Sergey Makhlai, a beneficiary of PJSC Togliattiazot (TOAZ), has published an open letter addressed to Russia’s Prosecutor General Igor Krasnov, in which he expressed his discontent as to the quality of prosecutorial supervision and work of law enforcement agencies. RAPSI has analyzed the legal aspects of this address and asked experts to comment those.
The reason of his appeal, Sergey Makhalai explained, were criminal cases involving serious criminal charges opened against participants of an organized gang, who committed a number of offences seeking illicit profits from TOAZ assets.
“Numerous criminal cases under Articles 159 and 210 of the Criminal Code of the Russian Federation have been opened against former TOAZ managers and partners upon applications of Uralchem,” Makhalai’s letter reads.
It needs to be reminded what exactly crimes Makhalai mentions. According to the verdict of the Komsomolsk District Court of the city of Togliatti, which became final on November 26, 2019, by an appellate decision of the Samara Regional Court, beneficiary owners of Togliattiazot Vladimir and Sergey Makhlai, as well as their Swiss partner Andreas Zivy, were found guilty of a large scale fraud (Article 159.4 of the Criminal Code of the Russian Federation), sentenced to 9 years in prison, and reimbursement of 77.3 billion rubles of damage in favor of TOAZ, and 10.3 billion rubles in favor of minority shareholder Uralchem (owns 9.97% interest in TOAZ).
Therefore, it looks absurd that Makhlai addresses critical observations and proposals concerning organization of work of prosecutors to the Prosecutor General. The sender has nothing to do with the Prosecutor General’s Office, moreover, he is not a legal professional. By and large, Makhlai can be hardly called an expert industrial chemist, since in 2011 he inherited TOAZ management from his father, Vladimir, who had been running the enterprise for 26 years
Makhlai-senior, as well as his son, had been many times held criminally liable, for instance for violations related to the privatization of the enterprise in 1996 and tax evasion. Therefore, it seems that the main spheres they specialize in are unlawful takeover of enterprises and various tax evasion schemes.
[“Such trials symbolize the end of the age of ‘wild market’ of the 1990s. With certain degree of objective certainty, it may be seen as an element of an efficient state strategy actively pursued to combat illegal exploitation of socially important assets of enterprises, which employ legal mechanisms. Basing on the example of Uralchem and TOAZ, it may be said that today the judiciary reasonably well defends the interests of workers of enterprises and facilitates realization of state tasks by gradually overcoming negative consequences of past illegal takeovers” - lawyer Alexander Zorin.]
“I decided to turn to you directly having read this September your interview to Kommersant newspaper and your recent statement made at the meeting of the Board of Prosecutor General’s Office dedicated to the discussion of the practices of prosecutorial supervision of the enforcement of the legislation regulating business and investment activities,” Makhlai’s letter reads.
Therefore, Makhlai himself directly states that the Prosecutor General’s interview was the formal pretext for his addressing Igor Krasnov. It looks especially curious that Makhlai chose to focus on exactly that text, as in that interview the Prosecutor General made certain statements which were to seriously worry Makhlai:
“Cooperation with foreign colleagues as to search for, seizure, forfeit, and return from abroad of stolen assets is a priority of our work. In six months, 65 requests for legal assistance in criminal cases over detection and seizure of criminally obtained assets were submitted the competent authorities of foreign countries, mostly those of Latvia, Estonia, Cyprus, and Switzerland,” Krasnov said.
It should be reminded that, as established by a court, in 2007 majority shareholders transferred TOAZ proceeds and assets to offshore jurisdictions. For instance, settlement and foreign currency accounts of Togliattiazot were opened with Togliattikhimbank owned by Sergey Makhlai, to which proceeds from the sale of ammonia and urea to Nitrochem Distribution AG were credited. Part of the profits regularly remained at the disposal of the defendants and did not return to the enterprise. In the course of the proceedings it was proved that acting this way Vladimir and Sergey Makhlai, as well as Zivy and Swiss company head Beat Rupreсht embezzled about 85 billion rubles owned by Togliattiazot and its shareholders.
In this connection, if the General Prosecutor’s attention is attracted to the TOAZ case, most certainly prosecutors are to work even more actively to return the assets of the Russian enterprise transferred to offshore jurisdictions and of embezzled funds.
“In the framework of court proceedings taking place in 2018 through 2019, courts refrained from taking into account the positions taken both by the defendants, and by Togliattiazot itself”, Makhlai’s letter reads.
It is difficult to comment on this statement of Makhlai, because it has absolutely no grounds. As experts point out, the results of these court proceedings with respect to Uralchem are especially remarkable because the court paid equal attention to all parties of the case, notwithstanding the scale of their respective roles.
