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Whatever happened to the Magnitsky money?

Efforts to track down hundreds of millions of stolen dollars from one of Russia’s loudest scandals suggest it’s just the tip of the iceberg.

Magnitsky 12 13 2012Enlarge
Magnitsky's case symbolizes the confluence of corruption, repression and human rights abuse that's flowered under Putin. (Andrey Smirnov/AFP/Getty Images)

MOSCOW, Russia — Sergei Magnitsky’s brutal death in a Moscow prison in 2009 has come to symbolize the confluence of corruption, repression and human rights abuse that’s flowered under President Vladimir Putin. His imprisonment and torture, detailed in a documentary film and many journalistic accounts, have brought the Kremlin condemnation from around the world.

But one key part of the scandal remains unsolved: What happened to the $230 million Magnitsky claimed bureaucrats had embezzled?

Now a recent investigation by a media NGO called the Organized Crime and Corruption Reporting Project, together with Barron's and the independent Russian newspaper Novaya Gazeta, has gathered documentary evidence apparently tracing some of the stolen money to two well-connected businessmen.

A workaholic lawyer hired by the London-based fund Hermitage Capital Management to track down money stolen in its name, Magnitsky was jailed by same police he had accused of taking part in Russia’s largest tax fraud.

He died a year later at age 37, alone and in a pool of his own urine after being beaten by prison guards, allegedly to make him recant his accusations. He had been refused medical aid for the pancreatitis he developed in prison.

Drawing on sources inside the police and other government agencies, the journalists tracing the Magnitsky money examined police documents, financial statements and court decisions, said Roman Anin, who led Novaya Gazeta's part of the investigation.

He said a court ruling on the bankruptcy of a Russian bank called Krainy Sever and documents from an unfinished police money laundering investigation helped uncover a scheme involving more than 10,000 financial transactions in Russia and still more outside the country.

The investigation contends that officials from a tax office Magnitsky had linked to the fraud obtained high-end real estate with some of the stolen money, including luxury apartments in Dubai on a group of artificial islands in the shape of a date palm tree. They were bought shortly before Magnitsky — who worked for the Moscow law firm Firestone Duncan — was jailed in the notorious Butyrka prison in November 2008.

Bank statements showed the apartments were partly paid for by Vladlen Stepanov, the former husband of the head of one of the two tax offices that enabled the fraud. Copies of Credit Suisse transaction records show Stepanov made payments of several hundred thousand dollars each on units in the Kempinski Residences Palm Jumeirah.

Besides Stepanov, the investigation ties some of the stolen tax money to Denis Katsyv, son of the Moscow Region’s former transportation minister.

“They are the first persons ever to be proven to have received money from the Magnitsky affair,” said Drew Sullivan, editor of the Organized Crime and Corruption Reporting Project, in an email to GlobalPost.

“We tracked maybe $2 million of the $230 million and got lucky,” he added. “Russian law enforcement could do this easily, but failed. That’s a gross injustice.”

According to Hermitage, the fraud began after police confiscated corporate and tax documents and seals during a raid on its offices in 2007. Thieves later used them to hijack three Hermitage-controlled companies. Impersonating Hermitage employees, they pled guilty to crimes for which the company was then fined in order to make it appear unprofitable. The three companies then proceeded to apply for the largest tax refund in Russian history. It was granted the same day.

Tracing some of that money through a maze of banks and companies in Russia, the Novaya Gazeta/OCCRP/Barron's investigation led to Krainy Sever, which apparently served as a hub for moving vast sums of laundered money abroad.

The Central Bank canceled Krainy Sever's banking license for violation of a law against money laundering in March 2008. However, clients had already moved $300 million to bank accounts in Cyprus, Estonia, Kyrgyzstan, Latvia, Lithuania, Moldova and Ukraine that belonged to companies from the United Kingdom, the British Virgin Islands and Belize, the investigation showed.

Attempts by GlobalPost to reach Vladlen Stepanov through Volsstroi, the company where Stepanov has said he is commercial director, were unsuccessful. He previously declined to meet with Novaya Gazeta, telling the newspaper through a representative that he had nothing to do with the Magnitsky affair or the theft of tax funds.

The investigation showed that $857,000 flowed from Krainy Sever to  Prevezon Holdings, a Cyprus company owned by Katsyv, though two Moldovan