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

Not unlike earlier verdicts, the Royal Court of Law in London has revealed more details on the way Kazakhstan’s banker/master-fraudster on the run Mukhtar Ablyazov, one-time majority shareholder and president of the country’s troubled bank BTA (later bailed out and now majority-owned by the state fund Samruk Kazyna which is keen on merging it with two other banks it controls and sell the bulk to a private party), has managed not just to divert billion after billion (in greenbacks, that is) from the bank’s credit reserves, but also to keep it hidden from the bank’s corporate eye through an ingenious internal network of cover-ups. Another remarkable fact in the latest verdict from London is that the court, for the first time, not just quotes BTA and its lawyers in their qualifications as intentionally criminal of Ablyazov’s schemes, but openly declares on its own behalf the culprit’s intentions to defraud and the criminal character of the acts committed by him and a number of his associates.


Ablyazov files: proceedings shed more light on BTA fraud chains/IIThe court elaborates on the Granton case as follows: “Between March 2006 and August 2008 the Bank made 20 loans to 17 companies totalling US$1,428,840,000 (‘the Original Loans’). Those 17 companies are listed in Appendix 5 to the Bank’s Skeleton Argument and are known as the ‘Original Borrowers’ (described in the Appendix as Recipients). However, the Original Borrowers paid almost all of the loaned sums to other companies, known as the ‘Original Real Borrowers’. There were many of them and they are also listed in Appendix 5 (described in the Appendix as Payees). The Original Real Borrowers then used the funds for a variety of purposes as is apparent from Appendix 5 (see onward payments 2 and 3 in the Appendix). Some funds ended up with the Bank ostensibly in repayment of other loans made to the Original Real Borrowers, others were used to pay for the insurance which was apparently in place as security for other loans and yet other funds were paid to other companies for unknown purposes.”

The affairs have been known for a long time, but along with the strikingly blunt language used in the court ruling, more details about the way the schemes were carried out have once more been made public. “Between 4 November and 4 December 2008 a number of loans (‘the Later Loans’) totalling US$1,031,263,000 were made,” Justice Teare who has been dealing with the BTA cases from their very beginning including the latest verdict, recalls. “The loan agreements suggest that they were made to four borrowers (the ‘Later Borrowers’), Branden, Granton, Zafferant and Aldridge and that the purpose of the Later Loans was to finance the acquisition of oil and gas equipment. But the Later Loans were in fact paid to other companies (“the Intermediaries”) who were, apparently, to source and deliver the equipment to the Later Borrowers. […] “The size of the 20 Original Loans was considerable. They ranged from US$35m. to US$140m. and totalled US$1.428 billion. Despite the very large size of the loans they were made to companies with apparently minimal assets such that there must have been little if any reason to believe that the companies would be able to repay the loans. An example, said without challenge to be representative of the Original Loans, was the loan of US$76m. made to AstroGold Corporation on 13 November 2007 of which US$45m. was drawn down on that date. AstroGold was a company incorporated in the BVI on 27 December 2006. Its director was a gentleman with an address in Cyprus, Mr. Emilios Hadjivangeli, to whom 5000 shares were allotted. As of 1 October 2007 AstroGold was reported as having assets of US$5,000 and authorised capital of US$5,000. Yet on 30 October 2007 the company resolved, through Mr. Hadjivangeli, to apply to the Bank for a credit facility of US$76m. On the same day the company applied for the said loan for a period of two years at a rate of interest of 16%. The purpose of the loan was stated to be “to replenish the Borrowers’ own working capital”. The size of the loans was such, that if there was no apparent reason to expect that they would be repaid in accordance with their terms, there must have been some other reason for making them.”

