The UK Firm at the Heart of a High-Level Fraud Conviction in Russia

By David Leask, a freelance journalist. Originally published at openDemocracy

It was the middle of November 2017 and a clerk in the glass-and-steel headquarters of Companies House in Edinburgh had just stamped a routine and unremarkable document.

This was an LP6, a form that records, for the UK’s corporate registry, any changes in the nature of a limited partnership.

The sheet of paper, which bore an indecipherable signature, said that a business called Newbay Investments LP had been dissolved four months earlier.

Companies House clerks do not routinely check whether such filings are accurate. So officials simply logged the paper and published it online. Newbay Investments was no more.

The business ceased trading, according to that seemingly inconsequential form, roughly two weeks before it was due to hand over details of the ‘people with significant control’ (PSC) of the organisation.

Newbay Investments was a type of business called a Scottish limited partnership (SLP). Transparency International has called SLPs “the UK’s homegrown secrecy vehicles” for their lack of transparency over ownership and use in high-profile money-laundering cases.

Anti-money laundering measures introduced by the UK government a few months before Newbay was seemingly wound up had required all SLPs to identify its PSCs by a certain date, and send the information to the authorities. As it was, the business never had to do this.

Nobody heard the words “Newbay Investments” for another 12 months, when two leading Russian businessmen, Ziyavudin and Magomed Magomedov, were arrested on embezzlement and organised crime charges in 2018.

It took a further four years for a Moscow court to rule that Newbay Investments had, in fact, been under the control of a Russian organised crime group – a process that finally came to an end last week.

More specifically, a panel of three judges determined that Newbay Investments was in the hands of Ziyavudin and Magomed Magomedov, businessmen who were once politically well-connected in Russia.

Indeed, the Magomedov case, with all its political ramifications and through-the-keyhole look at the lives of the country’s mega-rich, has gripped Russia.

In a lengthy verdict, Moscow’s Meshchansky district court found the brothers guilty of racketeering and embezzlement on a grand scale.

The Magomedov and their associates had stolen, the judges said, some 11 billion roubles (about £143m).

Ziyavudin, 54, was sentenced to 19 years behind bars. Magomed, his older brother, received 18 years in prison. A number of co-accused also received lengthy custodial sentences.

In addition, the court ordered the confiscation of billions of roubles, a Porsche and other cars, a Gulfstream corporate jet, two homes in Moscow, and four apartments in London. The British properties were registered in the name of various corporations, according to local reports.

Another Moscow court had already ordered the seizure of $750m from the Magomedov brothers. At the time, it was said to be the biggest recovery operation of the proceeds of crime in Russian history.

The Magomedovs and their co-accused, first arrested in 2018, have always maintained their innocence. Russian media reports suggest the brothers and their associates intend to appeal the 1 December verdict.

Ziyavudin led a holding company called Summa with interests in strategic sectors such as Russian telecoms, ports and oil transportation infrastructure. He has described the case against him as a “symbiosis of lies and absurdity”. Magomed has said the organised crime group described by prosecutors is a “mythical” construct.

Speculation has swirled around why the brothers, once feted by the Kremlin, were prosecuted.

Back in 2018, the Russian newspaper Novaya Gazeta suggested the Magomedovs’ legal problems began after they started showing political interest in their native North Caucasus republic of Dagestan. The brothers are ethnic Avars, the largest of the different groups which live in Dagestan.

The Magomedovs were previously said to be close to Dmitri Medvedev, Russia’s former president and prime minister.

openDemocracy approached the Magomedovs’ defence lawyer for comment but did not receive a response.

Ziyavudin, who was estimated to be worth more than $1bn in 2017, held several high-profile roles in the world of sport and culture. He used to be president of Vladivostok’s Admiral hockey club and was on the board of trustees of both the Bolshoi Theatre and the Russian Tennis Federation. Magomed sat in the Federation Council, the upper house of the Russian parliament.

Now, the pair have now been stripped of all their honours.

Their prosecution under Russian organised crime legislation was widely seen as a warning shot to big business. Economist Sergei Aleksashenko, a former minister and central banker, on Tuesday told independent Dozhd TV that the Magomedov cause showed to oligarchs who are in the sights of Russian law enforcement that “it was better not to resist”.

The Magomedovs were specifically convicted of misappropriating public funds for construction work on a railway, on Kaliningrad airport and on two of the stadiums built for Russia’s 2018 World Cup. They were found to have used Newbay Investments – the Scottish limited partnership that officially ceased trading in November 2017 – to carry out more than $20m worth of fake transactions via OZK, Russia’s semi-privatised national grain company. The brothers deny this, saying that contracts between Newbay Investments and OZK were not fictitious but had simply fallen through.

Yet the role played by this Edinburgh ‘ghost’ firm in the saga has once again highlighted how little scrutiny there is on thousands of offshore-owned UK corporate entities.

“This case points to a contradiction at the heart of our anti-money launder system,” explained Kristian Lasslett, a criminology professor at Ulster University.

“The policing frontlines are staffed by private sector organisations, such as banks and company formation agents, who are obliged to identify and report shady actors.

“Most on the frontline do not want the job, are frequently found to be doing lousy work, and face little in the way of sanction even when asleep at the [anti-money laundering] wheel.”

Newbay Investments is typical of the Scottish limited partnership genre.

It was set up in 2010 and registered, along with thousands of similar entities, at an Edinburgh residence two miles from Companies House. Its entire public bureaucratic footprint consists of two filings. One is its certificate of registration. The other is the belated LP6, effectively its dissolution.

These documents do not cast any light on who owned or controlled Newbay Investments or what it did in its seven years as a commercial entity.

That said, Companies House filings do reveal which company formation agent created Newbay Investments and who hosted it.

Newbay’s certificate of registration has the stamp of Kearney Curran & Co, which describes itself as one of Ireland’s biggest company formation agents.

A prolific creator of SLPs and other entities, Kearney Curran’s managing director Desmond Kearney declined to answer questions about Newbay Investments.

“I can’t discuss any of that,” Kearney told openDemocracy.

There is no suggestion that Kearney, who, according to his LinkedIn profile, has run his business for 37 years, would have any knowledge of how Newbay Investments was used after its incorporation.

Kearney Curran’s website explains that it does not necessarily do its own due diligence on clients. It says that under Ireland’s 2010 money-laundering legislation, “we can rely on regulated customers (certain Accountants, Auditors, Lawyers and others) to obtain and hold such information and under agreement, to release this to us if requested”.

Newbay’s certification of registration names its official partners, two shell corporations registered in the same office in Belize, a known secrecy jurisdiction.

This is the typical structure of the kind of enterprise once and openly widely marketed in the former Soviet Union as a “Scottish zero-tax offshore company”.

The final piece of information on Companies House is the registered address of Newbay Investments: 78 Montgomery Street.

But Newbay had no office there. In reality, 78 Montgomery Street was the home of a now dead company formation agent called John Hein. It was also the official headquarters of thousands of SLPs and other shell firms, including those named in some of the biggest money-laundering scandals of the last decade.

There is no suggestion that Hein knew anything about the activities of the businesses which, on paper at least, he hosted.

A founder of Edinburgh Pride and prominent liberal political activist, his normal business was setting up firms for Scottish entrepreneurs. He occasionally incorporated prank companies too, such as United States of America Limited.

Hein also provided an Edinburgh peg for SLPs created by other formation agents. In 2018, two years before his death, he told the Scottish paper The Herald that this side business had resulted in regular visits by the police. But, because of a quirk in Scots corporate law, he was unable to deregister firms from his home.

“If I got any money for it, it would be slightly more tolerable,” he said. “But I am not getting a penny.