By John Helmer, Moscow
“It is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God” – Jesus Christ
After the ancient Jewish preachers spoke of improbability as elephants trying to navigate needles, the Christians slimmed down to camels. But there was also the post-gospel interpretation that what Jesus actually meant, in that piece of advice to a nervous rich man, was a gate in Old Jerusalem, which opened after the main gate was shut at night. A camel could only pass through this smaller gate if it stooped and had its baggage removed. A lot of camel bones have been excavated around Jerusalem, but the small gate hasn’t turned up yet.
By contrast, there are plenty of small gates in the Kremlin wall, and plenty of camels who make it through without having to unload their baggage until they get inside. So is there a small gate in Federal Law (FZ) No. 79, which President Vladimir Putin (image left) signed on May 7, 2013?
Here is the official text . Until this law, buying and selling public office, stealing state assets, giving and receiving bribes, were crimes which Russian prosecutors, police and courts enforced only to the extent that they weren’t corrupt themselves. The first innovation of 79-FZ was that instead of attacking the crime at the point of instigation or completion, it went after the proceeds where they were hidden on the other side of the Russian border – in bank accounts and asset holding companies registered in untraceable havens. The second innovation was that the criminal didn’t have to give up his ill-gotten gains, so long as he stayed out of the three branches of government – executive, legislative, judicial – as well the state-appointed managements of state-owned corporations and banks. The third innovation was the creation of a new crime which the weakness of Russian legal concepts of bribery and conflict of interest put out of reach. This isn’t the crime of being on the take, but rather the crime of hiding abroad how much the take is.
The first two articles of the law are clear in identifying the officials who must comply, including their spouses and under-age children; and the assets which must be repatriated if the official wants to keep his post. There is no doubt that the fortune which Deputy Prime Minister Igor Shuvalov collected from Alisher Usmanov and Evgeny Shvidler, is covered . He has announced  he is repatriating the lot.
Suleiman Kerimov (centre), one of two senators representing the republic of Dagestan in the upper house of the Russian parliament, is also covered by the new law. But he has announced he’s keeping his fortune in Switzerland. We’ll come back to that in a moment.
Moscow’s lawyers and accountants claim there is ambiguity in the new law’s term “foreign financial instrument”; for example, whether it includes company shares, and whether jewels, bullion, currency, houses, boats, planes and cars are exempt so long as they aren’t stored in banks, or owned by foreign shareholding companies. According  to an analysis of the legislation by PriceWaterhouseCoopers (PwC), “unfortunately, the Federal law does not define foreign financial instruments for the purposes of applying this Federal law. It seems likely that, with the application of the Federal law provisions, at least securities of foreign issuers, including shares in foreign companies, may be qualified as foreign financial instruments.” A foreign house, boat, plane and car owned directly and titled in the name of the official or his family looks to be exempt and allowable, though the rules require that the official fully discloses their ownership, and if asked, explain how he came by the money to buy them. On the other hand, if these valuables have been bought by a company in which the official holds shares, then the prohibition applies.
Articles 4 to 10 are more or less straightforward in setting out how the officials targeted by the prohibitions must comply, and what powers government enforcers have to compel disclosure.
But there is a joke in Article 5. This sets out how the compliance of officials can be checked or investigated. According to Section 3, “information of an anonymous character cannot form the basis for decision-making on the implementation of checks.” In other words, no whistleblowers are allowed, nor spreadsheets and documents which fall off trucks.
More serious than this joke is Article 3, section 3, for here there is a crucial ambiguity which Moscow specialists in asset management and estates say they cannot resolve. The text of the law says, as clumsily in English as it is in the original: “Trust management of property, which includes investments in foreign financial instruments and the founder of management in which there is a person who in accordance with this Federal law is prohibited to open and have accounts (deposits), to store cash and valuables in foreign banks located outside the territory of the Russian Federation, own and (or) use foreign financial instruments, must be terminated within three months from the date of entry into force of this Federal Law.”
This looks like a prohibition on officials using foreign trusts or other legal entities to act as cutouts between themselves, the ultimate owner or beneficiary, and what they think of as their assets. Blind trusts, as these are understood outside Russia — legal entities managed for a beneficiary without the beneficiary having the right to make buy-sell or other asset decisions – appear to be banned. This too is the interpretation of PriceWaterhouseCoopers: “These individuals are also required to terminate property fiduciary management arrangements, which provide for investments in foreign financial instruments and where the settlor of such fiduciary management is a person to whom the respective restrictions are applied.”
Unlike the Anglo-American law concept of a trust acting for an individual’s benefit, but incorporated to be legally distinct from the individual and to survive the individual’s death, such trusts are missing from the legal codes of Europe. The Russian Civil Code is not unusual in focusing on the ultimate owner or beneficiary, and ignoring the cutouts.
From the point of view of PwC and the people it thinks of as its clients, this is an enormous “risk”. “We believe that there is a risk that under the Federal law the term ‘fiduciary management’ may also imply the transfer of property to a foreign trust or foreign private foundation (even though many reasons can be brought forward related to the differences between the terms of foreign trust, private foundation and fiduciary management as it is understood by Russian legislation). It is important to note that the Federal law prohibits not only to hold but also to use foreign financial instruments. We suppose that this prohibition may also apply to beneficiaries of trusts where assets include securities of foreign issuers, as well as to ultimate beneficial owners in foreign nominee shareholding structures. Hence, there is a risk that those individuals to whom the Federal law applies and who hold foreign companies’ shares through nominees or who are beneficiaries of trusts holding shares of foreign companies may be required to cease such structures.”
