Cablegate: Attack of the Anti-Raiders

DE RUEHMO #2716/01 2541305
R 101305Z SEP 08





E.O. 12958: N/A



1. (SBU) Summary: Corporate raiding, the takeover of businesses by
criminal means, is a plague on the Russian economy (REFTEL A) and
combating it must be a central part of any anti-corruption program.
Last week, the National Anti-Corruption Committee (NACC), an NGO
which has been tasked by the government with drafting anti-raiding
legislation, released its report and proposals. At the same time,
the Ministry of Internal Affairs (MVD) also presented its own
anti-raiding proposals. Upon scrutiny, both sets of proposals
appear to be poorly drafted and would likely do little to eliminate
raiding. It is not clear if this poor drafting is the product of a
well intentioned but misguided effort or a deliberate attempt to
protect the interests of raiders. End Summary.


2. (SBU) On September 4, the National Anti-Corruption Committee
(NACC) (which is, despite its official sounding name, an NGO) held a
press conference to unveil its recent study of raiding and its
proposals to address the problem. According to the NACCQs Chairman,
Kirill Kabanov, the CommitteeQs study was prepared at the request of
President Medvedev and in conjunction with the Phoenix Group (a
private consulting group), Transparency International, and the
QAgency for Anti-Crisis Technologies and Investments.Q The
CommitteeQs report, Kabanov said, is based on a survey of over 100

3. (SBU) Many of the CommitteeQs findings were familiar and have
been reported widely both in the press and by us. (REFTEL A). For
example, the CommitteeQs report details a variety of common raiding
schemes, most of which involve the falsification of internal
corporate documents to seize control of a company or its assets,
followed by the rapid transfer of the stolen property to an
ostensible good faith purchaser from whom it cannot be recovered.
The CommitteeQs study also echoed other reports to the effect that
Russia has developed a class of professional raiders who, for set
fees, can help companies illegally acquire target companies. For
example, according to the report, changing a target companyQs
incorporation documents costs $10,000, opening a criminal case costs
$30,000, closing a criminal case costs $50,000, and obtaining a
needed judicial decision costs $35,000.

4. (SBU) Not surprisingly, the Committee identified official
corruption as one of the main causes of raiding and concluded that
corruption and raiding are inextricably intertwined and cannot be
dealt with independently. At the press conference, Kabanov
criticized the government for requesting separate reports on
corruption and raiding and said that this indicates a lack of
understanding of both problems. Kabanov also said that official
government organs have become more deeply involved in raiding
recently and noted a dangerous alliance between the FSB and MVD.
The CommitteeQs report also set forth in detail the different roles
played by corrupt government agencies in raiding schemes.

5. (SBU) Kabanov also noted the rise, in recent years, of
Qmerchandise raiding,Q which is generally understood to refer to the
seizure by law enforcement of consumer items followed by the re-sale
of those items on the black market. As an example, he pointed to
the notorious 2006 Motorola case in which MVD officials seized
167,000 Motorola phones on the pretext that they created a potential
Qhealth riskQ to users. (Note: Embassy intervention helped to secure
the return of some of the phones. However, some of the phones were
subsequently found in local markets where they were being offered
for sale. End Note.)

6. (SBU) In addition to this familiar territory, the Committee also
focused on other causes of raiding which have been less widely
discussed. For example, Svetlana Vasina of the Phoenix Group
pointed to the weak legal protection of minority shareholders
rights and abuse of those rights by majority shareholders.
Reflecting this viewpoint, the CommitteeQs report at one point even
appears to justify raiding by minority shareholders, stating that
they are often left with no choice but to turn to raiders after
discovering that they have been defrauded by majority shareholders.

7. (SBU) Elena Panfilova of Transparency International said that
Russian corporate governance, despite being the subject of massive
attention and assistance efforts in the late 1990Qs and early part
of this century, still does not meet world standards, a factor which

MOSCOW 00002716 002 OF 003

facilitates raiding. Almost every company, she said, has engaged in
at least minor defalcations at some point. Raiders use these
violations as a way to initiate regulatory inspections or criminal
investigations of target businesses. Through these investigations,
they obtain compromising and confidential information about the
subject business, which they use in the raid. Therefore, she and
other members of the Committee, argued, companies must clean up
their own acts in order to avoid being targeted by raiders.
Panfilova and Vasina also said that the unreliability and corruption
of the civil justice system forces aggrieved parties to turn to
criminals to resolve ordinary business disputes.

8. (SBU) The Committee noted another allegedly negative trend
unjustified accusations of raiding. Kabanov and Vasina both said
that businessmen are now quick to attack legitimate competitors as
QraidersQ in order to discredit them and said that corporate
directors and majority shareholders raise the spectre of raiding in
order to refuse legitimate disclosure requests by minority
shareholders. They also expressed concern that new anti-raiding
legislation would be used by businessmen to simply Qsettle scores
among themselves.

9. (SBU) The CommitteeQs report concludes that law enforcement lacks
the tools needed to combat raiding, including a legal definition of
raiding and a specific Criminal Code article addressing it.
Therefore, the Committee proposes the introduction of a new article
in the Criminal Code defining raiding as Qacts designed to give a
legitimate appearance to the illegal (accomplished through illegal
means) transfer to the actor or a third party of property rights,
rights to the results of intellectual activity, and also rights to
individualization (of intellectual rights) as well as, the illegal
acquisition of the right to carry out managerial functions in a
commercial or other organizationQ and making it punishable by up to
6 years incarceration (assuming no aggravating circumstances).


