laundering) of money acquired through the commission of gross criminal acts under Part 4 Article174.1 of the
Criminal Code of the Russian Federation.
72 Russian Federation v. Mr. M.B.Khodorkovsky, Mr. P.L.Lebedev, A.V.Kraynov (Judgement).
73'Russian Federation v. Mr. M.B.Khodorkovsky, Mr. P.L.Lebedev, A.V.Kraynov (Court Decision).
74 Interregional Tax Inspection N1 v. Yukos (А40-61058/04-141-1510)', System Garant (Federal Abitrasion Court of Moscow Region, 2005e).
75 For example, Sergey Pepeliaev, Marina Ivlieva, and Ivan Khamenushko, 'Opinion Regarding Compliance with Legislation of Inspection Report No. 08-1/1 of December 29, 2003 Issued by the Tax Ministry of Russia', (YUKOS Oil Company, 2004), 3, Genrikh Padva, 'Transcript of the Closing Arguments as Given by Genrikh Padva, Lead Lawyer for Mikhail Khodorkovsky, in the Meshchansky Court on April 5', (Moscow: KhodorkovskyTrial.com - Press Center for Mikhail Khodorkovsky, 2005), Genrikh Padva, 'Transcript of the Closing Arguments as Given by Genrikh Padva, Lead Lawyer for Mikhail Khodorkovsky, in the Meshchansky Court on April 6', (Moscow: KhodorkovskyTrial.com - Press Center for Mikhail Khodorkovsky, 2005).
76 See the Summary of the Chargers, Andrew E. Kramer, 'Yukos Managers Are Now Targets of Prosecutors', The
New York Times, August 17, 2006, sec. C p. 9.
77 For example, “In 1998 Khodorkovski, Lebedev and the other members of the organised group conspired to acquire by criminal means a majority shareholding in the said joint-stock company, for the purposes of which they acquired the shares of OAO Achinski NPZ, OAO Novosibirskoye Predpriyatiye po Obespecheniyu Nefteproduktami, OAO Tomsknefteprodukt, OAO Khakasnefteprodukt, OAO Tomskneftegeofizika and OAO Tomskneft VNK, incorporated by the Russian government into the authorised capital of OAO VNK (38% shareholding)”. The Summary of the Chargers.
78 See Mosnews, 'Khodorkovsky Charged with Money Laundering', MosNews.Com (2007), Anonymous, 'Yukos Bosses to Face New Charges '.
16
Khodorkovski and Lebedev bribed those shareholders who were not
under their control and those members of the higher management
(directive from the former shareholder in the person of the state) who
were likely to put up active resistance to their nefarious activities. The
bribe took the form of the unlawful payment of a bonus from the bank
accounts of foreign companies under the control of Khodorkovski and
Lebedev.79
It should be noted that no charges of bribery have been officially brought against any managers of the group, so it is hardly possible to ascertain either the nature of the chargers or the persons who can be potentially charged.
The assessment of the general activities of the Yukos Group as a continuous criminal offence is confirmed by the amount of funds, allegedly laundered by the organized criminal group through Yukos.80
3) Approach to business and corporate operations. The investigation considers even formal actions undertaken in the course of business and corporate activity of the group as a part of the continuous criminal offence. For example the corporate restructuring procedure which took place in 200081 has been described in the Summary of the Charges as follows:
In order to fulfill his criminal aspirations …. and obtain the right to their
strategic and operational direction, Khodorkovski, together with the
members of the organised group, created management companies
controlled by them for OAO NK YUKOS and OAO VNK. For which purpose,
on the instructions of Khodorkovski and the members of the organised
group, the commercial establishments under their control founded OOO
[limited company] YUKOS-Moskva, which became the management
company for OAO NK YUKOS. Similarly in 1998 ZAO [closed corporation]
YUKOS Exploration and Production (ZAO YUKOS EL) was created for the
management of petroleum-extracting companies, and ZAO YUKOS
Refining and Marketing (ZAO YUKOS RM) for the management of
petroleum processing companies.82
This approach enables the prosecution to construe any corporate action as preparatory to further organized criminal activity.
79The Summary of the Chargers.
80 The total amount of money allegedly laundered by the organised group during the period 1998 to 2004 was 487,402,487,523.59 roubles (approximately 19 bn. USD) and 7,576,216,501.76 US dollars. For the comparison see Yukos performance at Yukos Oil Company, 'Tax Slides Update', Mikhail Khodorkovsky, 'Yukos', Yukos Oil
Company (2003), 1-26.
81 Iji, 'Corporate Control and Governance Practices in Russia', at 20-22, Yousef-Martinek, Minder Knight, and Rabimov, 'Yukos Oil: A Corporate Gvernance Success Story', Mikhail Khodorkovsky, 'The Third Alternative (Speech by Mikhail B. Khodorkovsky at the 2nd International Oil Summit in Paris)', YUKOS Review. (Moscow: «Business Information Service», 2001), 16-19.
82 The Summary of the Chargers.
17
4) Khodorkovsky’s Position in the Corporate Group. Khodorkovsky’s position in the legal entities named in the Summary of the Charges in one of the key aspects of the case. In the “First Khodorkovsky Case” his lawyers extensively used the argument that neither Khodorkovsky, nor Lebedev controlled the corporate structure of the group of affiliated companies (the corporate group).83 The Summary does not name all the posts taken up by Khodorkovsky, but gives several examples of the control that Khodorkovsky and his allies exercised over the Corporate Group and the personnel.
Figure 3. Summary of the Charges on Khodorkovsky's Positions in the Group
YUKOS OIL COMPANY
CONTROL
“…Khodorkovski and the other members of the
organised group led by him had acquired the right to
the strategic management of OAO YUKOS NK in
1996…”84
YUKOS’ SUBSIDIARIES CONTROL “…the organised group of persons led by
Khodorkovski procured the right to the strategic and
operational management of the petroleum-
extracting subsidiaries…”85
THE PERSONNEL “The administrative personnel appointed by
Khodorkovski and the members of the organised
group were mostly the former employees of the
Menatep Bank and ZAO Rosprom, which were also
used by the organised group to further their criminal
designs…”86
GENERAL POSITION
AND THE ROLE AFTER THE
FORMAL RESIGNATION
“Khodorkovski and Lebedev, who ran OAO NK YUKOS
and occupied leading positions on the managing
bodies of the company, and who had accumulated
capital in the companies under their control by
misappropriating the assets of its subsidiaries,
withdrew from the managing bodies of OAO NK
YUKOS without losing control of the strategic
management of the company…”87
From the last paragraph in the Table it becomes clear that the prosecutors have applied a concept similar to the US concept of the “controlling person”, or the UK
83 See Padva, 'Transcript of the Closing Arguments as Given by Genrikh Padva, Lead Lawyer for Mikhail Khodorkovsky, in the Meshchansky Court on April 5', Padva, 'Transcript of the Closing Arguments as Given by Genrikh Padva, Lead Lawyer for Mikhail Khodorkovsky, in the Meshchansky Court on April 6'.
84 The Summary of the Chargers
85 Ibid.
86 Ibid.
87 Ibid.
18
concept of the “shadow director”, to both Khodorkovsky and Lebedev88. The diagram below clearly shows that they have proper grounds to prove that Khodorkovsky had been the sole controlling individual, not only for Yukos and Menatep Groups, but for the Open Russia Foundation as well. By emphasizing Khodorkovsky’s controlling and managerial functions the prosecutors want to show that all the cash flows, either within the Yukos Corporate Group, or outside it (dividends, paid to the Menatep Group; dividends paid by the Menatep Group to its shareholders and the funds distributed to the the Open Russia Foundation), were ultimately under control of the same person (Khodorkovsky) who perfectly understood their illicit origin. By introducing this concept the prosecutors purport to demonstrate that Khodorkovsky and other members of the organized criminal group actions were intentionally aiming at the continuous laundering of “dirty” funds, and their accumulation abroad.
88 Shadow directors arise from a statutory concept created under the Companies Act in order to extend obligations of directors to persons who exercise the same kind of influence over the company as appointed directors would do. They are, in effect, not real directors and have no legal powers to act on the company's behalf . Simon Plant and Michael Prior, 'Officers' and Directors' Liability in the Context of Insolvency', Int'l Bus.
Law., 28 (2000), 303-12 at 304.. Shadow directors are persons in accordance with whose instructions the company's directors are accustomed to act; thus a shadow director might be a significant shareholder or creditor of the company. A shadow director has been described as one who "lurks in the shadows, sheltering behind others who, he claims, are the only directors of the company to the exclusion of himself." Caroline Bradley, 'Transatlantic Misunderstandings: Corporate Law and Societies', U. Miami L. Rev. , 53 (1998-1999), 269 -315 at 293-94. He is not held out as a director by the company. To establish that a defendant is a shadow director of a company it is necessary to allege and prove: (1) who are the directors of the company, whether de facto or de jure; (2) that the defendant directed those directors how to act in relation to the company or that he was one of the persons who did so; (3) that those directors acted in accordance with such directions; and (4) that they were accustomed so to act. Caroline M. Hague, 'Directors: De Jure, De Facto, or Shadow', Hong Kong L.J. , 28 (1998), 304-14 at 307-08.
The American concept of "control-person liability" is much broader. Controlling shareholders of corporations in the United States may be subject to a duty of fair dealing similar to the duties imposed on directors and officers of the corporation, and breach of this duty will give rise to liability in the same way. Unlike the liability imposed on shadow directors in Britain, this liability will not arise only on insolvency of the corporation. Moreover, the liability is for breach of a duty of loyalty rather than for breach of a duty of care. Bradley, 'Transatlantic Misunderstandings: Corporate Law and Societies', (at 293-94. The term "control-person liability" in the United States is frequently used to refer to provisions in the federal securities laws which impose liability for violations of those laws on control-persons as well as on the persons directly responsible for the violations. When a person is civilly liable under the Securities Act of 1933, the same liability applies to "[e]very person who, by or through stock ownership, agency or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls" the other person. The Securities Act of 1933 §15, 15 U.S.C. §770 (1998). Cf The Securities Exchange Act of 1934 §20A, 15 U.S.C. §78a (1998) It should be noted that several Yukos minority shareholders have made an attempt to prove that certain controlling persons concealed the risk of the Russian Federation taking action against Yukos by failing to disclose: (1) that Yukos had employed an illegal tax evasion scheme since 2000; and (2) that Khodorkovsky’s political activity exposed the Company to retribution from the current Russian government, but failed to state a claim for primary liability. The Court, amongst other things, remarked: “To make out a prima facie case of control person liability under Section 20(a), “a plaintiff must show a primary violation by the controlled person and control of the primary violator by the targeted defendant, and show that the controlling person was in some meaningful sense a culpable participant in the fraud perpetrated by the controlled person.” SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996). See In re. Yukos Oil
Securities Litigation (S.D.N.Y. 2004)
19
Figure 4. Khodorkovsky's positions in the Group and outside.89
It is also should be noted that although Russian law does directly recognize the concept of “shadow directorship” or the “controlling person” in the form as they are recognized by the UK and US legislation and case law, Article 56 of the Civil Code and Article 3 of the Federal Law on Joint Stock Companies, provides that if a person is able to give orders to a company, they can be held liable for the
89 The nformation on the offices held by Khodorkovsky obtained: on the management companies – from the official sites of information disclosure (see http://fcsm-arch.parking.ru/disclosure.asp); and on the Menatep Group – from Catherine Belton, Valeria Korchagina, and Alex Nicholson, 'Yukos Shares Frozen as Stakes Raised in Kremlin's War', The St. Petersburg Times (2003), General Prosecutors Office of the Russian Federation, 'Text of the Official Indictment ', Catherine Belton, 'No Individual Menatep Owners Left', The Moscow Times.com (2004), Yukos Oil Company - Yukos Oil Company, 'Annual Report for 2000', (YUKOS Oil Company, 2001) at 5, Yukos Oil Company, 'Annual Report for 2001', (YUKOS Oil Company, 2002), Open Russia Foundation - Gazeta.Ru, 'Khodorkovsky Leaves Yukos to Us Citizen', Gazeta.Ru (2003). On the Open Russia Foundation’s involvement in money laundering see Mosnews, 'Khodorkovsky Charged with Money Laundering', Peter Finn, 'Raids on Yukos Affiliates Presage New Charges', Washington Post, October 7 2005, Amsterdam and Peroff, 'White Paper on Abuse of State Authority in the Russian Federation - the New Politically Driven Charges against Michail Khodorkovsky', at 36-37.
