How much is the fish? Fish King Vitaly Orlov makes billions on tax haven schemes
The owner of the Norebo Group, Vitaly Orlov, seems to be having more problems every day. No sooner had he been recognized as Russia’s richest fishing industrialist with a net worth of over $1 billion that he got bombarded with lawsuits and criminal cases. So far, they have only been coming from his former business partner. However, taking into account all the new facts that indicate some opaque business practices at best, the authorities may take some issues with the billionaire as well, since there have been discrepancies in the figures of the fish supplied abroad, the prices, and the final profit, which may indicate attempted tax avoidance.
Since 2015, Alexander Tugushev, Orlov’s former business partner, has been trying to regain a third of the assets of the company that they had cofounded.
The story of Murmansk Maritime Academy graduates, Tugushev and Orlov, began back in the late 90’s. By that time, each of them already had a vast fishing business experience: Tugushev ran his own company in Russia, while Orlov worked at the Swedish Scansea International that bought fish from Murmansk sailors, including Tugushev's company, and sold it in Norway. In 1997, Orlov and Scansea International co-owner, Magnus Roth, founded Ocean Trawlers in Norway, which was engaged in supplying trawlers to Russia in exchange for fish.
In 1998, the partners created a new group of companies, Karat, in which, according to Tugushev, he got a share of 34%, while Orlov and Roth got 33% each. Later, Orlov stated that he never cofounded Karat with Tugushev and that officially, their partnership started in 2001, when he and a few others established Almor Atlantica.
When moving to the post of deputy head of the State Fishery Committee (later transformed into the Federal Agency for Fishery) in 2003, Tugushev had to comply with the law and get rid of his shares. Formally, they were sold at a nominal price, while he claimes to have handed them over to Orlov. Later, Tugushev went to jail on fraud charges, and as soon as he got out, he said he wanted his share back.
Norebo Group is the largest fish supplier in Russia. According to the company’s figures, the total 2017 catch amounted to about 600.000 tons of fish. The group controls about a dozen companies engaged in fishing in the North and the Far East of Russia. They had a 15% quota for Alaska pollock, cod and herring a year ago. According to the Bloomberg Billionaires Index, Orlov’s net worth exceeded $1 billion at the beginning of 2017.
In 2015, Orlov offered Tugushev an option he believed to be a win-win: $60 million for abandoning his claims. However, the man still wanted a third of the assets that were estimated at $350 million.
This all resulted in a sharp confrontation, in which Orlov thought any means were fair, including framing Tugushev in Moscow’s Koptevsky court; the partner was charged with extortion and coercion to a deal, although the case became a dead duck.
In 2018, Tugushev filed a lawsuit against Orlov in the High Court of London. The hearings are ongoing, but the court has already blocked $350-million’s worth of Orlov’s assets.
It should be noted that the company’s third co-owner, the Swedish national Magnus Roth, left the business and sold his share to Orlov for $350 million in the midst of the confrontation, in 2016.
Recently it was reported that Roth and another company employee, Andrei Petrik, became involved in that UK case. Tugushev’s claims were also made against them as he believed that it was his partners’ conspiracy that made him lose his share.
In addition, according to Tugushev, a criminal case was initiated in Russia under part 4 of Art. 159 (swindling on a large scale). The committal order states that unidentified persons initiated drafting of sale contracts that featured false information that 34.828 shares of Almor Atlantika had been alienated from Tugushev; 20.318 in favor of CJSC Norebo Invest, and the rest in favor of Almor Atlantic. Meanwhile, the order said that Tugushev was not aware of the transactions and did not conclude any contracts, so he suffered damage in the amount of 1.46 billion rubles. As it follows from the Unified State Register of Companies, Almor Atlantika had previously owned shares in various Norebo-related companies.
While investigating the case, the Moscow Investigative Committee and the Economic Security and Anti-Corruption Department for the South-Western administrative district came to the Murmansk companies belonging to Norebo with a search warrant in September.
