Hulley v. Russia 2014
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year 2000.796 Claimants note that Respondent decided to carry out additional control measures and to review the 29 December 2003 audit report in light of Yukos’ objections but communicated no information about this review prior to issuing its Decision to hold Yukos liable on 14 April 2004 when it dismissed Yukos’ objections.797
750.The Tribunal does not accept that, if Yukos had acted as Respondent maintains, it would have been able to escape the imposition of fines. As with the issue of VAT liability, the Tribunal is convinced that had Yukos done so, the Russian Federation would still have found a way or a reason to impose the fines on Yukos.
vi.Was the Quantum of the Fines Reasonable, in Terms of Both the Rate and the Absolute Amount?
751.In its Counter-Memorial, Respondent compares the regime for fines in the Russian Federation with those that exist in other countries. Respondent notes that fines for taxpayers that have underpaid their taxes, whether or not associated with tax evasion, can lead to fines at rates ranging up to 300 percent of the evaded tax (this highest rate applies, according to Respondent, in Austria, the Netherlands, and Switzerland). On this basis, Respondent concludes: “It is clear from the foregoing that the fines levied on Yukos were not excessive by international standards.”798
752.The Tribunal notes that Claimants did not address this last submission of Respondent. In any event, given the Tribunal’s conclusions regarding the legitimacy of the willful and repeat offender fines imposed by the tax authorities on Yukos, it is unnecessary for the Tribunal to deal with this contention.
vii.Extracts from Other Yukos-Related Awards
753.In respect of the limitations period as it applied to the 2000 tax year, the ECtHR found, “notwithstanding the State’s margin of appreciation”, against the Russian Federation:
571. Turning to the facts of the case, the Court would note firstly that the rule which, in the present case, underwent changes as a result of the decision of 14 July 2005, was contained in Article 113 of Chapter 15 “General provisions concerning the liability for tax
796Ibid.
797Ibid., n.475.
798Counter-Memorial ¶ 1224.
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offences” of the Tax Code (see paragraph 403) and thus formed a part of the domestic substantive law. Even though the rule in itself did not describe the substantive elements of the offence and the applicable penalty, it nevertheless constituted a sine qua non condition with which the authorities had to comply in order to be able to prosecute the relevant taxpayers in connection with the alleged tax offences. Accordingly, Article 113 of the Tax Code defined a crime for the purposes of the Court’s analysis of lawfulness. It remains to be determined whether in the circumstances the decision of 14 July 2005 could be seen as a gradual clarification of the rules on criminal liability which “[was] consistent with the essence of the offence and could reasonably be foreseen” (see Kafkaris, cited above, § 141).
572.In this connection the Court may accept that the change in question did not change the substance of the offence. The Constitutional Court interpreted the existing rules on time-limits in relation to taxpayers who acted abusively. At the same time, the Court is not persuaded that the change in question could have been reasonably foreseen.
573.It observes that the decision of 14 July 2005 had changed the rules applicable at the relevant time by creating an exception from a rule which had had no previous exceptions (see paragraphs 86 and 88). The decision represented a reversal and departure from the well-established practice directions of the Supreme Commercial Court (see, by contrast, Achour, cited above, § 52) and the Court finds no indication in the cases submitted by the parties suggesting a divergent practice or any previous difficulty in connection with the application of Article 113 of the Tax Code at the domestic level (see paragraphs 407-408). Although the previous jurisprudence of the Constitutional Court contained some general references to unfavourable legal consequences which taxpayers acting in bad faith could face in certain situations, these indications, as such, were insufficient to provide a clear guidance to the applicant company in the circumstances of the present case.
574.Overall, notwithstanding the State’s margin of appreciation in this sphere, the Court finds that there has been a violation of Article 1 of Protocol No. 1 on account of the change in interpretation of the rules on the statutory time-bar resulting from the Constitutional Court’s decision of 14 July 2005 and the effect of this decision on the outcome of the Tax Assessment 2000 proceedings.
