22
A TRUE STORY OF CORPORATE CRIME IN THE RUSSIAN
FEDERATION
BY ROBIN BARRATT
In the late 1990s, a
US-based global vehicle-battery manufacturer, and one of the
biggest auto-component companies in the world, set up an office and
a manufacturing plant just outside Moscow, serving their extensive
chain of established retailers throughout the Russian Federation.
They had, in fact, been trading in Russia since the early ’90s but
had not actually manufactured their batteries in the country.
Everything had been assembled in Ukraine and then imported as a
completed unit.
The company had a large turnover, but actually made
very little profit in Russia, which baffled the US directors and
accountants, as the rest of their global offices had more or less
the same margins, yet made much greater profits, no matter where in
the world they operated. After a very detailed internal audit, a
thorough investigation and a large number of unscheduled visits to
retailers around Russia, a huge discrepancy was discovered between
the number of units that were imported and those that were actually
on the shelves. It was found that there was an estimated four or
five times the number of batteries being sold than were registered
on the export sheets from Ukraine. This meant that somewhere along
the supply chain counterfeit batteries were being manufactured and
sold as originals.
Counterfeiting was (and still is) extremely common
in Russia; in fact, it has been estimated that probably 75 per cent
of all products are fake, and you never really know whether you are
buying the genuine product or a cheap counterfeit, repackaged and
sold as the original. You need to know exactly what you are buying
and be familiar with the supplier, and you always need to make sure
that you only shop in the most well-known shops and supermarkets,
although even they can occasionally get caught out by unscrupulous
suppliers and clever conmen.
One famous case involved an Italian boutique
selling very expensive designer coats in Smolenska Passage, an
upmarket shopping mall in the centre of Moscow not far from the
British Embassy. The coats were supposed to have come directly from
Italy and had a huge price tag to match; however, the only thing
that came from Italy was the labels – everything else was
manufactured in sweatshops on the outskirts of the city.
Admittedly, the templates were from actual one-off items bought in
Italy, so in theory the coats were made from Italian designs, but
they were sold as genuine imports and not cheap imitations made
locally with substandard materials and shoddy workmanship. The
owner of the boutique went over to Italy on a cheap package holiday
once or twice a year, bought a few coats, brought them back to
Moscow illegally and then counterfeited them. The owner eventually
got caught, not because of a complaint, but because one of the
designers instigated a global investigation and the Moscow shop was
targeted.
Hundreds if not thousands of Russian retailers do
exactly the same – buy templates from abroad while on holiday and
have them copied and sold as originals. A major high-street
pharmacy and one of the biggest chains in the Russian Federation
was recently charged with selling a huge range of counterfeit
perfume. Apparently, the main buyer was targeted by the Mafia and
bribed to buy products from a company that specialised in
counterfeiting fragrances. In the same year, a large supermarket
chain was also caught selling hundreds of imitation goods.
Sadly, those who get caught are in the minority, as
almost everything is counterfeited, from coffee, tea, olive oil,
butter, cigarettes and tobacco to computer chips, car parts,
clothing and sports equipment. In some cases, the quality can be
awful, especially DVDs and tobacco from market traders, but in many
cases the counterfeiting is excellent and only the specialised eye
can tell the difference.
The batteries that were being sold as genuine
imports were Russian made and of very poor quality. However, they
had been cleverly inserted into the supply chain and made to look
as though they had been imported from the real company. This did
the company no good; first, its reputation was falling to pieces;
and second, someone else was making a vast amount of money.
It could not be pinpointed exactly how this crime
had been put in place. It also proved to be extremely difficult to
ascertain where the counterfeit supply came from – probably because
too many people had been paid off and too many people were scared
of the consequences of spilling the beans. So, the company decided
to import the components directly into Moscow, where they would
then be assembled and distributed, which would hopefully make
things easier to control.
The Russian financial crisis of 1998 provided a
perfect excuse to get rid of the old directors. As banks collapsed
and the rouble devalued, most foreign companies pulled out of the
country. Many people lost everything in just a few short months –
Russia was no longer the get-rich-quick place it had been at the
fall of Communism. The very few foreign companies that decided to
remain cut their staff and their operating costs and rode the
storm. The auto-component company was one of the few that stayed,
and new Russian directors were appointed, new systems put in place
and a new manufacturing plant opened in Zelenograd, about 30
kilometres north-west of Moscow’s outer ring road.
For a few years, everything went smoothly. As the
country recovered, so profits slowly rose, and the company began to
grow again. And then suddenly, even though turnover was growing,
profits dipped significantly, and the company found itself on the
verge of bankruptcy.
I was living in Moscow at the time, providing
security, protection and investigation services. I mainly worked
for myself, subcontracting to various English security companies.
The battery manufacturer contacted a well-known company in the UK,
who then contacted me. The contract consisted of two elements:
first, the Russian directors needed to be thoroughly yet discreetly
investigated; and second, if new directors needed to be found, I’d
have to thoroughly investigate their backgrounds before they could
be employed.
Money rules in Russia, and the implications of
losing it can be extreme. Many businessmen have been assassinated
since the demise of Communism, for a whole host of reasons: to get
rid of competition, to quickly end business partnerships and even
to avenge disputes and debts. Most Russian businessmen and
entrepreneurs have teams of bodyguards protecting them from such
risks. Ironically, however, most foreign businessmen after the
crisis did not require protection and could run a foreign company
in relative safety. It seemed that targeting foreigners was more
trouble than it was worth for the Mafia, thugs and criminals. At
that time, Russia needed foreign investment. If foreigners were
targeted, they would quickly pull out again, foreign banks would
call in loans, aid would stop and the country would plunge into an
even deeper crisis than it had in 1998.
