Ablyazov files: proceedings shed more light on BTA fraud chains/I

Three more cases have been added to the list of assets which can be recovered by BTA after having been diverted to fictive loan schemes by its former head and majority shareholder Mukhtar Ablyazov – now on the run with the authorities of the UK, Russia, Kazakhstan, Ukraine and Kyrgyzstan after him. The Royal Court of Justice for England and Wales (Scotland and Ulster have their own courts) is now proceeding with unprecedented speed to put BTA’s rights to its stolen property into effect. So far, close to 4 billion greenbacks in collateral have been collected. It is now up to BTA to sell the valuables – meaning to find anyone wanting to buy them. The key word is dokhody – “tracing claim” in English legal jargon which means to cash in on sales of interests in assets despite their changed formal ownership. Meanwhile, a lso for the first time, the court has not just attributed the charges of theft, embezzlement and forgery to BTA as a claimant, but included them in its judgment. More cases are to follow – and now much the sale of diverted collateral could bring in remains yet to guess. What is also important is that the verdict sheds more fresh light on the way Ablyazov and his associates at the time managed to get their cash and collateral diversion schemes carried out – apparently without being noticed for it for years until the alarm sounded in 2008 for the first time.

CHARLES VAN DER LEEUW, WRITER, NEWS ANALYST

Ablyazov files: proceedings shed more light on BTA fraud chains/I“An English judge said oligarch Mukhtar Ablyazov, who has been in hiding since he was sentenced to jail for contempt of court last year, organised a complex fraud to embezzle billions of dollars from Kazakh bank BTA,” Reuters wrote in a report published on March 19. “Judge Nigel Teare said on Tuesday that Ablyazov must have orchestrated or authorised false loans and ‘deceived’ BTA’s board by failing to disclose his interest in borrowers. […] In a judgment against three of Ablyazov’s co-defendants, the High Court judge, who has presided over much of the tortuous case since it was brought in 2009, backed BTA’s allegations that its former chairman committed one of the largest frauds ever tried in Britain. Teare, who awarded BTA an initial $2.1 billion damages in a default judgment against Ablyazov last November, granted the bank another $1.74 billion on Tuesday in three further claims against some of Ablyazov’s allies. He found that Zhaksylyk Zharimbetov, a former deputy chairman of BTA’s management board who now lives in London, Ildar Khazhaev, former head of BTA’s Moscow office and Cypriot company Usarel, which owns Vitino Port on the White Sea, knowingly helped Ablyazov misappropriate cash from BTA. All three defendants had pleaded not guilty. BTA expects the judge next week to hand down further damages awards against Ablyazov, whose attempt failed last month to halt proceedings by appealing to the UK Supreme Court to review a case he says denies him a fair trial.”

The verdict concerns three cases known as the Granton, Drey and Chrysopa files. “JSC BTA Bank, a bank in Kazakhstan (“the Bank”), has commenced 11 actions against its former chairman, Mukhtar Ablyazov, and others in which it is alleged that the Bank has been defrauded of up to US$6 billion. This is the judgment of the court in 3 of those actions. They were selected for trial after a contested case management conference (the “CMC”) on 29 March 2011 in which the many parties put forward different views as to which actions should be tried first. The Bank wanted only one to be tried. Mr. Ablyazov wanted five actions to be tried and there was a variety of other views. In the event, for reasons given at the CMC, three were selected for trial. They are known as the Granton action, the Drey action and the Chrysopa action. The material events in the Granton action span the period March 2006 – December 2008. The material events in the Drey and Chrysopa actions took place in 2008. In essence the Bank claims that Mr. Ablyazov defrauded it by procuring the payment of the Bank’s money to offshore companies which he owned or controlled. In the Granton action the Bank claims that sums approaching US$2.5bn. were paid away in this fashion. In the Drey action the Bank claims that some US$400m. was paid away and in the Chrysopa action the Bank claims that US$120m was paid away.”