Group MENATEP
YUKOS Oil Company
Yukos-Moscow
Yukos RM
Yukos EP
Open Russia Foundation
(Russia)
Mikhail
Khodorkovs
ky
Core shareholder
Owned 9% and controlled 50% through
the special Trust
Chief Executive Officer
[being a Head of the Management
Committee of the Board (not an
executive body according to the Russian
law), was named as CEO in official
The Head of the Directors’ Board
[other four directors were appointed by
Yukos and fully controlled ]
The Head of the Directors’ Board
[Yukos was a founder]
The Head of the Directors’ Board
[other four directors were appointed by
Yukos and fully controlled ]
20
damages incurred in a course of the company’s bankruptcy, if the bankruptcy arose from such orders.90
Therefore, by describing Khodorkovsky’s position inside and outside Yukos Group in detail and stressing his actual managerial position, the investigation aims to solve the threefold problem:
1) To prove Khodorkovsky’s actual position as a head manager and core owner of the Group before and after his formal resignation, for the purpose of the ongoing criminal investigation and the pending court hearing in Russia;
2) To create proper grounds for the Yukos money laundering case in the light of current European anti money laundering legislation, including confiscation, seizure and civil recovery provisions, which may help the investigators to seize the funds allegedly belonging to Menatep, Khodorkovsky and his allies abroad;
3) To create grounds for prospective civil actions against Khodorkovsky in the West and internationally, by additionally confirming his role as the ultimate controlling person in the Group.
5. The Core Episodes of the Khodorkovsky/Yukos Money Laundering
Case91
The Summary of the Charges represent a “secondary” document, which just summarizes the main points of the official charges, in the form that the prosecution would like to represent to the public. Yet the Khodorkovksy/Yukos case is extremely complicated from a legal perspective, spans over a ten-year history of several dozens of companies, and is interrelated with quite a number of other corporate, tax and criminal cases, therefore the episodes covered in the money laundering case should be analyzed in line with the corporate story of the Group and other significant data.
5.1. Creation of the On Shore Networks of Shell-Companies.
90 See The Civil Code of the Russian Federation, The Federal Law N208 "On Joint Stock Companies" from
November 24, 1995 (in the edition of Federal Laws N65 from 13.06.1996, N101 from 24.05.1999, N120 from
07.08.2001, N31 from 21.03.2002, etc), The Resolution of the Plenum of the Supreme Court of RF and the Plenum
of the Supreme Arbitration Court of RF N 4/8 from 02.04.97г. "About some aspects of application of the Federal
Law "On joint stock companies" (in the edition of the Resolution of the Plenum of the Supreme Court of RF N 5,
and the Resolution of the Plenum of the Supreme Arbitration Court of RF N3 from 05.02.98). available at: Law of
Russia in English / System GARANT (http://www.garant.ru/nav.php?pid=286&ssid=89&mv=1.
91 The Summary of Charges also includes an episode on the illegal alienation of the subsidiaries shares belonging to VNK, 53 per cent stock of which was acquired by Yukos on the privatization tender. However, this episode does not concern the main Yukos operational schemes and does not represent the case that needs an in-depth analysis.
21
Stage 1. The prosecutors clearly see two stages in the development of the Yukos’
shell-company network. The first stage, which lasted approximately from 1997 to
2000, is characterized by using mostly shell companies92 registered in so-called
“closed cities” or ZATOs:93 areas which were authorized to grant tax exemption to
the companies producing something in their territory.94
Thus, between 1997 and 1998 in the closed community of Lesnoi [one
of the ZATOs] the subordinates of Khodorkovski, Lebedev and the other
members of the organised group registered at their instigation the
following commercial organisations:…
These organisations were essentially dummy legal entities, using the
movement through them of petroleum, petroleum products, securities
and cash as their raison d’être. On behalf of these dummy companies,
which gave them the right of ownership of the extracted petroleum,
Khodorkovsky, Lebedev and the other members of the organised
group disposed of the petroleum as if it were their personal property95.
The key element of the scheme of alleged fraud, tax evasion and money
laundering used by Yukos, was the large-scale usage of so-called “shell” or
“dummy” companies. It is important to note that before the Yukos case, this term
had had an extremely rare application in Russian case law.96 The definition of the
“shell” or “front” company, given in the Judgment on Khodorkovsky case, is,
92 During this period the secretarial services to the Company were provided by Peter Bond and the holding and secretarial company Valmet Group Limited (Bermuda). The Summary of the Chargers.
93 ZATO (zakrytye administrativno-territoriaVnye obrazovaniya) or closed cities. “ZATO are closed cities in several senses. They are physically closed in that there is often a pre-fabricated concrete wall surrounding them with the city boundaries ignoring regional and local administrative boundaries. Administratively, they are closed in that they require a permit to visit, though this has become more lax in the post-Soviet era. Perhaps most importantly, these company towns closely tied to the military industrial complex are budgetarily independent of the region in which they are located. Residents of a region, including finance officials, often know little about public finance inside the ZATO and even deny their existence.3 Although ZATO residents were able to live somewhat independently off the region in the Soviet era, they now must use many public services of the region, though they contribute no money to help support these services.” Gregory Brock, 'Public Finance in the ZATO Archipelago', Europe-Asia Studies, 50/6 (September 1998 1998), 1065-81 at 1065.
94 Before Prerestroika, military institutions and production units had been located in these areas, and were authorized by Government decree to grant special tax benefits to companies conducting production operations on their territory. See on the problem of tax exemption policy in Russia Vadim Radaev, 'Informal Institution Arrangements and Tax Evasion in the Russian Economy', (2001), 19, Maria Ponomareva and Zhuravskaya Ekaterina, 'Federal Tax Arrears in Russia. Liquidity Problems, Federal Redistribution or Regional Resistance?' Economics of Transition, 12 (2004), 26, Vladimir Samoylenko, Government Policies in Regard to
Internal Tax Havens in Russia (Moscow: International Tax and Investment Center, 2003) 22, Brock, 'Public Finance in the ZATO Archipelago', Gregory Brock, 'The ZATO Archipealago Revisited. Is the Federal Government Loosening Its Grip? A Research Note', Europe-Asia Studies, 52/7 (November 2000 2000), 1349-60.
95 The Summary of the Chargers.
96 I Degrariev, 'Overseas Holding Guards Russian Assets ', Economy and Life, /18 (2005).
22
actually, the first comprehensive definition that sets standards for Russian case
law.97
The companies… had not actually possessed any functions or features
of a legal entity, envisaged by articles 48 through 50 of the Civil Code
of the Russian Federation, i.e.:
� did not posses, manage or operate a separate property for
processing, storage and sale of crude oil and oil products,
� were not able to achieve and exercise their rights of property on
their own without the orders,
� were not able to perform their activity, the main objective of which
was to receive profit, since their activity was unprofitable,
� meant for the purposes of evasion of taxes by the oil-production and
oil-refining subsidiary enterprises of OAO ‘NK ‘YUKOS’, engaged in
sale of oil and oil products, and profit-making organizations affiliated
to it. 98
Although, the substance of the term “shell company”, as it is understood by the Russian court, is close to that of international case law,99 the absence of consistent practice raises the question of application of the “Rule of Law” in Russian Federation in general, and in the Yukos Case in particular.100
It should be noted that according to the Arbitration court decisions, the network of on-shore companies was created and used mainly for the purpose of tax evasion.101 So, only after obtaining illegal profit derived from the tax evasion
97 It should be noted that the same position has been expressed in the Yukos-related tax cases. See Interregional Tax Inspection N1 v. Yukos (А40-61058/04-141-1510), Tax Inspection N 5 v. Zao "Pwc", (Moscow City Arbitraz Court, 2007), A. Rodionov, Tax Schemes, for Which Khodorkovsky Has Been Detained. (Мoscow: Vershina, 2005) at 58-68. The position of Yukos regarding the shell companies : “Inspection Report alleges that these 17 companies acted as front companies, although it is said in the Inspection Report that all of them were duly registered and operated as autonomous legal entities. These companies were duly registered for tax purposes as independent taxpayers. Saying that these companies acted as front companies actually leads to ignoring the independent status of these legal entities…” Pepeliaev, Ivlieva, and Khamenushko, 'Opinion Regarding Compliance with Legislation of Inspection Report No. 08-1/1 of December 29, 2003 Issued by the Tax Ministry of Russia'.
98 Russian Federation v. Mr. M.B.Khodorkovsky, Mr. P.L.Lebedev, A.V.Kraynov (Judgement), at 40.
99 Aden R. Pavkov, 'Ghouls and Godsends - a Critique of Reverse Merger Policy', Berkeley Bus. L.J., 3 (2005-2006), 475-514 at 501-03, Dmitry Gololobov and Joseph Tanega, 'Sham SPEs: Part 2—the Regulatory Gaps in International Accounting Standards Concerning the Consolidation of Special Purpose Entities', I.C.C.L.R., 17/12 (2006), 369-80 at 378-80.
100 See Peter L. Clateman, 'Yukos Part VI: Tax Claims Revisited', Johnson's Russia List (2005), 1-20. and Rodionov, 'A Look at Khodorkovsky and Lebedev's Taxes'. Both sources perfectly illustrate that regardless to the questionable character of the tax optimization schemes used by Yukos, the same schemes were employed by 90% of the big Russian corporate groups. See as an example OAO Lukoil, 'Consolidated Financial Statements (Prepared in Accordance with Us Gaap) as of December 31, 2001 and 2000 and for Each of the Years in the Three Year Period Ended December 31, 2001. ' (2002).
