Ablyazov’s fund and asset freeze: the ice-cold path to prison

Election proceedings in January have shown that there is room for dissent in Kazakhstan – but not for dissidents who work to undermine the system rather than enrich and diversify it. Opposition movements working in the margins of Kazakhstan’s official political arena have been recognised as camouflage for revenge camp On top of the list are Rakhat Aliyev, Pres. Nazarbayev’s prodigious son-in-law who attempted an armed coup back in 2002 and took off with billions in cash and property in the process, and former BTA chief Mukhtar Ablyazov who has already been dubbed the world’s biggest fraudster ever, with embezzled assets and funds amounting to some 12 billion US dollar in historic value. In late December, two more verdicts were issued in the UK considered detrimental for Ablyazov, who has entrenched himself in the United Kingdom where he is faced with up to two years in prison for perjury. The first rule contained a final confirmation of a freezing order for all accounts, funds and assets he holds – either directly or by proxy. The second, by a court of law on the island of Jersey, confirms their receivership to be supervised by KPMG through local authorized firms in various parts of the UK, with the ultimate aim, after a final round of trials that could take years, of returning them to their rightful owners – including BTA, the fate of which largely depends on making ends meet in terms of liability services But while liabilities are piling up, remaining assets keep dwindling in the process of attempts to save the day..

by Charles van der Leeuw, KZW senior contributor

Ablyazov’s fund and asset freeze: the ice-cold path to prison“On 23 December 2011 the Royal Court of Jersey delivered a judgment recognising receivers [within its jurisdiction] appointed by the High Court of England and Wales to locate and preserve the assets of a defendant in proceedings pending trial in England,” a news release from Standish, Milsom and Outen
receivers of the assets of Mr Mukhtar Ablyazov on the Isle of Jersey publicised on January 10 this year reads. These receivers were not therefore receivers in an insolvency, nor seeking to enforce security. […] The English receivership order was made in the context of a dispute in the English courts between JSC BTA Bank and Mukhtar Ablyazov. The Bank is based in Kazakhstan and Mr Ablyazov is a Russian national resident in London and the former chairman of the Bank. The Bank has accused Mr Ablyazov of widespread misappropriation of the Bank’s funds. At the time of the making of the receivership order, the claims were in excess of US$1.8 billion with further claims anticipated to bring the total sum claimed to $4 billion. […] The Royal Court noted that Mr Ablyazov was resident in England and that this was a sufficient connection with the English jurisdiction. The Royal Court, having confirmed its power, then exercised its discretion to recognise the receivers’ appointment and powers principally on the grounds that the English order had been made after a 5 day inter parties hearing before a High Court judge, who was in an excellent position to assess whether it was necessary to go beyond a freezing injunction and make a receivership order to protect the assets.”

“The receivership order has already been recognised in the British Virgin Islands, Cyprus, the Seychelles, Luxembourg and Germany. “The receivership order was extended on three further occasions.  On 26th January, 2011, it was extended to cover 212 companies listed in the order (referred to as the “undisclosed assets”),” the Jersey court’s verdict reminds. “In April 2011 it was extended to cover a further 389 companies (“the further undisclosed assets”) and finally on 27th May, 2011, it was extended to cover a further 35 companies (“the additional undisclosed assets”).  In broad detail the assets now covered by the receivership order consist principally of the shares in and assets held by, for or on behalf of some 700 companies incorporated in a number of different jurisdictions.  One of the companies comprised in the additional undisclosed assets is a Jersey company called Eurasia Logistics Limited (“Eurasia”) which is administered in Jersey by Nautilus Trust Company Limited (“Nautilus”).  Nautilus has made it clear that Eurasia will not disclose information without a local court order, although it has indicated through its advocates that, so far as it is concerned, Eurasia does not form part of the property of Mr Ablyazov.  Eurasia, recently sold by Ablyazov for half a billion US dollar, is among BTA’s hopes to recuperate some of the money embezzled by its former top executive and his associates. “It is significant that this is an international receivership involving some 700 companies in many different jurisdictions,” the Jersey court rule concludes. “ There is clearly an interlocking network of companies and it is reasonable for the Receivers to seek recognition in a number of jurisdictions.”

The history of the freezing order was clearly summarised in a verdict following staunch attempts by Ablyazov (here dubbed Mr.A) to “freeze the freezing order” (even though only at the end of the late December hearings the culprit was to claim that “only now he understood what a freezing order really is” in the words of news reports by Reuters and Bloomberg) dated October 10, under the “Right Honourable Lords Justice” Maurice Kay, Longmore, and Patten – the first one being no one less than the vice-president of the British Court of Appeal’s civil division.

