BVI Offshore Business: Grey Area

On June 22, the U.S. Securities and Exchange Commission filed securities fraud charges against a prominent California investment adviser, who allegedly oversaw three funds that invested all of their assets (nearly $1 billion) with Madoff, and a NY brokerage firm Cohmad Securities Corp. that are said to be controlled by Bernard Madoff. They are accused of funneling billions of dollars from investors into Madoff’s Ponzi scheme.

It is alleged by the SEC that, while channeling billions of dollars in investor funds to Madoff scheme, the associates together collected several hundred million dollars in fees from him. These money are said to have played great role in the success of Madoff’s $50 billion fraud scheme, and the defendants are said to get nearly all of its revenue from introducing investors into Madoff’s operations.

The SEC lawsuit widened the circle of players around Madoff who have been charged by the government in what might be one of the biggest investment frauds in history. There are some British Virgin Islands-registered companies and  “feeder funds” of Madoff’s company Investment Securities LLC involved in the large-scale process. Concerning the current case, the federal regulator is seeking injunctions against the defendants, and unspecified civil fines and restitution of allegedly ill-gotten profits.

The Russian Bailiff Service prepared documents to auction off a 26.6% stake in Russian mobile operator VimpelCom, which is the subject of a long dispute between its shareholders - Norway’s telecommunications company Telenor and British Virgin Islands-based Farimex. The Norwegian company also claimed that Farimex is linked to Alfa Group - another major shareholder of VimpelCom, and in this case it becomes dispute between Telenor and Alfa Group.

The 26.6% stake currently auctioned was blocked under the court order in March, as part of the dispute. This was done when BVI company filed a lawsuit against Telenor, after which Russian Arbitration Court ordered USD 1.728 billion compensation to be paid by Norwegians, and 26.6 % of its stake in VimpelCom to be frozen. On June 3, Moscow court rejected Telenor’s appeal to suspend the order.

BVI-registered freight-logistics company UTi Worldwide reported its financial results for the first quarter of the year 2009, which appeared to be even worse that it had been expected by Wall Street. After announcing the results, the stock of the company fell down 5% - much more than average.

For the period ended April 30, 2009, the BVI company named the earning figure of US$9.8 mln on revenue of US$768.4 mln - much lower that market analysts’ expectations of nearly US$938 mln; and both these figures were much lower than a year ago - 27% and 35% respectively. Among the reasons for so dramatic fall of revenues of UTi Worldwide, there is the large slowdown  in worldwide shipping volumes. The company has already reported losses for the period ended January 31, 2009, and now the downfall continued.

The company also has cut expenses during this period to about US$292 mln - 20% if compared to the same last year period.

The BVI company said its earnings figures included restructuring costs and the sale of real estate in South Africa. Also, the company blamed currency fluctuations of its losses.

CEO of UTi Worldwide, Eric Kirchner, said in a statement that he wants to heighten company’s sales efforts to improve revenue growth, but did not specify what kind of measures these could be.

Eastern Property Holdings Limited, a BVI-registered company engaged in real estate development and listed in the Real Estate Companies segment of Swiss Exchange, has to pay a fine of CHF 30,000, pronounced by the sanction commission of the SIX Swiss Exchange Ltd.

The BVI company is said to have violated the provisions governing ad hoc publicity in the publication of its 2008 semi-annual report, and have failed to fulfill its reporting requirements in a number of cases. Concerning the 2008 semi-annual report and press release related to it, the company published it during continuous trading hours, without sending notification about it to the SIX Exchange Regulation, while it is presecribed to inform of the publication 90 minutes before the public release.

The SIX Swiss Exchange Regulation also stated that Eastern Property violated its reporting requirements and did not provide the important details on the company, like its postal address and web link to enable to see ad hoc publicity notifications. The specific reporting requirements violated by the BVI company help investors to obtain information necessary of assessing the characteristics of a given security and the quality of the issuer, and are a means to ensure a properly functioning market and orderly securities trade.

The Sanction Commission took into consideration all aspects of this matter with the BVI company, as well as the fact that in 2006 it had been already fined for violating the provisions concerning the disclosure of management transactions, and imposed the CHF 30,000 fine against the company and the costs associated with the proceedings.

About a week ago, the Norwegian telecommunications operator Telenor, which is in long-lasting litigation with the British Virgin Islands-registered Farimex, announced that it faced a challenge from it over its holdings in Russian mobile operator Vimpelcom, having initiated investigation by Ukraine’s Anti-Monopoly Committee into its operations. Farimex claim to the Ukrainian anti-monopoly authority is based on its opinion that Telenor hindered competition in Ukraine by delaying Vimpelcom’s acquisition of Ukrainian Radio Systems (URS).