Kerimov can’t be a client of PwC if that’s what they think the new law means, even if Uralkali, one of the Russian mining companies Kerimov controls, employs PwC as its auditor. That’s because Kerimov has announced he intends to hang on to his offshore assets by transferring them to a foundation managed by a Swiss trustee he has employed for many years. “Kerimov made a decision the other day to transfer beneficiary rights to his business assets to his charity fund, the Suleiman Kerimov Foundation,” Alexei Krasovsky, Kerimov’s spokesman at the Federation Council, has announced  to the Russian press. “Kerimov decided to transfer his assets to a charity fund so that there could be ‘no questions’ about his status in the wake of the new foreign accounts ban legislation, Krasovsky told RIA Novosti.”
The president of this foundation  is Alexander Studhalter; the second and third directors are Philipp Studhalter and Albina Studhalter. The Studhalter family has been engaged in Kerimov’s profit-making businesses for many years in Lucerne, including two of Kerimov’s Swiss-registered asset holdings, SWIRU and Millennium. What the Studhalters have been doing can be followed here . The auditor of the Kerimov Foundation is PriceWaterhouseCoopers.
According to the audited financial reports, the foundation had assets of 19 million Swiss francs ($17.7 million) at the end of 2010, but just CHF6 million ($5.6 million) by the end of 2011. In that year Kerimov gave the foundation an income of CHF45.6 million ($42.5 million), and the foundation gave away CHF44.4 million ($41.1 million). Cash at the bank at year’s end was just CHF1.8 million ($1.7 million). Capital of the foundation at the same date was CHF5 million ($4.7 million).
The financial report for 2012 has not yet been released, but when it is, it will be obsolete. That is, if Kerimov’s full foreign asset value has been transferred to the foundation, according to Kerimov’s announcement of April 30, 2013. A big if — and one which ought to show up on the foundation books as a new capital item roughly equal to the Forbes estimate of Kerimov’s asset value – $7.1 billion (CHF6.6 billion).
At his parliamentary office in Moscow Kerimov was asked whether he believes the transfer of his assets to the Swiss foundation complies with the new law. Spokesman Krasovsky replied: “Nothing here is connected. He just transferred his beneficial interests and that’s all. And what is linked with what, one can only guess. That is, these things are not related. This statement about the beneficial interests we have issued more than a month ago, when the law had not yet entered into force.”
Mikhail Prokhorov (image right) is another well-known Russian figure whose foreign assets would come under the disclosure and transfer requirements of the new law if he intends to qualify as Mayor of Moscow, when the city holds its mayoral election in September, and he runs against the current mayor, Sergei Sobyanin. Prokhorov’s move to resume politicking after his abortive campaign for president last year has triggered speculation in the Russian press that he is thinking of putting his assets into a blind trust along the lines of Kerimov’s Swiss scheme.
Anti-corruption campaigner and opposition politician Alexei Navalny says: “We ourselves do not yet understand [the application of the law to trusts]. But now there is an interesting situation with Prokhorov in such a plan: will he be allowed to participate in elections or not?”
State Duma deputy Irina Yarovaya, head of the Security and Corruption Fighting Committee, and a member of the United Russia faction, has vocally attacked the blind trust scheme for Prokhorov. Her spokesman Oleg Zhdanov said “of course [they are] prohibited. Read the law, it is written there.” Asked whether the law is ambiguous, he responded: “Well, then [refer] to the Central Bank, it is their formulations.” Is Yarovaya equally convinced that Kerimov’s foundation scheme is legal or illegal? Zhdanov replied that Yarovaya isn’t available today to answer.
Prokhorov’s spokesman Andrei Belyak said: “while there have been no statements, so there is no comment.”
Roman Malovitskiy, head of the banking and finance law practice at the Moscow firm Egorov, Puginsky, Afanasiev and Partners, acknowledges the ambiguity in the wording of Article 3, Section 3. He also reveals another backdoor for officials favoured by the Kremlin. “It is not clear what is meant by ‘trust management of property, which includes investments in foreign financial instruments.’ In my opinion, the more correct approach from the point of view of the Russian language will be that trust management, providing an opportunity to invest in foreign financial instruments, is prohibited. Traditionally, blind trusts are established for the purpose of transfer of assets by persons who, by virtue of their position, may have a conflict of interest, insider information, the ability to influence the market, etc. If we assume that the purpose of the law is to avoid possible conflicts of interest, then the blind trust ought not to fall within its scope. However, in the case of the Law 79-FZ the primary goal, apparently, is to secure the close link of a person occupying a prominent public position with the interests of Russia, and the prevention of pressure on him by foreign governments. That purpose is best served by a total ban on the possibility of investing in foreign financial instruments. In my opinion, so far, any blind trusts under which acquisition of foreign financial instruments is possible should be terminated in accordance with the Law 79-FZ.”
The president’s and prime minister’s spokesmen were also asked to clarify the application of the new law to fiduciary management entities, such as trusts and charitable foundations. The text submitted to them both was: “please answer yes or no, to the following question: does the law ban officials from transferring their offshore assets into trusts or blind trusts or charitable foundations?”
Dmitry Peskov for Putin confirmed receiving the request; his assistant said he would try to answer. At the office of the Department of Press and Information for Prime Minister Dmitry Medvedev, Mikhail Buben is in charge. A week after he confirmed receiving the request, his deputy, Kseniya Kaminskaya, replied: “We ask you to make contact for information on this subject with the press service of the President of the Russian Federation.” After a week the President’s spokesman is still refusing to answer.