Normally, I wouldn’t think twice about reading a book about
high finance. But this is no ordinary
book. The Boston Globe’s review of Red Notice: A True Story of High Finance,
Murder, and One Man’s Fight for Justice “a tale of an accidental activist.” This is a very accurate description of Bill
Browder’s tale of Russian corruption and murder. A “red notice” that gives the book its title is
a tool a country uses to let other countries know they wish to arrest a person
with an eye toward extradition. It is a
tool that Vladimir Putin’s regime uses to silence its critics outside of
Russia. The custom is this – if a
country issues a red notice, countries that participate in Interpol [which is every
country except North Korea] are obliged to honor the wishes of the requesting
country. The police don’t have to arrest
the subject of a red notice, but countries cut the individual in question off
from their bank accounts and, in theory, the entire global financial system.
The book tells of Browder’s story. His grandfather, Earl Browder, was a
Communist who ran for President of the United States twice [1936 and
1940]. Bill Browder himself was the son
of left-wing academics. But somehow,
this son of academics with Communists in his family closet was interested in
pursuing a life in business. He worked
for Bain Capital and the Boston Consulting Group. it was at the latter group that he expressed
an interest in making some kind of business mark in Eastern Europe, a place
where his Communist grandfather had spent a lot of time. Soon after beginning work in the London offices
of BCG, the Iron Curtain crumbled. There
would be opportunities galore to help ex-Communists become capitalists.
Later, as an employee of Salomon Brothers, he found many
opportunities for foreign investment in Russia.
the Russian government had decided to give away most of the state’s
property to the people. The government was going about this in a number of
ways, but the most interesting was something called voucher privatization. The Russian government granted each citizen
one privatization certificate. These
certificates were exchangeable for shares in Russian companies. And the companies for which the shares were
literally being given away were very undervalued. One of the higher-ups at Salomon Brothers got
wind of what Browder found about Russian investment opportunities, and decided
to drop lots of money in Russia. Soon
Salomon Brothers became the owner of $25 million worth of the most undervalued
shares that had ever been offered anywhere in history. Having made this mark at Salomon Brothers,
Browder decided the time was right to form his own company, Hermitage Capital.
The book starts with a deportation. Bill Browder was the founder and CEO of
Hermitage Capital. Since its founding in
1996, Hermitage Capital made a lot of money for a lot of people. In 2000 the firm had been ranked as the best
performing emerging-markets fund in the world.
In November 2005, Browder had taken a flight from the United Kingdom
[his adopted home] to Moscow, where his company managed approximately $4.5
million worth of assets. His main
approach to investing had been shareholder activism. In Russia that meant challenging
the corruption of the oligarchs, the twenty-some-odd men who were reported to
have stolen 39 percent of the country after the fall of communism and who
became billionaires almost overnight.
The oligarchs were stealing from their own companies, and Browder made
it his mission in life to expose corruption among these Russian oligarchs in
order to do right by his investors.
Flights from London to Moscow were routine for Browder, but
this flight in November 2005 was different – he was denied entry into
Russia. He was sent back to whence he
came – London. Browder tried to find out
why he was suddenly persona non-grata
in a country he routinely visited. At
first, he thought it was some bureaucratic screw-up. Then he was told the Russians refused entry
into their country on the grounds of “national security.” Browder made a lot of enemies in Russia, but
as long as those enemies [the aforementioned oligarchs] were also enemies of
Vladimir Putin, Browder could crusade against corruption in Russia to his heart’s
content. After the arrest and conviction
of Mikhail Khodorkovsky, then Russia’s richest man and an opponent of Vladimir
Putin, Browder continued to name and shame the rich people who were
kleptocrats. Unbeknownst to Browder,
these kleptocrats were “friends of Vladimir”.
Browder crossed a line he didn’t know existed. Soon the Russian FSB wanted to deprive
Hermitage of all of its assets.
Who was Sergei
Magnitsky, and what was his “crime”?
