asset protection: threats and solutions for russian private clients
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Asset protection: threats and solutions for Russian private clients. Ilya Aleshchev, Partner, Alimirzoev & Trofimov law firm, Moscow. What Dangers are for a Typical Russian Private Client?. Lives Globally. Key risk areas: Matrimonial disputes Inheritance Creditors Political risks . - PowerPoint PPT PresentationTRANSCRIPT
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Asset protection: threats and solutions
for Russian private clientsIlya Aleshchev, Partner, Alimirzoev & Trofimov law firm, Moscow
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What Dangers are for a Typical Russian Private Client?
Key risk areas:
• Matrimonial disputes• Inheritance• Creditors• Political risks
Can be a PEP
Lives Globally
Family abroad
Owns abusiness
Cyprus/BVIstructured
Foreign bank accounts
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Divorce Disputes
Dmitri
RybolovlevWealth: $9.1B Wife filed for
divorce in 2008Swiss court issued freezing order over
assets held in trusts
Trustee accused wife of $25M ring
theftCase still open
Arkady Rotenberg
Wealth: $3.3B Filed for divorce
in 2013Wife challenged Russian law pre-
nuptial agreement Challenge failed
Vladimir Potanin
Wealth: $14.3B Filed for divorce in 2013, for asset division in 2014Wife obtained
discovery orders in US courts
Case still open
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Typical Weak Points•Married before acquiring wealth
• No pre-nuptial agreement • Structured his assets too straightforward or too
late (e.g. after wife rejected pre-nup agreement)•Exercises direct control over assets held in trusts•Structure details compromised to wife / rivals•Rivals may attempt using divorce to attack
NB: Potanin’s wife Natalia was represented in her US discovery litigation by law firm Alston&Bird, who earlier assisted in obtaining US visa for Oleg Deripaska, Potanin’s rival in Norilsky Nikel dispute
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Divorce Case Study 1
Mr. XRussian HNWI
Involved in business projects structured
mainly offshore Acted as a front-person
for PEP partnersMarried for 20 years
No pre-nuptial agreement
• Clean-cut divorce, matrimonial property divided, fair provision for spouse made
• Spouse suddenly sues for half of business, actually belonging to business partners
• Aggressive discovery in many jurisdictions• Fishing expeditions and use of improper
means of obtaining information• Suspicion that litigation is funded by rivals
Challenge: coordination of multi-jurisdictional team of counsels to fight off unsubstantiated disclosure requests filed in many jurisdictions simultaneously
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Divorce Case Study 2
Mr. YRussian businessman
Built highly successful business
from scratch, prepared to sell it to a strategic investor
Married for 18 yearsNo pre-nuptial
agreement
• On the verge of business sale completion suspects spouse’s infidelity, hires private eye
• Reveals infidelity and a plot to file for divorce immediately after sale completion
• Existing corporate structure known to wife• Needs a new ‘clean slate’ structure to
protect sale proceeds and to invest furtherChallenge: Building the new corporate structure being recipient of business sale proceeds and yet formally unrelated to the Client
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Divorce Risk Mitigation• Use pre-nuptial agreements (both on Russian and
common law levels, supplementing each other)• Carefully structure asset holding (existing
structures shall be reviewed from time to time)• Trust the trustees – allow discretion, do not
manage directly (or at least leave no paper track)• Be reasonable – moderate provision to the ex-
spouse may pay off by decrease of litigation riskNB: If the proceedings have already started, try
limiting wife’s access to the “real money” to prevent further discovery and litigation funding
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Inheritance Disputes
Leonid RozhetskinBusiness: LV
FinanceGone missing in
2008Death not
confirmed until 2013
Assets held in trust and partly by
partner Reportedly wife and son received
nothing
Oleg Zakharov
Business: Rosinka Died in 2006
Business held by Cyprus trustees
Trustees reportedly attempted to seize
the business Litigation continues
Arkady "Badri" Patarkatsishvili
Business: Imedi TVDied in 2008
Heirs, creditors and executor fought for
estate in English, US, Gibraltar and
Georgian courts with conflicting outcomesFamily secured assets
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Typical Weak Points•There is very often no will or only Russian law will
• Succession rarely considered in business structuring• Straightforward view on inheritance (e.g. income
