Putin’s Billionaires Dodge Sanctions by Financing Lawsuits (1)

An investment firm founded by Russian billionaires with ties to Vladimir Putin has financed lawsuits around the world, in some cases working with the company’s directors, clients, and Russian banks in an effort to evade international sanctions.

A Bloomberg Law investigation found that A1, a subsidiary of Russian financial giant Alfa Group, has backed lawsuits in New York and London, both before and after three of its billionaire founders were sanctioned following the 2022 invasion of Ukraine.

While banks and financial firms are easy targets for Western governments, the opaque world of litigation finance is more elusive. With no reporting requirements and few regulations, deep-pocketed investors can pour millions of dollars into a case without ever appearing on a court docket. That’s opened a new kind of cross-border cash spigot used to skirt international law and the spirit of why sanctions were imposed in the first place.

“I think it’s a big development in that sense because it kind of puts the US judicial system on par with the New York Stock Exchange and the US dollar as things that we need to start thinking carefully about how to deny access to,” said J. Scott Maberry, a partner at Sheppard Mullin who represents clients in sanctions matters.

Federal agencies will need to start considering litigation finance when searching for ways that sanctioned entities are interacting with capital markets, he said. He’s not the only one drawing attention to the industry.

The lack of reporting requirements has attracted criticism. The US Chamber of Commerce argues that the shortage of available information about who is financing cases opens the door for foreign adversaries to undermine US national security. The Chamber has supported legislation from House Speaker Mike Johnson (R-La.) and Sen. John Kennedy (R-La.) that would regulate foreign entities’ ability to fund litigation.

A1 has spent about $20 million in ongoing bankruptcy cases in New York and London on behalf of a Russian agency seeking to recover assets from a brother and sister accused of embezzling more than $2 billion from a Moscow bank. The cases show how A1 was able to continue its funding even as people and companies connected to it were sanctioned.

Just six days after three of its billionaire directors were sanctioned in the UK, they sold the company for about $900 to another A1 director who hadn’t been sanctioned, according to testimony this month in one of the London bankruptcy cases. Attorneys for the fugitive Russian banker fighting an A1-funded claimant called the transaction a sham to evade sanctions.

“It very likely follows that there has been to some degree a scheme of concealed sanctions evasion,” if sanctioned people remained in control of A1 even after the sale, according to a March 13 UK court judgment in a related bankruptcy case funded by A1.

Alexander Fain, the director who bought A1, said in a witness statement in one of the bankruptcy proceedings, that the reason for the purchase was due to the “complicated geopolitical situation” potentially affecting the litigation.

“It became obvious that A1 LLC would no longer be able to operate normally and that there was a risk of default on its obligations to fund the litigation against Georgy Bedzhamov,” Fain said.

Fain could not be reached for comment.

Russian tanks had just started rolling into Ukraine on Feb. 24, 2022, when Western governments started sanctioning A1’s billionaire directors, and their lawyers began trying to minimize the impact.

Alfa Group, A1’s parent, was one of the first private conglomerates after the Soviet Union collapsed, controlling oil, mineral, shipping, banking, and investment firms that stretched beyond Russia’s new borders. Its directors, led by Mikhail Fridman and Petr Aven, were among the earliest post-Soviet billionaires and helped the company retain its influence after Vladimir Putin took power in 2000.

Fridman, Aven, and Alfa Group’s two other founders German Khan and Alexey Kuzmichev are each worth billions of dollars and are listed in the 2024 Bloomberg Billionaires Index. Fridman has the highest net worth of about $13 billion. Aven, Fridman, and Khan have owned mansions in and around London. Kuzmichev owned a villa in Saint-Tropez in France.

Fridman, Khan, Aven, and Kuzmichev did not respond to requests for comment.

The European Union and the UK soon sanctioned the directors. The EU alleged Fridman “has managed to cultivate strong ties to the administration of Vladimir Putin, and has been referred to as a top Russian financier and an enabler of Putin’s inner circle.”

Even before the Ukraine invasion, Putin worried that Alfa Group’s vast influence and wealth would make it a target for Western sanctions, Aven told US prosecutors working for Special Counsel Robert Mueller. Aven said he was one of about 50 Russian businessmen who met regularly with Putin, and he followed Putin’s orders to try to curry favor in the US to keep Alfa Group from sanctions.

It didn’t work.