575.Since the applicant company’s conviction under Article 122 of the Tax Code in the 2000 Tax Assessment proceedings laid the basis for finding the applicant company liable for a repeated offence with a 100% increase in the amount of the penalties due in the 2001 Tax Assessment proceedings, the Court also finds that the 2001 Tax Assessment in the part
ordering the applicant company to pay the double fines was not in accordance with the law, as required by Article 1 of Protocol No. 1.799
754.On the issue of the “repeat offender” fines, the RosInvestCo tribunal held as follows against the Russian Federation:
From the evidence on file, the Tribunal concludes that the interpretation of Articles 122 and 114 of the Tax Code used on Yukos was not used before or thereafter in any
comparable cases. Again, this resulted in an extremely large liability in the range of US$ 3.8 billion.800
. . .
Repeat offender fines: The US$ 3.8 billion repeat offender fines on the basis of conduct pre-dating the tax audit again appears to the Tribunal as a departure from practice applied
799ECtHR Yukos Judgment, ¶¶ 571–75, Exh. R-3328.
800RosInvestCo ¶ 454, Exh. C-1049.
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earlier and from that granted to other companies and thus to be one part of a cumulative effort to prevent Yukos’ ongoing existence.801
(d)Concluding Observations
755.The Tribunal recalls that, at the outset of this chapter, it referred to the question put by Counsel for the claimant to the arbitral tribunal in the Quasar arbitration. “Why would Russia have treated Yukos as it did if its purpose was to collect taxes?”802
756.After having now traversed, at some length, the treatment of Yukos by Russian tax authorities, the bailiffs and the courts, and having considered the totality of the evidence, especially the VAT evidence, the Tribunal has concluded that the primary objective of the Russian Federation was not to collect taxes but rather to bankrupt Yukos and appropriate its valuable assets.
757.The principal reasons, discussed in this chapter, which lead the Tribunal to this conclusion include:
i)the attribution to Yukos of the revenues earned by its trading companies, even though there was no precedent in Russia for such attribution based on the theory of “actual owner”, and the refusal at the same time to give Yukos any of the benefits of the VAT filings made by the trading companies, with the result that Yukos was assessed USD 13.5 billion or 56 percent of the total tax claims levied against Yukos;
ii)the imposition on Yukos of the “willful offender” fines, at the very least as they related to VAT;
iii)the refusal of the tax authorities to give Yukos the benefit of Article 3(7) of the Russian Tax Code to resolve doubts as to the interpretation of Article 112(2) of the Russian Tax Code in favor of the taxpayer, with the resulting imposition of nearly USD 4 billion in “repeat offender” fines; and
iv)the imposition of “repeat offender” fines on Yukos when the conduct that was punished occurred prior to the determination by the courts that the conduct was wrongful; for example, the “repeat offender” fine assessed against Yukos for the
801Ibid. ¶ 620(c).
802See above at paragraphs 504 and 579.
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2001 tax year is based on the finding by the courts in 2004 that the conduct in 2000 was wrongful.
758.In reaching its conclusion, the Tribunal has also taken into account the fact that, in February 2007, before Messrs. Khodorkovsky and Lebedev had served half of their prison terms, the Prosecutor General’s Office levelled new charges against them, this time for theft of oil and funds from Yukos, embezzlement and money laundering.
759.As will be seen in subsequent chapters of this Part VIII of the Award which now follow, the Tribunal is sustained in this central and all important conclusion by its analysis of other disturbing facets of the Yukos saga, including:
i)the campaign of harassment carried out by the Russian authorities under the cloak of “investigative activities” including arrests, interrogations, searches and seizures against Yukos senior executives, mid-level employees, in-house counsel, external lawyers and related entities;803
ii)Yukos’ repeated, reasonable attempts to settle its tax debts with the Russian Federation, all of which proved futile;804
iii)the seizure of YNG, Yukos’ main production subsidiary, and its auction in questionable circumstances for an inadequate price;805
iv)the way in which Yukos’ bankruptcy proceedings were initiated and conducted;806 and
v)the pressure brought to bear by the Russian authorities on PwC, which ultimately conduced to the withdrawal of PwC’s audits of Yukos’ financial statements.807
760.The Tribunal will determine later in this Award how these conclusions impact the liability of Respondent under the ECT.