This allegation was already the reason of Farimex’s $1.7 billion suit against Telenor in the Siberian court. The decision of the court in favor of the BVI corporation currently is under appeal by Telenor. Ukrainian Radio Systems was acquired by VimpelCom in 2005 at a price of US$231 mln, after it was offered in 2005 at a price of US$100 million to Golden Telecom. Telenor-appointed members of the Board of Directors of VimpelCom argued against the acquisition for three reasons - two high price, unidentified sellers and non-credible business plans presented for URS development.

Telenor owns 56 per cent of Ukrainian mobile market leader Kyivstar, and the rest is owned by Russia’s Alfa Group. BVI-registered Farimex holds a  0.002 per cent stake in New York-listed Vimpelcom whose two main shareholders are Telenor and Alfa Group. Telenor claims Farimex is linked to Alfa Group - but this is rejected by Alfa itself.

Now, according to Telenor, Farimex said that Telenor, Kyivstar and Alfa company Storm have broken the Ukrainian competition rules because of a non-participation clause in the Kyivstar shareholders’ agreement, which bans shareholders from owning more than 5 per cent stakes in Kyivstar rivals without each others approval. Country Manager of Telenor Group Ukraine said that inclusion of non-participation clauses was standard practice. He said that non-participation clauses are normally included in agreements between partners worldwide, so too between the Kyivstar shareholders in the agreement signed in 2004. This was done to promote fair competition and avoid monopolization of the market.

On Friday, May 15, Britain’s Serious Fraud Office arrested two managers of the collapsed hedge fund Weavering Capital, which is now investigated in connection with artificial inflation of its value by derivative transactions.

Liquidators of Weavering Macro Fixed Income hedge fund (Cayman Islands) are now investigating the swaps where the counterparty was an offshore firm Weavering Capital Fund Limited, registered in the British Virgin Islands, and controlled by the fund’s founder and chief executive.

The Weavering Macro Fixed Income Fund (CI) was working mainly with high-net-worth clients. Actually, it started voluntary liquidation after it failed to meet its investor demands for withdrawals. Its main asset was a series of derivative transactions valued at $637.1 million, while a derivative counterparty, which was described as a BVI entity “effectively under common control” with Weavering Capital UK, had a net worth not exceeding $50 million.

The Irish Stock Exchange listing of the Cayman Islands-registered fund was suspended, and by the opinion of the fund representatives it had “revealed a related party transaction in the form of a large interest rate swap position of a material amount where the counterparty is a company controlled by a related party”.

Now, the main issue of the British investigators into the fund is whether the connection between the Cayman fund and BVI fund should have been disclosed under the rules of the Irish Stock Exchange (ISE)composite triple beat, as a related party transaction.

In the last time, the hedge fund industry was influenced very much by a number of high-profile scandals, the most notable of which is scandal with the U.S. financier Bernard Madoff alleged of large-scale fraud and pyramid scheme.

Further investigation is to be made into the network of companies (including BVI-registered entities) linked to African National Congress , as well as into a great number of industrial offset programmes that have become a good ground for corruption. It is suggested that recent closure of the Directorate of Special Operations (the Scorpions), which investigated organised crime and corruption in South Africa, was connected to their work on the arms deals with the British defence company and arms manufacturer BAE Systems.

Two months before their closure they launched a series of simultaneous raids at seven locations in three South African provinces, all of them related to the bribes paid by BAE Systems and related to the South African deal. The search warrants, obtained on suspicion of racketeering, corruption, money laundering and fraud, identify three sets of suspects associated with corruption in the deal. The first of them is BAE, its officials and front companies, including its head office marketing services and the BVI-registered Red Diamond, others include middlemen, among them the shady Zimbabwean businessman John Bredenkamp, and unnamed officials and agencies of the South African government.

Actually, the seach warrants were supported not only by evidences found by the Scorpions but also from the evidences found by the Serious Fraud Office (SFO). One of the warrants stated that there is a “reasonable suspicion that BAE devised a system of payments… designed as bribes to achieve success… and to seek to obtain undue advantage over its competitors in the bidding process”.

The SFO suspects that BVI-registered Red Diamond was created with the purpose to ensure that corrupt payments could be made, and to make it more difficult for law enforcement agencies to penetrate the bribes system. Also, according to the SFO investigation, payments to some middlemen were made through BAE itself, a South African company established by BAE and Saab to manage their offset obligations, the BVI-registered Arstow Commercial Corporation, and the Jersey-registered Commercial Corporation International (CIC).