101 See Interregional Tax Inspection N1 v. Yukos (А40-61058/04-141-1510), and comments to it in Rodionov, 'A Look at Khodorkovsky and Lebedev's Taxes', Rodionov, Tax Schemes, for Which Khodorkovsky Has Been
Detained.
23
operations, could the network of “shell” companies be used for its “secondary purpose” – for the purpose of laundering of the illegal gains.102
… evasion of OJSC NK YUKOS from payment of taxes resulted in
application of illegal tax evasion scheme, discovered during performed
traveling tax inspection of OJSC NK YUKOS. 22 entities were registered in
territories with preferential taxation regime and semblance was created
regarding their activity of purchase and sale of oil and oil products, so
that tax payment obligation arose with these entities, rather than with
OJSC NK YUKOS. The mentioned entities unlawfully applied benefits and
hence did not pay taxes. Since it was established in the course of the
inspection that OJSC NK YUKOS is the actual owner of oil and oil
products, then the obligation to pay taxes to the budget, unpaid from
the amount of earnings received from sales of oil and oil products,
appeared with OJSC NK YUKOS.103
This “dual” approach, based on the recognition of the illicit nature of the Yukos’ offshore and onshore company network, has actually allowed the authorities “to kill two birds with one stone”: the tax side of the story has lead to the liquidation of the company and forced sale of its assets; the money laundering aspect has led to new charges being brought against its owners and managers. Figure 5. Business operations and cash flow of the Company
102 This scheme sets up a perfect example of nexus between money laundering and tax evasion
103 Interregional Tax Inspection N1 v. Yukos (А40-61058/04-141-1510)
Russian Tax Benefit Zone
YUKOS Oil Company
SPV (operational
company)
Production Subsidiary
Marketing Subsidiary
Offshore Financial
Centre
Offshore SPV
MENATEP Group
Public
tender
Other
shareholders
Dividends
Open Russia
Foundation
100% ownership
Intra-Group trading operations
Non-taxable payments
from a parent to a
Export
Financing
24
Stage 2. The prosecutors point out that by 2001 Khodorkovsky, and the other
members of the organised group, concentrated a huge amount of wealth in
Russia and in foreign companies under their control, and because of the criminal
nature of the accumulated capital and their intent to continue increasing that
capital, the group of changed the system of misappropriating petroleum and
laundering money. As a result they organised a new system to move petroleum
and products via companies, registered in the regions that gave them tax
breaks.104 For this purpose the executives of the companies, controlled by the
organized group, drew up appropriate agency agreements, purchase and sale
agreements, commissions and other documents needed for the purchase and
sale between petroleum and products companies.105 The key principals of the
system were, according to the prosecutors, “false” publicity gained through the
scheme of forced changeability:
With the aim of concealing the bogus nature of the said companies
from the tax and other regulatory authorities, the plan worked out by
Khodorkovsi and the other members of the organised group to
104 Evenkia, Mordovia and some others.
105 The Summary of the Chargers.
25
misappropriate other people’s wealth entrusted to them made
provision for the periodic renewal of the artificial systems of sales of
petroleum and petroleum products, i.e. the regular replacement in
these systems of just the dummy organisations – the petroleum raiders
– which were engaged in the resale of petroleum and petroleum
products to other organisations, including newly founded ones.106
The investigators say that between 2001 and 2003 Khodorkovsky and the other
members of the organised group misappropriated 202,214,394 tonnes of
petroleum from the main Yukos production subsidiaries, with a total value of 27 bn.
USD.107
5.2. Using the Auditor’s Opinion as a Shelter.
According to the prosecutors, while using the network of shell companies,
Khodorkovsky and his allies, acting as managers of the corporate group,
undertook several steps to conceal the illegal character of the operations:
….Khodorkovsky and the members of the organised group declared
the balances of these dummy companies, which they nominally
referred to as operational companies, side by side with the balances of
their subsidiary petroleum-extracting and petroleum-processing plants
when presenting their financial statements to the international auditors.
By this deception they convinced everybody that the dummy
companies were all within the sphere of influence of OAO NK YUKOS108.
Prosecutors point out that having received the false opinion from the auditors, that
no infringements had been involved in the sale of petroleum and products, the
members of the organised group continued to use the major portion of the funds
for their personal enrichment and just a fraction was paid to the production
companies engaged in petroleum extraction and processing, allowing the
criminal scheme to run.109 However, the Summary of Charges contains no
evidence that the funds accumulated on the balance of the corporate group as
a consolidated company, were used illegally or were in violation of the
appropriate corporate procedures. The absence of any significant violations has
been confirmed by the consolidated accounts audited by PwC since the
106 Ibid.
107 Ibid.
108 Ibid.
109 Ibid.
26
beginning of 1997.110 Nevertheless, the charges are based on the assumption that
the consolidated accounts of the Company are just a method of concealing the
embezzled and laundered funds. Respectively, PwC’s opinion is considered as a
tool for such concealment.111
It is quite important to note that the role of the international auditor (PwC) in the
collapse of Yukos, and its alleged involvement in the Yukos schemes, had not
been assessed in any way until the Russian Ministry of Tax and Levies, represented
by one of its inspections, filed an unprecedented application with the Moscow
Arbitration Court, claiming PwC’s actual knowledge, and its direct facilitation of,
the Yukos fraudulent tax schemes.112 The Moscow court actually sided with
accusations from Moscow city tax officials, who claimed that PwC had aided Yukos
in perpetrating tax evasion by covering up the company's tax shelter schemes,
and drawing up two different audit reports in over three years.113 Accordingly, the
court found that the audit agreements between Yukos and PwC Audit for the
years 2002-2004 were invalid because they constituted illegal and unethical deals
according to the Civil Code of the Russian Federation. The court awarded the
government 16.8 million rubles ($480,000) in restitution.114
This case is the first and the only example of when a company such as PwC has
been recognized as an accomplice and a facilitator of the Yukos schemes,115
110See, for example accounts for 2000-2002 Yukos Oil Company, 'Consolidated Financial Statements, 31 December 2000', (YUKOS Oil Company, 2001), 36, Yukos Oil Company, 'U.S. GAAP Consolidated Financial Statements, December 31, 2001', (Moscow: YUKOS Oil Company, 2002), Yukos Oil Company, 'U.S. GAAP Consolidated Financial Statements. 31 Dec. 2002', (Moscow: YUKOS Oil Company, 2003), 17.
111 The position of the investigators generally complies with paragraph seven of the Resolution of the Supreme
Court of the Russian Federation Plenary Session of 28 December 2004 N 64 “On the court policy on the
application of the criminal law on the tax crimes”, which provides that persons, who facilitated tax crimes by
means of providing the intellectual assistance in a form of advice, are criminally liable as other accomplices of
the offence. See the Resolution of the Supreme Court of the Russian Federation Plenary Session of 28
December 2004 N 64 “On the court policy on the application of the criminal law on the tax crimes”, available
at: Law of Russia in English / System GARANT (http://www.garant.ru/nav.php?pid=286&ssid=89&mv=1)
112 Elizabeth Judge and Tony Halpin, 'PwC Faces Court Action in Russia over Yukos Audits', Timesonline (2006). Catherine Belton, 'PwC Signed False Yukos Accounts, Court Rules', The Financial Times, March 21 2007.
113 The court case revealed that the firm had compiled two sets of accounts — one for internal use, that warned of illegal actions taken by Yukos; and another for shareholders. Tax Inspection N 5 v. ZAO "PwC"'.
114 Olga Pleshanova, Igor Moiseev, and Natalia Grib, 'PriceWaterhouseCoopers Blamed in Yukos Tax Affair', Kommersant Russia's Daily Online (2007).
115 Many experts think that this unprecedented decision has been masterminded by one of the Groups in the Kremlin Administration, and aims not only to contribute to the second Khodorkovsky case, but to put the big shots of international audit in Russia under statutory control. Read together Yelena Komarova, 'PwC Appeal Likely to Be Sustained at Top Level ', The Moscow News (2007). Kommersant.Com, 'Supreme Arbitration Winds up Moscow Subordinate', Kommersant Russia's Daily Online (2007). Sergei Nenashev, 'Supreme Arbitration Court Applies Raiders Methods', Kompromat.RU (Moscow, 2007), Vladimir Solovev, 'Who and Why Destroys Moscow Arbitration Court', Kompromat.RU (Moscow, 2007).
27
although PwC had used the same formula to describe the tax risk for all its “big”
clients in the Russian oil sector, which is clearly seen from the table below.
Facing a significant threat of losing its Russian business and, quite evidently, with
criminal charges against several key employees, PricewaterhouseCoopers finally
decided to withdraw all its Yukos audit reports.116 The auditor said that it had
withdrawn Yukos' audits from 1995 to 2004 because of the existence new
information, which could have influenced those reports, had it come to light
earlier.117 "PwC now believes that information and representations which were
provided to PwC by Yukos' former management may not have been accurate,"
the firm said in its statement, published on the Russian office website.118 The letter,
sent on June 15 to Yukos's liquidator, says that PwC believes the Yukos
management lied by declaring that its main trading structures, Baltic Petroleum,
South Petroleum and Behles, were not affiliated to the company.119 The letters also
provide three other reasons for the unprecedented withdrawal: (1) the Yukos
management failed to provide enough information on whether Russian entities,
later used by Yukos, were in arm's length transactions or not; (2) the management
also failed to disclose information on "significant payments" the company made to
entities owned by the shareholders of Menatep Bank, which went bust in the
August 1998 financial crisis (3) the management failed to inform the auditor about
payments, made by the Menatep Group to several Yukos managers.120 It needs
no comment that all these allegations perfectly comply with the charges, recently
brought against Mikhail Khodorkovsky and his allies, analyzed below. It should be
noted that Russian legislation and judicial doctrines during these years have
changed more substantially than, for example, British legislation and case law has
over a couple of centuries.121 These substantial changes enable any auditor to find
numerous omissions and inaccuracies in the data disclosed to him, and repeat
PwC’s trick.
116 Gregory L. White, 'Yukos Audits Withdrawn ', The Wall Street Journal Online (2007).
117 Kommersant.Com, 'PwC Withdraws Yukos Reports', Kommersant Russia's Daily Online (2007).
118 Pricewaterhousecoopers, 'Withdrawal of Yukos Audit Reports', <http://www.pwc.com/extweb/ncpressrelease.nsf /docid/FB66FD4D8CBB5640802573050019EB74>, accessed June 25 2007.
119 Irina Resnik, Alexey Nikolsky, and Filipp Sterkin, 'What Yukos Concealed ', Vedomosti (2007).
120 ZAO "Pricewaterhousecoopers", 'Letter of Withdrawal', Kompromat.RU (2007).
121 For example, the Regulations on affiliated entities were approved by the Russian Securities Market Regulator only in 1999. See Decision of the Federal Commission of the Securities Market N 7 “On registration and information disclosure of affiliated persons” from September 30, 1999 available at: Law of Russia in English / System GARANT (http://www.garant.ru/nav. php?pid =286&ssid=89&mv=1).
