Asset protection: threats and solutions

for Russian private clientsIlya Aleshchev, Partner, Alimirzoev & Trofimov law firm, Moscow

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

Divorce Disputes

Dmitri RybolovlevWealth: $9.1B Wife filed for divorce in 2008Swiss court issued freezing order over assets held in trustsTrustee accused wife of $25M ring theftCase still open

Arkady RotenbergWealth: $3.3B Filed for divorce in 2013Wife challenged Russian law pre-nuptial agreement Challenge failed

Vladimir PotaninWealth: $14.3B Filed for divorce in 2013, for asset division in 2014Wife obtained discovery orders in US courtsCase still open

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

Divorce Case Study 1

Mr. XRussian HNWIInvolved in business projects structured mainly offshore Acted as a front-person for PEP partnersMarried for 20 yearsNo 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

Divorce Case Study 2

Mr. YRussian businessmanBuilt highly successful business from scratch, prepared to sell it to a strategic investorMarried 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

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

Inheritance Disputes

Leonid RozhetskinBusiness: LV FinanceGone missing in 2008Death not confirmed until 2013Assets held in trust and partly by partner Reportedly wife and son received nothing

Oleg Zakharov

Business: Rosinka Died in 2006Business held by Cyprus trustees Trustees reportedly attempted to seize the business Litigation continues

Arkady "Badri" Patarkatsishvili

Business: Imedi TVDied in 2008Heirs, creditors and executor fought for estate in English, US, Gibraltar and Georgian courts with conflicting outcomesFamily secured assets

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

Inheritance Case Study 1

Mr. XRussian businessmanMajor shareholder in a food production business (personally)Died in 2010Left spouse and minor childrenThere 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

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

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.

Creditor Protection

SergeyPugachev

Business: OPK, Mezhprombank 2010: Bank failed to pay €200M bonds, lincense revoked2013: flees county, put on wanted listOPK assets seized

Shalva СhigirinskyBusiness: Moscow city development2009: 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 orderUK Supreme Court denied freezing order, refused piercing of corporate veil, denied UK courts jurisdiction 2014 dispute settled

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

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

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

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

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

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 interestDenies conflict, states that assets are held in a blind trust2013 Moves assets to RF to comply new rules

Vladimir Pekhtin

State 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

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

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

PEP Case Study

Mr. XRussian HNWIHolds 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

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

Questions?

Thank You For Attention!

Ilya AleshchevAlimirzoev & Trofimov law firm, Moscowi_aleschev@atlawyers.com