Sergei Magnitsky was the head of the tax practice at law firm of Firestone
Duncan. He was an expert on Russian tax law. Browder described his knowledge as “encyclopedic.” After Browder pissed off the wrong people, he
was being investigated [and eventually charged with] tax fraud. Bill Browder retained his services, and in so
doing Magnitsky uncovered $230 million of tax fraud involving some of the
companies stolen from Browder’s firm, Hermitage Capital. He discovered that some of Hermitage’s
companies had been “stolen”. The new “owners”
of the stolen companies tried to get rebates of taxes paid by the Hermitage
companies before they were stolen. These
rebates were paid.
How does one “steal” a company? The police raided Hermitage’s offices, seized a ton of
documents, and then used a convicted killer to fraudulently re-register their
companies. The police took the company’s
original seals, certificates of ownership, and registration files. Once stolen, the new owners could act just like
any other owners of a company. They could run it, liquidate it, take its
assets, relocate it. After that was
accomplished, Hermitage became victims of what is called a “Russian raider
attack.” These typically involved
corrupt police officers fabricating criminal cases, corrupt judges approving
the seizure of assets, and organized criminals hurting anyone who stood in the
way.
What happened to
Sergei Magnitsky? After exposing the
largest case of tax fraud in Russia’s history, Sergei Magnitsky was arrested by
Russian police. The charge – tax fraud. In November 2008, Russian police arrested
Magnitsky. He didn’t think the Russian
authorities would do anything to him because he hadn’t done anything
wrong. He was wrong. The same people that he discovered were
defrauding the Russian people were the same people investigating his case. During his detention, he was denied
bail. The Russian Interior Ministry
fabricated a “report” that Magnitsky had applied for a UK visa and had bought
an airplane ticket to Kiev, and so he was labelled a flight risk. He was refused any contact with his
family. He was subject to terrible
living conditions. He nearly froze to
death in his cell. As his detention
dragged on, Magnitsky got very sick. The
doctors where he was detained diagnosed him with pancreatitis, gallstones, and
cholecystitis. A week before he was to
undergo an ultrasound exam, he was moved to another facility that was not
equipped to handle illnesses like those that afflicted Magnitsky. He asked for medical treatment but was
refused. They deliberately withheld
medical treatment from him.
On October 14, 2009, he submitted a formal twelve-page
testimony to the Interior Ministry in which he documented the full extent of
the financial fraud. He provided names, dates, and locations. On November 12, 2009 Magnitsky finally had
his day in court. He first read
his complaint about not receiving adequate medical care. The judge rejected it.
He then read his complaint about the fabrication of evidence in his case file. The
judge rejected this as well. As he began to read the complaint about his false
arrest, the judge cut him off midsentence and rejected it too. In total, she
rejected more than a dozen of Magnitsky’s complaints. After his hearing was over, Magnitsky’s medical
condition became critical. He was
transferred to a place called Matrosskaya Tishina to be treated. But instead of being taken to the medical
wing, Magnitsky was taken to an isolation cell and handcuffed to a bed. Eight guards in full riot gear entered the
cell and beat Sergei Magnitsky to death.
The “official” version of Magnitsky’s death was that he died of “heart
failure, with no signs of violence.”
Executive Inaction
vs. Congressional Action. Throughout
the Obama Administration, the President was rarely hesitant to take executive
action to remedy a problem when faced with Congressional inaction. In the case of Sergei Magnitsky’s murder by
Russian police, the script was flipped.
When Bill Browder visited the State Department’s Office of Russian
Affairs, he suggested the State Department use something called Proclamation
7750 against those Russian officials implicated in Sergei Magnitsky’s
death. Created during the Bush
Administration in 2004, Proclamation 7750 allows the State Department to impose
visa sanctions on corrupt officials.
Since the fall of Communism, corrupt Russian officials travelled across
the globe, spending money like it was their last days on Earth. Restricting travel for these individuals
would get the Kremlin’s attention. But
when presented with this option, the State Department balked. They didn’t want to upset the apple
cart. It was more important for them to
document the Magnitsky problem that to actually do anything about it.