The fact that in contrast to the main culprit in the mega-affair and his closest associates some of the lower-ranking echelons involved in the schemes have “cracked” and told the court all they knew has helped to identify the channels through which the money and the collaterals were diverted. A special department within the bank, contrarily to the rules not responsible to the bank’s credit committee and not even to its board, known as UKB6, allocated the loans, with antennas in other departments to take care of the cover-ups. “Each loan was administered by UKB6. Ms. Chegimbaeva, who worked in the ‘middle office’ providing support to the credit committees gave evidence that UKB6 was the only lending department which was responsible for its own credit files. The middle office compiled or stored credit files for the other lending departments. Similar evidence was also given by Ms. Palymbetova who was in the ‘methodology’ department from 2006 and from June 2008 was in the Department of Analysis of Corporate Business. […] The fact that each loan was administered by UKB6 in a manner different from other departments and that there was communication between Eastbridge and UKB6 tends to suggest that the companies in question were owned or controlled by Mr. Ablyazov. There is therefore cogent evidence, which I accept, that the Original Borrowers and the Original Real Borrowers were companies owned or controlled by Mr. Ablyazov. It is also clear that Mr. Ablyazov did not disclose to the Board that he owned or controlled those Borrowers. He has never claimed that he did so and there is no evidence that he did. None of the represented Defendants has suggested that he did. In those circumstances there can be only one explanation for the fact that the very large sums of money which were advanced were immediately transferred to companies owned or controlled by Mr. Ablyazov, namely, that the Original Loans were part of a dishonest scheme whereby Mr. Ablyazov sought to misappropriate monies which belonged to the Bank.”

More details revealed in the latest verdict on the Grant affair shed light on how the chain of loans-on-loans-on-loans into the final deadlock was constructed. Put together, for the first time the English court not just refers to BTA’s point of view concerning the criminal content of the schemes carried out by Ablyazov and in this case two particular associates, but takes on the assumption of fraud in its own observations and conclusions. “The Original Loans were made between March 2006 and August 2008. Whether they represented all of the loans made by UKB6 for Mr. Ablyazov’s benefit during that period is not apparent from the evidence (though the Bank has its suspicions that there were more.) They have been identified as a group of loans merely because they were “repaid” by the Later Loans. […] The Later Loans were made between 5 November and 8 December 2012 but they were paid out, not to the Later Borrowers, but to Intermediaries who paid them on to other companies, the Recipients, who in turn paid them to the Bank in apparent discharge of the Original Loans. They were not used for the purchase of oil and gas equipment. Documents said to support and evidence the Later Loans were created after the monies had been paid out by the Bank but backdated. Thus contracts for the purchase of oil and gas equipment supposedly by the Later Borrowers were still being prepared in late November 2008 and backdated to 23 October 2008. Loan agreements and credit committee extracts were still in draft in mid-December 2008. When completed they were backdated. […] It is beyond argument that the Later Loans were a mere cloak which sought to hide from view the reality, which was that money was being extracted from the Bank for the purpose of paying back the Original Loans. Since this circular exercise benefitted Mr. Ablyazov (because he owned or controlled the Original Borrowers) it is also clear that he must have orchestrated or, at the least, authorised this fraud.”

As for the so-called Drey case, its scheme consisted of two stages, in the court’s words: “First, the Bank entered into agreements relating to the Bank’s purchase of shares in three foreign banks, BTA Moscow, BTA Belarus and BTA Ukraine (‘the Target Banks’). The structure of the purchase involved (i) a number of sale and purchase agreements with selling shareholders (‘the SPAs) and (ii) three ‘compensation agreements’ with Drey, an English company, whereby Drey was to be paid for procuring the agreement of various (non-selling) shareholders in the Target Banks not to exercise alleged pre-emption rights. The Bank says that the Target Banks were owned and controlled by Mr. Ablyazov, that his affiliation with them was not disclosed to the Bank’s Board of Directors, that the total price to be paid by the Bank was greatly in excess of the market value of the Target Banks and that because the Target Banks were owned and controlled by Mr. Ablyazov there was no need for the compensation agreements. Thus the Bank says that Mr. Ablyazov engineered a scheme whereby (i) the money paid by the Bank under the compensation agreements was used for his own purposes (in particular repaying loans made by the Bank to other companies owned or controlled by Mr. Ablayzov) and (ii) the Bank overpaid for the shares in the three foreign banks. The second part of the scheme was a plan, in relation to at least BTA Moscow and BTA Ukraine, whereby there would be a new share issue by those banks and that more of the Bank’s money, under the guise of loans to companies owned or controlled by Mr. Ablyazov, was to be used to purchase the new shares issued by the Target Banks with the result that, notwithstanding the purchase of the old shares in the Target Banks, Mr. Ablyazov would remain in control of the Target Banks.”

