The company had a large turnover, but actually made very little profit in Russia, which baffled the US directors and accountants, as the rest of their global offices had more or less the same margins, yet made much greater profits, no matter where in the world they operated. After a very detailed internal audit, a thorough investigation and a large number of unscheduled visits to retailers around Russia, a huge discrepancy was discovered between the number of units that were imported and those that were actually on the shelves. It was found that there was an estimated four or five times the number of batteries being sold than were registered on the export sheets from Ukraine. This meant that somewhere along the supply chain counterfeit batteries were being manufactured and sold as originals.
Counterfeiting was (and still is) extremely common in Russia; in fact, it has been estimated that probably 75 per cent of all products are fake, and you never really know whether you are buying the genuine product or a cheap counterfeit, repackaged and sold as the original. You need to know exactly what you are buying and be familiar with the supplier, and you always need to make sure that you only shop in the most well-known shops and supermarkets, although even they can occasionally get caught out by unscrupulous suppliers and clever conmen.
One famous case involved an Italian boutique selling very expensive designer coats in Smolenska Passage, an upmarket shopping mall in the centre of Moscow not far from the British Embassy. The coats were supposed to have come directly from Italy and had a huge price tag to match; however, the only thing that came from Italy was the labels – everything else was manufactured in sweatshops on the outskirts of the city. Admittedly, the templates were from actual one-off items bought in Italy, so in theory the coats were made from Italian designs, but they were sold as genuine imports and not cheap imitations made locally with substandard materials and shoddy workmanship. The owner of the boutique went over to Italy on a cheap package holiday once or twice a year, bought a few coats, brought them back to Moscow illegally and then counterfeited them. The owner eventually got caught, not because of a complaint, but because one of the designers instigated a global investigation and the Moscow shop was targeted.
Hundreds if not thousands of Russian retailers do exactly the same – buy templates from abroad while on holiday and have them copied and sold as originals. A major high-street pharmacy and one of the biggest chains in the Russian Federation was recently charged with selling a huge range of counterfeit perfume. Apparently, the main buyer was targeted by the Mafia and bribed to buy products from a company that specialised in counterfeiting fragrances. In the same year, a large supermarket chain was also caught selling hundreds of imitation goods.
Sadly, those who get caught are in the minority, as almost everything is counterfeited, from coffee, tea, olive oil, butter, cigarettes and tobacco to computer chips, car parts, clothing and sports equipment. In some cases, the quality can be awful, especially DVDs and tobacco from market traders, but in many cases the counterfeiting is excellent and only the specialised eye can tell the difference.
The batteries that were being sold as genuine imports were Russian made and of very poor quality. However, they had been cleverly inserted into the supply chain and made to look as though they had been imported from the real company. This did the company no good; first, its reputation was falling to pieces; and second, someone else was making a vast amount of money.
It could not be pinpointed exactly how this crime had been put in place. It also proved to be extremely difficult to ascertain where the counterfeit supply came from – probably because too many people had been paid off and too many people were scared of the consequences of spilling the beans. So, the company decided to import the components directly into Moscow, where they would then be assembled and distributed, which would hopefully make things easier to control.
The Russian financial crisis of 1998 provided a perfect excuse to get rid of the old directors. As banks collapsed and the rouble devalued, most foreign companies pulled out of the country. Many people lost everything in just a few short months – Russia was no longer the get-rich-quick place it had been at the fall of Communism. The very few foreign companies that decided to remain cut their staff and their operating costs and rode the storm. The auto-component company was one of the few that stayed, and new Russian directors were appointed, new systems put in place and a new manufacturing plant opened in Zelenograd, about 30 kilometres north-west of Moscow’s outer ring road.
For a few years, everything went smoothly. As the country recovered, so profits slowly rose, and the company began to grow again. And then suddenly, even though turnover was growing, profits dipped significantly, and the company found itself on the verge of bankruptcy.
I was living in Moscow at the time, providing security, protection and investigation services. I mainly worked for myself, subcontracting to various English security companies. The battery manufacturer contacted a well-known company in the UK, who then contacted me. The contract consisted of two elements: first, the Russian directors needed to be thoroughly yet discreetly investigated; and second, if new directors needed to be found, I’d have to thoroughly investigate their backgrounds before they could be employed.
Money rules in Russia, and the implications of losing it can be extreme. Many businessmen have been assassinated since the demise of Communism, for a whole host of reasons: to get rid of competition, to quickly end business partnerships and even to avenge disputes and debts. Most Russian businessmen and entrepreneurs have teams of bodyguards protecting them from such risks. Ironically, however, most foreign businessmen after the crisis did not require protection and could run a foreign company in relative safety. It seemed that targeting foreigners was more trouble than it was worth for the Mafia, thugs and criminals. At that time, Russia needed foreign investment. If foreigners were targeted, they would quickly pull out again, foreign banks would call in loans, aid would stop and the country would plunge into an even deeper crisis than it had in 1998.