“These oligarchs, businesses and hired thugs are complicit in the murder of innocent civilians and it is right that they pay the price,” said then UK Foreign Secretary Liz Truss in March 2022 when another of Alfa Group’s subsidiaries was sanctioned.

On March 15, 2022, the UK sanctioned A1’s directors, setting off a frenzy across the Atlantic Ocean in a Manhattan federal court. Within hours, A1 and its US lawyers began working to help get millions of dollars back to Moscow.

About six years earlier, a Russian state agency roughly equivalent to the Federal Deposit Insurance Corporation in the US, engaged A1 to help it recover billions of dollars. The money had been stolen by Larisa Markus and her brother Georgy Bedzhamov, who co-owned Russian bank Vneshprombank until it became insolvent in 2015, the Russian state agency said. Both were found guilty in Russian court of having committed large-scale fraud with estimated losses of about $2 billion. Markus was sentenced to nearly nine years in Russian prison, but Bedzhamov had already left the country. He continues to fight the bankruptcy cases in the UK and denies committing fraud.

The A1-backed Russian agency consistently won approval in New York state and federal courts to liquidate Markus’ assets, successfully fending off every attempt by her lawyers to block the sale of condominiums and other assets.

Then came the invasion.

A federal judge on March 15 blocked any transfers to Russia and ordered all estate assets to be placed in an escrow account. The balance now sits at about $7.5 million, and is not accruing any interest, court records show.

With the US account frozen, an A1 subsidiary in Gibraltar hired the law firm Hogan Lovells to write an opinion stating that Treasury Department sanctions did not apply in the New York bankruptcy case. On the same day, an A1-financed attorney in Moscow and attorney Stephen Selbst of Herrick Feinstein in New York sent separate emails to court escrow agent George Benaur. Each instructed him to send about $6.1 million to an account at the Central Bank of Moscow, which was already under US sanctions.

Selbst provided wire transfer numbers and instructed Benaur to contact A1’s in-house attorney, Dmitri Tchernenko, before sending the money, according to emails included in his March 17, 2022 filing. He also added a disclaimer: “This letter does not constitute any opinion or legal advice concerning application of United States sanctions against Russia, and this letter may not be relied upon for compliance purposes.”

Benaur immediately contacted Chief Bankruptcy Judge Martin Glenn by filing a letter with the court seeking the judge’s guidance on whether the transfer was permissible. Benaur told the judge he felt Selbst’s direction to send the money was “problematic.”

Glenn did not release the money.

Over the next several weeks, lawyers for Herrick Feinstein continued negotiating with the US Attorney’s Office, according to status conferences filed with the court in October 2022. One plan forwarded by A1’s lawyers called for creditors in the New York bankruptcy case, including a sanctioned Russian bank, to transfer their claims to A1. That would make the transfer legal, Herrick Feinstein attorneys wrote to prosecutors in the summer of 2022.

Assistant US Attorney Lawrence H. Fogelman rejected the proposal.

“This type of shell game would undermine relevant U.S. sanctions, which are intended to prevent sanctioned persons from availing themselves of the U.S. financial system,” Fogelman wrote on Aug. 11, 2022. He added that the proposal was seemingly designed to sidestep laws that “prohibit sanctioned persons and those acting on their behalf from utilizing such mechanisms to evade, avoid, or circumvent such restrictions.”

In an interview with Bloomberg Law last week, Selbst said he and his clients abided by the judge’s rulings and avoided taking any actions that ran afoul of the sanctions. He added that the US Attorney’s Office has taken part in discussions and had “been quite firm about being involved with any actual or perceived violations of sanctions.”

Selbst declined to say whether A1 is still involved in the Markus case or providing any funding.

The litigation finance sector has risen to prominence in recent years. In the US, some legislators have taken aim at regulating the industry by introducing state and federal bills that would require all parties in a case to disclose if they are receiving funding from a third party. The main entity pushing for regulation is the US Chamber of Commerce, the largest lobbying group in the country and representative of the interests of multinational corporations.

In 2022, the chamber’s Institute for Legal Reform published a report outlining how the lack of regulation of litigation funding could provide a path for foreign adversaries to undermine US national security. This became a focal point of many of the regulatory bills.