Then, in early November, it was reported that the ICR had completed the investigation of a criminal case against another partner of Orlov’s, Yuri Tuzov. He is accused of abduction of a person and major extortion, but who knows what else he told the detectives about the business practices. The CrimeRussia had a few articles on the dubious fish-selling schemes of Tuzov’s Nord Pilgrim that used Orlov’s offshore company, a Hong Kong-based Dragon Seafoods Limited, instead of directly selling overseas. The price was abnormally low, which allowed the Russian company to siphon off the profit abroad without paying taxes.
Next year, contracts will be signed between the Federal Agency for Fishery and the fishers to secure the quotas for the next 15 years (the quotas had been given for 10 years the previous time). Norebo gets the largest quotas in the country for the catch of pollock, herring and cod. Based on the analysis of customs declarations the CrimeRussia has obtained, Orlov’s companies must have operated in just the same way.
Based on the analysis of customs declarations the CrimeRussia has obtained, Orlov’s companies must have operated in just the same way.
Norebo export practices
Unlike the rest of the Russian oligarchs, who started in the 90’s, the first post-Soviet decade, Orlov never had close ties with the top authorities of the country. However, it was the foreign policy the country has pursued in recent years that made it possible for Orlov to make it to Forbes. Many associate his success with counter-sanctions Russia imposed on Europe that resulted in fish from Norway and Iceland completely disappearing from the stores, so Orlov’s companies were able to dramatically increase their supply to the Russian domestic market. He even renounced his Norwegian citizenship for this in 2014, because it would limit his possibilities as a foreign businessman, and was said to have moved to Murmansk, his hometown, while the truth is that his family lives in London, and Orlov changes countries all the time: his tax returns indicated Hong Kong as his home address. The question is how much did Russia and its budget benefit from all this anyway?
According to Orlov, about 60% of the group’s produce is exported. Those 60% are expensive high-processed products, while cheaper fish is sold in Russia. That is, in terms of value, the share of export revenues will be considerably more than 60%.
In absolute terms, the 2017 revenue of the eight largest companies of the Norebo Group amounted to about 680 million dollars, of which about 470 million were shipped abroad, or 77% of products’ worth. The group, therefore, mainly operated on the foreign market.
The official website of Norebo lists three trading companies that sell the group’s products abroad: UK-based Norebo Europe Limited, Hong Kong-based Norebo Hong Kong Limited and Spain-based Norebo Africa S.L.U.
UK-based Norebo Europe Limited
According to 2013-2017 customs statistics, foreign trading companies Norebo Europe and Norebo Hong Kong buy almost 80% of all products that Russian Norebo companies send abroad. For cod and haddock, which are mainly shipped to Europe, this figure is generally 95%. In other words, most of the products are supplied through the company’s intermediaries rather than directly to the foreign buyers.
Now there is nothing unusual about a large international group having its own trading company abroad. It is easier to find new customers this way, enter into contracts, do logistics, etc. Besides, many foreign buyers feel safer entering into an agreement with a British firm, rather than a Russian one.
Hong Kong-based Norebo Hong Kong Limited
Orlov’s Russian company enters into a supply contract with Orlov’s British or Hong Kong company, and they, in turn, conclude a contract with the final buyer. The products get sent directly to the final customer, so no one has to take the fish from Russia to England, and then, say, to Germany.
According to Russian customs, 396-million-dollars’ worth of fish was exported via the Britain-based Norebo Europe in 2017. Norebo Europe’s financial statements say that the total worth of products the company sold that year was pretty close to that figure, $383 million. Technically, everything that the British Norebo Europe buys and sells must be the fish caught by Russian companies of the Norebo Group, and the figures confirm this.
Discrepancies in export reports
When comparing the customs reports of different years, some discrepancies are easily revealed.