Whereas on the financial side the verdict looks satisfactory, attempts by BTA to bring more associates of Ablyazov who have helped him carry out his schemes and/or covered them up appear to have stranded – with the notable exception of two of them, namely Khazhayev (spelt Khazaev in the verdict) and Zharimbetov. “As a result of his defence being struck out the Bank has now obtained judgment against Mr. Ablyazov in the Drey action for a sum in excess of US$400m,” in the latest verdict’s words. “It has also obtained judgment on the same basis against Mr. Ablyazov in what is known as the DCM action for a sum in excess of ?1 billion with interest accruing on the judgment in a sum of in excess ?225,000 per day. At the end of the trial the Bank sought judgment on the same basis against Mr. Ablyazov in the Granton action in a sum in excess of US$1 billion and in the Chrysopa action in a sum to be assessed. Judgment was also sought against Chrysopa (a Dutch company) and Lux (a Cypriot company) in a sum to be assessed on the basis that their defences had also been struck out. […] Finally, judgment was sought in default of acknowledgment of service against Mr. Rybalkin, a Russian lawyer. Again, there is no reason why such judgment should not be given. Notwithstanding the judgments which have been given or will be given against Mr. Ablyazov the Bank seeks judgment in the Granton and Drey actions against Mr. Zharimbetov (a 45 year old Kazakhstani citizen who now lives in London but who held office in the Bank under Mr. Ablyazov) and in the Chrysopa action against Mr. Khazhaev (a 31 year old Russian citizen who lives in Moscow and was employed by the Bank in Moscow) and Usarel (a Cypriot company). What prospect, if any, the Bank has of executing any judgment it obtains against Mr. Zharimbetov and Mr. Khazhaev is, at best, unclear. However, Usarel used the proceeds of the Chrysopa loan to purchase the Vitino port in the White Sea on the northern coast of Russia and the Bank asserts against that asset what it says is the Kazakhstani equivalent of a tracing claim in English law (dokhody). The Vitino port therefore appears to be a real and substantial prize in the Chrysopa action.”

BTA was bailed out by the Kazakh government coinciding with Ablyazov’s flight to London in early 2009 in return for a share majority which formerly used to belong to Ablyazov. A most interesting aspect of the latest London verdict is that it is questioned whether they ever belonged to Ablyazov in the first place – meaning that relatives of the culprit’s former partner, Yerzhan Tatishev who died under mysterious circumstances during a hunting party with one of Kazakhstan’s most notorious capos, could claim their property rights in the bank back. “In his 18th witness statement made in preparation for the trial he stated that before 2002 [Ablyazov] held a controlling interest in the Bank,” the judgement’s text reads. “He said that 75% of the shares in the Bank were held by Mr. Tatishev (the former chairman of the Bank), 60% of those shares being held for Mr. Ablyazov and 40% being held for Mr. Tatishev. In December 2004 Mr. Tatishev was killed in a hunting accident and the shares which had been held by him passed to his widow. When Mr. Ablyazov became Chairman of the Bank (in succession to Mr. Tatishev in 2005) the shares held by Mrs. Tatishev were, over time, transferred into the control of Mr. Ablyazov. Some of the shares which had been held beneficially by Mr. Tatishev were sold by Mrs. Tatisheva to Mr. Ablyazov. In the result, prior to the nationalisation of the Bank in February 2009, Mr. Ablyazov admitted to owning over 75% of the shares in the Bank. Those shares were not held by Mr. Ablyazov personally but by nine companies on his behalf. However, Mr. Ablyazov did not admit that ownership to the AFN, the banking regulator in Kazakhstan. In January 2009, shortly before the nationalisation of the Bank, the AFN requested Mr. Ablyazov to state whether he owned more than 10% of the shares in the Bank. He replied on 19 January 2009 that he did not own directly or indirectly more than 10% of the shares in the Bank. That statement was untrue.”