803See Chapter VIII.C.
804See Chapter VIII.E.
805See Chapter VIII.F.
806See Chapter VIII.G.
807See Chapter VIII.H.
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C.HARASSMENT, INTIMIDATION AND ARRESTS
1. Introduction
761.Claimants allege that Respondent carried out a campaign of harassment and intimidation of Yukos, its management, employees, external advisers and associates with a view to destroying the company and removing Mr. Khodorkovsky as a political threat:
In what has been described as “a literal orgy of lawlessness”, the Russian Federation instigated and conducted a campaign of terror aimed at depriving Yukos of its ability to run its business, and thus facilitating the destruction of the company. This was achieved through an escalating process of arrests, intimidation, harassment, searches and seizures. The breadth of the campaign, which targeted not only Yukos and its management but also entities and individuals associated with the company, and the flagrant violations of due process that characterized the actions of the Russian Federation, underscore both the ruthlessness with which the Russian Federation sought the destruction of Yukos and the coordinated nature of the attack.
The undeniable effect of the actions described below was to undermine the viability of Yukos, placing the Russian Federation in a position to carry out the dismantling of the Company.808
762.Claimants allege that Respondent’s harassment campaign has “continued throughout the time period at issue in these arbitrations and continues even today,” most notably with a second round of charges in 2007 against Messrs. Khodorkovsky and Lebedev leading to a trial described as a “travesty of justice” that resulted in a sentence of a further thirteen and a half years in prison.809
763.Respondent for the most part does not question the facts underlying Claimants’ allegations, though it does question the credibility of some of Claimants’ witness accounts. Rather, the events described by Claimants as constituting a campaign of “harassment and intimidation” are, according to Respondent, better characterized as legitimate acts of law enforcement undertaken in full compliance with Russian law and Russian practices as well as standards of other countries.810
764.In any event, Respondent considers the events complained of to be largely irrelevant to the Tribunal’s enquiry in these arbitrations. That is because Article 26 of the ECT limits the Tribunal’s jurisdiction to disputes alleging the breach of an obligation under Part III of the ECT, of which Articles 10(1) and 13 are directed only to investments, and afford no personal
808Memorial ¶¶ 106–7. See also Memorial ¶¶ 65, 83–197; Reply ¶¶ 17–94; Claimants’ Post-Hearing Brief ¶¶ 156–65.
809Reply ¶¶ 17, 41.
810See Counter-Memorial ¶ 673; Transcript, Day 18 at 113–21 (Respondent’s closing).
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protection for nationals. Respondent observes that “the alleged violations of the human rights of Messrs. Khodorkovsky, Lebedev and others . . . are outside the scope of this Tribunal’s jurisdiction, unless Claimants can establish that any such violations directly impaired the management or operation of their investments.”811 Respondent argues Claimants have failed to do so,812 and that the prosecutions of Messrs. Khodorkovsky and Lebedev did not destroy Yukos. To the contrary, Yukos exceeded its 2003 performance in 2004.813
765.The Tribunal recognizes that it is not a human rights court. Nevertheless, it is within the scope of the Tribunal’s jurisdiction to consider the allegations of harassment and intimidation as they form part of the factual matrix of Claimants’ complaints that the Russian Federation violated its obligations under Part III of the ECT. The Tribunal’s task includes determining whether the Russian Federation “in any way impair[ed] by unreasonable or discriminatory measures [Claimants’] management, maintenance, use, enjoyment or disposal” of its investment, or subjected Claimants’ investment to measures having the effect equivalent to an expropriation. In the context of that inquiry, the Tribunal will set out the evidentiary record with respect to the alleged “campaign of harassment and intimidation.”
