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Asset protection: threats and solutions for Russian private clients Ilya Aleshchev, Partner, Alimirzoev & Trofimov law firm, Moscow.

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Presentation on theme: "Asset protection: threats and solutions for Russian private clients Ilya Aleshchev, Partner, Alimirzoev & Trofimov law firm, Moscow."— Presentation transcript:

1 Asset protection: threats and solutions for Russian private clients Ilya Aleshchev, Partner, Alimirzoev & Trofimov law firm, Moscow

2 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 a business Cyprus/BVI structured Foreign bank accounts

3 Divorce Disputes Dmitri Rybolovlev Wealth: $9.1B Wife filed for divorce in 2008 Swiss court issued freezing order over assets held in trusts Trustee accused wife of $25M ring theft Case still open Arkady Rotenberg Wealth: $3.3B Filed for divorce in 2013 Wife challenged Russian law pre- nuptial agreement Challenge failed Vladimir Potanin Wealth: $14.3B Filed for divorce in 2013, for asset division in 2014 Wife obtained discovery orders in US courts Case still open

4 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

5 Divorce Case Study 1 Mr. X Russian HNWI Involved in business projects structured mainly offshore Acted as a front-person for PEP partners Married 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

6 Divorce Case Study 2 Mr. Y Russian businessman Built highly successful business from scratch, prepared to sell it to a strategic investor Married for 18 years No 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 further Challenge: Building the new corporate structure being recipient of business sale proceeds and yet formally unrelated to the Client

7 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 risk NB: If the proceedings have already started, try limiting wife’s access to the “real money” to prevent further discovery and litigation funding

8 Inheritance Disputes Leonid Rozhetskin Business: LV Finance Gone missing in 2008 Death 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 TV Died in 2008 Heirs, creditors and executor fought for estate in English, US, Gibraltar and Georgian courts with conflicting outcomes Family secured assets

9 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

10 Inheritance Case Study 1 Mr. X Russian businessman Major shareholder in a food production business (personally) Died in 2010 Left 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

11 Inheritance Case Study 2 Ms. Y et al Spouse, parents and minor children inherited majority stake in a Russian business Another 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

12 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 advance NB: 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.

13 Creditor Protection Sergey Pugachev Business: OPK, Mezhprombank 2010: Bank failed to pay €200M bonds, lincense revoked 2013: flees county, put on wanted list OPK 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

14 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

15 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

16 Creditor Case Study 1 Mr. X Beneficiary and shareholder in Russian company Construction 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 claim Challenge: 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

17 Creditor Case Study 2 Mr. Y Family office of a Russian HNWI Invested 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 liability Challenge: 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

18 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

19 Risks for PEPs Gennady Gudkov State Duma Deputy from opposition 2011: Supported street protests 2012: Expelled from Duma on accusations of business activity in form of holding & voting shares in a company Igor Shuvalov First Deputy Prime Minister 2012: US SEC, FT and WSJ reported possible conflict of interest Denies conflict, states that assets are held in a blind trust 2013 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, US Initially denied, then alluded mistake Resigned from Duma, works at RusGidro

20 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 worse NB: 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

21 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

22 PEP Case Study Mr. X Russian HNWI Holds political position No active holding or involvement in business management Business transferred and being run by a son Son 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

23 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

24 Questions?

25 Thank You For Attention! Ilya Aleshchev Alimirzoev & Trofimov law firm, Moscow

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