The suspected orchestrator of tax fraud channeled millions into lavish hotels in Dubai during the Magnitsky affair

The suspected orchestrator of tax fraud channeled millions into lavish hotels in Dubai during the Magnitsky affair

A company owned by the alleged mastermind behind a massive tax fraud in Russia poured millions into two luxury hotel resorts in Dubai, while the whistleblower who uncovered the tax scam died in a Moscow prison after being arrested and jailed.

Perched on a crescent of artificial islands known as Palm Jumeirah in Dubai, the Kempinski Hotel & Residences resembles a sprawling seaside palace.

Many of the 244-unit development’s luxurious apartments and villas have reportedly sold for millions of dollars, some even before the complex officially opened in 2011.

OCCRP reporters found that among the early investors was a company owned by Dmitry Klyuev, the alleged mastermind of a massive Russian tax scandal known as the Magnitsky Affair. 

The Magnitsky Affair was named after whistleblower Sergei Magnitsky, a lawyer who died in prison after giving evidence to Russian prosecutors about the fraud, only to be arrested himself on tax evasion charges. The fraud scheme he exposed involved $230 million being stolen from the Russian state and siphoned out of the country through a maze of shell companies.

OCCRP reporters’ new findings show that an offshore company owned by Klyuev paid for luxury property at two Kempinski resorts around the same time the fraud came to light and Magnitsky was arrested and jailed.

Dmity Klyuev, the alleged mastermind behind the tax fraud revealed by Sergei Magnitsky.

Although financial records obtained by the reporters don’t provide a complete picture of where the money used by Klyuev’s company to purchase properties came from, they found that around the time of several of the real estate deals, the offshore firm received millions of dollars from two companies involved in processing funds from the Magnitsky Affair. The timing of the events raises questions over whether the property investments may have been funded with money connected to the fraud scheme. 

Klyuev did not respond to questions. Kempinski Hotels did not respond to an invitation to comment. Nver Mkhitaryan, a former MP for the pro-Russian Ukrainian Party of the Regions who developed the resorts and whose companies were paid by Klyuev’s firm when it purchased the properties, also did not respond to a request for comment.

OCCRP has reported extensively on how Dubai has become an appealing option for those looking to launder or hide cash, due to its reputation for financial secrecy, low taxes, and valuable real estate. 

Leaked corporate filings show that Klyuev was the sole owner of a British Virgin Islands (BVI) company called Virginia Invest & Finance S.A. from 2006 to 2011. Reporters found evidence that during that time, the company spent some $15 million dollars on a villa and four luxury apartments in Dubai.

Excerpt from the purchase agreement for a villa bought by Virginia Invest & Finance S.A.

The villa and apartments were purchased in May and June 2009, according to the Dubai transaction data, just as Magnitsky’s case was increasingly gaining international attention. Two apartments and the villa were bought on the same day, June 11, 2009, which is also when Magnitsky filed a complaint at the European Court of Human Rights about his conditions in prison in Russia.

The lawyer had been jailed in Moscow the previous year after testifying to Russian prosecutors. He had implicated Russian Interior Ministry officials and Klyuev in the complex tax fraud scheme. 

Magnitsky was beaten in prison and died in November 2009 at the age of 37 after being denied medical treatment for pancreatitis.

Whistleblower Sergei Magnitsky’s tombstone at Preobrazhenskoye Cemetery, in northeastern Moscow.

Klyuev went on to hand ownership of Virginia Invest & Finance in 2011 to a former Russian official. The company bought two more properties at the Kempinski Hotel & Residences in 2012, according to the Dubai transaction data, for just over $4 million. 

By 2016, the company had sold its properties for at least $13.7 million, taking losses on some of them – before being liquidated that December. 

Tax officials implicated in the fraud also spent millions on property at Kempinski Hotel & Residences between 2008 and 2010, as OCCRP has previously reported. None of the officials has been convicted for their involvement in the scheme.

The Kempinski Hotel & Residences in Dubai.

A criminal investigation by Russian authorities fixed legal blame for the massive tax fraud scheme exposed by Magnitsky on two low-level ex-convicts. Both pled guilty and got minimum sentences of five years in a correctional colony in 2009 and 2011.

However, the U.S. announced sanctions against those who it alleged were the real perpetrators in 2014. The Treasury Department alleged Klyuev had “masterminded” the scheme and had owned a bank that laundered around $97 million from fraudulent tax returns.

The sanctions were brought under the so-called Magnitsky Act, legislation that resulted from a campaign spearheaded by the investor Bill Browder, whose companies had been targeted by the fraud and who employed Magnitsky as a lawyer. 

Klyuev has never been charged over the tax fraud. 

A 10-year investigation by the Swiss Attorney General into funds linked to the Magnitsky Affair fraud ordered the seizure of assets worth about $19 million linked to Klyuev and others implicated in the case. But the case was closed in 2021 because there was not enough evidence to bring charges in Switzerland, according to an announcement by the Office of the Attorney General of Switzerland. Most of the frozen funds were released.

