Criminal charges are piling up against Togliattiazot owner in Russia’s top corporate dispute

Criminal charges are piling up against Togliattiazot owner in Russia’s top corporate dispute
Sergei Makhlai, the majority shareholder of Togliattiazot (TOAZ), has been accused of paying $1.2mn bribe to Russian Supreme Court judges in Russia's top corporate dispute
By Ben Aris in Berlin June 10, 2020

Sergei Makhlai, one of the beneficiary owners of Togliattiazot (ToAZ), has become a defendant in a new case where he is accused of ordering the payment of a $1.2mn bribe to judges of Russia’s Supreme Court to overturn a decision that would have seen the recovery by the state of substantial unpaid taxes.

He has been named as one of the defendants in a case where bribery charges have been brought against Alexander Popov, the former CEO of Togliattikhimbank, which is solely owned by Sergei Makhlai. The case is widely seen as one of the biggest ongoing corruption investigations in Russia.

As bne IntelliNews reported, previously Sergei Makhlai was at the centre of a separate criminal investigation that culminated in July 2019 with the verdict by Komsomolsky District Court of Togliatti, which found Sergei Makhlai, his father Vladimir Makhlai, who was previously chairman of the board at ToAZ, and three other individuals guilty of fraud.

The Court found that the group siphoned off a total of RUB84bn ($1.4bn) from ToAZ through related-party transactions defrauding the company and its minority shareholders. ToAZ’s products – ammonia and urea – were sold at knock-down prices to a Swiss trader, Nitrochem Distribution AG, controlled by the Makhlais’ Swiss partner Andreas Zivy, which then sold on the products at market prices and the difference of 15-20% was diverted to their offshore bank accounts – a classic “transfer pricing” scam that was the hallmark of Russian commodity trading in the 1990s.

Because all the defendants at the time of the sentence had fled the country, their sentences of eight and a half to nine years in jail were imposed in absentia.

In addition, Sergei and Vladimir Makhlai were stripping ToAZ of its production assets. Using Togliattikhimbank, an ammonia production unit worth RUB10bn ($322m at the 2010 exchange rate) was sold for just RUB100mn ($3.2m). ToAZ also sold a methanol production facility with an annual capacity of 450,000 tonnes per year (tpy) for a paltry RUB132mn ($4.3m), inflicting financial damage on ToAZ exceeding RUB200mn. Both facilities were sold to Tomet LLC, a firm controlled by Andreas Zivy.

Bank manager charged with fraud

The new episode goes back to 2012, when the regional tax authority calculated that ToAZ had understated its revenue for 2010 by over RUB1bn and charged it RUB161mn in additional corporate tax. ToAZ challenged that decision in commercial courts but lost in all the subsequent rulings. A Supreme Court review was the Makhlais’ last chance to overturn the charges. So the decision was made to buy the judges off.

According to the investigation, Makhlai-owned Togliattikhimbank was the vehicle for the alleged bribery payment. Last month, the Basmanny District Court in Moscow ordered the arrest and extended the detention of the former chairman of the board of Togliattikhimbank, Alexander Popov, until August 12 on the orders of Russia’s Investigative Committee, RAPSI reported on June 4.

Popov was charged with bribery (Article 291.5 of the Criminal Code) on May 20 by the Investigative Committee, Russia’s top criminal investigation agency that deals with big crime, which found he haad attempted to pay a bribe of $1.2mn to judges of the Supreme Court.

Also included in the indictment was ToAZ’s main shareholder, Sergei Makhlai, and the former head of the Togliattiazot security service, Oleg Antoshin, whose role was to secure an intermediary, as well as one more person that was not named. All four men were indicted for the same bribery charge.

“According to investigators, Makhlai instructed Popov to bribe the judges. In October 2015, the head of Togliattikhimbank cashed out $1.2mn and put them in a bank’s safe deposit box opened in the name of intermediaries. After that, Popov persuaded them to transfer the money to the judges,” Anatoly Kruglov, the news editor of Secret Firmi, a business magazine, reports. “In return, they had to make a decision positive for ToAZ regarding the tax lawsuit.”

In addition to these bribery accusations, Popov and other members of the ToAZ group have been charged with the oligarchs’ bane: “participating in a criminal group” (Article 210.3 of the Criminal Code), “evading taxes” (Article 199.2 of the Criminal Code) and “committing especially large-scale fraud” (Article 159.4 of the Criminal Code), which are the classic charges for big business crimes in Russia.

A former employee of ToAZ, Ksenia Balashova, has already been arrested for actually carrying out many of the transactions and has pleaded guilty to all counts. In her defence she claims that she only followed the direct instructions of her boss, Vladimir Makhlai, who was then in charge of ToAZ.

Balashova, who was the general director of the Kontaz subsidiary and dealt mainly with ToAZ's foreign customers, reportedly put through a series of deals, selling the group’s most valuable assets for pennies on the dollar as the group was stripped of its assets in anticipation of more legal woes.

