An absolutely epic piece in Esquire reminded me of something important. Esquire compiled a ranking of Russian businessmen by the number of companies they had founded HOW THE RANKING WAS COMPILED The ranking was based on data on the number of companies registered in each participant’s name. The information was taken from the Unified State Register of Legal Entities (EGRUL) and rulings by commercial courts in cases involving tax violations. The ranking also lists the number of companies in which the person in question was registered as CEO. These entrepreneurs lead very secretive lives, so biographical information was drawn from testimony given in court proceedings, tax audits, and criminal cases. The place of residence listed was the registered address, which does not always match the actual one. Although some of the people listed are dead, they continue to engage in active business activity and were therefore included in the ranking.
At number two is the truly remarkable “entrepreneur” Baeva, whom many of you will remember from our high-profile “Transneft case.”
Put simply, Esquire went ahead and compiled a ranking of money-laundering shell companies used for siphoning off cash, cash-outs, and moving funds to offshore entities and foreign bank accounts. Why this ranking was put together by Esquire magazine rather than the so-called FSB, Bastrykin, or Ivanov, who was once again fighting corruption today by saying various words with his mouth, is unclear. Or, on the contrary, perfectly clear. Take your pick. Anyway, what Esquire reminded me of was the fairly sensational interview with former Bank of Russia chief Ignatyev, who, right before stepping down, said things that make your hair stand on end:
— Is everything really explained solely by the poor investment climate? — Of course, there may be other explanations for this phenomenon—additional ones, though not alternative ones. In recent years, the volume of overseas real-estate purchases by Russian citizens has risen sharply. In 2011, that figure exceeded $9 billion. Most of the property is bought in countries with favorable climates: Spain, Montenegro, Bulgaria, and so on. Perhaps what matters for the movement of private capital is not only the investment climate, but simply the climate. It also appears that Russia has begun a generational смена among business owners. The people who built their businesses in the early 1990s are gradually stepping aside, selling their businesses to new owners—usually Russians—and investing the proceeds not only in Russian assets but also in foreign ones. These are my personal reflections. Some capital outflow may also have been driven by the shift to a more flexible ruble exchange rate. Asset holders increased their currency diversification. But I would especially like to note the balance-of-payments category “dubious operations,” which in 2012 amounted to $35 billion and was included in the financial account and in net private capital outflow. — What are these dubious operations? — In the balance of payments, the Bank of Russia classifies as dubious operations mainly payments by Russian organizations to nonresidents where the stated purpose clearly does not match the real one. In such cases, tax law is definitely being violated. For example, a Russian company—usually an LLC with obvious signs of being a fly-by-night shell company—regularly receives payments into its accounts at Russian banks, including VAT, from a number of Russian counterparties, supposedly for goods delivered. Then all incoming funds are converted into foreign currency and transferred to foreign banks, to the accounts of offshore companies, supposedly as payment for securities. The company pays no taxes at all, or only token amounts. To supply goods, a company must either produce them or purchase them. Yet the firm makes no payments for goods, raw materials, or electricity. A few months later, it stops using its bank accounts altogether. Clearly, no goods were ever delivered. That is the simplest example. Much more sophisticated schemes are also used, involving large numbers of front companies, many banks, and long chains of payments. In every case, at some point in the chain there is a “VAT break”—that is, one company receives money from payers including VAT, but transfers funds to its own counterparties without VAT and pays no taxes at all, thus clearly violating tax law. It is possible to determine the original source of the money and identify the ultimate beneficiaries, but only in the course of a criminal investigation. — What are the real purposes of such operations? — They may be payments for drug shipments or other goods prohibited from being imported into Russia. They may be payments for gray-market imports. Such operations belong to the current account of the balance of payments. They may also be bribes and kickbacks to officials, with the money ultimately transferred to foreign bank accounts under their control. They may also be kickbacks to procurement managers in large private companies with ineffective internal controls. They may be tax-evasion schemes. The Bank of Russia has accumulated substantial