“The original Freezing Order (at this stage in the sum of ?175 million) was made by Blair J on 13th August 2009 and, in accordance with the usual form, required a disclosure of assets together with information about where certain moneys had gone (“the Schedule C questions”) within 48 hours,” the report reads. “Mr. A applied for the order requiring information to be stayed pending an application to discharge the Freezing Order. Teare J refused that application but extended time for providing information about assets until 27th August 2009. Mr A sought to appeal Teare J’s refusal of a stay. He obtained a stay pending appeal but that appeal was dismissed on 30th September 2009 although Mr. A did obtain from this court an order that the information about assets which he was to disclose should be restricted to the Bank’s solicitors and not passed on to the Bank. Mr. A had sworn (but not served) affidavits on 27th August 2009 to comply with Teare J’s original order; he served those affidavits after this court had given its judgment on 30th September. That disclosure was so defective that Teare J found it necessary on 16th October 2009 to order that Mr. A be cross-examined.” As a result, more stringent and compelling measures were, and still are, required to allow justice to take its course and give duped parties any chance they lawfully deserve to recover as much of the damage as they can under the law, the court explains – adding: “It is impossible to conclude that Mr A had been doing his best to comply with the orders of the court.”

The Jersey rule quoted earlier has been the logical consequence of a final decision taken on 20 December last year, following court hearings on December 8, by a court of appeal presided by Lord Justice Stanley Burnton. The court blocked a last desperate-looking attempt by Ablyazov to appeal against the extension of the freezing order to all assets he directly or indirectly controls or used to control – including the ones previously exempted. In its verdict, the court once more dismisses any alleged political context in the case, as claimed continuously by Ablyazov. “The 7 actions which the Bank has commenced against one or more of the Respondents in the High Court in England (6 in the Commercial Court and one in the Chancery Division) are part of this recovery exercise,” the verdict reads. “They are pursued on the authority of the new management and pursuant to the Bank’s obligations undertaken towards its creditors upon the restructuring. Major beneficiaries of any success in the actions will be the former creditors of the Bank. The suggestion that the actions are part of a pet project of the President to crush the Respondents could hardly be further from reality. The governance protections granted to the Bank’s creditors under the restructuring (including the asset recovery programme) are enshrined in the Bank’s charter which was amended for this purpose as part of the restructuring.”

The contradictions in Ablyazov’s and his lawyers’ argumentations have been accumulating in the process. As Lord Justice Burnton concludes, he seems to seek protection under the law by having claimants and plaintiffs denied that very protection under the same law. “I have to say that it would be startling indeed if a person who had defrauded a foreign bank (which is one of the hypotheses that must be accepted for the purposes of this application) could not be pursued in legal proceedings in this country on the ground that to seek to enforce, or to enforce, his liability, requiring him to disgorge his ill-gotten assets, because the claim against him was actuated in part or principally by personal or political hostility on the part of the government of the foreign country in question,” the court report reads. “In my judgment, the defendants’ contentions do not even arguably represent the law. The claim is, as the judge held, a claim to enforce a civil liability, and that is the beginning and end of the present issues.” Bad news for Ablyazov: permission to appeal refused – thereby also flinging prison gates wide open for him.

But even with Ablyazov behind bars, all BTA seems to be able to do for the time being is buying more time. The spectre of default has become reality once more last week, and in order to save the day BTA now considers selling off those assets over which it still exercises control. “Kazakh bank BTA is poised to sell its 34 percent stake in Turkey’s Sekerbank to its main shareholder, sovereign wealth fund Samruk-Kazyna, as it attempts to persuade angry creditors to accept a second debt restructuring,” Reuters reported on January 12. “BTA, Kazakhstan’s third-largest bank by assets, expects a deal to sell its Sekerbank stake for $166 million to be completed ‘very soon’, the bank said in a presentation to GDR holders dated Jan. 11 and published on its website on Thursday. It said the transaction price had been confirmed by a ‘fairness opinion’ given by an unidentified third party. ‘The transaction foresees that BTA keeps the upside potential in case of the future sale of Sekerbank shares (by Samruk-Kazyna),’ the bank said in the presentation, without giving further details. […] BTA said in the presentation that it had identified non-core assets, including insurance company London Almaty and pension fund Ular Umit.”