These figures show that in the period till 2017, the British company Norebo Europe had been buying fish not only directly from Russia, but also from other abroad companies. Some of this ‘foreign’ fish could have been bought from Hong Kong-based company Dragon Seafoods Limited, through which Tuzov sold fish. However, the total amount of shipments from Russia to Dragon is significantly less than the difference between the export and the sales in the UK. This means there may be another intermediary company through which Orlov sells fish.
Dragon Seafoods played a role of an intermediary company through which profits were withdrawn from Russia. Due to the low export prices, Tuzov saved tens of millions of rubles on income tax and export duties.
However, the customs data shows Tuzov was not the only supplier of fish for Dragon Seafoods Limited. Andeg and M.I. Kalinin also supplied products to the company. In total, average turnout of Dragon was $ 20 million per year.
It is noteworthy that, the Netherlands were always indicated as a place of delivery, yet some of the goods were transported to Hong Kong and to the British Norebo Europe. And the types of fish (cod and haddock) that were sold through the Hong Kong Dragon, are in demand in Europe, not in Asia.
Another prof that the fish exported through Dragon Seafoods was later resold to the final buyer through Norebo Europe is the fact that in 2017 shipments through Dragon Seafoods were suspended. In the same year, the amount of exports from Russia and the cost of products sold through Norebo Europe began to coincide.
Finally, there is one more strange moment in the export supplies of the Norebo holding. If the company buys products from its related companies (Russian exporting companies Norebo and the British Norebo Europe have the same owner - Orlov), then this should be reflected in the financial reports as purchases from related parties. Yet the reporting for 2017 shows the total amount of purchases from related parties was 855 thousand dollars only. Recall that the total cost of products sold in 2017 was 398 million dollars.
It turns out that, according to the Russian customs, the British Norebo Europe buys fish from related Russian companies, and according to the reports submitted by Norebo Europe in the UK, the fish is bought from other companies. This fact points to the existence of an intermediary or distortion of data in the statements.
All in all, Orlov’s Norebo Holding sells most of the products abroad through British and Hong Kong trading firms. In the reporting of the British company, the fact of buying products from related companies is somehow hidden. At the same time, in the period till 2017, the British company had sold not only fish caught by the holding’s enterprises and sold directly, but also some other fish. Thus, Orlov’s Hong Kong offshore company participates in schemes to conceal and withdraw the profits of other fishing companies from Russia.
Prices for exported fish
Russian companies, members of the Norebo Group of Companies, have never delivered products directly to Hong Kong's Dragon Seafood. So, if Orlov helps other fishing enterprises to siphon off profits through low export prices, then what happens to his own export prices?
To compare the export prices of Russian holding companies with market prices for similar products, we used the following data.
- Prices from the Russian customs statistics database for deliveries to Norebo (transportation costs excluded).
- Average monthly market prices from the base of European exports and imports of fish products ( EUMOFAa project of the European Commission).
- Export average monthly prices from Norway for 2016 according to the Norwegian Seafood Commission.
To preform our analysis, we took EUMOFA prices for frozen, gutted and decapitated cod and haddock as these types of fish were exported by Norebo. Comparing prices for fillets would be incorrect, since the prices of different types of fillets cannot be obtained from the EUMOFA database.
Thus, we take the price of cod export from Russian companies Norebo and compare it with the price for those imported to the Netherlands. As it can be seen from the table, where the monthly data are compiled by a year, the cod imported into the Netherlands is usually 16% more expensive than Norebo’s price for British trading company.
Then we take the price of cod imported to the UK, as more than a third of fish is sold through the British company Norebo Europe on this market. The average price difference is 24%!
Now we will compare export prices. In addition to Russia, Norway is the largest producer of cod and haddock. According to data for 2016, export prices from Norway to the UK were 22% higher than from Russian companies Norebo to the British company Norebo Europe.