However, even though foreigners living and working
in Russia were rarely targeted, if the business was going to be
closed and/or the directors sacked, they would become justifiable
and legitimate targets. I contacted a Russian investigations
company who had previously done a number of very discreet
investigations for Western giants, including Philip Morris and
Microsoft. Their methods were thorough and systematic, although
occasionally a little unorthodox, and their references and results
from previous work proved that they could complete the task in
hand.
It still is impossible for a foreign company to be
wholly owned and managed by foreigners – every foreign company must
have at least a 51 per cent Russian ownership. My new clients, the
auto-component company, had one director who had worked for them
for many years and in various countries. He was asked to move to
Moscow from his previous post in Germany. He had an excellent work
record and viewed his move to Moscow as a promotion. All the top
management knew and trusted him, and he was not a suspect. However,
the three Russian directors were.
An initial basic investigation into the three
Russian directors was undertaken. After just a few days, it was
quickly found that they were also the managing directors of a total
of ten other battery companies, all with very similar names. It was
also revealed that just a few short months after joining the
company all three directors had made large purchases, which had
exceeded their salaries. One director had bought a new Audi,
another had taken a two-week vacation on a tropical island, while
the third had invested in a major refurbishment of his apartment.
Of course, they had all done their best to mask their purchases by
using either their spouses’ names or the names of other family
members; however, investigations such as these almost always
include every member of the family, as well as close friends.
And so it had gone on, from the period of their
appointment to the time of the investigation. Houses and land were
bought, and cars were frequently changed and upgraded. The initial
report also highlighted a connection between all three directors,
even though they were apparently taken on independently of each
other. None were reported to have any previous connection with the
Mafia or organised crime prior to their appointment. But once they
had been appointed and were working for a foreign company, they had
put systems in place to rip it off – big-time. It was also found
that the bank balances of the ten other battery companies that the
Russians were directors of exceeded £100,000, and one of the
companies had a bank balance of almost $250,000. That is one very
good thing about Russia: if you pay the right people, the right
information can be obtained – unlike in England!
It was fraud on a massive scale, but prosecution
would be almost impossible. From a Western point of view, a
managing director risking his job and his livelihood to steal from
his employers when he could have a secure position for the rest of
his life might not seem worth it. But because wages in Russia are
low compared to Western standards and there is little
accountability, stealing and fraud are extremely common. A Russian
executive would view £150,000 as a lot of money, and it would last
them a very long time. And should a defrauded company push for
prosecution, a small percentage of stolen funds could be used to
bribe the judge to either delay proceedings or dismiss them.
Russian judges are extremely wealthy people but get paid a very
small salary, so almost all of them supplement their wages with
bribes. Employers and employees know full well that any prosecution
would take years to process, and in most cases it simply would not
be worth it. Therefore, employees know that they can do more or
less what they want – if they are that way inclined and not
strictly supervised – and employers know that there is little that
can be done about it.
The auto-component company decided to close the
Russian branch of the company. After two attempts, they realised
that trying to run a legitimate and profitable business in the
country was not really worth all the hassle. The company as a whole
was bordering on bankruptcy, and the Russian losses were adding to
the overall global financial difficulties. They decided that they
would find a wholesaler who would buy the units, which would again
be assembled in Ukraine and exported to Russia. The wholesaler
would buy each unit for a set price and that would, in effect, be
that. What happened thereafter would be out of the control of the
company, but at least they would have no costs associated with
manufacturing and distribution, just a battery being sold for a set
price.
Having worked in Moscow for quite some time, I
totally agreed with this policy. And this is a route a large number
of the major companies take. The quality of manufacturing in Russia
is at best questionable, controlling counterfeiting is almost
impossible and the logistics of supplying effectively to such a
massive country extremely complicated, so exporting products to a
Russian company who would then distribute and sell them made
infinitely more sense.
We were tasked with providing security and
protection to the legitimate director and two company auditors, one
of whom was familiar with Russian accounting, who would spend five
days in Moscow closing the business down. The legitimate director
knew what was happening; however, at that stage the Russian
directors did not know that the company was being closed. They were
just told that a high-level visit was going to take place and the
manufacturing plant, the offices and all the accounting systems
would be thoroughly inspected.
Because of the possible risks and the fact that we
had three principals to look after, I asked a colleague whom I had
worked with before on another high-level operation in Israel to
come over and help me. He was ex-Special Forces, and although he
had never worked in Moscow he was very experienced. We also
employed a third Russian bodyguard, a guy called Alex, whom I had
also worked with before, as well as a team of three armed Russian
drivers and their executive vehicles. The budget didn’t stretch to
much else, and it meant very long days, but we coped with the
resources we had.
Security during this fragile and volatile period
was extremely tight, and no stone was left unturned in protecting
our principals. Two weeks after the operation started, the company
submitted its final accounts to the Russian government and ceased
trading in the country until a new wholesaler could be found. The
operation went smoothly: the company closed down, around 200 people
were laid off, property was made vacant and trading more or less
stopped overnight. This made a few people very pissed off, from the
workers in the factory who lost their jobs to the directors who
lost a large amount of income.
Like many foreign businesses starting up in Russia,
the auto-component company skimped on detailed initial
investigations on both the market and their Russian employees,
which cost them dearly in the long run. They also failed to do
regular checks and background investigations, and they failed to
control their operations, leaving too much responsibility to the
Russian directors.
Corruption and crime is endemic in Russia, and it
will never change. Because of this, Russia is one of the few places
in the world not at war where the word of the bodyguard still rules
supreme.