Browder approached Senator Ben Cardin [D-MD] with the details
of the Magnitsky case. Sen. Cardin was
chairman of the US Helsinki Commission, an independent government agency whose
mission is to monitor human rights in former Soviet Bloc countries. Once Browder gave Sen. Cardin all the details
of the Magnitsky case, he pledged to provide any and all support to Browder’s
efforts to sanction the Russians. Sen.
Cardin wrote to Secretary of State Clinton, asking her to invoke Proclamation
7750. Attached to the letter was the
list of the sixty officials involved in Sergei’s death and the tax fraud, and
next to each name was his or her department affiliation, rank, date of birth,
and role in the Magnitsky case. The
State Department ignored Sen. Cardin’s letter.
Browder then testified before the House Human Rights
Commission. Rep. Jim McGovern [R-MA] chaired
the commission. After he heard the story
of Sergei Magnitsky, he decided to up the ante.
He promised that not only would he support Sen. Cardin’s efforts on
Magnitsky’s behalf, he would introduce legislation to codify the contents of
Sen. Cardin’s letter to Secretary Clinton, and to make Obama say “no” during an
election year. Sen. Cardin and Rep.
McGovern worked together on the Magnitsky Act.
Sen. Cardin told Browder he needed some Republican co-sponsors for the
draft bill to go anywhere. Thus cued,
Browder got a meeting with John McCain, who agreed without hesitation.
Context: The effort to pass the Magnitsky Act came in
2012, an election year. During one
presidential debate, Mitt Romney was asked what he considered to be the United
States’ biggest geopolitical threat.
Without hesitation, he answered “Russia”. President Obama retorted “the 80s called, and
they want their foreign policy back.” If
the Obama Administration supported passage of the Magnitsky Act, it would be
admitting the “reset” policy was a failure.
The last thing any political
campaign wants to do is to admit failure to anything. But still they resisted. However, the Obama Administration wanted to
repeal the Jackson-Vanik amendment so that American businesses can be
competitive in Russia when it became part of the World Trade Organization. But he needed help from Congress. Since Jackson-Vanik was still public law,
President Obama couldn’t unilaterally get rid of it – he needed Congressional
help. He was told in no uncertain terms
that if he didn’t support the Magnitsky Act, he wouldn’t get what he wanted
regarding Jackson-Vanik. John Kerry, who
chaired the Senate Foreign Relations committee, tried to stonewall its passage
– he wanted to succeed Hillary Clinton at Foggy Bottom. But once the Administration heard of the quid
pro quo [I’ll give you Jackson-Vanik repeal for support for Magnitsky], Kerry’s
stonewalling stopped. The Magnitsky Act
passed both houses of Congress with overwhelming [veto-proof] majorities. President Obama had no choice but to sign it
into law, which he did in December 2012.
How did Vladimir
Putin react? Not well. The Magnitsky Act is a source of extreme
resentment by Putin. But he’s really
pissed because the law penalizes those whom he allows to continue their acts of
corruption without any consequences. He’s
been trying in his own way to get the Magnitsky Act repealed. But so far, the only concrete “retaliation”
has been to ban American families from adopting Russian children. One other action taken by Russia – they put a
dead man on trial. In March 2013, Bill
Browder and Sergei Magnitsky [who had been dead since November 2009] were tried
for tax fraud. Not even Stalin put dead
people on trial. Of course, the two were
found guilty. Browder was sentenced in
absentia to a nine-year prison term.
Though not covered in this book, Russian lawyer Natalia Veselnitskaya met with Donald Trump, Jr. at Trump
Tower to lobby for the repeal of the Magnitsky Act. Since the Magnitsky Act was enacted, Vladimir
Putin has made its repeal one of his top foreign policy priorities.
Browder had the last laugh.
“We found their Achilles Heel. Following
the money and freezing the money is by far the most effective tool there is
when dealing with a kleptocracy.” Since
the Magnitsky Act became law, other countries have followed suit. Among the most recent, Canada’s Justice for
Victims of Corrupt Foreign Officials Act became law on October 19th
of this year. Putin’s reaction was "the
issue is simply used for fanning anew anti-Russian hysteria." he US Magnitsky Act has since been broadened
to be world-wide.
Score one for the good guys…