[“The defense of the interests of minority shareholders on the part of the court, in my opinion, was the main aspect of this case. I hope such a court policy will become a systemic one, and be of a precedential value. In such a case, it could be taken for granted that the Russian judiciary will follow a new vector aimed at equalizing possibilities of business figures, oligarchs, representatives of giant enterprises, and ordinary businesspersons. The TOAZ case let us see as a really democratic court works.” – lawyer Vladimir Alexandrov.]
Experts point out that exactly active actions on the part of minority shareholders and attention paid by the court to all voiced positions facilitated the liquidation of a long-year scheme of violation of the rights not only of shareholders, but also those of the enterprise employees, as well as public and state interests as concerns the lack of necessary investments in the enterprise’s infrastructure on the part of its owners.
“Decisions, taken in a short time frame… give rise to doubt… no crime was committed, and courts lacked time and will to sort out the situation,” Makhlai’s letter reads.
This phrase of Makhlai lets to recall yet another prominent feature of the TOAZ case, that is its almost record length, caused, among other things, by abuse of their rights on the part of the defendants. Thus, lawyers of the victim, Uralchem, noted the efforts to drag out the trial, disrupt hearings, carry to the pint of absurdity the stage, at which the defense presented its evidence.
Such actions on the part of Makhlai’s and other defendants’ raised the question of the necessity to undertake measures aimed at guaranteeing of the exercise of the right to a trial nearly lost by representatives of the victim.
As earlier observed by lawyer of the Moscow City Bar Association Alexander Nizov in his interview to RAPSI, “the tactics of deliberate stalling of the proceedings have been chosen by the defense from the very start of the trial.”
[Defendant’s lawyers have repeatedly lodged complaints and petitions, for instance, at first they alleged that the indictment was read ‘at a too fast pace’. At the same time, they could compel the court to give them the right to repeatedly present the same materials. In spite of the fact that several dozens of volumes have been attached to the case at their requests, they immediately stated that any decision not in their favor was a ‘violation of their rights’ and attempted to disrupt court hearings. Shortly before the end of the process, that is 18 months after its start, one of the defendants’ lawyer suddenly said it was necessary to summon to the court several foreign nationals failing to clearly explain how they are involved in the process. It is worth mentioning that the lawyer proposed to summon them via email,” – lawyer Alexander Nizov.]
“The court has ruled to seize company’s assets, what negatively affected the business activities of the enterprise. In the framework of the investigation of criminal cases, searches and seizures of documents had been constantly carried out at the enterprise. Managers and workers of the enterprise had been repeatedly called in for questioning, as a result, the business operations were impeded, the moral environment in the company deteriorated,” Makhlai’s letter reads.
In this phrase, Makhlai again is at variance with the actual facts, which were registered by an independent expert examination. It could be seen with confidence that TOAZ had been in a dismal and lacking any prospects situation prior to the opening of the criminal case proceeding from an analysis of the strategy the enterprise pursued on the market: by the time the court hearings started one of the largest global suppliers of ammonia depended on a contract for supply of its products to the only buyer, what permitted to freely transfer funds to offshore jurisdictions causing great damages to the enterprise, which had to sell its products at prices almost ten times below the market.
As a result, an important enterprise, which formally continued to operate, but lacked any corporate management strategy was at risk to reach the no return point, where it debts could not be covered even by planned prospects of its development.
“The head of Togliattikhimbank Alexander Popov was arrested in 2019 under a far-fetched pretext; against him, alongside with ‘traditional’ for businesspersons Articles 159,199, and 210 of the Criminal Code of the Russian Federation, was opened a criminal case on charges of an attempt to bribe a judge of Russia’s Supreme Court,” Makhlai’s letter reads.
It needs to be reminded what ‘far-fetched pretext’ Makhlai mentions. In 2012, according to officers of the Interregional Inspectorate for Major Taxpayers No. 3 for largest taxpayers estimates, TOAZ understated its export proceeds from sales of ammonia for year 2010 by more than 1 billion rubles. As a result, additional tax amounting to over 161 million rubles was charged on the TOAZ profits. Representatives of the enterprise (investigators believe it was Sergey Makhlai) intended to annul this decision via a cassation petition to Russia’s Supreme Court.
Investigators inform that in the fall of 2015, under the oversight of Popov, there were found intermediaries, who could assist in bribing of a Supreme Court judge. The choice of the persons to act as the intermediaries was approved by Popov. It is the ex-head of Togliattikhimbank, who is suspected of collecting and putting in a bank box $1.2 million, which were to be paid to the intermediaries for their assistance in the passing of the bribe.
