Insurance Man Jailed For 'Legal' Tax Dodge

A regional court this week convicted the head of an insurance company for helping companies dodge taxes using one of the most widespread evasion schemes in Russia Ч a scheme that the judge himself acknowledged is legal.

Yury Shevchenko, head of the -Dzerzhinsk branch of the Promyshlenno-Strakhovaya Kompania insurance company, or PSK, in the Nizhny Novgorod region, was sentenced to eight years in prison on charges of "organizing tax evasion" and "financial transactions with ill-gotten funds," according to a ruling issued Sunday by the Dzerzhinsk city court. Shevchenko has been in prison for over 16 months.

"The court has decided that Shevchenko was proven guilty of tax evasion involving large sums of money," said the ruling, a copy of which was obtained by Vedomosti.

However, Judge Sergei Kuzovatov, who presided over the case, conceded that the scheme employed by Shevchenko "falls within the bounds of the law."

"But the most important thing is how these insurance schemes were used," the judge said in a phone interview Tuesday.

PSK said in a statement issued Tuesday that it considers the court ruling "unlawful and unfounded" and that Shevchenko's lawyers have already filed an appeal.

"The [court's] decision is based on complete ignoring of insurance legislation, legislation on taxation in the sphere of insurance, clarifications issued by the Finance Ministry" and other government papers, the statement said.

Shevchenko's method, as described by tax police, is a simple one many companies have used to avoid paying full taxes on their employees' earnings: A company transfers a large sum to an insurance firm to purchase life insurance for its employees; the insurer then pays out annuities to the company's staff instead of salaries. For years, those annuities were tax exempt.

Elvira Topko, the tax police investigator who handled the case, said Shevchenko used precisely this scheme.

Nizhny Novgorod regional tax police investigated PSK's Dzerzhinsky branch, which Shevchenko has headed since 1996, as part of an "overall inspection" of insurance companies in May 1999. The investigation concerned the company's activities from 1996 to 1998. A criminal case against him was opened in September 1999 and he was arrested Nov. 3, 1999.

In its ruling, the court said it had based its verdict largely on affidavits from employees of AOZT Industria, a PSK client, as well as payment records. Industria employees had confirmed during questioning that they filled out insurance documents and received money from PSK in lieu of wages.

Several other companies working with PSK had been under investigation, according to the ruling. But the cases against them were dropped after they "paid damages."

The ruling did not specify the full sum of money covered by the tax-evasion schemes.

Some independent experts said the ruling was poorly put together and would not hold up in a higher court.

"The sleep of reason produces monsters Ч and this [ruling] is just such a monster," said Sergei Pepelyayev, a lawyer and director of the tax and legal department for the FBK auditing firm. "No one can deny a person's right to minimize tax payments by legal means."

The Finance Ministry has said that life insurance made up as much as 50 percent of Russia's 170 billion ruble (nearly $6 billion) insurance market last year. But market players say a huge part of that life insurance is purchased by businesses with the aim of evading taxes.

Sergei Sarkisov, general director of the RESSO Guarantee insurance company, estimated only $5 million to $6 million worth of life insurance policies are "authentic," while the rest are acquired as tax-free salary-payment schemes.

The government has pushed legislation to try to counter such schemes. But as late as last year, the gaping loophole was so tempting that even the Moscow city department of the Tax Ministry took advantage of it.

According to an Audit Chamber report released last fall, the city tax department augmented its staff's salary by an untaxed $5.4 million using the same kind of life insurance scheme for which Shevchenko has been convicted.

Because Russian law is not based on precedents, it is not clear whether the court ruling will scare other companies out of using insurance policies to evade taxes. But one thing is clear: The current tax legislation has left many people confused Ч and many trying to take advantage of the chaos.

"We have been urging the government for three years to form a commission on tax laws to make changes to the existing legislation," said Igor Yurgens, the president of the All-Russian Insurance Association.

"Certainly, we need to get away from these kinds of schemes. But that can only happen after a reform of the tax system and the creation of a healthy economic climate."