and capital are not seen as separate assets)•Heirs rarely know how assets are structured•Personal input in business valued above capital•Management can abuse when shareholder dies•Surviving partners tend to squeeze out heirs
NB: Yuri Abramyan, owner or an ice cream manufacturer, divorced his first wife in 2005 and remarried, but never separated marital property with the first wife. After his death in 2009, widow reportedly attempted to take control over the business, squeeze out deceased’s heirs and to strip assets
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Inheritance Case Study 1
Mr. XRussian businessmanMajor shareholder in
a food production business (personally)
Died in 2010Left spouse and minor children
There was no will
• Shares in Russian company passed to minor children under intestacy rules
• Under Russian law, voting and disposition requires consent of state guardian authority
• Children studied abroad, lost RF resident status, personal income tax on div. increased
• Sought legal advice after estate distribution
Challenge: Convincing Russian notary and state guardian authority on post death variation which is permitted under Russian law but used very rarely
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Inheritance Case Study 2
Ms. Y et alSpouse, parents and
minor children inherited majority stake in a Russian
businessAnother shareholder
in the company becomes more active
No shareholders’ agreement
• After patriarch dies, majority stake in company dissipates between beneficiaries
• Parents are not interested in running business, spouse has no experience or skills
• Minor (but blocking) shareholder becomes more active in operational control, and aggressively attempts to increase its stake
Challenge: Protection of late patriarch’s family who are collectively the major shareholder but most members are passive and not involved into operational control
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Inheritance Risk Mitigation• A will or several wills covering all jurisdictions
where assets are held to meet local law rules• Structuring business or asset holding shall provide
reliable transfer of control to beneficiaries • A trustworthy protector capable to represent heirs
before business partners and to enforce the will• If heirs are unfit to continue business, agree share
buy-out with business partners in advanceNB: Even relatives of deceased HNWIs can face
cash flow issues when death is sudden and no arrangements were made. Easily accessible emergency cash reserve can resolve this.
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Creditor Protection
SergeyPugachev
Business: OPK, Mezhprombank
2010: Bank failed to pay €200M
bonds, lincense revoked
2013: flees county, put on wanted listOPK assets seized
Shalva Сhigirinsky
Business: Moscow city development
2009: VTB secured freezing order
London court over personal assets under $110M lawsuit to his
company, most assets sold to cover
debt
Konstantin Malofeev
Business: Marshall CP
VTB sued for $225M, sought freezing order
UK Supreme Court denied freezing order, refused
piercing of corporate veil,
denied UK courts jurisdiction
2014 dispute settled
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Typical Weak Points• Business structuring often mixes asset holding
and operational roles•Structure details are disclosed or compromised•Ultimate beneficiary issues personal guarantees
• Ultimate beneficiary involved in operational management as a shadow director or even holds role of a general director (CEO) / board member
NB: Gleb Fetisov, ex-owner of “My Bank “, sold the bank in December 2013, but reportedly sale was on nominal value due to bank’s poor financial position. Bank license was revoked in January 2014, and in February Mr Fetisov was arrested on charges of RUR 10B embezzlement from bank. RF Central Bank claims money were withdrawn from the bank as loans to sham companies before the sale
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Trends• Russian courts apply corporate veil piercing• Skakovaya-5 – bona fide purchaser status• Citadele Banka (Parex) – bank licensing rules• Severnuy Kuzbass – thin capitalization rules
• Standards for Directors’ liability grow stricter • Supreme Arbitrazh Court Plenum Ruling #62• Pre-bankruptcy rules – statute amended in 2013• Kirovsky Zavod (Doroga) case – Director’s duties
• Interested transaction rules reform would cover wider scope of affiliates, including informal ones• Statutory criteria for affiliates are debated
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Creditor Case Study 1
Mr. XBeneficiary and shareholder in
Russian companyConstruction
business Personally held
General Director position as well
• Company was involved in construction project, hired sub-contractors
• The project owner never paid, business had no funds to repay sub-contractors
• Considered the company as a write-off• Sub-contractors filed for bankruptcy and