28
PwC’s withdrawal decision, recognized as completely politically driven by several
experts, is likely to produce an unprecedented effect on the Yukos case by, on the
one hand, eliminating one of the most powerful arguments of the defense and, on
the other hand, providing the lawyers with more evidence of politically motivated
influence.122
The PwC story is far from at an end as it is evident that both parties will appeal to
the Supreme Arbitration Court, whose final ruling sets precedent on any occasion,
and it will set the benchmark for auditors’ liability in Russia.123
Figure 6. Yukos and TNK-BP US GAAP tax risk notes for 2002
Yukos TNK International Limited124
PwC PwC
Note 19: Commitments and Contingent
Liabilities. Taxation.
Note 18: Commitments and Contingent
Liabilities. Taxation.
Russian tax legislation is subject to varying interpretations and periodic changes, which may be retroactive. Further, the interpretation of tax legislation by tax authorities as applied to the transactions and activities of the Company may not coincide with that of management. As a result, certain transactions may be challenged by tax authorities and the Company may be
Russian tax legislation is subject to varying interpretations and constant changes, which may be retroactive. Further, the interpretation of tax legislation by tax authorities as applied to the transactions and activities of the Group may not coincide with that of management. As a result, tax authorities may challenge transactions, and the Group may be assessed additional
122 See Tai Adelaja, 'Pwc Is Criticized for Pulling Yukos Audits', The Moscow Times. com (2007), Olga Pleshanova, 'Pwc Discovered a Group Crime', Kommersant Russia's Daily Online (2007), Catherine Belton, 'Yukos Chiefs Lied to Us, Claims Pwc after It Withdraws Audits', FT.com (2007).
123 PwC was "tried" under Article 169 of the Civil Code - citing "violation of the fundamental principles of law and order and morality." However, the international auditor found an influential Russian backer in Anton Ivanov, the chairman of Russia's Supreme Arbitration Court. "Market participants should be assured that there are basic principles which ought not to be violated. If we apply Article 169 of the Civil Code without grounds, belief in the stability of [business] contracts will be undermined," said Ivanov in a statement which appeared in the media just a day before the Moscow Arbitration Court heard the case against PwC. Experts and print media were quick to recognize in the statement an early, hidden hint to the court regarding the PwC case's outcome. Komarova, 'Pwc Appeal Likely to Be Sustained at Top Level '.
124 During 2004 and 2005 the Federal Tax Service performed tax audits on certain subsidiaries of the Group, relating to their 2001 activities. In connection with these audits the FTS has presented the Group tax acts totaling approximately USD 1,009 million (RR 28 billion), including penalties and interest. Among other items, these tax acts challenge the Group’s treatment of capital construction profits tax concession, transfer pricing and the use of reduced rate tax economic zones. Tnk-Bp Limited, 'Tnk-Bp Limited Us Gaap Consolidated Financial Statements for Full Calendar Year 2004', (Moscow: TNK-BP Limited, 2005), 21 at Note 18, p. 13.On the nature of the tax claim by which TNK-BP was hit in 2005 also see Agence France-Presse Reuters, 'TNK-BP Disputes Tax Claim', International Herald Tribune (2005). The New York Times, The Associated Press, and Reuters, 'Russian Tax Claim on Tnk-Bp Isn't Seen as a Repeat of Yukos', International Herald Tribune (2005), Miriam Elder, 'TNK-BP Pays Off $1.44bln Tax Bill', The Moscow Times (2006), Anna Skornyakova, 'TNK Causes Troubles', Kommersant Russia's Daily Online (2005), Standard & Poor's, 'Tax Claims on Russian Companies: Credit Cliff Risk or Business as Usual? ' RatingsDirect (2005).
29
assessed additional taxes, penalties and interest. Consolidated tax returns are not required under existing Russian tax legislation and tax audits are performed on an individual entity basis only. Tax periods remain open to review by the tax authorities for three years.125
taxes, penalties and interest. Tax periods remain open to review by the tax authorities for three years.126
5.3. Creation of the Off-shore Network of Shell (dummy) Companies.
The Summary of Charges provides that, for the purpose of legalising the
misappropriated petroleum, Khodorkovsky acquired dummy companies abroad
and through them created a network of foreign sales organisations for petroleum
and products based on the following pattern: Yukos (or a dummy company
registered in Russia in a preferential tax assessment zone) sold oil and products to a
controlled foreign company registered in Switzerland, which resold them to a
controlled foreign company registered offshore, which, in turn, resold them to an
actual buyer at a petroleum-processing plant, in the form of a foreign company.127
The objective of Khodorkovski, Lebedev and the other members of the
organised group was to mislead the regulatory authorities and foreign
businessmen by including in the network a foreign company controlled
by them and registered in Switzerland, which was enough to impart an
image of reliability and trustworthiness to OAO NK YUKOS operations
involving the export of petroleum and petroleum products.128
The fact that almost all major Russian companies used the same tax optimization
schemes has never been a secret and has been addressed by several pieces of
research, commenting on Russian corporate governance problems.129 All Russian
oil and gas corporations have off-shore companies networks, which reside
125 Yukos Oil Company, 'U.S. GAAP Consolidated Financial Statements. 31 Dec. 2002.'
126 TNK International Limited, 'Consolidated Financial Statements. 31 Dec. 2002', (2003).
127The Summary of the Chargers, Lucy Komisar, 'Yukos Kingpin on Trial. Billionaire Mikhail Khodorkovsky Faces the Music in Moscow. Are the Charges Politically Motivated?' (updated May 12, 2005) <http://www.gnn.tv/print/1376/Yukos_Kingpin_on_Trial>, accessed March 2 2007. Michael Teagarden, 'Yukos Defaults on Long-Term Contracts to Supply Oil', Bloomberg.com. (2005), Riverlake Shipping, 'Who Is the King of Baltic Chartering?' <https://www.riverlake.ch/pages/news/ news_29.php?back=archives>, accessed April 26 2007.. On the Yukos’ structure see Figure 7.
128 The Summary of the Chargers.
129 Iji, 'Corporate Control and Governance Practices in Russia', Sergei Guriev et al., Corporate Governance in
Russian Industry (Moscow: NES-CEFIR-IET, 2003) 1-57, Alexei Goriaev and Konstantin Sonin, 'Is Political Risk Company - Specific? The Market Side of the Yukos Affair', (August 2005 2005), 32. See on the problem of Sibneft and TNK-BP tax optimization schemes Anonymous, 'Taxsaving Schemes from Sibneft', Moscow
Accountant, 2 (2004), Carl Mortished, 'BP Venture Pays $1bn in Back Taxes as Russia Gets Tougher ', The Times
2006.
30
primarily in the same jurisdictions as Yukos.130 It is only in the case of Yukos that the
creation of several off-shore companies has been recognised as a constituent part
of the criminal offence. The fact that information about the core off-shore
companies, which were directly controlled by Yukos, had been publicly disclosed
according to the regulations of the Federal Securities and Exchange Commission
has not been given any consideration at all.131
Figure 7. The offshore network of Yukos before the
collapse
130 See as an example the structure of Alfa Group at http://www.alfagroup.ru/276/about.aspx
131 See http://www.yukos.ru/files/10938/spisok_03_11_03.pdf
31
132
5.4. Accumulation of profit on the foreign accounts.
The key element of the charges is that by organising the sale of petroleum and
products by the Swiss company to the “shell” offshore company, the organised
group accumulated part of the money, laundered through the sale of
misappropriated petroleum, in their off-shore bank accounts in order to reduce the
132 In a Case Under Chapter 15 of the Bankruptcy Code Case No. 06-B-10775-RDD. Declaration of Gerhard H. Gispen. (Appeal Brief Par. 1.11 pages 6 and 7).
49%
100%
100%
100%
100%
53,7%
Yukos Oil Company
Yukos Finance
B.V.
Rep
Offices:
Lithuania
Yukos International UK B.V.
NL
Transpetrol a.S.,
Slovakia
Mazeikiu Nafta,
Lithuania
Yukos Capital Sarl,
Lux
Petroval Bunker,
Services B.V., NL
Petroval SA.
Yukos Services
(UK) Ltd, UK
Yukos USA Inc.
USA
Yukos International
Services Ltd, UK
Intelligent Energy
Ltd, UK
John Brown
Hydrocarbons Ltd.,
UK
Davy Process
Technology AG,
Davy Process
Technology Ltd, UK
DPT International
Ltd, UK
DPT Research
Ltd, UK
Gulf Advanced
Chemical
Industries Company Limited
100%
100%
100%
100%
100%
100%
100% 4,35%
24,25%
100%
32
tax burden on the Company’s profits obtained via illegal operations. The
prosecutors claim that Khodorkovsky and the other members of the organised
group transferred funds from the bank accounts of the “trading” shell companies
(SPVs) to the bank accounts of the other (“financial”) shell companies (SPVs)
controlled by them. Subsequently, the organised group manipulated these funds
for their own interests.133
The fact that quite a number of Russian companies used offshore schemes and
fund-accumulation techniques is quite evident.134 Moreover structuring the
corporate group cash flow through offshore treasury companies is an
internationally recognized business practice.135 So, the prosecutors’ approach to
business practice erodes the line between legal business operations and illegal
business practices, putting political prosecution issues on the agenda.
5.5. Redistribution of the Illegal Profit through Shared Re-distribution and
Dividends .
The final “masterstroke” of the prosecutors was the part of the Summary that
stated that, Khodorkovsky had redistributed the share capital of the Menatep
Group, under the guise of official dividend payments, amongst the several
members of the organised group for the purpose of concealing their
“remuneration” for the crimes committed. The investigation claims that it was done
with the purpose of making them partners and owners of shares in Yukos, and
other companies on the accounts of which the legalized funds were kept.136
Taken separately from other episodes, these allegations mean that any
redistribution of shares in a holding company (a head company of a corporate
group) could be taken as concealment of illegal operations inside the group.
5.6. Laundering operations
In the Summary of Charges, the prosecutors have separately enumerated several
laundering operations, allegedly conducted by the members of the organized
133 The Summary of the Chargers.
134 For example Sibneft schemes. See Mikhail Tulski, 'Why Abramovich is Transferring Abroad 1 Bn. A Year', <http://compromat.ru/main/abramovich/pokupki.htm>, accessed April 20 2007. See also Boris Utkin, 'The Network for Tax Evasion: Alfa Group One of the Biggest Settler of Overseas Offshore Companies', Kompromat.RU (2005), Lenpravda, 'The Business and Tax Evasion Scheme of Fridman's Empire', Kompromat.RU (2003), Eugene Sidorov, 'Deputies Got Interested in the Offshore Aristocracy ', Kompromat.RU (2006).
