The Ablyazov -Kythreotis Hidden ‘beneficial owners’ case Study
30 November 2017 by Bachir El Nakib (CAMS)
The identity of the real owners – the ‘beneficial owners’ – of the companies that have obtained rights to extract oil, gas and minerals is often unknown, hidden by a chain of unaccountable corporate entities. This problem also affects other sectors and often helps to feed corruption and tax evasion. People who live in resource-rich countries are at particular risk of losing out as extractive assets are too often misallocated for corrupt reasons.
Definition of beneficial ownership:
i. A beneficial owner in respect of a company means the natural person(s) who directly or indirectly ultimately owns or controls the corporate entity.
ii. The multi-stakeholder group should agree an appropriate definition of the term beneficial owner. The definition should be aligned with (f)(i) above and take international norms and relevant national laws into account, and should include ownership threshold(s). The definition should also specify reporting obligations for politically exposed persons.
iii. Publicly listed companies, including wholly-owned subsidiaries, are required to disclose the name of the stock exchange and include a link to the stock exchange filings where they are listed.
iv. In the case of joint ventures, each entity within the venture should disclose its beneficial owner(s), unless it is publicly listed or is a wholly-owned subsidiary of a publicly listed company. Each entity is responsible for the accuracy of the information provided.
The former chairman of a Kazakh bank went to considerable lengths to conceal his beneficial ownership of an offshore company, including the use of verbal agreements, a London High Court judgment has shown.
The Kazakhstani state-owned BTA Bank Joint-Stock Co. is pursuing the son of its former chairman Mukhtar Ablyazov for more than £1 million the bank says Ablyazov fraudulently transferred, in the latest step of a long-running battle from the bank to claw back $6 billion it claims Ablyazov embezzled during his time in charge, England’s High Court heard Wednesday.
The bank’s claim centers on £1.1 million ($1.37 million) that was transferred from Ablyazov’s European Financial Group bank account in Switzerland to a London-based EFG account in the name...
For the first time within Europe’s jurisdiction one of Kazakhstan banker-swindler Mukhtar Ablyazov, one-time head of the country’s one-time leading bank BTA has faced the enforcement of the law in the form of imprisonment. Not in the UK where Paul Kythreotis has been convicted to 21 months in jail for “contempt of court” meaning perjury, but in Cyprus where he is now serving two months behind bars for the same offence. This leaves his close associate Jason Hercules and the main culprit Ablyazov, both of whom have also been convicted to jail terms in England, on the run. The former is supposed to be hiding either in Cyprus or to have already fled to an unknown destination – possibly joining the latter. Rather surprising is that as far as known the UK has made no attempt so far to get the two Cyprus-based convicts extradited – even though both within the British Commonwealth and the European Union, with Britain and Cyprus being members of both, such procedures must lead to results in the absence of frictions between the law and the measurement of punishment versus crime. For instance, the UK will not extradite a citizen of India with the possibility of his dear countrymen waiting to have him hanged.
“Kythreotis, who helped manage some of Ablyazov’s offshore companies, is the first of the ex-chairman’s former business associates to be jailed since BTA accused him in U.K. lawsuits of siphoning billions of dollars from the bank,” Bloomberg reported on August 8. “Ablyazov, who moved to London, is on the run after being sentenced in February by a U.K. court to 22 months in prison for lying under oath.” Media also reported a comment from BTA’s managing director Pavel Prosyankin on the bank’s behalf. “We welcome today’s judgment in Cyprus sending one of Mr Ablyazov’s key associates to prison. We have pursued these committal actions to break the networks through which Mr Ablyazov and his associates can improperly hide and disperse assets. The Bank is determined to seek redress against those who have been instrumental in the losses that it has suffered from alleged fraud, as well as those who are assisting in the concealment of monies or assets misappropriated from the Bank.” Assets at stake amount to $295 along with funds under Kythreotis’ personal control up to the sum of $68,286,517.