As to Makhlai’s attempt to present charging of Popov as a means of ‘pressure’ on business, it should be reminded what exactly role the latter played in the criminal scheme employed at TOAZ, which investigators could reveal.
Investigators allege that in controlled by him Togliattikhimbank Popov managed a network of firms affiliated to the defendants, controlled accounts of these firms, to which the funds gained from the illegal sales of the production were transferred, and ensured the corruption-based cover of fraudulent schemes.
Popov also took part in a scheme permitting the members of the criminal society underpay taxes to the budget: in 2008, two companies being under his control could evade taxes due to the budget totaling not less than 320 million rubles. At the same time, a methanol production complex with the capacity of 450,000 metric tons a year and a plot of land, on which the facility was built, was stolen from TOAZ. In the framework of this deal the value of the assets was significantly understated: in spite of the fact that the market price of the assets made 13.5 billion rubles, the enterprise could gain for it only 132 million rubles.
Operations relating to the transfer of funds under the sale and purchase contracts made with respect to the assets owned by TOAZ were carried out exactly by the bank controlled by Popov. As a result, Popov and other members of the group could posess and dispose of real properties and equipment of Togliattiazot they stole from the enterprise as if those were their own.
[I do not see any serious legal grounds and any possibility to really influence the sentence in Makhlai’s statements. Since the substantive content of other points is limited to rather abstract formulations, I can suppose that exactly the charges against Popov are most important for the author of the letter. Judging by the fraudulent scheme with participation of these persons as described by investigators, Popov has all the reasons to make a deal and tell the court about all the details of the crime in exchange for a milder sentence. Probably, Makhlai has in mind to rob him of this option,” – lawyer Konstantin Ganderov. ]
“They (minority shareholders - RAPSI)… disseminate knowingly false statements about the situation at the enterprise and about its employees, present and former managers, mislead the authorities and law enforcement agencies… put forward untrue arguments as to dilapidated state of Togliattiazot and its efficiency,” Makhlai’s letter reads.
The deplorable situation as to industrial safety and labor protection at TOAZ has been repeatedly confirmed by inspections of the regulatory bodies, which revealed over 300 violations, which were proved in courts.
According to an expert finding of representatives of the Federal Service for Environmental, Technological, and Nuclear Supervision (Rostekhnadzor): “the revealed violations create the present and real danger to lives and health of people, can result in accidents involving injuries, which have already taken place at the enterprise.”
In the court, Rostekhnadzor employees also noted that TOAZ had for a long time failed to undertake meaningful measures to correct 360 most serious violations, thus deteriorating the situation even further, even if “further use of these industrial facilities entails real danger for lives and health of the employees of the enterprise and the environment.”
TOAZ representatives stated that some violations had been corrected. Nevertheless, according to Rostekhnadzor, the most serious and dangerous problems relating to collapsing equipment and communications still pertain.
“The evidence collected in the case in its entirety confirm the fact that Togliattiazot has failed to undertake measures aimed to meet industrial safety requirements permitting to use an industrial facility with violations of industrial safety requirements applicable to hazardous industrial facility, and this fact has been established beyond controversy on the basis of the evidence studied in the course of the proceedings. At the same time, the fact of violation of industrial safety requirements is not disputed even by the representatives of the company,” the decision of the Komsomolsk District Court of the city of Togliatti reads.
In the actions of Togliattiazot there is an aggravating circumstance, that is, the repeated nature of an administrative offence. Hundreds of violations of industrial safety rules and protection of labor have been registered at TOAZ for years.
The court established that the policy pursued by the management in the sphere of safety both presents direct danger for lives of TOAZ employees, and invites industrial disaster dangerous for the residents of the Samara Region.
“I am ready to provide to you any assistance in the restoration of justice. I ask to send all messages and answers addressed to me to The Law Office Padva & Partners for the attention of A.M. Gofshtein,” Makhlai’s letter reads.
It is interesting that Makhlai has found no time to appear in the court in person or via a video link ‘for the restoration of justice,’ although the probe into this case and court hearings are underway for seven years. Significantly, even in his letter to the Prosecutor General Makhlai conceals his address proposing to answer him via The Law Office Padva & Partners; it needs to be reminded that he currently is hiding abroad.
Experts believe that the lack of any new information in the letter, which at the same time contains certain provocative statements on the part of Makhlai, some of which are addressed to the Prosecutor’s Office, may be seen as a desperate move in the situation, where he exhausted all his arguments and is aware of impossibility to influence the course of justice.
[The Togliattiazot case confirms that the judiciary has learned to efficiently meet the challenges related to faltering enterprises siding up with infrastructure facilities, their employees, and removing toxic institutions without detriment to businesses,” – sums up lawyer Alexander Zorin.]