Concerning BTA Moscow – later rebaptised AMT and these days in liquidation and under scrutiny for fraudulent bankruptcy, Judge Teare recalls: “In or about June 2008 (possibly 13 and 19 June 2008 respectively) the Compensation Agreement and SPAs [Share Purchasing Agreements] were executed. Payments under the Compensation Agreement (some US$133,876,080) and SPAs (some US$88,227,663) were made in June and July 2008. On 3 September 2008 a total of US$300m. was provided by the Bank to Avonhill, Kinmate and Bresnop pursuant to loan agreements which made no provision for security. This money was to be used for the purchase of new shares in BTA Moscow by other companies owned or controlled by Mr. Ablyazov. However, the Bank makes no claim for this US$300m. because there is some evidence that it was repaid following a request by the AFN for the provision of credit files regarding the loans.” Regarding BTA Belarus, the status of which today seems to hang in the air, less details are given: “In or about August 2008 (possibly after 15 and on 18 August respectively) the SPAs and Compensation Agreements were executed. Payments under the SPA (some US$17,855,709) and Compensation Agreement (some US$11,349,840) were made in October 2008. I was not referred to any evidence which suggested that there was a plan for companies owned or controlled by Mr. Ablyazov to acquire new shares in BTA Belarus obtained from the Bank under loan agreements.” The same applies to BTA Ukraine: “In about November and December 2008 (possibly on 3 November and after 30 December 2008 respectively) the Compensation Agreement and SPAs were executed. Payment of US$150,149,477 was made under the Compensation Agreement on 31 October 2008. The sum of approximately US$77m. which was due under the SPAs was never paid by the Bank. On 28 January 2009 the SPAs were cancelled even though US$150m. had been paid by the Bank under the Compensation Agreement.” As a result, losses to BTA appear to amount to more than 400 million US dollar (see table below), while it is far from sure in how far BTA can recuperate even part of that amount following the English court ruling.

Nevertheless, the London court considers the fraudulent intention of the three schemes as established. “It is common ground that Mr. Ablyazov was the owner of the selling and non-selling shareholders in the Target Banks,” the verdict reads. “In those circumstances the Compensation Agreements appear to have been a mere device to extract more money from the Bank, in excess of the value of the shares being bought. […] I consider it much more probable than not that the Compensation Agreements were dishonest and fraudulent devices orchestrated or authorised by Mr. Ablyazov to enable the Bank’s money to be extracted from it for the purpose, in substantial part, of repaying other loans to the Bank in order to give the impression to the AFN that those other loans were ‘performing’. The overpayment for the shares in the Target Banks is likely to have been part and parcel of this scheme. The later scheme to diminish the Bank’s shareholding in the BTA Moscow and BTA Ukraine was an obviously fraudulent scheme.”