2.Chronology of Facts
(a)Yukos Grows; Mr. Khodorkovsky Becomes More Politically Engaged; Yukos Leaders Receive Warnings
766.Claimants allege that by early 2003 “Mikhail Khodorkovsky’s participation in the social policy and political spheres in Russia, coupled with Yukos’ growing economic power, came to be perceived as a threat by the Russian authorities.”814
767.As already noted in Chapter VIII.B above, President Putin’s former Chief Economic Advisor, Dr. Illarionov alleged in his witness statement that around late 2002, a “special unit was set up at the General Prosecutor’s office, comprised of approximately 50 people and working exclusively on fabricating evidence against Mr. Khodorkovsky and Yukos.”815 The special unit
811Rejoinder ¶ 1335.
812Ibid. ¶ 1331.
813Russia’s Yukos says interim oil output up 5.3% on year in 2004, Prime–TASS Energy Service (Russia), 21 March 2005, Exh. R-509.
814Memorial ¶ 63.
815Illarionov WS ¶¶ 35–36.
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came up with approximately 15 possible theories to justify Mr. Khodorkovsky’s arrest, amongst them “tax evasion schemes allegedly set up either for Mr. Khodorkovsky’s personal benefit or for the benefit of Yukos.”816 Upon cross-examination, Dr. Illarionov declined to identify his source, a “high-placed official in the Russian Administration at the time” who still lives in Moscow, out of concerns for the official’s safety.817 Dr. Illarionov testified that the official told him the unit had “been created to ‘zanyatsa’ Khodorkovsky. . . ‘take care of’ Khodorkovsky . . which means one day some kind of security services and officers did receive an order so-called to solve the problem.”818
768.The turning point, according to Claimants, was a meeting at the Kremlin between President Putin and the Russian Union of Industrialists and Entrepreneurs on 19 February 2003, to which the Tribunal has referred earlier, at which Mr. Khodorkovsky delivered a speech about corruption in Russia.819 President Putin responded by alluding to some companies, including Yukos, having accumulated considerable wealth from non-payment of tax, and thus told Mr. Khodorkovsky that he was “passing the puck back to you.”820 At this point, according to Dr. Illarionov, the tone became “steely and menacing,”821 and from then on, the “gloves were off.”822 The Tribunal has observed earlier in this Award that the Russian authorities, particularly in the ZATOs, were questioning the legality of Yukos’ tax optimization scheme prior to the February 2003 meeting and that this meeting was not a “turning point” in terms of being the catalyst for challenging the Yukos tax scheme.823 Nevertheless the record does show that from around the time of the February 2003 meeting, the Russian authorities escalated the intensity and extent of their investigations into Yukos and associated individuals and entities.
769.In the months following the February 2003 meeting, Mr. Khodorkovsky’s financial support for
816Ibid.
817Transcript, Day 7 at 156–57.
818Ibid. at 158. As discussed below in Subsection 3(a), Respondent describes Dr. Illarionov’s evidence as “rank hearsay” and a “lie”, Transcript, Day 18 at 114–16.
819Memorial ¶¶ 63, 86–91.
820Excerpt of Television Report “Un milliardaire en Sibérie” broadcast on TF1 on 1 October 2006, Exh. C-590; Video recording and transcript of the meeting of the members of the Union of Industrialists and Entrepreneurs with President V. Putin held in the Ekaterininsky Hall, Kremlin, on 19 February 2003, Exh. C-1396.
821Illarionov WS ¶¶ 31–32.
822Ibid. Memorial ¶¶ 86–91. See also Statement of Prime Minister Mikhail Mikhailovich Kasyanov to the ECtHR, 8 July 2009, in Khodorkovskiy v. The Russian Federation (Application Nos. 5829/05, 11082/06 and 51111/07) ¶¶ 10–12, Exh. C-446.; Kovalev Report ¶ 53.
823See above at paragraph 513.