10. (SBU) The day before the Committee unveiled its report, the
MVDQs Investigative Committee presented its own set of anti-raiding
recommendations. These proposals appear similar to a proposal
drafted by Duma Deputy Gennady Gudkov of the Security Committee and
introduced in the Duma in March by Gudkov and two other Deputies,
Andrei Lugovoi and Aleksander Khinshteyn. According to reports (we
have not yet been able to obtain the original text), the Gudkov/MVD
legislation would also introduce a new article in the Criminal Code
on raiding, defined as the Qcommission of a crime connected with the
illegal acquisition of the right of ownership, and/or use, and/or
management of the shares of participants in a legal entity in the
foundational capital of a legal entity and/or voting shares of a
stock company.Q In addition to this stand-alone article, it would
also make raiding an aggravating circumstance for certain other
crimes. For example, falsification of documents committed as part of
a raiding scheme would carry a maximum penalty of 20 years
incarceration (currently falsification carries a maximum of only
four months).


11. (SBU) Both the NACC and Gudkov proposals appear inadequate. The
NACCQs proposed definition of raiding appears to be focused
exclusively on the laundering aspects of raiding (i.e., the process
of making illegally acquired assets appear legitimate) while failing
to address the illegal acquisition in the first place. Moreover,
the wording of the definition is so convoluted that it is hard to
imagine how it could be used in practice. Finally, the proposed
penalties (up to 6 years incarceration without aggravating
circumstances) are insufficient and roughly equivalent to the
penalties provided for by the anti-fraud articles of the Criminal
Code that are currently used as a stopgap to prosecute raiding.

12. (SBU) The NACCQs recommendations also fail to address other key
aspects of raiding such as falsification of documents and criminal
prosecutions that have been illegally bought and paid for. When
asked about these issues at the press conference, Committee members
explained that they were concerned that anti-raiding legislation
could be easily misused by aggrieved businessmen to Qsettle scores
and therefore were reluctant to support too much anti-raiding
legislation, especially legislation carrying severe penalties.

MOSCOW 00002716 003 OF 003

13. (SBU) Although, in contrast to the NACCQs proposal, the
Gudkov/MVD definition appears appropriately focused on the
acquisition, rather than laundering, aspect of raiding, it too
appears unworkable in practice. For example, it simply refers to
Qcrimes connected with the illegal acquisition of property,Q without
defining the crimes or defining what makes acquisition of property
illegal in the first place. (By contrast, the U.S. RICO law
criminalizes acquiring a business through a Qpattern of racketeering
activity,Q which is defined as the commission of two or more
specified predicate crimes within a ten year period.)


14. (SBU) It is not clear what is behind the apparently poor quality
of these proposals. One concern is the possible role of alleged
raiders in preparing them. The Duma proposal was apparently prepared
primarily by Gudkov, while the NACC Report identifies one of its
authors as G.A. Shantin, a Senior Investigator with the MVD
Investigative Committee. Both Gudkov and Shantin have themselves
been accused of raiding. For example, former Duma Deputy Maksim
Vasiliev has recently accused Shantin and Gudkov of conspiring to
fabricate a criminal case against him in order to help raiders steal
several of his businesses. Vasiliev specifically alleges that
Gudkov wrote an official DeputyQs request (deputatstkii zapros) to
MVD Minister Nurgaliev demanding that a criminal case be opened
against him (an allegation that Gudkov does not deny) and that
Shantin then conducted the investigation in a corrupt manner,
culminating with the fabrication of criminal charges.

15. (SBU) VasilievQs claims appear to have some basis. Our
monitoring of his prosecution (which has included observation of the
trial in Basmanny District Court and conversations with both his
lawyers and one witness) causes concern. For example, four of the
MVD officers involved in the investigation were themselves
criminally prosecuted for violations committed during the
investigation. Moreover, the charges against Vasiliev appear to be
little more than allegations of civil breach of contract and his
pre-trial detention, which has lasted for over a year, appears to be
based on testimony coerced from his father that Vasiliev was
attempting to flee by attending a baptism in a monastery while
police were looking for him.

16. (SBU) Furthermore, the fact that GudkovQs legislative
co-sponsors, Lugovoi and Khinshteyn, are themselves the subjects of
considerable suspicion is troubling. Lugovoi has been charged by
British authorities with the 2006 poisoning murder of Aleksander
Litvinenko and contacts tell us that Khinshteyn, a journalist, is
notorious for publishing defamatory articles for money.


17. (SBU) Of course, the shady reputations of a lawQs authors do not
alone provide a basis for condemning the law. However, when
combined with the NACCQs statements appearing to justify raiding
tactics by minority shareholders, the NACCQs stated concerns that
penalties for raiding not be too harsh, and the fact that the
legislation appears to have been drafted in a way that would make it
unusable, there appears to be a basis for concern that some involved
in the drafting process may be attempting to influence it for
corrupt ends.


© Scoop Media

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