The verdict also includes decisive assessments of Mukhtar Ablyazov’s co-perpetrators and deals with the level to which some of his closest associates have been aware of the irregularities they helped stage. “The Board of Directors of the Bank at the times material to this litigation consisted of the following persons, in addition to Mr. Ablyazov. Ms. Ablyazova was related to Mr. Ablyazov and was thought by an independent director to be an aunt of Mr. Ablyazov. There were two Messrs. Tatishev who were relatives of the former chairman and may have been his sons or his brothers. Mr. Solodchenko worked closely with Mr. Ablyazov and was chairman of the Bank’s Management Board, the operating board below the Board of Directors. Mr. Akhsambiev was thought (by the independent director) to vote with Mr. Ablyazov. Finally, there was Mr. Talvitie, the independent director who represented the interests of East Capital, an investor in the Bank. Mr. Solodchenko had been an advisor to Mr. Ablyazov in 2005 and subsequently became the Chief Financial Officer of the Bank. In February 2007 he was promoted to the position of Chief Executive Officer and Executive Director of the Bank. At some stage he also became Chairman of the Bank’s Management Board. He is a defendant to the Drey action but on 14 November 2012 he wrote to the court stating that the effect of Mr. Ablyazov being debarred from defending himself was that it was impossible for Mr. Solodchenko to support his own defence and so he was ‘withdrawing from further participation in these proceedings’.”

What appears to be true for Solodchenko, also applies to two of Ablyazov’s other comrades-in-crime – namely Zharimbetov and Khazayev. “Mr. Zharimbetov joined the Bank in 2005 and became a Deputy Chairman of the Management Board in 2007 and First Deputy Chairman of the Management Board in 2008. He was also a member of several committees, in particular the Credit Committee whose task was to consider whether credit applications were in the Bank’s best interests. He is a defendant in both the Granton and Drey proceedings.

Banks in Kazakhstan tend to be operated in a different manner from that in which they are typically operated in the West. It is common for banks to be owned by a single shareholder who is both chairman of the board of directors and also closely involved in the management of the bank. He therefore has considerable influence over the operation of the bank. Mr. Ablyazov’s relationship with the Bank conformed with this general description of Kazakh banking practice. Thus Mr. Talvitie, the independent member of the Board of Directors of the Bank from East Capital, gave evidence that it seemed to him that at board meetings Mr. Ablyazov had already made the decisions. He described the other members of the board as “straw men”. Others in the Bank, below board level, had the same impression. Thus Ms. Tleukulova (a member of the Credit Committee) gave evidence in Russia in 2012 that “all top managers of the bank, including Board Members, have to obey him”. Mr. Khazhaev also gave evidence in Russia in 2012 that Mr. Ablyazov was “the main” person in the Bank who controlled the granting of the largest and most important loans.”

The worst aspect of the entire mega-scheme must have been that in order to cover up the ever-widening holes in the accounts, money was simply borrowed by the billion from western banks, using the Kazakh oil myth and seemingly ignoring that the petrodollars had a different destination and could not possibly be swallowed by bank deficits – even though, ironically in the end they would. “The Bank borrowed considerable sums from Western financial institutions and in turn lent considerable sums itself. The Bank’s Balance Sheet for 31 December 2007 recorded a substantial increase in loans made to customers between 2005 and 2007. In 2005 the loans amounted to 680,385 millions of Kazakhstani tenge. In 2007 they amounted to 2,379,810 millions of KZT. […]In the 2007 report of the CIS Financing Department, the division responsible for lending outside Kazakhstan, a distinction was drawn between ‘group’ or shareholding projects and ‘market’ projects. That ‘group’ projects were ‘shareholder’ projects is apparent from the oral evidence of two of the Bank’s witnesses, Ms. Gozhakhmetova (who worked in the ‘middle office’ ensuring that credit files were correctly maintained) and Ms. Niyazova (who also worked in the ‘middle office’ before being seconded to BTA Moscow in September 2008). In an email dated 10 September 2008 from Ms. Musina (head of the administrative department which provided support for the CISFD) she stated that she had received an instruction ‘to divide projects into market ones and shareholder ones’.”