RUR 160m director’s personal liability claimChallenge: Protection from very formal and rigid rules of RF insolvency legislation, imposing director’s liability for debtor company in full for failure to file insolvency application or transfer accounts to insolvency officer
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Creditor Case Study 2
Mr. YFamily office of a
Russian HNWIInvested into a
start-up business For two years
acted as a dormant financing partner
• Operational partner requested additional funding to overcome “liquidity issues”
• Investor had concerns on mismanagement• Audit, legal and technical DD conducted• Management abuse revealed, funds wasted• Operational partner formally not related to
any misfeasance triggering personal liabilityChallenge: Review and analysis of complicated and entangled governance, decision and financing structure to reveal any grounds for operational partners’ personal liability for waste and embezzlement, locating his assets
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Creditors Risk Mitigation• Structure business in watertight vehicles for
various types of assets or business activities • Thinly capitalized subsidiaries are not prohibited,
but major shareholder can be potentially liable • Protect identity of the beneficiary, e.g. by creating
plausible role (e.g. a hired manager after sale of business to a strategic investor)
• Do not personally hold director positions NB: Delegate operational management , and if
personally involved into decision making try not to leave paper track as shadow director concept is likely to be applied by Russian courts
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Risks for PEPs
Gennady Gudkov
State Duma Deputy from opposition2011: Supported
street protests2012: Expelled from Duma on accusations of
business activity in form of holding & voting shares in a
company
Igor ShuvalovFirst Deputy
Prime Minister 2012: US SEC, FT and WSJ reported
possible conflict of interest
Denies conflict, states that assets are held in a blind trust2013 Moves assets
to RF to comply new rules
Vladimir PekhtinState Duma Deputy from United Russia,
Ethic committee chair
Watchdogs revealed undeclared property
in Miami, USInitially denied, then
alluded mistake Resigned from Duma, works at
RusGidro
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Typical Weak Points• Assets owned or actually used but not declared • Gap between declared income and assets/lifestyle • Owning or de-facto controlling business • Business structured in a straightforward way • Personal assets structured poorly or held directly• Hasty attempts to cover up tracks make it worseNB: As declaration deadline approached in 2013, a number of high-ranked officials divorced, leaving businesses and inappropriately valuable assets to ex-wives. These include Zhirinovsky, head of LDPR party and some 30 State Duma deputies, as well as $450M worth Maxim Liksutov, head of Moscow Transportation Dept. and (ex)owner of Aeroexpress, railroad service connecting Moscow with airports
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Trends• 2013 Declaration campaign: Income disclosure• De-offshorization policy: capital should return home• Federal Law 196666-6: introduces UBO concept,
tax authorities can receive personal bank accounts data, toughens currency control rules
• Tax rules aimed to deter evasion• DTT benefits can be subject to UBO disclosure • CFC bill is being under development
• Anti-Corruption rules for state officers• Bank accounts abroad had to be closed• Securities held abroad had to be disposed of
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PEP Case Study
Mr. XRussian HNWI
Holds political positionNo active holding or
involvement in business management Business transferred
and being run by a sonSon suddenly dies,
leaving no will
• On son’s death shares passed under intestacy under Russian law, partly to farther
• Political position the Client holds requires declaration of shareholding
• Voting by shares can be considered as restricted business activity, holding is a grey area
Challenge: Weighting legal and political risks of involuntary receipt of shares and timeframe for disposing of the same
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PEP Risk Mitigation• Full compliance with restrictions, where possible• Structuring business holding using blind trusts • Using vehicles with no UBO (funds, charities)• Some rely on relatives as trustees or front-persons• Providing plausible explanation for assets
(including ones being used, not owned) or lifestyle• Being reasonable – do not hold assets directly on
PEP’s personal name, be moderate in lifestyle
NB: Watchdog activism has increased in Russia over last few years, when activist reveal and publicly disclose undeclared property of state officials
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Questions?