135 See Gareth Green, 'Transfer Pricing Techniques for Group Treasury Companies', Int'l Tax Rev., 12 (2001), 23-26.
136 The Summary of the Chargers.
33
group through the corporate structure of the Company.137 All the operations
generally complied with the publicly known business activities of the Company
and its core shareholder the Menatep Group. The bulk of these activities was
respectively disclosed in the audited, quarterly and annual, Company accounts.
The list of “laundering” operations includes:
Figure 8. The Table of the Money Laundering Charges and Business operations
comparison.
THE SUMMARY OF CHARGES THE BUSINESS SUBSTANCE OF OPERATIONS
Cancellation of the Menatep Bank’s creditor indebtedness to foreign banks, restructured on Yukos, the money from which (credit) was used by Khodorkovsky to acquire shares of Yukos through the Menatep Group .
In 1998 the Russian ruble collapsed, taking Bank Menatep with it.138 Its banking license was respectively revoked and a 31.9 percent holding in Yukos, pledged on security of $266 million, was taken into possession by three banks: the Standard Bank of South Africa, the Japanese Daiwa Bank and Germany’s West LB Bank .139 Khodorkovsky urged the banks to accept a three-year repayment plan that would be secured by oil exports rather than shares in Yukos, but the banks refused, taking control of their shares in Yukos. Soon afterwards, they dumped their shares, recovering only about half of their loan.140 Subsequent to Bank MENATEP’s bankruptcy in 1999 and continuing into 2000, Yukos entered into a series of transactions, in which it acquired the rights to collect from Bank MENATEP from third party assignors.141 Through this procedure the indebtedness of the Banks was restructured and the Yukos’
137 Ibid.
138 See e.g. Vladimir Tikhomirov (ed.), Anatomy of the 1998 Russian Crisis (Melbourne: CERC, 1999).
139 See Malcolm S. Salter, 'Oao Yukos Oil Company', (Harvard Business School, 2001), 1-28.
140 Anthony Latta, 'Khodorkovsky, Menatep, and Yukos', The Moscow News, April 11 2004.
141 Yukos Oil Company, 'Annual Report for 2000', at 45.
142 Tatyana Grishina and Maksim Builov, 'Banking 2000-2004', Kommersant Russia's Daily Online (2004).
143 Yukos Oil Company, 'Annual Report for 2000', at 45.
34
shares were bought back. Similar restructuring schemes were used by other Russian business groups.142 The transaction was fully disclosed in the Annual Report for the Year 2000 (Note 8)143. This voluntary buy-out scheme was quite evidently aimed at mitigation of the adverse effects incurred by the Bank MENATEP’s clients and had primarily a reputational goal.
Acquisition of euro-bonds and currency bonds from foreign companies to the amount of 1 billion US dollars, which were transferred to the shell companies controlled by the organized group.
The acquisition of different types of securities has always been regarded as a conventional treasury and investment operation of any corporate group, which needs to invest the temporary available funds.144 For comparison annual reports of any big Russian oil company could be taken. TNK –BP Limited Consolidated Financial Statements for 2004 provide that at 31 December 2004 and 2003 the Group had USD 700 million of Eurobonds issued and outstanding.145
The performance of various financial exchange operations to a total amount of more than 264 billion rubles, and the laundering of this money in the bank accounts of Russian and offshore company networks. The transferring of funds of offshore
“shell” companies, disguised as
dividends, to a sum of more than 4.2
billion US dollars, into the bank
The main argument against this claim is that all operations, enlisted in the Summary of Charges, were simply transfers of funds inside a corporate group, without which it cannot function as a group.146The funds remained properly reflected in the Consolidated Financial Statements of the Group, and all the operations with them were conducted in accordance with the centralized financial policy and relevant internal
144 Ibid. at 43. Yukos Oil Company, 'U.S. GAAP Consolidated Financial Statements, December 31, 2001', at 6-8. 145 TNK-BP Limited, 'TNK-BP Limited US GAAP Consolidated Financial Statements for Full Calendar Year 2004', (Moscow: TNK-BP Limited, 2005), 21 at 9.
146 For a comparison with the Yukos’ reports, the TNK-BP reports can be taken. See TNK-BP Limited, 'TNK-BP Limited US GAAP Consolidated Financial Statements for Full Calendar Year 2004', TNK International Limited, 'Consolidated Financial Statements. 31 Dec. 2002'.
35
accounts. regulations. The legitimacy of intra-group transfers is recognized internationally and subject to the anti-avoidance rules.147 For example the Rosneft Consolidated Financial Statements for the years 2003, 2004, 2005 provide: “…the guarantee obligations of OJSC Yuganskneftegaz with respect to the loan described above have become intercompany in nature”148
Transferring funds amounting to 2.8 billion US dollars as credits from the offshore “shell” companies to Yukos and its subsidiaries.
The prosecutors aim to represent the treasury operations, i.e. intra-company loans common for any corporate group, as illegal activities149
The analysis of the Summary of the Charges gives quite evident, but surprising
results:
Yukos as a corporate group has generally complied not only with international
business practice, but with the practices of comparable Russian companies. The
language of the Summary does not show any corporate restructuring transactions
or business operations that cannot be found in the accounts and reports of other
Russian oil giants. The only assumption is, which may be still used by the
prosecutors, that the transfer pricing schemes used by Yukos were so blatant, that
they may qualify as embezzlement.
6. Transfer pricing issues in the Khodorkovsky/Yukos Case
For the “Second Khodorkovsky case/Yukos Money Laundering Case” the prosecutors chose the model of the predicate offence, never used before in the recent history of Russian criminal justice. According to their innovative scheme, all acts of sale of crude from the Yukos’ production companies to the SPVs (“dummy” or “shell” companies, also controlled by Yukos,) at a price which was evidently below the market price, should be deemed as a predicate offence for the further acts of laundering. So, the prosecution says that transfer-pricing sales represent
147 See Colin G. Davis and Daron Gunson, Squires: Tax Planning for Groups of Companies (LexisNexis, 2006) at 1102.
148 Rosneft Oil Company, 'Consolidated Financial Statements Years Ended December 31, 2005, 2004 and 2003 with Report of Independent Auditors', (Moscow: Rosneft Oil Company, 2006), 63 at 52.
149 For example the same loan was provided to Mazeikiu Nafta. See Yukos Oil Company, 'Annual Report for 2002', (YUKOS Oil Company, 2002) at 56. See also Green, 'Transfer Pricing Techniques for Group Treasury Companies'.
36
acts of embezzlement, and as all operations have been conducted under the alleged control of Khodorkovsky and the other members of the organized criminal group, the following operations with oil and funds represent a continuous series of money laundering acts.150 It should be noted that the detailed analysis of the Yukos affair as a whole shows that, initially, the investigators aimed to use the fact that the production companies had actually overproduced oil, to create their “Yukos Money Laundering Case”.151 The offence of over-production, according to Russian criminal case law, could qualify as illegal entrepreneurship, which can be deemed a predicate offence for the further money laundering operations.152
However, the investigators have declined this scheme, as acts of illegal entrepreneurship do not amount to a serious criminal offence in Russia, and the prosecutors have obviously found them not completely suitable for such a significant criminal case.153 As Russian criminal law contains tax crime exception provisions in respect of money laundering offences, the Summary of the Charges does not mention tax evasion issues, describing the schemes used for the alleged corporate tax evasion as schemes designed and used for money laundering.154
The existence of “tax exemption” in Russian Criminal Law may be viewed as a repetition of a typical mistake made previously by other countries. In the earlier attempts to deal at an international level with laundering, explicit exceptions were made for tax offences. Many jurisdictions do not have such a wide category of predicate offences, and exclude tax offences, but now the problem of how to fight the nexus of money laundering and tax evasion is currently being debated at an international level.155
According to conventional understanding, transfer pricing enables a parent company to concentrate profits, to funnel profits to foreign subsidiaries, to transfer profits to subsidiaries located in well-established tax havens, or to simply evade
150 The Summary of the Chargers.
151 Kommersant, 'Third Case of Pavel Anisimov', Kommersant, June 21, 2006, Kommersant.Com, 'Heads of Yukos’s Subsidiary Suspected of Money Laundrying', Kommersant Russia's Daily Online (2006).Khodorkovskytrial.Com - Press Center for Mikhail Khodorkovsky, 'Timeline of Events',
152CCRF, art. 171 and 174. See also V.K. Duynov et al., Comments to the Criminal Code of the Russian
Federation (Moscow: Walters Kluwer, 2005) at art.171, art 174, Alexander Guev, Comments to the Criminal
Code of the Russian Federation for Entrepreneurs (Moscow: Eksamen, 2006) at art.171, art 174.
153 CCRF, art. 171. See also Guev, Comments to the Criminal Code of the Russian Federation for Entrepreneurs
at art.171.
154 CCRF, art . 174.
155 “The reasons are not difficult to guess. Schemes to avoid tax frequently depend upon complex routings of deals without apparent commercial rationale. Money movements under a tax avoidance scheme make money movements that are laundering the profits of crime less easy to detect. If the law of taxation could be altered in such a way as to discourage 'artificial' avoidance schemes then the laundering disposals would no
longer sit amidst their camouflage. This can be used as an argument for general anti-avoidance rules.” Peter Alldridge and Ann Mumford, 'Tax Evasion and the Proceeds of Crime Act 2002 ', Legal Studies, 25/3 (2005), 353-73 at 360-61.
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taxes.156The argument of the prosecutors, regarding the Yukos tax schemes, are based on the following assumptions:
1) The sale and purchase agreement between Yukos- controlled entities were false, as they named Yukos as a purchaser, when it actually was not.
The agreements regarding the purchase and sale of petroleum were
bogus because they contained the false information that OAO NK
YUKOS was a purchaser of petroleum, whereas Khodorkovski, Lebedev
and their friends were perfectly well aware that OAO NK YUKOS was not
in fact a purchaser of petroleum, and that the products of the
petroleum-extracting companies were shipped directly and
independently to Russian and foreign customers157.
2) The price of oil and products was not at market price and was determined by the members of the organized group. It represented only the cost of extracting the raw material and was on average 2-4 times lower than the market price.158
3) The third argument was not expressly reflected in the Summary of the Chargers, but it is seen from the Arbitration Court decisions on the Yukos tax claims and concerns the public auctions,159 conducted by the Company’s production subsidiaries for the oil produced. The actions have been declared sham, as concealing the true nature of the transaction, aimed at sale of the crude to the Yukos-controlled “sham” companies (SPVs) for tax evasion purposes.160
Combining the above argument with the arguments concerning Khodorkovsky’s ultimate managerial position in the Yukos Corporate Group, which allowed him directly and indirectly exercise control under all the entities involved in the allegedly fraudulent schemes, they came to the conclusion that the organized criminal group headed by Khodorkovsky had committed embezzlement of the oil and funds of the production subsidiaries of the company.