experience in detecting them: in 2012, such operations totaling $49 billion were identified. The relevant information is sent to Rosfinmonitoring (Russia’s financial intelligence service), the Federal Tax Service, and law enforcement agencies. Of that amount, $14 billion we assigned to the current account (for example, payment for gray imports); that figure does not appear directly in the balance of payments. The remaining $35 billion we included in the financial account and in capital outflow. This represents an increase in foreign financial and other assets held by Russian residents, accumulated as a result of shadowy, illegal activity. I estimate the damage to the budget system from such operations at roughly 30% of the total flow of dubious operations—around 450 billion rubles a year. If we add domestic cash-out operations organized by the same people, I think the total damage to the budget system exceeds 600 billion rubles a year. — And are all dubious operations carried out using front companies, so-called fly-by-night firms? — Fly-by-night firms are simply a scourge of our economy. To understand the scale of the problem, let me give a few figures. There are 3.9 million “active” commercial organizations registered with Russia’s Federal Tax Service, of which 3.6 million are LLCs. The number of genuinely active organizations—that is, those making at least some payments through the banking system—is about 2 million. The rest—roughly half, apparently—are waiting for their moment. Of the organizations making payments through the banking system, 11% pay no taxes at all, and another 4–6% pay only token amounts. ... — So what should be done? How do we fight this? — The law drafted by Rosfinmonitoring and submitted to the State Duma by the government must be passed urgently. Among other things, it would give banks the internationally standard right to unilaterally terminate relations with a client conducting dubious operations. We also finally need to impose basic order on the system for registering organizations. I am absolutely certain that a system can be designed that places minimal burden on honest people while creating serious obstacles to the creation of fly-by-night firms. Liability should be introduced for nominal directors who hand over control of a bank account to persons unknown. In addition, our analysis shows that more than half of the total volume of dubious operations is carried out by firms directly or indirectly connected to one another through payment relationships. It creates the impression that all of them are controlled by one well-organized group of individuals. If law enforcement concentrates its efforts seriously, I think those individuals, as well as the beneficiaries of these operations, can be found. After reading such horrifying revelations, one wants to cry out: WHAT?! Mobilize not only the FSB, the Investigative Committee, the Interior Ministry, and Gennady Onishchenko (then Russia’s chief public health official), but even Russia’s only true allies—its Army and Navy! But seriously, jokes aside. The head of the Central Bank, a man who ought to be informed—probably the best informed in this area—while in full possession of his faculties, is telling us that a well-organized group of criminals is operating in Russia and inflicting 600 billion rubles a year in damage on the budget system. Moreover, the head of the Central Bank suggests that this group is also involved in drug trafficking and bribing officials (looking at Esquire’s table, the bribery part is easy to believe right away). Frankly, that is enough information to launch the investigation of the century. But no investigation began (for some reason). And I’m not the only one baffled, by the way. Presumably, as usual, the explanation is simple: they forgot to file a complaint. I mean, everyone’s ready. The Central Bank has prepared the data. The investigators have picked up their briefcases. The FSB special forces have readied those iron contraptions they use to smash doors in. And they’re all standing there, shifting from foot to foot, unable to do anything—because there’s no complaint. * And the Criminal Procedure Code forbids it. Apparently nothing can be done without a citizen’s formal complaint. And now some good news for everyone in the Kremlin who has declared that the “war on corruption is serious”*: a citizen has been found. It’s me (sorry). Here is the complaint to the Interior Ministry. Here is the complaint to the Investigative Committee. Here is the complaint to the Prosecutor General’s Office. They were sent from us on February 25. Add a week for the mail. Add a month for the first response. So the reply should be coming soon (as the publication in Esquire so helpfully reminded me). So stay tuned. Sometime within the next week they’ll mobilize the FSB, the Investigative Committee, the sniffer dogs, and the helicopters. They’ll be looking for the people who steal 600 billion rubles from us every year. The main thing is that the Headquarters for Getting the Money Back must not turn out to be exactly the same as the Headquarters for Sending the Money Out, or that would be awkward.