However, even though foreigners living and working in Russia were rarely targeted, if the business was going to be closed and/or the directors sacked, they would become justifiable and legitimate targets. I contacted a Russian investigations company who had previously done a number of very discreet investigations for Western giants, including Philip Morris and Microsoft. Their methods were thorough and systematic, although occasionally a little unorthodox, and their references and results from previous work proved that they could complete the task in hand.
It still is impossible for a foreign company to be wholly owned and managed by foreigners – every foreign company must have at least a 51 per cent Russian ownership. My new clients, the auto-component company, had one director who had worked for them for many years and in various countries. He was asked to move to Moscow from his previous post in Germany. He had an excellent work record and viewed his move to Moscow as a promotion. All the top management knew and trusted him, and he was not a suspect. However, the three Russian directors were.
An initial basic investigation into the three Russian directors was undertaken. After just a few days, it was quickly found that they were also the managing directors of a total of ten other battery companies, all with very similar names. It was also revealed that just a few short months after joining the company all three directors had made large purchases, which had exceeded their salaries. One director had bought a new Audi, another had taken a two-week vacation on a tropical island, while the third had invested in a major refurbishment of his apartment. Of course, they had all done their best to mask their purchases by using either their spouses’ names or the names of other family members; however, investigations such as these almost always include every member of the family, as well as close friends.
And so it had gone on, from the period of their appointment to the time of the investigation. Houses and land were bought, and cars were frequently changed and upgraded. The initial report also highlighted a connection between all three directors, even though they were apparently taken on independently of each other. None were reported to have any previous connection with the Mafia or organised crime prior to their appointment. But once they had been appointed and were working for a foreign company, they had put systems in place to rip it off – big-time. It was also found that the bank balances of the ten other battery companies that the Russians were directors of exceeded £100,000, and one of the companies had a bank balance of almost $250,000. That is one very good thing about Russia: if you pay the right people, the right information can be obtained – unlike in England!
It was fraud on a massive scale, but prosecution would be almost impossible. From a Western point of view, a managing director risking his job and his livelihood to steal from his employers when he could have a secure position for the rest of his life might not seem worth it. But because wages in Russia are low compared to Western standards and there is little accountability, stealing and fraud are extremely common. A Russian executive would view £150,000 as a lot of money, and it would last them a very long time. And should a defrauded company push for prosecution, a small percentage of stolen funds could be used to bribe the judge to either delay proceedings or dismiss them. Russian judges are extremely wealthy people but get paid a very small salary, so almost all of them supplement their wages with bribes. Employers and employees know full well that any prosecution would take years to process, and in most cases it simply would not be worth it. Therefore, employees know that they can do more or less what they want – if they are that way inclined and not strictly supervised – and employers know that there is little that can be done about it.
The auto-component company decided to close the Russian branch of the company. After two attempts, they realised that trying to run a legitimate and profitable business in the country was not really worth all the hassle. The company as a whole was bordering on bankruptcy, and the Russian losses were adding to the overall global financial difficulties. They decided that they would find a wholesaler who would buy the units, which would again be assembled in Ukraine and exported to Russia. The wholesaler would buy each unit for a set price and that would, in effect, be that. What happened thereafter would be out of the control of the company, but at least they would have no costs associated with manufacturing and distribution, just a battery being sold for a set price.
Having worked in Moscow for quite some time, I totally agreed with this policy. And this is a route a large number of the major companies take. The quality of manufacturing in Russia is at best questionable, controlling counterfeiting is almost impossible and the logistics of supplying effectively to such a massive country extremely complicated, so exporting products to a Russian company who would then distribute and sell them made infinitely more sense.
We were tasked with providing security and protection to the legitimate director and two company auditors, one of whom was familiar with Russian accounting, who would spend five days in Moscow closing the business down. The legitimate director knew what was happening; however, at that stage the Russian directors did not know that the company was being closed. They were just told that a high-level visit was going to take place and the manufacturing plant, the offices and all the accounting systems would be thoroughly inspected.
Because of the possible risks and the fact that we had three principals to look after, I asked a colleague whom I had worked with before on another high-level operation in Israel to come over and help me. He was ex-Special Forces, and although he had never worked in Moscow he was very experienced. We also employed a third Russian bodyguard, a guy called Alex, whom I had also worked with before, as well as a team of three armed Russian drivers and their executive vehicles. The budget didn’t stretch to much else, and it meant very long days, but we coped with the resources we had.
Security during this fragile and volatile period was extremely tight, and no stone was left unturned in protecting our principals. Two weeks after the operation started, the company submitted its final accounts to the Russian government and ceased trading in the country until a new wholesaler could be found. The operation went smoothly: the company closed down, around 200 people were laid off, property was made vacant and trading more or less stopped overnight. This made a few people very pissed off, from the workers in the factory who lost their jobs to the directors who lost a large amount of income.
Like many foreign businesses starting up in Russia, the auto-component company skimped on detailed initial investigations on both the market and their Russian employees, which cost them dearly in the long run. They also failed to do regular checks and background investigations, and they failed to control their operations, leaving too much responsibility to the Russian directors.
Corruption and crime is endemic in Russia, and it will never change. Because of this, Russia is one of the few places in the world not at war where the word of the bodyguard still rules supreme.