The entire conglomerate into which value was funneled away from BTA’s control by Ablyazov and his associates looks bewildering indeed. “The report of CISFD provided to the Management Board in January 2008 divided group projects into ‘financial companies of the group’and ‘BTA Capital projects’,” the verdict reads further. “The report envisaged that the value of BTA Capital projects would increase during the year to US$500m. One such project was the Vitino port project which is the subject of the Chrysopa action. It is necessary to identify ‘BTA Capital’ more precisely because there are two companies with similar names and therefore scope for confusion. The first is Investment Group BTA Capital LLC. The second is BTA Capital LLC. The former, IGBTA, was established in March 2007 by Mr. Ablyazov, Ms. Zhankulieva (head of the Bank’s representative office in Moscow until succeeded by Mr. Khazhaev) and others. Mr. Ablyazov had a 51% interest. Records at Russian Companies House show that Ms. Zhankulieva is or was the President and that the company has two shareholders, Konami Corporation of the Seychelles which holds 51% of the shares and Lindfield Corporate Inc which holds 49% of the shares. There is evidence that Konami is owned by Mr. Ablyazov; it has been added to the receivership. IGBTA is therefore not a subsidiary of the Bank but is, rather, a company owned and controlled (to the extent of 51%) by Mr. Ablyazov. The other company, BTA Capital LLC, was a subsidiary of the Bank. BTA Capital LLC had been incorporated in 2006 but it was reported in the Bank’s 2007 accounts that it did not operate and in the Bank’s 2008 accounts that it had been liquidated. It therefore seems more likely than not that the reference in the reports of the CISFD to BTA Capital was to IGBTA. The further references which I shall make in this judgment to BTA Capital are therefore references to IGBTA, a company owned and controlled by Mr. Ablyazov by reason of his 51% shareholding in it.”

What followed looked very much indeed like ordering General Mladi? to investigate into his own war crimes. “In April 2008 the Financial Market and Financial Organisations Control and Supervision Agency of the Kazakh Government (the “AFN”) provided to the Bank a working report on its investigation of the Bank’s internal risk management system,” Judge Teare’s report reads further down. “The Bank’s credit files had been found to be deficient and not in accordance with the standards set by the Bank’s own Corporate Lending Manual. Evidence of a conflict of interest was found in the circumstance that Mr. Ablyazov was Chairman of the Board of Directors and yet also headed the Regional Credit Committee. […] On 11 June 2008 the AFN provided to the Bank a “Comprehensive Inspection Report” which highlighted the fact that much of the Bank’s lending was to entities outside the Republic of Kazakhstan. […] In addition the AFN was concerned that such borrowers had no assets. The AFN considered that the Bank lacked adequate risk management and reviewed the Bank’s classification of its loan portfolio. The AFN disagreed with the Bank’s classification of its portfolio. In particular, whereas the Bank considered that only 1% of its portfolio was non-performing, the AFN considered that 8% was non-performing.”

“On 22 January 2009 the AFN sent the Bank its final report following its inspections between 22 October and 12 December 2008, the purpose of which had been (a) to check on whether the Bank had implemented a plan to eliminate the violations found in the previous inspection and (b) to classify the Bank’s loan portfolio. The AFN concluded that the required steps to improve the Bank’s business had not been taken. The AFN noted the continuing practice of lending to companies in the BVI and the Seychelles and that notwithstanding the AFN’s advice about a conflict of interest the Bank had, on 30 April 2008, arranged for Mr. Ablyazov to chair the regional credit committees for Russia and the CIS. Following its review of the loan portfolio (in which the AFN classified 19.46% of the portfolio as non-performing whereas the Bank had classified only 1.82% as non-performing) the AFN required additional provisions of KZT443,148,000,000 or about US$3.58 billion based upon the financial position as at 1 October 2008. On 30 January 2009 the Bank informed the AFN that it could not meet its obligations. On 1 February 2009 the AFN requested the Government purchase the Bank and on 2 February 2009 the AFN removed Mr. Ablyazov and Mr. Zharimbetov from their offices of Chairman of the Board of Directors and First Deputy Chairman of the Management Board of the Bank. They fled to London.” (to be continued)

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