“Mr Kythreotis is a British citizen who resides in Cyprus,” the explanation of the written verdict dated December 14 last year of an appeal in the case by three Lords of Justice in London reads. “He owns and operates the Starport group of companies which provide nominee and other corporate services.” An earlier verdict, issued on October 10 last year, also points at another company called PKM Management Ltd. as being under Kyrthreotis’ control these days. His equally convicted co-defendant Jason Christian Hercules, still on the run, should not be hard to find since he also remains involved in his brother-in-crime’s present-day business. Mr Hercules works with [Kythryotis] and is the company secretary of Starport Secretaries Limited, a company within the Starport group. Mr Kythreotis has made an affidavit in which he describes the nature of his business. He says that Starport acts for hundreds of companies (later verified as 902). It acts under instructions and does not initiate the transactions it is asked to carry out or even necessarily understand their commercial purpose. He and Mr Hercules act as nominee service providers including as nominee directors and simply execute the documents provided to them. His evidence is that the instructions in respect of the corporate defendants came from Eastbridge Capital Limited (“Eastbridge”), an English company with offices in the City of London, Cyprus and Moscow.”
The mailbox firms acting on behalf of Ablyazov in the case have become referred to as the BVI companies after their location on the British Virgin Islands. “The companies whose affairs Mr Kythreotis has administered include five companies registered in the British Virgin Islands,” the October 10 verdict reads. “They are Celina Holding Investments Ltd, formerly Bubris Investments Ltd (“Bubris”); Shoreline Investment Holdings Ltd, formerly Granta Investment Holdings Ltd; Nafazko Investments Ltd ; Olofu Investments Ltd; Mymana Holdings Investments Ltd, formerly Kyma Investment Holdings Ltd. […] In June 2008 the BVI companies sold or purported to sell certain securities to Alfa Equity Investments Ltd (“Alfa Equity”).” Instrumental in the transactions of funds originating from BTA when Mukhtar Ablyazov was at its helm appears to have been a company called Eastbridge, run by Ablyazov’s deputy and longstanding man of confidence Roman Solodchenko – also sought by the British justice and in hiding these days.
The case, the exact chronology has been reported earlier, has become known as the AAA case and concerns bonds in various top-qualified financial institutions, purchased by BTA at the time. “In January 2009 Mr Solodchenko arranged for certain bonds belonging to the bank, worth about US $290 million, to be used to fulfill the obligations of the BVI companies,”the verdict reads. “The bank received no consideration for this loss of its assets. Thus the payments received by the BVI companies under the June transactions, totalling about US $290 million, represented money belonging to the bank. The BVI companies transferred that money to four further companies, namely Mabco Inc, Calernen Finance Inc, Astrogold Corp and Grundberg plc. They have been referred to as ‘the further recipients’, an expression which I shall adopt. Where the money went after that is still under investigation. The bank seeks to recover its losses against all who were involved in the misappropriation of its assets. In particular, it alleges that Eastbridge Capital Ltd gave instructions for the incorporation of the BVI companies and for many of the subsequent fraudulent transactions. It alleges that Mr Kythreotis implemented many of those transactions with full knowledge of the fraud, that he was a director of Bubris and Astrogold, and that he backdated documents in order to conceal the true beneficial ownership of the BVI companies. It alleges […] that Park Hill Capital Ltd took over the business of Eastbridge as from January 2010. The bank alleges that Mr Ablyazov is the ultimate undisclosed beneficial owner of both the BVI companies and the further recipients; and that Mr Ablyazov, using his senior position in the bank, facilitated the transfer of valuable assets from the bank to the BVI companies.” For all it matters, Park Hill also pops up concerning the luxury property owned by Ablyazov through proxy firms in and around London – also subject to the freezing order and included in Ablyazov’s own perjury verdict, still under appeal and confirmation (or, in theory, reversal) of which can be expected any day now.
It all started with the first issue of the now widely-known freezing order in summer 2010, almost a year-and-a-half after BTA’s bail-out in Kazakhstan and Ablyazov’s flight to London. “On 23rd July 2010 the bank, without notice, applied for and obtained a worldwide freezing order, a proprietary injunction and related relief against the second defendant, Mr Kythreotis,” the October 2011 verdict reminds. “The order was sealed on 26th July and served on Mr Kythreotis on 29th July. Paragraph 5 of the order stated that the frozen amount of Mr Kythreotis’ assets was US $68,286,517. The order also contained disclosure provisions. Mr Kythreotis was required to provide details of his assets over $10,000 in value and to answer a series of questions set out in schedule D to the order. The schedule D questions sought pertinent information about the transfer of money/securities from the bank to the BVI companies, thence to the further recipients and beyond. […] These comprised the June transactions, the payment of monies by Alfa Equity to the BVI companies, the payment of monies by the BVI companies to the further recipients, the subsequent payment of those monies by the further recipients to others, the transfer of securities from the bank to the BVI companies and from the BVI companies to Alfa Equity. Mr Kythreotis was required to provide written answers to the schedule D questions together with supporting evidence within seven working days, i.e. by 10th August, and to verify the information by affidavit within ten working days, i.e. by 13th August 2010.”