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opposition parties, including the Communist party, apparently was increasingly of concern to President Putin. For example, Mr. Dubov testified that President Putin had advised Mr. Khodorkovsky in April 2003 to restrict his political activities and not to finance the Communists.824 Similarly, former Prime Minister Kasyanov testified to the ECtHR that a conversation with President Putin had left him in no doubt that “by funding the communists Khodorkovsky had crossed a line so far as Putin was concerned and that the criminal prosecution case of Yukos employees was started exactly because of the funding of political parties not sanctioned by Putin.”825
770.Mr. Khodorkovsky’s close business associate, Mr. Leonid Nevzlin, testified that in the Spring of 2003 the then Media Minister met him for lunch and informed him that “the decision had been taken to seize Yukos, and that [President Putin’s deputy chiefs of staff] would not stop at anything in order to achieve that end, including arresting Khodorkovsky.”826 From this, Mr. Nevzlin received the message that Mr. Khodorkovsky should put an end to his criticism of President Putin and his administration, “otherwise he could lose everything.” Mr. Nevzlin reported warnings from other sources at the time, including Sibneft’s Roman Abramovich saying President Putin told him he “would like to see Mr. Khodorkovsky’s bottom on a prison bench” and Federation Council members telling Mr. Nevzlin that Mr. Khodorkovsky “could face problems should he stay in Russia.”827
(b)Prosecutor General Launches Investigations Involving Searches and Seizures
771.From June 2003, the Office of the Prosecutor General of the Russian Federation launched a series of investigations against various members of Yukos’ management, most prominently among them Mr. Khodorkovsky and Mr. Platon Lebedev (GML director and close associate of Mr. Khodorkovsky).828 Mr. Lebedev was arrested on his hospital bed on 2 July 2003 on charges of fraud, embezzlement and tax evasion.829 Two days later, Messrs. Khodorkovsky and
824Dubov WS ¶ 69.
825Statement of Prime Minister Mikhail Mikhailovich Kasyanov to the ECtHR, 8 July 2009, in Khodorkovskiy v. The Russian Federation (Application Nos. 5829/05, 11082/06 and 51111/07) ¶¶ 17–19, Exh. C-446.
826Nevzlin WS ¶ 30.
827Ibid. ¶¶ 31–33.
828Memorial ¶ 108; ‘Chronology’, Attack on Yukos, Yukos Review, Special Issue, 2003, p. 5, Exh. C-22.
829Attack on Yukos, Yukos Review, Special Issue, 2003, Exh. C-22; Oil Executive is Arrested, and Russians Look for Putin’s Role, NY Times, 3 July 2003, Exh. C-637; Yukos oil oligarch arrested in raid, The Washington Times, 26 October 2003, Exh. C-658. Respondent points out that the ECtHR dismissed a complaint by Mr. Lebedev that the
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Nevzlin were summoned for questioning in what Mr. Nevzlin described as an “absurd” investigation.830 That same day, the Russian authorities raided the office of the registrar of Yukos’ shares and confiscated documents.831
772.On 11 July 2003, the Russian authorities conducted the first large-scale raid on Yukos. Yukos’ then Chief Financial Officer, Mr. Bruce Misamore, describes it as:
an incredible scene full of armed, masked officers—during which they trawled through our computer records for approximately 17 hours. This was to begin a wave of raids on Yukos’ Moscow headquarters and other companies affiliated with Yukos by investigative officers . . . sometimes accompanied by . . . heavily armed police officers.832
773.Yukos group Financial Controller, Mr. Frank Rieger, also recounts the raids on the accounting department, which started from July 2003. He describes how the staff was forced to stop work during the raid, that a Deputy Chief Accountant had been told by the authorities that they “knew that she had grandchildren, a dacha etc and that she had better tell them what they wanted to hear,” another staff member resigned having been told by the prosecutors it would be best for him, and that the authorities regularly seized “lorry loads of documents” in an unsystematic fashion, without leaving copies or any record of the documents seized.833
774.According to Mr. Misamore, the loss of key documents “created great difficulties not only in managing the company, but in preparing the annual financial statements.”834 Mr. Misamore elaborated that “these raids with the guys in their balaclavas and their AK47s coming in and harassing our employees, taking original documents away from our offices, not leaving us with any copies, we couldn’t even accomplish accounting . . . . We lost our entire U.S. GAAP consolidation accounting group by the end of 2004: they all left the company because they didn’t want to be harassed.”835 Steven Theede, who joined Yukos as Chief Operating Office in August 2003 noted that by the end of 2003:
Russian Federation violated its human rights obligations with respect to his health in detention conditions, Lebedev v. The Russian Federation (No. 1) (Application No. 4493/04), ECtHR Decision of 18 May 2006, Exh. R-4000.