It turns out that Norebo products are cheaper than fish from other suppliers, so that a seller on the British market should get extra profit. For example, in 2017, decapitated cod was delivered for $ 100 million, which is 26% lower than similar imports. Even if we take the price understatement by 15%, then the profit from the sale of this cod at market prices should be at least $ 15 million. However, Norebo Europe’s report does not show any extra profit. On the contrary, it reflects a very modest pretax profit of $ 6 million a year. Despite an extremely favorable purchase price, the company does not receive the expected profit in all the analyzed periods.
There is a version that Norebo Europe sells its fish to customers at understated price as well. We do not know the price at which the British Norebo Europe sells fish, but since 2017 Russian Norebo companies have begun to sell more fish to foreign buyers. And the prices in such contracts are at the market level: the average difference does not exceed 5% compared to the prices of imports to the Netherlands and the UK.
So, we have an interesting situation. Norebo sells most products abroad. Russian companies of the holding receive (especially in the last two years) a significant part of the profit - about 250 million rubles of net profit last year. Taxes are paid to the Russian budget. At the same time, products are sold abroad at low prices and the holding should get a huge profit after the final deal. However, we cannot see this profit in the reports of Norebo. The question is where is this money?
Understating customs duties and income taxes in Russia
In addition to high profits which are gained outside Russia, another consequence of low export prices is earning on customs duties and income taxes by Russian companies of the Norebo holding.
Let's try to estimate the damage done to the Russian budget. In 2017, the export price for decapitated cod, which was supplied through the British Norebo Europe, was 20% lower than for the same cod sent directly to an independent company. As it was mentioned earlier, cod was delivered for $ 100 million, so the Russian companies of the holding received about $ 20 million less revenue than they could. Accordingly, the profit tax of the Russian seller was underestimated by $ 4 million.
Perhaps, $ 4 million is not a big sum for the budget of the country. Yet these calculations concern only one type of product. If we assume that all export deliveries to Norebo companies are performed at such low prices, the underpayment in 2017 will reach 1.2 billion rubles! In the period of past five years, the amount will be about 4.2 billion rubles. And this is just a tax on profits. Until the fall of 2016, the understated prices also made it possible to underpay the customs duty (5%), which adds another 3 billion rubles to the amount of damage done to the budget.
In total, taking into account the fine for deliberately lowering the base for income tax and penalties for customs payments, the budget can receive about 9 billion rubles.
Exports to the UK at a reduced price
(copies of all customs declarations are available at the bottom of the article)
It is important to note that Murmansk customs officers and tax authorities ignored such transactions at reduced prices for some reason, which probably led to a damage for several billion rubles. This fact points to corruption. Less than a month ago, the Prosecutor General’s Office initiated an audit of the activities of the North-West Customs Administration which includes the Murmansk Customs.
A similar scheme which allowed hiding the profits from the supply of drugs with the help of an intermediary company was recently revealed by the Federal Tax Service. The goods were shipped to Russia from India, but the sale went through a related intermediary company registered on the BVI. Russian tax authorities managed to charge 200 million rubles. There is no need to prove affiliation in the case of Dragon Seafoods, since all documents have already been published.
It is noteworthy that the Dutch customs is currently performing a check in connection with the violations in British Norebo Europe which can lead to a fine of $ 1 million for the company. There is no information whether this audit is related to low prices or other frauds.
Finally, tax authorities in the UK may also be interested in a British company that buys fish at low prices and does not make a corresponding profit selling this fish.
Orlov’s success recipe
In spite of the significant strengthening of Norebo’s positions on the Russian market in recent years, the company still receives most of its profits from exporting fish to European markets and uses non-transparent schemes. The profit from export disappears from the financial statements. In addition, other companies which Orlov helps to withdraw profits from Russia through his offshores are likely to be useful for him. Thus, the successes of Orlov is clearly connected with some criminal activities. This fact explains his desire to gain full control over the holding: he probably does not want to share such huge income of dubious origin. However, Orlov’s well-being may come to an end very soon. The trial in the British court will attract attention to the activities of Orlov: not only of British but also Russian law enforcement agencies. So, Orlov may end up with more serious consequences: to be jailed and even lose his successful business.