Taking into consideration the tremendously complicated and confusing situation with the trading operations of the holding companies in The Russian Federation since their creation and until 2003, several remarks regarding trading operations of Russian holding companies have to be made:
1. Russian holding companies (or, as they are called in the privatization
legislation “vertically integrated companies”) were incorporated as vertical
corporate groups, in which the head holding company quite commonly
156 Toshihiko Shiobara, 'Oversights in Russia's Corporate Governance: The Case of the Oil and Gas Industry', in Shinichiro Tabata (ed.), Dependent on Oil and Gas: Russia's Integration into the World Economy (Slavic Research Center, 2006), 85-115 at 93.
157 The Summary of the Chargers.
158 Ibid.
159 See the scheme N 5
160 See Interregional Tax Inspection N1 v. Yukos (А40-61058/04-141-1510)'.
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owned 50%+1 of the ordinary voting shares.161 So, there were a large
number of minority shareholders in the subsidiaries, who quite rightly
demanded dividends from the production companies where they held
stock.162 It strongly contradicted the very idea of “virtually integrated
holding companies” which had to profitable as consolidated corporate
groups.163 Until 2006 the were no mechanisms for the compulsory buyout of
minority stock, and that put newly established corporate groups in an
ambiguous position, when, on the one hand, they did not want to pay
shareholders-blackmailers who tried to enforce their rights, and, on the other
hand, they had no legal means for the effective compulsory consolidation
of the minority stock at the level of the head company.164
2. The transfer-pricing scheme was usually realized as followed:
a) large-scale oil companies sold oil obtained from their subsidiary oil producing companies to their affiliated companies, or SPVs, registered in domestic offshore, or preferential tax zones, at the price of one-half or one-third lower than the international price;
b) the affiliated companies sold the oil to their subsidiary refineries at the price of two thirds of the international prices, therefore, most profits were accumulated in the affiliated companies registered in domestic offshore or preferential tax zones.165
3. Transfer pricing rules were first introduced in Russia in 1999 and since then the “arm’s length” concept has remained relatively unchanged.166 The Russian transfer pricing rules are mainly contained in articles 20 ("related parties") and 40 ("principles of determining prices of goods [work, services] for tax
161 Iji, 'Corporate Control and Governance Practices in Russia', Black, Kraakman, and Tarassova, 'Russian Privitization and Corporate Governance: What Went Wrong', at 1750-52, Sprenger, 'Ownership and Corporate Governance in Russian Industry: A Survey', at 11-14, Irina Shitkina, Holding Companies: Legal and Corporate
Governance Issues (Moscow: Walters Kluwer, 2006) at 214-21.
162 Dmitry Gololobov and Svetlana Bakhmina, 'Three Stages in Russian Holding Companys' History', Law and
Business, 10 (2001), Iji, 'Corporate Control and Governance Practices in Russia', at 9-12.
163 See Dmitry Gololobov, Company v. shareholder: greenmail resistance strategies (2nd edn.; Moscow: Ustichinform, 2004), at 20-21.
164 See the Federal Law N7 -FZ "On amendments to the Federal Law “On Joint Stock Companies" and other legislative act of the Russian Federation” from January 5, 2006, available at: Law of Russia in English / System GARANT (http://www.garant.ru/nav. php?pid =286&ssid=89&mv=1). See also S. Savchuk and R. Kadikov, Voluntary and Compulsory Buy-out of Shares: Practical Aspects. (Moscow: INKOR, 2007).
165 Shiobara, 'Oversights in Russia's Corporate Governance: The Case of the Oil and Gas Industry', at 93.
166 Ruslan Vasutin and Yekaterina Kosheleva, 'Russian Transfer Pricing Rules: On the Verge of Change', The St.
Petersburg Times (2007).
39
purposes") of the Russian Tax Code.167 The Code provides the Ministry of Tax and Levies with a mechanism known internationally as “price adjustment”.168 Russian Tax Code codifies an arm's length method as the basis for determining corporate income.169 Although these provisions were introduced together with the First Part of the Tax Code, a lack of the judicial practice, the weakness of the general tax administration and general problems in the Russian Federation’s economic system gave birth to a confusing system of statutory willful blindness, where big corporations paid taxes not on the basis of the Tax Code, but on the basis of a special agreement with the Ministry of Tax and Levies, and the Government closed its eyes to the universal application of questionable tax optimization schemes.170
4. The weaknesses in the transfer-pricing legal framework played a huge role in the Yukos tax case, where the tax authorities were forced to apply and further develop a “bad-faith taxpayer” concept171 to penalize the company
167 Svetlana Stroykova, 'Courts Extend Application of Russian Transfer Pricing Rules', International Tax Review (2006).
168 Article 40 of the Tax Code of the Russian Federation prescribes some cases in which the tax authorities have the right to control prices used in transactions. According to Clause 1, Article 40, the prices for taxes are applicable to the prices of goods, works, and services, specified by transaction parties, supposing these prices correspond to the level of market prices. In order to monitor whether this premise is fulfilled, the tax authorities are given the right to check the legitimacy of transaction prices only in the following circumstances: (1) transactions between “interdependent” persons; (2) good exchange (barter) transactions; (3) foreign trade transactions; and, (4) transactions where the level of prices used by the taxpayer for identical goods fluctuates by more than 20 percent in either direction over a relatively short period of time. See the Tax Code of the Russian Federation (Part 1) [hereinafter “Tax Code”], available at: Law of Russia in English / System GARANT (http://www.garant.ru/ nav.php?pid =286&ssid=89&mv=1)
169 Nadia Havard, 'Comparative Analysis of Tax Incentives Provided by the United States, the United Kingdom, and Russia to Domestic and Foreign Businesses.' Alb. L. Rev., 67 (2003-2004), 1159-83 at 1167.
170 Samoylenko, Government Policies in Regard to Internal Tax Havens in Russia at 2-5, Maxim Mironov, 'Economics of Spacemen: Estimation of Tax Evasion in Russia', Working paper (2006), 20 at 1-3, Daniel Treisman, 'Russia's Taxing Problem', Foreign Policy, 112 (1998 1998), 55-66 at 55-64.
171 In the Yukos case, the Constitutional Court confirmed that the notion of a “bad-faith taxpayer” does exist. However, it did not provide a definition. Since then the concept of good faith seems to have been developed for a particular meaning for tax purposes and the courts have started to apply it in practice. Naturally, controversy has arisen. On April 24, 2006, the Supreme Arbitration Court introduced a draft of the Information Letter called “Concerning Circumstances Which Cast Doubt on a Taxpayer’s Good Faith in Connection with the Resolution of Tax Disputes in Arbitration Courts”. The letter offers an open list of circumstances which may cast doubt on a taxpayer’s good faith. In particular, this list includes the following:
• the terms of transactions are not the most beneficial for a taxpayer;
• accounting for transactions does not reflect their economic substance;
• the alienation of assets and subsequent acquisition of rights to those assets.
• transactions between related parties in connection with loans and the sale of goods, work or services with the subsequent offset of mutual liabilities, causing a decrease in tax accruals;
• a taxpayer conducts and accounts for only those operations which are directly concerned with obtaining tax benefits, if the type of activity involved requires that other operations be conducted as well. Ernst & Young, 'Taxpayers’ Good Faith Questioned', Russian Tax Brief (May, 2006), 3-4 at 3-4.
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for tax evasions, instead of adjusting the intra-group resale prices used.172 Some commentators have made attempts to justify the application of the unprecedented concept in the Yukos case:
The short conclusion …. is that the tax claims brought against Yukos are
based on schemes that would be considered blatant tax evasion in most
countries. As is common in blatant fraud or tax cases, there may be a
number of theories available to challenge the illegal behavior. The Russian
Tax Authorities in fact set forth a number of parallel theories for questioning
these tax schemes. The Tax Authorities clearly are using this case (along
with a number of other relatively recent cases) to signal that they will use
various legal tools that have not previously (or very rarely) been used,
although they are explicitly and implicitly built into Russia’s Civil Code, to
prevent classical forms of “abuse of rights” and “bad faith” behavior. The
intent appears to be to introduce a degree of “substance-over form”
thinking into the enforcement of Russian tax law and to reign in some of
the more blatant forms of abuse that have been staples of “doing
business” in Russia in the post-Soviet period. There is little doubt that such
rules, which exist in just about every western jurisdiction in some form and
are built into Russia’s own law, will eventually be applied in practice in
Russia.173
However, an analysis of existing Russian case law shows the only legal concept for challenging the “transfer-pricing” schemes would be for the tax authorities to challenge the pricing in the agreements between the Yukos production company, and to adjust the price paid by the SPVs upward to market rates.174 This would result in a re-computation of the production subsidiary’s taxes, as if it had received market price for its products. However, under this theory, the tax claims would have to be brought against the various Yukos production subsidiaries that sold products at below-market prices, and not against Yukos.175 Therefore, all the taxes
172 The prospective legislative developments drastically change the previous guidelines and bring them more in line with OECD standards. The draft law introduces three new transfer pricing methods – the method of secondary product, transactional net margin method (TNMM), profit split method (PSM) – that shall be applied along with currently existing CUP, subsequent sales method and cost plus method. The priority of methods would be changed as well – CUP would be the preferable method, PSM has the lowest priority and all other methods shall be applied under the best method rule.
Moreover, the new rules provide a detailed description of methods that would permit the elimination of certain loopholes in current legislation. For instance, the draft law finally defines the notions of “regular costs” and “regular profit” required for application of methods., Vasutin and Kosheleva, 'Russian Transfer Pricing Rules: On the Verge of Change'.. Another revolutionary development relates to the definition of ‘related parties transactions’. The Tax Code currently envisages very narrow criteria stipulating that for tax purposes only parties with more than 20 percent direct or indirect capital participation shall be deemed related. Introducing provisions allowing for the conclusion of advance pricing agreements. Svetlana Stroykova, 'Government Focuses on Transfer Pricing', International Tax Review (2007).
173 Clateman, 'Yukos Part Vi: Tax Claims Revisited'.
174 Pepeliaev, Ivlieva, and Khamenushko, 'Opinion Regarding Compliance with Legislation of Inspection Report No. 08-1/1 of December 29, 2003 Issued by the Tax Ministry of Russia'.
175 Clateman, 'Yukos Part Vi: Tax Claims Revisited'.
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of the corporate group imputed to Yukos should have been respectively recalculated. However, the complexity and unpredictable results of this method (the complete recalculation might not have given a figure, sufficient for the forceful sale of the Yukos assets) excluded it from the agenda of the Russian authorities.
5. Russian corporate law generally demands the same “arms-length” approach to the transactions of companies as does Western and international corporate law.176 The special procedure of approving the related parties and major transactions must be respectfully applied to all the transactions inside the corporate groups.177
6. It should be noted that due to the peculiarities of the Russian oil trading system, the application of the “fair market price” rule faced significant problems. As the export capacity of the Russian oil companies was restricted by the physical pumping capacity of the export pipeline, belonging to the state-controlled company “Transneft”, they were allowed to sell approximately one third of the produced crude to overseas consumers.178 The rest of the oil had to be sold on the internal market or refined and sold as products.179 Therefore, there was the “world” fair market price, fixed by the international rating agencies for overseas sales, and the “internal” fair market price for domestic sales.180 The internal market price did not actually exist as there was no public exchange for oil contracts, and the bulk of oil was refined. This phenomenon could easily be explained by political factors: the internal price of oil was deemed a core macroeconomic factor that determined the rest of the internal prices. If it had not been statutory indirectly controlled, the country would have faced a tremendous price rise shock. So, the artificial absence of an internal market price should be understood as state policy, which, of course, suppressed the internal market of oil and encouraged the application of the transfer-pricing schemes.