Whilst the partial asset-stripping operations might give parties in the dispute some breathing space, it very much looks like too little, too late. It will definitely not solve the basic problem. Moreover, the more assets are being turned into cash to pay off immediate obligations, the less the remaining skeleton is set to be worth. “Kazakhstan’s decision to shell out $160m to relieve the troubled BTA Bank of a stake in a Turkish lender won’t be enough to rescue the state-controlled BTA from default,” The Financial Times wrote in a comment the same day. “But the move has lifted the mood among creditors afraid that Kazakhstan was ready to give up BTA as a bad lot: Samruk Kazyna, the Kazakh sovereign wealth fund, would not be paying out the cash if it intended to walk away. […] BTA began buying up foreign banks as it moved to internationalise in the years before the 2008 financial crisis. Apart from the Sekerbank stake, BTA also acquired banks in Russia, Ukraine, Georgia and Armenia setting its sights on becoming the leading bank in the CIS.”

The fate of these assets is likely to be years away from now, with trials concerning them in the UK not to start before the end of this year. Meanwhile, clocks keep ticking. Since January 18 this year, BTA has once again slipped into default by missing a coupon pay-out amounting to 166 million US dollar. “BTA’s failure on Wednesday to meet the final deadline for payment of a $160m coupon on its $2bn eurobond was hardly a surprise,” The Financial Times wrote in a comment on January 19. “The bank that is majority owned by Samruk-Kazyna, Kazakhstan’s sovereign wealth fund, asked creditors to consider a second debt restructuring last month, warning it could face a capital shortfall of $5.1bn by the end of 2012 unless urgent action was taken. But creditors are angry that BTA feels unable to pay its bills. Only last November the bank reported having $700m of liquid assets as well as about $1bn of bonds eligible for repo with Kazakhstan’s National Bank. […] Moody’s turned the knife this week warning that Kazakhstan’s reputation was at risk if BTA went into default: A disorderly default of a large government-controlled bank is credit negative, not only for BTA, but for the whole banking system as it undermines investor confidence in Kazakh lenders and may call into question the government’s commitment to support foreign investments. BTA has called a shareholders’ meeting on January 26 to discuss the proposed restructuring. The bank needs the approval of two thirds of global depository receipt holders who vote at the meeting before it can start restructuring talks.”

Exactly the last observation brings the entire affair back home to Ablyazov. “Sceptics believe that BTA may have a dual function, serving both as a bank and as a useful vehicle for Kazakhstan’s clannish patronage network, the FT wrote in its comment quoted above. “Others say that Kazakhstan is keeping BTA alive for political rather than commercial reasons. BTA is suing Mukhtar Ablyazov, its former chairman, in London’s High Court for allegedly embezzling billions of dollars from the bank. Ablyazov, who fled to London when Samruk-Kazyna took over his bank, has become a thorn in Kazakhstan’s side, openly criticising the government of corrupt practices and human rights abuses. It would be convenient for Kazakhstan if his reputation was wrecked, even better if he landed in jail. Even if BTA pushes through another restructuring, it is difficult to see the bank having a viable future after treating creditors in such cavalier fashion. “Even if they have a restructuring, no one will ever lend money to BTA again on a private basis,” the newspaper quoted James Croft, head of emerging markets trading at Mitsubishi Securities, as saying. “I don’t see where BTA fits in the future of the Kazakh banking system.”

News media reported that the interim chairman of the board of BTA Askhat Beisenbayev has qualified the basis for the default as “the primary need to restore Bank’s equity capital within the planned restructuring of its debt”. “Within the restructuring process underway the payment of coupons comes second, in other words it is a matter for negotiations with creditors,” the official was quoted as stating during a Senate hearing on January 19 by Interfax. “Accordingly, it cannot be viewed out of the context of restructuring. I think that’s the main reason why this coupon must not be paid. […] The second reason, is that the restructuring process and negotiations with creditors can be a very lengthy affair. The agency noted that the default on paying up the said coupons, the bank’s shareholders at a meeting on January 26, is set to discuss “imposing of a moratorium on certain payments of the Bank to those of its creditors, other than depositors, as may be determined by the Bank’s Management Board in its sole discretion” – in the news report’s words “The board of directors also suggested that shareholders discuss amendments to the Bank’s Charter,” the agency wrote. “Earlier the agenda for the general shareholders’ meeting included the issues relating to restructuring of certain parts of the Bank’s financial indebtedness in order to reach an arrangement with its creditors and imposing a general moratorium with respect to proceedings by third parties.”