In December 2008, she sold more than 860,000 Togliattiazot shares for just 1mn rubles ($40,000) to the Cyprus offshore company Borgat Investments Ltd, which was reportedly controlled by Vladimir Makhlai. According to the investigation, the market value of this package at the time of sale was about RUB577mn ($23mn). In addition, the investigators found that this company, together with affiliate Rodnichok, had evaded taxes to the tune of more than RUB320mn ($12.8mn).

International paper chase

In the meantime, ToAZ’s minority shareholder Uralchem has not giving up a decade’s worth of struggling to recover some of its investment made in 2008 and has secured its first favourable court decisions in the United States.

Most of the problems ToAZ is facing now started with Uralchem’s complaints about the incongruous halt in dividend payments after it became a shareholder in 2008, and ToAZ’s management’s refusal to share key corporate financial information back in 2011, which triggered the criminal investigation against the majority shareholders and managers of the company.

In February, Uralchem applied to a US court to obtain information about the movement of money through the Swiss trading company Nitrochem, which, according to the Russian court, played a central role in the transfer pricing schemes, although the company has since been dissolved.

The US court ruled that Uralchem was entitled to receive information from UBS that handled the cash flowing through Nitrochem, which was shared with Uralchem in February this year.

Based on the UBS information, in April 2020 Uralchem filed requests with the US courts for more information about money movements via other US banks in the States of New York and New Jersey to get a clearer picture of how the money stolen from ToAZ was distributed from the accounts of Nitrochem.

According to the statement of Uralchem’s legal representatives to the US courts, the UBS information revealed that "Nitrochem was engaged in highly suspicious transfers of significant amounts of money," including tens of millions of dollars to "accounts of companies registered in offshore jurisdictions, without any public profile, and which were wound up soon thereafter". The Court for the Southern District of New York has already granted the discovery request.

Nasty fight

Sergei Makhlai formally took over running the company from his father Vladimir in 2011. As relations between the two soured, Vladimir accused his sons Sergei and Andrey of stealing ToAZ from him, saying in a press interview that "in just a day they discharged me from all positions, seized offshore companies and booted me off the trusts". Yet just like his father, Sergei had also fled Russia ahead of looming criminal charges. According to reports, he now lives in the US but has changed his name and has kept a much lower profile than his gregarious father, who is a prominent member of the “Londongrad” community of émigrés, many of whom are now threatened by the Unexplained Wealth Orders Act adopted in the UK.

In July 2019, in addition to handing prison sentences in absentia to both Makhlais and three associates, the Russian criminal court also ordered the company to pay $1.85bn in damages. As an interim measure, TOAZ’s assets have been frozen by the Russian courts.

But the Makhlais won’t let go and are continuing the fight with Uralchem from outside Russia to prevent any arrest of their capital held overseas. Amongst other cases, an Irish court is currently considering their civil claim against ToAZ minority shareholders.

At the same time, they have been running a “black PR” campaign by placing articles in the Russian press attacking Uralchem and its owner, Dmitry Mazepin.

The international press has also apparently been targeted by a PR campaign which appears to be sponsored by the Makhlais. bne IntelliNews was approached by the PR firm APCO Worldwide and offered “an opinion piece by former German Justice Minister Sabine Leutheusser-Schnarrenberger about the risks faced by Swiss and German businesses returning to Russia.” Leutheusser-Schnarrenberger is a well-known opponent of Russian corruption and personally attended the funeral of murdered opposition lead Boris Nemtsov.

To whet editors' appetites, the article mentions murdered Russian lawyer Sergei Magnitsky, murdered Russian opposition leader Nemtsov and arrested US fund manager Michael Calvey – all hot button news items.

“Every few weeks, we are given a new reminder of how dangerous business in Russia can be,” Leutheusser-Schnarrenberger writes.

But the article itself makes no mention of any foreign companies that have been victim of thuggery and choses as its sole example of why foreign investors should be wary the ToAZ dispute with UralChem – an entirely domestic dispute between two Russian companies that has nothing to do with foreign investors whatsoever.

Leutheusser-Schnarrenberger goes on to say that, “In July 2019, a regional court in Samara ruled against the former leadership of ToAZ, despite widespread evidence that the defendants were denied the right to a fair trial as part of an effort to conduct a corporate raid by well-connected business rivals,” before making a string of accusation against the courts, the Investigative Committee amongst others. None of these claims are substantiated, nor is the “widespread evidence” alluded to identified or even obvious. The claims are at best controversial and the ToAZ dispute and the corruption convictions against the management are hardly a poster boy for Kremlin abuse of foreign investors interests in Russia.

bne IntelliNews asked APCO Worldwide to clarify who was paying for its PR campaign and also for an interview with Leutheusser-Schnarrenberger so we could ask her why she had chosen this dispute out of the many candidates to highlight Russian abuse of foreign investors’ interests. We also enquired whether she had any contact with the Makhlais or their representatives. APCO Worldwide did not respond to the email requests.