176 Shitkina, Holding Companies: Legal and Corporate Governance Issues at 351-54, Roswell B. Perkins, 'The FCSM Corporate Governance Code for Russian Companies', Transnat'l Law., 16 (2002-2003), 75-110 at 99-100, Alexander Astapovich et al., 'Corporate Reform and Harmonization of Russian and EU Corporate Laws', in Alexander Astapovich, Thomas Fennell, and Emily Keim (eds.), (London: The National Council on Corporate Governance, 2006) at 114-19.
177 The Federal Law N208 "On Joint Stock Companies" from November 24, 1995, available at: Law of Russia in English / System GARANT (http://www.garant.ru/nav.php?pid=286&ssid=89&mv=1). Articles 78-79, 81-84
178 See The Main Conditions, regulating access to the oil-main pipelines and terminals in sea-ports for oil export
operations. Approved by the Government Decree N 1466 from December 31, 1994, available at: Law of Russia
in English / System GARANT (http://www.garant.ru/nav.php?pid=286&ssid=89&mv=1). See also S Sitnikov, 'Oil
Pipe Transportation Agreements : Theory and Practice ', The Journal of the East Siberia Regional Arbitration
Court 5(2005).
179 Robert Corzine and John Thornhill, 'Oil Price Collapse Threatens Russian Economy', The Financial Times, March 19 1998, Carl Mortished, 'Crude Oil Falls as Russia Lifts Export Curbs', The Times, May 18 2002.
180 In case of Yukos, the free sale price of its subsidiary mining companies exceeded five times the transfer price of their affiliated refineries. Shiobara, 'Oversights in Russia's Corporate Governance: The Case of the Oil and Gas Industry', at 96.
42
7. Both tax and corporate problems made application of the intra-group tax and cash flow optimization schemes in 1996-2003 completely universal. 181 The line between optimization, avoidance and evasion was completely unclear, which made the application of the transfer-pricing schemes, based on the complete disregard of the “substance over form” principle, a must for all big corporate groups.182
8. One of the reasons why transfer-pricing schemes have become less popular, apart from the consequences of the “Yukos Affair”, is merely that amendments have been made to the tax laws. The sales of mining minerals were targets of taxation, until the introduction of the mining tax on mineral resources, integrating a “user fee” on underground resources, a deduction for reproducing minerals and resource bases, and excise taxes on oil and gas, at the beginning of 2002.183 The transfer pricing methods could deduct 16 percent off 24 percent of the profit tax in 2003.184 Nevertheless, it can be concluded that the incentive to underestimate sales has also faded, because in 2002 the rate on taxable profit was reduced.185
The above arguments generally describe the situation that took place in Russia between early 90’s and the beginning of the Yukos case. They provide a foundation on which to understand the reasons why Yukos, like many other production companies, aggressively used transfer-pricing operations incorporated in its tax and cash flow optimization schemes.
Having reviewed the situation in Russia, it makes sense to take a brief look at existing international practice, which considers transfer-pricing within the related groups of a corporation one of the greatest problems in international tax law.186 It is widely recognised, that the arm's length principle, as embodied in the model tax treaties and OECD Guidelines, is universally accepted throughout the world.187 This principle permits national tax authorities to adjust the accounts of enterprises under common control, if they consider that “conditions are made or imposed between the two enterprises in their commercial or financial relations, which differ from those which would be made between independent enterprises”, in order to
181 Ibid. at 95-101.
182 The Economist Intelligence Unit Ltd., 'Russia Risk: Tax Policy Risk', The Economist Intelligence Unit Ltd. (2007), 4, Samoylenko, Government Policies in Regard to Internal Tax Havens in Russia.
183 Shiobara, 'Oversights in Russia's Corporate Governance: The Case of the Oil and Gas Industry', at 97.
184 Ibid. at 93.
185 In addition, since 2004, regional preferential privileges concerned with the profit tax have been restricted within 4 percent points of 24 percent. Ibid. at 97.
186 Elizabeth Chorvat, 'Forcing Multinationals to Play Fair: Proposals for a Rigorous Transfer Pricing Theory', Ala. L.
Rev. , 54 /1251-1280 (2002-2003) at 1252.
187 Robert Ackerman and Elizabeth Chorvat, 'Modern Financial Theory and Transfer Pricing', Geo. Mason L.
Rev., 10 (2001-2002), 637-74 at 640. See also Frances M. Horner, 'International Cooperation and Understanding: What's New About the OECD's Transfer Pricing Guidelines', U. Miami L. Rev., 50 (1995-1996), 577-96, John Neighbour and Jeffrey Owens, 'Transfer Pricing in the New Millennium: Will the Arm's Length Principle Survive', Geo. Mason L. Rev. , 10 (2001-2002), 951-58.
43
reallocate profit which would have accrued but for those conditions.188 By incorporating the separate entity concept, the arm's length principle places related and unrelated enterprises on an equal footing for tax purposes, avoiding the creation of tax advantages or disadvantages that would otherwise distort the relative competitive positions of either type of entity.189 In practice, however, transfer-pricing disputes have entailed negotiation and bargaining over the “fair profit allocation”. Both officials and business representatives, have continually tended to reject the possibility of developing explicit criteria for profit allocation, and have preferred to focus on price adjustments.190
The experience of tax authorities reveals the difficulty of allocating profit by means of price adjustments. The British HM Revenue and Customs, which strongly advocated the separate accounting approach, uses negotiation to agree a reasonable basis for pricing.191
U.S. transfer-pricing is based on the arm's length standard and implies the separate entity concept.192 It is recognized that the U.S. transfer-pricing rules are inconsistent with modern business models, which organize by process rather than by function.193In contrast with the UK approach, in the USA the procedures have become increasingly juridified,194 since the politicisation of the problem in the
188 S Picciotto, 'Transfer Pricing and Corporate Regulation ', in Mc Cahery En Al (ed.), Corporate Control and
Accountability. (Oxford: Clarendon Press, 1992) at 398, Eduardo Baistrocchi, 'The Transfer Pricing Problem: A Global Proposal for Simplification', Tax Law, 59 (2005-2006), 941-80 at 952-54, Chorvat, 'Forcing Multinationals to Play Fair: Proposals for a Rigorous Transfer Pricing Theory', (at 1255.
189 OECD, 'The OECD Guidelines for Multinational Enterprises: Policy Brief', OECD, (June 2001 2001), 1-8, Organisation for Economic Co-Operation and Development, Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations (1995) at 1.7.
190 Picciotto, 'Transfer Pricing and Corporate Regulation ', at 398.
191 Ibid.
192 There are three traditional specified transactional methods set forth in the U.S. transfer pricing regulations: comparable uncontrolled price (CUP) (or, in the case of intangibles transfers, comparable uncontrolled transaction (CUT)), cost-plus, and resale price. The CUP method uses prices in comparable transactions between or with unrelated third parties. The cost plus method is used when the costs incurred for supplying a product are known. The transfer price is then determined by adding a reasonable markup to the cost. The resale price method is used when the ultimate sales price to arm's length third parties is known. Here, the transfer price is determined by reducing the price by a reasonable markup. Robert T. Cole, Practical Guide to
U.S. Transfer Pricing, ed. 2d (Matthew Bender, 2001) at para. 7.01.
193 Ackerman and Chorvat, 'Modern Financial Theory and Transfer Pricing', at 637.
194 On the procedures, also initiated by the US authorities and on which considerable stress is being placed, is for 'advanced pricing agreement* (APAs). This allows, at the taxpayer's initiative, the negotiation of an agreed transfer pricing method which the tax authorities would accept, and which might remain valid, providing there is no change in the key parameters identified in the agreement, for several years. Since the procedure requires the same effort and level of disclosure as a contested audit, it is likely to be initiated only by firms at high risk of tax scrutiny. However, political pressure has led to a much more active programme of examination of TNCs, especially of foreign firms entering the US market which are popularly suspected of not playing fair. Picciotto, S. (1992). Transfer Pricing and Corporate Regulation Corporate Control and Accountability. Mc Cahery en al. Oxford, Clarendon Press.
44
1960s.195 Approved in 1968, the regulations on transfer pricing defined five categories of transaction (for loans, services, leasing, intangibles, and tangibles), and specified rules for determining prices for each.196 Furthermore, for each of the five categories of transactions they specified that the primary test of price should be the “comparable uncontrolled price” (CUP), the price that would have been charged by uncontrolled parties dealing at arm's length.197 Regardless to the sophisticated legislative efforts, the problem of transfer pricing in multinational companies in the US is still on the agenda,198including proposals to use criminal legislation for ensuring the effective enforcement.199
So, although the existing international practice shows the importance and actual incontestability of the arm's length principle, the legislative and political history of anti-transfer pricing rules worldwide clearly demonstrates that they need a comprehensive and balanced approach, which inevitably includes element of negotiation between a taxpayer and the tax authorities. The Yukos case does not set up an example of such approach.
Regardless to the legal, economic and political arguments, either justifying the application of the Yukos transfer pricing schemes, or declaring them an essential element of blatant tax evasion, qualification of these schemes as a form of embezzlement raises significant questions. Russian legislation and case law consider, as embezzlement, 200 an act of personal misappropriation or transfer to a third person without any compensation of the assets, which have been entrusted to the offender. The assets may also be under his control due to other legitimate reasons (agreement, order, etc.) and he could exercise the rights of possession, management or delivery in respect of these assets. The replacement of assets for less valuable ones shall also be considered as embezzlement.201 So, according to the commentators the corpus delicti in the offence of embezzlement should involve the following characteristics:
1) The offender has the legal and official control over the certain assets (he does not hold them illegally). This control may originate from an agreement, power of attorney or orders of the owner.
195 Michael C. Durst and Robert E. Culbertson, 'Clearing Away the Sand: Retrospective Methods and Prospective Documentation in Transfer Pricing Today', Tax L. Rev., 57 (2003-2004), 37-136 at 47-58.
196 Ibid. (at 52-58.
197 Picciotto, 'Transfer Pricing and Corporate Regulation ', at 399.
198 See Durst and Culbertson, 'Clearing Away the Sand: Retrospective Methods and Prospective Documentation in Transfer Pricing Today', (at 134-35. Steven Harris and Paul B. Burns, 'Transfer Pricing in the Post-Enron World', Int'l Tax Rev. , 13 (2002), 30-31.
199 James D. Jr. Harmon, 'Rico Meets Keiretsu: A Response to Predatory Transfer Pricing ', Vand. J. Transnat'l L. , 25 (1992-1993), 3-36.