The rest of the story is known, and was soon to lead to Kythreotis’ initial charge with perjury. “On the return date, 6th August 2010, none of the defendants was present or represented,” the verdict relates. “Mr Justice Newey continued the worldwide freezing order until trial or further order and directed that the disclosure obligations should remain in force. Mr Kythreotis did not comply with the disclosure obligations by the due dates. Accordingly, on 25th August the bank applied to commit Mr Kythreotis for contempt. On 27th August that application was served on Mr Kythreotis and he was notified of the hearing date, namely 21st September.” From there on, Kythreotis did little but squirm – trying at the same time to avoid prison for contempt and while at the same time trying to hide as much information as he possibly could. “The committal proceedings duly came on for hearing on 21st and 22nd September 2010 before Mrs Justice Proudman,” the verdict’s text continues. “Mr Kythreotis did not attend but was represented by counsel. Mr Kythreotis admitted through counsel that he had acted intentionally in disregard of the July order and thus was in contempt of court.
He asked for time to purge his contempt, namely until 28th September. The judge in her judgment of 22nd September 2010 identified the matters which had to be proved in order to establish contempt and held that they had been proved. Accordingly, she made a finding that Mr Kythreotis was in contempt. She adjourned the question of sentence until 29th September, principally in order to see whether Mr Kythreotis would fulfil his promise to make disclosure. Neither party appealed against that decision. Unsurprisingly, Mr Kythreotis did not challenge the finding of contempt and the bank did not challenge the decision to adjourn sentence for a week.”
Following the verdict, Kyrtheotis’ lawyers appealed, followed by an entire winter of legal arm-twisting including no less than 16 affidavits on behalf of Kythreotis, many of which contradicted others. Not only did this prove intentional failure to disclose the required facts and figures, but it also demonstrated that in spite of repeated and subsequently granted requests to purge his non-compliance with the freezing order, the defendant had again and again failed to do so – deliberately, that is. “In the present case Mr Kythreotis’ contempt has been aggravated by his deliberately placing false evidence before the court at the sentencing hearing and misleading the judge,” the final conclusion of the verdict in the words of Lord Justice Carnwath reads. “In my view the punitive portion of the sentence in respect of Mr Kythreotis’ past non-compliance should be nine months imprisonment. It should be made clear to Mr Kythreotis that it will be open to him in the event of prompt and full compliance with the disclosure provisions of the freezing order in the future to apply to the court to vary the sentence of 21 months imprisonment. However, it is the view of this court that any variation which may be made on that account should not reduce the sentence to less than nine months. This indication is not binding upon any future court, but I hope it will be of assistance if there is an application to vary the sentence Let me now draw the threads together. If my Lords agree, the order of the judge will be discharged and there will be substituted a sentence of 21 months imprisonment.”
So what had made Kythreotis swagger to and fro in the course of the legal battle between him and his associates and officials on one side and BTA on the other? One explanation could well be found in the activities he and Hercules were still engaged in: rendering services, varying from company registration to fund and asset transactions and carrying out liability shift schemes, to companies they were supposed to know nothing else about.
Dangerous business – as the couple seemed to have been increasingly aware of without, however, being either willing or able to leave it all behind for the sake of justice. “On 5th May 2011 Mr Kythreotis served an affidavit in response to the bank’s fresh evidence,” the court report quoted earlier reads at one stage. “Although not numbered, this was Mr Kythreotis’ fourth affidavit and I shall so refer to it. In his fourth affidavit Mr Kythreotis admitted that his earlier evidence had been false and said that this was because he was “a frightened man”. He alleged that he had been subject to threats, surveillance and intimidation by other defendants. Mr Kythreotis admitted that he had an “enormous” email archive, which he had not previously disclosed.”
It all amply illustrates that the business the Cyprus-based couple were involved in may not have been illegal in itself (although advocates of legal reforms aimed against offshore tax havens have been insisting that it should for decades already – with the desired results) but that it drags one into an atmosphere where threats as felt by Kythreotis are likely to become all too real. The numerous connections traced by investigators and documentary journalists alike linking the white-collar criminal Ablyazov to even much more dangerous types of criminals – including “merchant of death” Viktor Bout and Italian mafia-connected Eugene Gourevich, just to name two, as well as Ablyazov’s and his one-time partner Yerzhan Tatishev’s earlier suspected links with Kazakh “heavy” criminals such as Muratkhan Tokhmadiyev strongly suggests that more than ever before white-collar crime and cloak-and-dagger crime are in the process of becoming interdependent to the extent that they are becoming intertwined. A trend that should be very carefully observed indeed – especially by those in the world who demand tougher suppression of fund and asset manipulations carried out at the expense of investors, shareholders and other victims including the global community at large.