Last year, Sens. Kennedy and Joe Manchin (D-W.Va.) and House Speaker Johnson introduced the proposed Protecting our Courts from Foreign Manipulation Act. The legislation, which has not been heard in committee, would regulate foreign entities’ ability to fund litigation by requiring disclosure of any foreign agents or investors financing a suit. It would also issue a ban on sovereign wealth funds and foreign governments from funding any US litigation.

“A1’s actions are an example of the problems that arise when foreign entities can finance litigation,” said Matt Webb, senior vice president for legal reform policy at the chamber’s Institute for Legal Reform.

“There’s a very, very real national security and economic security threat to the US and to US companies when foreign-based funding is present,” he said.

The American Bar Association’s best practices for litigation finance recommends that litigation should be managed and controlled by the party and party’s counsel.

A1 actively participated in the New York and London cases. Its senior attorney, Dmitri Tchernenko, directed legal strategies from Moscow and was involved in day-to-day decisions. Court records show he quizzed lawyers about motions they made in court and even the structure of a routine commission from sale of real estate. He told the lawyers to make the commission payment contingent on sending millions of dollars to an account at a sanctioned Russian bank, according to emails included in filings by the trustee.

In written responses to Bloomberg Law, Tchernenko said A1’s role as litigation funder is “to ensure that the cases are run according to agreed budgets and the legal strategy.”

He said A1 is funding at least a dozen cases around the world. He also wrote to Bloomberg Law that A1 stopped funding the New York bankruptcy in September 2023 when A1 was sanctioned. He didn’t respond to a question about how it divested from the case.

Thursday afternoon, Tchernenko announced in a social media post, that he has left A1 for a new venture.

In the UK, A1 remains unsanctioned, but the $900 sale caught the attention of the lawyers fighting litigation funded by A1. During a three-day hearing in March of this year, each side in the Bedzhamov proceedings debated whether the sale was designed as a way to keep A1’s sanctioned leaders in charge.

If the judge rules that the sale is evasion, it would call into question how money can be exchanged with the lawyers being funded by A1 as it could ultimately flow back to sanctioned individuals.

The UK’s Office of Financial Sanctions Implementation’s regulation states that a person must not deal with funds or economic resources if they have reasonable cause to suspect that they are held or controlled by a sanctioned person.

A1-funded lawyers for a bank trustee and Vneshprombank, which Markus and Bedzhamov were found guilty of defrauding in a Russian court, say it is not evasion, while Bedzhamov’s attorneys say it is.

Attorneys for the bank did not respond to requests for comment. One attorney for the trustee declined to comment and the other did not respond to requests for comment. The attorneys for Bedzhamov declined to comment.

During the court hearing, Bedzhamov’s attorney Justin Fenwick referenced correspondence his firm received from the Vneshprombank’s lawyers about the change in ownership.

He paraphrased their explanation during the hearing by saying, “‘You don’t need to worry about ownership and control any more, because we’ve sold A1; it all belongs to Mr. Fain now and he’s not sanctioned.’”

“How very convenient and how very implausible,” he added.

Vneshprombank attorney Fergus Randolph rebutted Fenwick during his arguments and said Fenwick, “has a problem, and one of his problems is that, although he might like to, might wish to have A1 LLC designated, it has not been.”

Fenwick argued that A1 is much more valuable than its price tag. Court records show that A1 had a higher value in previous years, with assets totaling $8.1 million and revenue of more than $11.5 million in 2021. Lawyers funded by A1 have also paid $6.6 million into the court as a security for payment of attorney’s costs if the bank and trustee lose.

Randolph, Vneshprombank’s attorney, argued that despite putting millions of dollars into funding the litigation, the case does not have value until completion.

“The claim is worth nothing until it is won and it is therefore correct that it doesn’t figure in the financial documents,” he said during the hearing.

Tchernenko echoed this in written responses to Bloomberg Law. He said that from A1’s auditor’s perspective, funding is considered an expense, and the investment is contingent on the success in court.

Randolph also announced that the Russian state agency that was the liquidator of the proceedings had decided to get a new litigation funder, and they are in the process of executing the terms and agreements of A1’s termination.

When the judge asked him whether similar issues regarding sanctions might arise, Randolph said, ”it would be a complete waste of everybody’s time, because essentially it would be swapping one thing for another.”

He also added that he couldn’t firmly state whether that would be an issue.

“I can’t say to you here and now that is indeed the position, because I don’t know the identity of the new funder,” he said.

Updated to reflect Tchernenko leaving A1 in the 44th paragraph.