200 Embezzlement by means of the large-scale misappropriation. The Summary of the Chargers.
201 The Resolution of Plenum the Supreme Court of the Union of the Soviet Socialist Republics of 11 July 1972 N 4 “On the court policy on the theft (embezzlement) of the statutory and public property”, available at: Law of Russia in English / System GARANT (http://www.garant.ru/nav.php?pid=286&ssid=89&mv=1)
45
2) The offender has a legal right to alienate the assets to himself or transfer assets to a third party.202
Therefore, this legislative and case law approach in application to Khodorkovsky/Yukos case raises two questions:
1) Can a chief executive officer or a “shadow director” (or the actual controlling person, not depending on his formal status) of the managing company be considered as a “controlling person” in the meaning given to its definition by article 160 of the Russian Criminal Code and Russian Case Law?
Taking into consideration the language of the Summary of the Charges, the position of the commentators203 and the judgments, brought in the “First Khodorkovsky case”,204 this question is highly likely to get a positive answer.205 However, this decision will set a precedent for other Russian corporate groups and may urge them to change their management structures.
2) Can transfer pricing transactions, conducted for the benefit of the parent company that fully owns its subsidiary, be considered as damaging for the subsidiary?
This question is important, as in Russian case law, the responsibility of the parent company for the damages caused to its fully owned subsidiary, as a member of a multi-level corporate group, is not clear.206 Nevertheless, Article 71 of the Law “On Joint Stock Companies” points out that either an individual manager or a managing company owes same general fiduciary duties of loyalty and care to the
202 Duynov et al., Comments to the Criminal Code of the Russian Federation at art. 160.
203 Guev, Comments to the Criminal Code of the Russian Federation for Entrepreneurs at art. 160. V.B. Lyandres et al., Law and Business: Mutual Responsibilities: Comments to the Legislation eds V.M. Zuikov and E.N. Renov (Moscow: Legal firm "Contract", 2004) at art. 160, V.D. Larichev and D.V. Kudryavstev, 'Characteristics of the Offences, Committed by Chief Bank Officers ', Advocat (2-3, 2005), Valeri Belik, 'Cfo’s Criminal Risks', Financial
Director (2006), 1.
204 That time he was sentenced for “embezzlement of other people’s property entrusted to the guilty party in large scale” regarding the Apatit trading scheme. See Russian Federation v. Mr. M.B.Khodorkovsky, Mr.
P.L.Lebedev, A.V.Kraynov (Judgement), at at14-19. However, later, the Moscow City Court stated in the its cassation decision that “the apatit concentrate has not been entrused to Khodorkovsky and Lebedev”. See the Lebedev’s Legal Team Supervison appeal to the Presidium of the Moscow City Court of December 26,
2005, availaiable at: <http://www.platonlebedev.ru/docs/default.asp?sid=2&mid=1478&open=1# doc> This decision may create certain problems for the second case, but it is evident that this inconvenient precedent can be easily overruled.
205 In the “Apatit episode” in the “First Khodorkovsky Case” the Court used the formula “Mr. M.B.Khodorkovsky, Mr. P.L.Lebedev acting as members of the organized group fraudulently misappropriated shares in OAO ‘Apatit’ and, holding the major equity of the above company, acquired the right to strategic and day-today management thereof by electing their subordinates to the leading positions with OAO ‘Apatit’, i.e. the Board of Directors and Director General”. Taking into consideration the language, used in the Summary of the Chargers, the similar approach will be used in the second “Khodorkovsky case”. Ibid. at 14. See also Figure 4 on the managing position of Khodorkovsky.
206 Shitkina, Holding Companies: Legal and Corporate Governance Issues at 328, 412.
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company they manage 207 as they owe in the UK and US law.208 Article 6 of the Law also fixes the responsibility of the parent company whose instructions have led to the insolvency of its subsidiary.209 The US law would give a similar answer to this question by using “separate entity”, “limited liability” and “piercing veil” doctrines. 210
Concluding the part on the Yukos transfer pricing problem, it is important to stress that all Russian oil companies used different transfer pricing schemes which varied in the level of prices, types of SPVs and other aspects. The new precedent, which is likely to be set in the new Khodorkovsky/Yukos case, is sure to create a new legal threat for all Russian production majors, which will exist at least for seven years, and could be used as a effective tool in a new wave of politically motivated redistribution of big property and industry in Russia.
7. Conclusion
It is not surprising that even a brief analysis of the Yukos’ corporate structure and business operations in comparison with the recently brought money laundering charges, shows that similar allegations based on the creative application of the money laundering legislation could be effectively brought against any corporate group in Russia. The important point is that it could be done in full compliance with the current Russian anti-money laundering legislation, which is regarded by the international experts to be a consistent part of the international anti money laundering framework. This situation simultaneously raises several problems:
1. The problem, which stems from the application of national anti-money laundering legislation, adopted in compliance with recent international guidelines, to multinational corporate groups, can be better seen in examples originating from countries with transition economies. Multinational business groups from such countries aim to conquer the international securities markets, showing an unprecedented level of production and capitalization growth. The majority of such corporations, acting primarily in the oil, gas and metal sector, demonstrate a high level of compliance with the most advanced international corporate governance, accounting and other standards, retaining the best
207 The Federal Law N208 "On Joint Stock Companies" from November 24, 1995, available at: Law of Russia in English / System GARANT (http://www.garant.ru/nav.php?pid=286&ssid=89&mv=1). See also Perkins, 'The FCSM Corporate Governance Code for Russian Companies', at 96-97.
208 Elena Makeeva, 'Legal Collisions inside Holding Companies ', Consaltant, 5 (2005), Alexandr Molotnikov, Accountability in Joit Stock Companies (Moscow: Walters Kluwer, 2006).
209 Shitkina, Holding Companies: Legal and Corporate Governance Issues at 316-329.
210 See Phillip I. Blumberg et al., Blumberg on Corporate Groups, 5 vols. (Second edn., 1; New York: Aspen, 2005-2007) at Part 1, Part 2. Phillip I. Blumberg, Problems of Parent and Subsidiary Corporations under Statutory
Law Specifically Applying Enterprise Principles, ed. Kurt A. Strasser (The Law of Corporate Groups Series; Boston, Toronto, London: Little, Brown and Company, 1992) 1090, Kurt A. Strasser, 'Piercing the Veil in Corporate Groups', Conn. L. Rev., 37 (2005), 637-66. Strasser, 'Piercing the Veil in Corporate Groups', E. Merrick Dodd, 'Evolution of Limited Liability in American Industry: Massachusetts', Harv. L. Rev. , 1351 (1947-1948), 61-88, Robert
Charles Clark, 'The Regulation of Financial Holding Companies', Harv. L. Rev., 92 (1978-1979), 787-863.
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consultants, lawyers and auditors, available on the market, who assist the companies’ shares to become “blue chips”. 211 However, the Yukos case shows the general vulnerability of such compliance. The company, known in the international business community as a leader, which set standards for Russian corporate governance in transition, within months became an example of the most outrageous corporate collapse in recent Russian corporate history. This case puts on the international agenda the question of whether or not advanced international corporate standards, even when meticulously applied by companies from the countries with transition economies, can protect international investors from unexpected scandals and losses. It also raises the question of what role of the anti-money laundering legislation may play in the promotion of such scandals.212
2. The Yukos case has already given birth to a number of unprecedented decisions and is still creating precedents for international case law. 213 More news is expected from the ECHR, where at least six Yukos-related applications have been filed. There are two main questions which are still outstanding and have to be addressed in the Yukos case: the role of the gatekeepers, including primarily the international auditors, in the collapse of Yukos, and the political motivation and its significance for corporate cases, such as the Yukos case, where the criminal and corporate tax evasion allegations were completely interrelated and used, not only for the attack on the individuals, but also as an attack on their economic wealth, which represented a danger for the existing political regime. The answer to the second question does not seem as evident as some experts are eager to represent it. The position of Amnesty International, which has refused to declare Khodorkovsky as a political prisoner, leaves a lot of room for further discussion and stresses the importance of the ECHR position. The judicial battles, unfolding around the PwC role in the
211 PricewaterhouseCoopers, 'IPO Watch Europe: Review of the Year 2006', in PricewaterhouseCoopers (ed.), IPO Watch Europe (London, 2007), 28, Arkady Ostrovsky, 'Russia's IPO Rush ', <http://www.fcsm.ru/eng/document.asp?ob_no=18520>, accessed April 20 2007.
212 Taking into consideration the growing number of Russian companies’ IPOs, especially in London, the problem is now how to protect international investors from new corporate disasters. Overregulation and overwhelming control may led to not only to the uncontrollable migration of issuers from one stock exchange to another, as has already happened with New York and London, but to de-listings as has happened with Tatneft. See Tatneft, 'O.A.O. Tatneft Announces Notice to NYSE Re Delisting', (updated August 18, 2006 ) <http://biz.yahoo.com/iw/060818/0155369.html>, accessed April 17 2007. In this situation, while the Russian Government makes attempts to promote Russian IPOs for Russian companies, the choice for the western regulators will be a difficult one: whether to introduce new regulatory regime or lose Russian issuers. See Mosnews, '150 Russian Companies to Hold IPO over Two Years — Stock Market Specialist', MosNews.Com (2007), Charles Ganske, 'Russian IPOs - Week 15 of 2007 Reviewed', <http://www.russiablog.org/2007/04/russian_ipos_week_15_of_2007_r.php>, accessed April 20 2007, Maria Ermakova, 'London and Moscow Exchanges to Cooperate on Ipos ', Herald Tribune (2006).
213 See, e.g. John Pottow, 'Greed and Pride in International Bankruptcy: The Problems of and Proposed Solutions to "Local Interests"', Mich. L. Rev, 104, (2005-2006), 1899-950, Matteo Winkler, 'Arbitration without Privity and Russian Oil: the Yukos Case before the Houston Court', U.Pa.J. Int'l Econ.L, 27 (1), (2006), 115-53
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Yukos case in Russia, are unlikely to come to an end for at least a couple of years and have a good chance of migrating to the US courts. Nevertheless, answers to these two questions would permit a full stop to the Yukos story and answer a principal political question: What did Yukos and its shareholders actually represent? An “organized corporate criminal group” of tremendous complexity and power or an extremely powerful group of individuals who were regarded as a danger to the interests of Putin’s ruling elite?
3. The Yukos case has unveiled the possible dangers of money laundering legislation in hands of transition economy governments with and weak democratic traditions. Even if the anti-money laundering laws of the country comply with international pronouncements to the letter, there are still a number of ways to use they can be used with the sole purpose of pressing political opponents. In the Yukos case, money laundering charges were interrelated with the charges of corporate tax evasion, which, taken separately, in Russia, represent a rather weak tool for suppressing the political opponents, but are perfect for the confiscation of assets. This allowed the investigators to represent the activities of the giant corporate group as a process of committing organized criminal offence, which continued for more than seven years.