Tracing Klyuev’s Company 

OCCRP reporters traced Virginia Invest & Finance’s Dubai real estate purchases by scouring leaked records from Dubai and Cyprus, along with property transaction records and bank statements. 

Reporters found that the company was registered in 2005 in the BVI, a jurisdiction that offers corporate secrecy, keeping Klyuev’s involvement hidden behind corporate services providers.

However, leaked corporate filings from Cyprus-based services provider ConnectedSky Legal & Corporate Consultants Ltd revealed that Klyuev was the sole shareholder of Virginia Invest & Finance from 2006 until 2011, when he transferred ownership to Sergey Smorodin, a former regional minister in Russia. 

Management of the company was handed over to ConnectedSky under a January 2013 letter replacing its previous BVI services provider Trident Trust (BVI) Ltd. 

The January 2013 letter was signed by Smorodin, who was by that time the company’s beneficial owner. A previous OCCRP investigation found Smorodin had served as a proxy for Klyuev in several cases. (Smorodin did not respond to a request for comment.)

The 2011 document transferring ownership of Virginia Invest & Finance from Klyuev to Smorodin.

OCCRP reporters discovered the ConnectedSky documents among leaked files from Cypriot corporate service providers that were the foundation for Cyprus Confidential, a global investigative collaboration led by the International Consortium of Investigative Journalists (ICIJ) and Paper Trail Media. 

Reporters analyzed Virginia Invest & Finance bank statements with Dubai property transactions data to establish the extent and value of the real estate payments made by Klyuev’s company. The records show the firm, while under Kyluev’s ownership, financed the acquisition of four luxury apartments at Kempinski Hotel & Residences and a villa at the neighboring Kempinski Emerald Palace (later rebranded as Raffles The Palm Dubai) for a total of at least $12.5 million.

Following its transfer to Smorodin, the company spent another $4 million, in March and April 2012, on two additional properties, according to leaked Dubai real estate transaction data. 

Virginia Invest & Finance may have also spent another $8.7 million on two other Kempinski Hotel & Residencies properties at the time the company was owned by Klyuev, according to bank statements reviewed by reporters, but these purchases could not be confirmed in the Dubai property registry and were not included in the total property spending figures. 

The Dubai transaction data was part of a trove of leaked information that formed the basis for the Dubai Unlocked investigation in which OCCRP and more than 70 other media partners exposed the potential scale of illicit money invested in Dubai real estate.

Sold For a Loss

The records from Dubai show that Klyuev’s company took a significant loss on the $8.4 million, 15,915 square foot (1,479 sq.m) villa at the Emerald Palace, purchased in 2009, and sold for just $5 million in 2016.

Virginia Invest & Finance purchased a villa at Kempinski Emerald Palace (later rebranded as Raffles The Palm Dubai.)

That wasn’t the only apparent failed investment: two apartments purchased for a total of $4 million in March and April 2012 were sold later that year at a combined loss of $1.7 million.

The seven properties acquired by Virginia Invest & Finance between 2007 and 2012 that were confirmed in the Dubai property data were all sold either at a loss or for roughly the same price they were originally purchased. 

Kathryn Westmore, who leads the Royal United Services Institute’s (RUSI’s) work on financial crime policy, said the sales of the properties gave Virginia Invest & Finance cash with a legitimate origin, and the pattern of selling properties for a loss could raise questions over the commercial rationale for the sales.

“What you have at the end of the process is, for the villa, $5 million in cash and a paper trail showing it came from the sale of a villa in the UAE, that lawyers and banks were involved, so now you can demonstrate where that money came from,” Westmore said.

The sales were not “definitive proof of money laundering,” Westmore said, but they should have attracted extra scrutiny.

“You might be able to explain one property sold at a loss, but to have multiple high-end real estate assets sold at a loss, especially in a short timeframe, should raise some red flags as being potentially suspicious – any regulated professional involved in the sales would need to understand the commercial justification for selling at a loss,” she said.

Documents show that Smorodin initiated liquidation proceedings for Virginia Invest & Finance in August 2013. According to BVI registry records, Virginia Invest & Finance’s liquidation application was submitted in August 2014, three months after Klyuev was sanctioned by the U.S. Treasury – and was completed in December 2016. 

A Complex Web of Funds

OCCRP has previously reported on Klyuev’s taste for luxury real estate. In 2023 reporters found that a company he owned had spent $3.3 million on a villa at a resort called Cap St Georges in Cyprus in October 2009 – just one month before Magnitsky’s death in a Moscow prison.

Aerial shot of seaside luxury villas at Cap St. Georges Beach Club Resort in the Paphos region of Cyprus.

That investigation also revealed that two Klyuev-linked companies — BVI-registered Vicolo Corporation and Mander Holding & Finance Ltd — received funds from firms the U.S. Treasury alleged were involved in the Magnitsky Affair tax fraud scheme.

Bank records reviewed by reporters show that Vicolo and Mander transferred at least $6.2 million to Virginia Invest & Finance between 2008 and 2010. While the records do not specify the purpose of the transfers, their timing – overlapping with payments for high-end Dubai properties – raises questions about whether the funds were used to finance those purchases.