AT Aleshchev asset protection presentation (ID 183823)

Asset protection:
threats and solutions
for Russian private clients
Ilya Aleshchev, Partner, Alimirzoev & Trofimov law firm, Moscow
What Dangers are for a Typical Russian Private Client?
Key risk areas:
Matrimonial disputes
Political risks
Can be
Owns a
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
Wife challenged
Russian law prenuptial 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
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. 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
• 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
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
• 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
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 exspouse 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
Inheritance Disputes
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
Business: Rosinka
Died in 2006
Business held by
Cyprus trustees
Trustees reportedly
attempted to seize the
Litigation continues
Arkady "Badri"
Business: Imedi TV
Died in 2008
Heirs, creditors and
executor fought for
estate in English, US,
Gibraltar and Georgian
courts with conflicting
Family secured assets
Typical Weak Points
There is very often no will or only Russian law will
Successionrarelyconsideredinbusiness 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. 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
Inheritance Case Study 2
Ms. Y et al
Spouse, parents and
minor children
inherited majority
stake in a Russian
Another shareholder in
the company becomes
more active
No shareholders’
• 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 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.
Creditor Protection
Business: OPK,
2010: Bank failed to
pay €200M bonds,
lincense revoked
2013: flees county,
put on wanted list
OPK assets seized
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
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
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
• 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. X
Beneficiary and
shareholder in
Russian company
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
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
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 opposition
2011: Supported
street protests
2012: Expelled from
Duma on accusations
of business activity in
form of holding &
voting shares in a
Igor Shuvalov
Vladimir Pekhtin
First Deputy Prime
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
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
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
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. 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
• 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
Thank You For Attention!
Ilya Aleshchev
Alimirzoev & Trofimov law firm, Moscow
[email protected]

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