830Nevzlin WS ¶ 34.
831“Yukos Repurchases its Shares,” Vedomosti, 7 July 2003, Exh. C-638.
832Misamore WS ¶ 31. See also “Police raid Russian oil giant,” BBC News, 11 July 2003, Exh. C-640; “Prosecutors Search Yukos Office for 17 Hours,” The Moscow Times, 14 July 2003, Exh. C-641.
833Rieger WS ¶¶ 27–28. See also Misamore WS ¶ 32.
834Misamore WS ¶ 32.
835Transcript, Day 4 at 244–45.
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It was obvious that . . . the Government was out to get us; it was that simple. The number of raids we had in the office, police coming and charging through our accounting department, knocking computers off desks, . . . tipping desks up on their side. I had four men in black masks outside my office with machine guns once, trying to get in.836
775.Following the arrest of Mr. Lebedev, the Board of Directors of Yukos set up a temporary ad hoc committee to assess the situation and potential risks related to the arrest, which was
chaired by Mr. Jacques Kosciusko-Morizet, then chair of the Board’s Audit Committee.837 Mr. Kosciusko-Morizet testified (over Respondent’s objection) about Mr. Khodorkovsky’s appearance before the ad hoc committee in August 2003.838 Although Mr. Khodorkovsky initially assured the Board that “everything is fine,” Mr. Kosciusko-Morizet pressed him for “some explanation” and recounted his response to the Tribunal:
He said the following, ‘I’m in touch with generals from the FSB’ [the successor of the KGB] . . . ‘They want a kompromat.’ . . . ‘kompromat’, which is a Soviet word . . . A kompromat is a document which gives you leverage on somebody, and practically forces him or her to follow whatever instructions he or she is given. And we asked, ‘What kind of kompromat do they mean?’ ‘Well’, he said, ‘all I have to do is write two lines: I committed criminal deeds.’ And then I said, ‘And what will happen if you sign such a kompromat?’ He said, ‘Nothing. They will just keep it, and from time to time I’ll receive a phone call asking me for some favour.’ And I asked again, ‘But for Yukos—so will you sign it?’ . . . He said, ‘No, I don’t want to live like that with my children.’ And then I said, ‘But under the assumption that you would sign it, what would happen?’ And his words were, ‘Well, if I would sign such a two-line letter, the problems of Yukos would disappear faster than it takes to switch off the light in this room.’ . . . And I did not leave this meeting in a very optimistic mood on future events. And indeed two months later he was in jail, in pre-trial detention. He did not sign the kompromat.839
776.Dr. Illarionov testifies that in September 2003 he met with Mr. Khodorkovsky to tell him he was in danger and it would be preferable for him to leave Russia. Mr. Khodorkovsky reportedly replied that he did not feel he had committed any offence and did not want to leave Russia.840
777.In early October 2003, the authorities conducted raids at the home of Mr. Lebedev, the offices of GML Management Services SA, and a boarding school for disadvantaged children sponsored by Yukos.841 Further raids were conducted in the office of Mr. Lebedev’s lawyer, a
836Ibid. at 9.
837Kosciusko-Morizet WS ¶ 23.
838Transcript, Day 4 at 226–28.
839Ibid.
840Illarionov WS ¶ 39.
841Memorial ¶ 161, Attack on Yukos, Yukos Review, Special Issue, 2003, Exh. C-22; Yukos Targeted in Three New Raids, The Moscow Times, 6 October 2003, Exh. C-652.
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