CASH VALUE OF FROZEN ASSETS IN THE KYTHREOTIS/HERCULES CASE
|
Respondent |
Amount |
|
Kythreotis |
US$68,286,517.36 |
|
Hercules |
US$50 million |
|
Bubris (Celina) |
US$68,286,517.36 |
|
Granta (Shoreline) |
US$70 million |
|
Nafazko |
US$58,963,708.33 |
|
Olofu |
US$50 million |
|
Kyma (Mymana) |
US$50 million |
source: Royal Court of England and Wales
The revelations of Mukhtar Ablyazov, published in the judgment, demonstrate from the horse's mouth the near-impossible obstacles that money laundering reporting officers (MLROs) may face when conducting due diligence on persons determined to avoid a paper trail. Ablyazov also faces claims in the New York District Court of conspiracy to embezzle funds and launder stolen money.
The recent High Court judgment is the latest twist in a long dispute between BTA Bank and Ablyazov involving alleged stolen money and how it was moved around the world. According to a previous August 2014 High Court judgment, BTA Bank had obtained judgment for $4.6 million against Ablyazov and others, after it was alleged he had treated the bank as if it were his own source of funds. The judgment said further proceedings were underway.
Ablyazov has dismissed these claims as an attempt by Nursultan Nazarbayev, Kazakhstan's president, to take control of his assets to support a politically motivated campaign designed to eliminate Ablyazov as a political opponent.
In a witness statement delivered to the London High Court, Ablyazov outlined the techniques he had used to stop a paper trail from leading to his beneficial ownership of an offshore company holding London property, the court judgment showed. But the case established that Ablyazov was the beneficial owner of the relevant company.
Secret methods
Ablyazov said in a witness statement, cited in the judgment, that most of his assets were held through nominee arrangements. Typically, an asset was recorded as held by a company situated offshore, for example, Cyprus. That company's shares were owned by a further company or companies owned in one or more other jurisdictions, he said.
"The shares in those companies are owned by a further company or companies located in one or more other jurisdictions, for example, the Cayman Islands and the Seychelles. The shares in those companies are in turn registered in the name of an individual in whom I repose my trust and confidence, Mr X, and with whom I have a mere oral agreement," he said.
"That means that, if the Kazakhstan government instructs someone to follow the 'paper trail' underlying the assets, that trail will hopefully never reach me. Indeed, if all goes to plan, the chain of nominee companies will provide sufficient protection, particularly in jurisdictions where there is no requirement to disclose shareholder identity, so that the trail will not even reach Mr X," he said.
"Even if it does, though, there can be no connection established between myself and Mr X because our agreement is often a purely verbal one, and Mr X is lawful to me," he said.
The court found for the bank that Ablyazov was the beneficial owner of the asset in dispute. This case concerned offshore companies. Even in the European Union it can be impossible to discover the true beneficial owner, as the 4th AML Directive has acknowledged.
"There may be cases where no natural person is identifiable who ultimately owns or exerts control over a legal entity.
As the High Court judgment just published demonstrates, even if an MLRO's due diligence finds a natural person at the end of the paper trail, that person may not be the true beneficial owner but rather a nominee who has agreed verbally to purport be the beneficial owner.
Ablyazov has now explained exactly how this can be done.
Laundering claims
There is more to come. Separately, in the New York District Court, Ablyazov faces claims of conspiracy to embezzle billions of dollars from BTA Bank and to launder the stolen funds around the world through shell companies and sham transactions, which include investment in New York City real estate projects through a special purpose vehicle.
According to a related December 2016 London High Court judgment, Ilyas Khrapunov, Ablyazov's son-in-law, is alleged to have conspired with Ablyazov to hide his assets from the bank or to dissipate them.
Sources:
1)http://kazworld.info/?p=23493;
2)https://www.law360.com/articles/861175/kazakh-bank-chases-ex-chair-s-son-in-long-running-fraud row;
3) http://www.bailii.org/ew/cases/EWHC/Comm/2014/2788.html