A wealthy Russian father and son accused of defrauding shareholders in a major chemical company used New Zealand-registered trusts to hold a vast array of assets offshore, according to the Pandora Papers.
Vladimir Makhlai, 84, and his son, Sergei, 52, controlled Toglittiazot (Toaz), a major Russian producer of ammonia, a chemical used to make fertilisers.
In 2019, a Russian court found them guilty of a "large-scale" fraud that allegedly involved selling Toaz's products at artificially low prices to a Swiss trading company connected to the family. The Makhlais were sentenced to nine years in prison and ordered to pay compensation to other Toaz shareholders.
The Makhlais denied wrongdoing and have not served time in prison because they no longer live in Russia. Vladimir lives in the UK and Sergei in the US, where he is estimated by Forbes to have a net worth of $US1 billion.
In a statement after the 2019 sentencing, Toaz called the court's decision "groundless and absurd" and blamed the proceedings on a "long-lasting corporate conflict" with a minority shareholder.
Documents obtained by the Herald in the Pandora Papers reveal that some of the Makhlais' shares in Toaz, amounting to what Asiaciti described internally as a "controlling stake", were held through offshore structures that used New Zealand foreign trusts administered from an office in Auckland.
The New Zealand-based structures also held a range of other assets, including properties in Spain and North Carolina, a Chinese port, and shares in oil tankers.
Internal records from the New Zealand branch of Asiaciti Trust, which administered the trusts, provide a detailed insight into the Makhlai's complicated international financial affairs and their long-running feud with a rival Russian businessman that led to legal proceedings in several countries.
The Makhlais are among thousands of wealthy foreigners whose offshore assets have been laid bare in the Pandora Papers, a major international investigation by more than 150 media outlets including the BBC, the Guardian, and the Washington Post.
The Herald and TVNZ are the only New Zealand media organisations involved in the collaboration.
Co-ordinated by the International Consortium of Investigative Journalists, a non-profit network of investigative reporters based in Washington, D.C., the project is based on one of the biggest data leaks in history.
The Pandora Papers contain nearly 12 million documents from 14 service providers that set up and manage companies and trusts in low-tax jurisdictions around the world, including New Zealand.
Among the offshore providers is Asiaciti, a Singapore-based company with an office in Auckland that, for more than a decade, marketed New Zealand foreign trusts to its clients as a safe way to hold assets offshore without paying tax or disclosing their identities, without the stigma of a tax-haven.
Asiaciti declined to address questions from the Herald about specific clients, citing confidentiality, aside from saying there were "inaccuracies and instances where important details are missing" in the information provided to it for comment.
"We are committed to the highest business standards, including ensuring that our operations fully comply with all laws and regulations," the company said in a statement.
"The regulatory and industry landscape has evolved over the course of our 45-year history, and we have worked diligently to comply with prevailing regulations through this passage of time. Compliance is core to our business and we have adapted our company to meet the changing requirements. Any organisation operating over such a length of time is likely to have legacy matters that do not reflect the current business. We recognise there have been isolated instances in the past where we have not kept pace, and in these situations we have worked closely with regulatory authorities to address any deficiencies and quickly updated our policies and procedures."
Asiaciti's full response to our questions can be read here.
The Makhlai family has engaged Asiaciti New Zealand since at least 2008, the documents show.
Vladimir Makhlai was a chemical engineer in the Soviet Union and became director-general of Toaz in the 1980s. After the fall of the Soviet Union he was left in control of the company. Vladimir moved to the UK in 2005, where he claimed asylum and was granted an investor visa, and eventually handed over the management of Toaz to his son.
Sergei became head of Toaz in 2011. He moved to the US, where he lives in North Carolina. Attempts to reach Sergei Makhlai went unanswered.
The Asiaciti documents show that the Makhlais had a New Zealand foreign trust called the Mirror Trust, which was set up by Vladimir in 2009. Sergei was the main beneficiary with roughly a three-quarter share and his brother, Andrei, held the remainder.
The Mirror Trust owned a holding company in the British Virgin Islands, which in turn owned three other trusts formed in the offshore tax havens of Mauritius, Jersey and Guernsey.
Each of these trusts, in turn, held two further layers of BVI companies, ultimately splitting most of the family's shareholding of Toaz into five separate parcels amounting to 40.52 per cent of the ammonia producer.
Another even-more complicated structure under a New Zealand trust was headed by a company called Byzantine Group Holdings.
Notes from an Asiaciti trustee meeting in 2008, which recorded Sergei Makhlai in attendance, explained part of the rationale for the complex structure: "For Russian purposes it is important to have different registered agents and registered offices for the underlying companies - this means there are less questions from the Russian side if they 'look' like different companies (from anti-monopoly law position)."
Over the years, the documents reveal, there were family tensions between the Makhlais and communications between Vladimir and his sons were strained. By 2017, Vladimir, then in his 80s, was said to be estranged from Sergei and Andrei.
"We understand he is ... on bad terms with the sons so not talking to them," an Asiaciti representative said in one email.
The Mirror Trust structure was later replaced with a similar arrangement under a new trust, the Igloo Trust, which did not include Vladimir.
The documents also include details of the Makhlais' disputes with another Russian businessman, Dmitry Mazepin, who controlled a rival chemical company, Uralchem.
Uralchem bought a minority stake in Toaz in 2008 and in the coming years the relationship between the Makhlais and Mazepin grew increasingly hostile, culminating in legal proceedings in several jurisdictions and the criminal charges against Vladimir and Sergei.
According to trust meeting minutes, there were discussions while these battles were going on of wanting "to try and take the war to Mazepin" through the media and by crimping his ability to raise finance.
Internal Asiaciti notes looking back in 2018 at the state of play state that Sergei "was put on an Interpol list and possibility that he would be arrested and deported to Russia … Took approximately a year, but lawyers finally managed to prove the allegations that resulted in the Red Notice were false and to get it lifted."
Meeting notes indicate that Sergei's public relations advisers suggested they may be able to get Mazepin placed on US sanctions lists by using a cut-out law firm to approach both Democrat and Republican senators. It is not clear whether this suggestion was acted on and, in any event, Mazepin did not subsequently appear on any US sanctions lists.
According to the trust minutes, the Makhlais blamed Mazepin for their mushrooming legal problems in Russia, which culminated in their prosecution for an alleged "large-scale fraud".
At one point, Asiaciti's notes stated, the Makhlais wanted to sell their shares in Toaz because "they are tired of dealing with the issue", but any sale would be complicated by Vladimir and Sergei's criminal trial.
"Hope the Russian lawyers can slow the process down," said the notes of one meeting in Auckland in February 2019.
However, Vladimir and Sergei were convicted of fraud later that year and sentenced in absentia.
Andrei, Vladimir's other son, is based in Switzerland, where he has citizenship.
Notes from a 2018 trust meeting in Melbourne state that Andrei bought a ski resort without arranging financing, and there was uncertainty about whether the venture would be financially sustainable.
He was also "potentially under investigation" in Switzerland for not disclosing the true value of his Toaz shares, which could result in a $15m tax bill, the notes claimed.
Trustees considered that Andrei was "basically bankrupt" and that they would have to give him up to $US350,000 in annual "consultancy fees" to keep him solvent and make arrangements to clear funds in case they were required to pay for the ski resort or Swiss taxes.
In the US, Sergei has taken up American citizenship and now goes by the name George Mack.
"Seems healthy and fine," said one Asiaciti document of his life there.