More tangible assets in the form of substantial stakes in operative and fully performing enterprises at the Russian terminal of Vitino could well mean cash-in-hand for BTA in the third case, known as Chrysopa – even though reactions from legitimate co-owners have not reached the public domain so far and proceedings in Russian courtrooms could well prove to be laborious and time-devouring. “In August 2008 the Bank paid US$120m. to Chrysopa Holding BV, a Dutch company pursuant to a loan transaction,” the verdict reminds. “It was passed on to Usarel, a Cypriot company who used it to purchase the Vitino port on the White Sea. […] The Vitino port (or the White Sea group of companies which formed the port) was owned by the Nitek group. In 2007 the Rusneftekhim group of oil companies, owned or controlled by Mr. Pukhlikov and Mr. Sheklanov, was interested in purchasing the Vitino port. […] In April 2007 Mr. Pukhlikov approached the Bank for finance. Rusneftekhim had had a loan facility from the Bank since 2006. Negotiations continued between the Nitek and Rusneftekhim groups for the sale and purchase of the port and between the latter and BTA Capital for the provision of finance. On 15 August 2007 the Rusneftekhim group and BTA Capital signed a Framework Agreement pursuant to which a joint venture vehicle, owned as to 51% by BTA Capital and as to 49% by Rusneftekhim, would purchase the port. BTA Capital would provide 90% of the funding and Rusneftekhim would provide 10%. The joint venture vehicle would have 5 directors, 3 appointed by BTA Capital and 2 by Rusneftekhim. Important decisions would require a majority of 4 directors.”

The Chrysopa files’ details revealed in the court document illustrate that the case is another perfect example of Ablyazov’s diversion method. “On 7 June 2008 a Shareholders Agreement was entered into regulating the affairs of Lux which was to be the company which held the shares in Usarel. This agreement was between Vetabet (owned by Mr. Pukhlikov and Mr. Scheklanov) and Tedcom (owned by Mr. Ablyazov – through Direct Logistic – as to 75% and as to 25% by Ms. Zhankulieva – though Med Consulting). […] On 10 or 11 July 2008 (the date is unclear) Chrysopa and Usarel concluded the sub-loan agreement. Remarkably it was for a period of 2 years whereas the loan agreement between the Bank and Chrysopa was intended to be for a period of 6 years. Article 5 was “an overriding principle” the effect of which appears to have been to ensure that the amounts paid by Usarel to Chrysopa equalled the amount paid by Chrysopa to the Bank. On 14 July 2008 Vetabet paid US$6m. to Usarel in respect of the anticipated purchase of the port by Usarel. […] On 8 August 2008 Usarel completed the purchase of the Vitino port by paying US$125,949,750 to the Nitek group.”

What followed was a continuing string of “amendments” in the loan agreement resulting in prolonged absence of payments – both in terms of dividends to shareholders and loan repayments. Furthermore, immediate access to collateral was not explicitly included in the loan contract and the right to collect assets in case of default could therefore be delayed time and again as well. “To permit a substantial loan to be made without immediate security to a company without any obvious assets again raises a question as to the parties’ true intentions,” the court observes. “It is common ground that no effective security was ever provided and there is a dispute as to whether a document purporting to be a pledge of Usarel’s shares by Lux was genuine.” Also in this case, the English court clearly and explicitly confirms that the case has a criminal character. “Article 73 of the [Kazakh] JSC law requires that transactions in which an affiliate was interested had to be approved by a majority of the Board,” the verdict reads further down. “The purpose of that Article is to protect a company from transactions which are not in its best interests and indeed from fraud. The Board was never asked to take such a decision with regard to the Chrysopa loan because Mr. Ablyazov had not declared his interest in it and so was kept in ignorance of that interest. That, in my judgment, was a deception and so a fraud on the Bank. […] I accept that there is evidence that in 2009 Mr. Ablyazov diverted monies which had been intended by Usarel to fund the interest payable by Usarel to Chrysopa and by Chrysopa to the Bank but, assuming that he did divert such monies, that was a further act of fraud or dishonesty by Mr. Ablyazov.” (to be continued)

BTA Moscow Compensation Agreement $133,876,080
BTA Moscow SPAs $88,277,663
BTA Belarus Compensation Agreement $11,349,840
BTA Belarus SPAs $17,855,709
BTA Ukraine Compensation Agreement $150,149,477
Total $401,508,769