On May 8, 2009, the Eastern Caribbean Supreme Court in the British Virgin Islands made an order appointing William Tacon and Richard Fogerty of Zolfo Cooper as Joint Provisional Liquidators of the British Virgin Islands-registered funds Kingate Global Fund Limited and Kingate Euro Fund Limited, the funds which are sued as the feeder funds which were fully invested in Bernard L. Madoff Investment Securities LLC. Both BVI funds have investors in many parts of the world. The legal action against the funds was recently started by the court-appointed trustee for the liquidation of Madoff’s fund, Mr. Irving Picard in the U.S. Bankruptcy Court.

Their function as Joint Provisional Liquidators is to identify, manage, secure and preserve the underlying assets of the funds, in accordance with the terms of the BVI Court order and the provisions of the BVI Insolvency Act of 2003. The Joint Provisional Liquidators also said that they were not asking investors to submit details of their interests or claims in the BVI funds. One of the provisional liquidators, Mr. Tacon, added that the lawsuits against the funds which have been filed by Mr. Picard will also be an immediate priority for the Joint Provisional Liquidators.

In order to assist investors and creditors, the Joint Provisional Liquidators have established special websites - www. kingateglobal-liquidation .vg and www. kingateeuro-liquidation .vg, where information updates will be posted periodically. The Joint Provisional Liquidators hope to receive full co-operation and support of directors of the BVI funds. They are also going to communicate with investors and any creditors in the near future.

German prosecutors are investigating the case of alleged bribery at German truck maker MAN AG. In connection with this case, more than 100 people are already under investigation, and two were arrested last week. They are alleged to have paid “bribes characterized as commission payments” to employees of MAN customers, sometimes via the accounts of relatives and friends, they said in a statement.

Munich prosecutors who launched the investigation and searched MAN’s offices last week, said they suspect that a “system to boost sales of trucks and buses” took place in Germany, and kickbacks were paid to promote sales of MAN trucks and buses in many countries.
The persons arrested and suspected are said to have funneled the money via front companies in the British Virgin Islands, Malta, the Bahamas, Cyprus, London and New York, or paid cash to crooked buyers to induce orders. The bribes were often paid to relatives or friends of purchasing executives, and had the purpose to secure sales of big amounts of heavy vehicles to big organizations.

The scheme is suggested to have worked from 2002 till 2009, longer than the 2002-2005 period mentioned last week. It was said that the total amount of  the payments abroad was 13 mln euros,  1 milion was paid inside Germany.

The allegations of bribery at MAN follow a high-scale corruption scandal at Siemens, which took place last year and was connected with making dubious payments to secure business. However, it was said by the spokesman for Munich prosecutors that the proceedings of this company cannot be compared with the Siemens proceedings by their scale.

In its turn, Munich-based MAN has said that it will give its full support to the investigation, and informed that its policies specifically prohibited the payment of bribes. An internal audit two years ago found irregularities regarding payment transactions in individual cases. MAN Group has announced it is co-operating with the inquiry, and none of the current members of MAN’s management board were among the suspects.

The Swiss bank UBS AG was summoned before the court in connection with the case of Bernard Madoff. This was done by the initiative of the bankruptcy trustee Irving Picard, liquidating Bernard L.Madoff Investment Securities LLC. There were already two lawsuits against UBS AG lost by French bank BNP Paribas SA, which tried to force the bank to release 2.5 mln euros ($3.1 mln) invested with two Madoff-linked funds.

Currently, the bankruptcy trustee seeks information about the accounts of the arrested manager at UBS, as well as information about UBS accounts held by several Madoff feeder funds (some of them registered in the British Virgin Islands), and banks. The representatives of the Swiss bank complied with the third-party lawsuit. The subpoena for documents to UBS was issued March 17, just some days after Madoff pleaded guilty. One of companies in the UBS subpoena is British Virgin Islands company Plaza Investments International Ltd.; according to its investor, the BVI entity placed money with Madoff company.

By the prosecutors’ information, $170 billion moved through Madoff’s company since the fraud began in the 1980s. So far, there are more than $1 billion of assets recovered by the NY lawyer Picard who is conducting thorough investigation to find assets.

Besides the liquidator’s subpoena, U.S. tax authorities are seeking the identities of 52,000 UBS customers - Americans who evaded paying taxes placing their money in Swiss accounts. UBS avoided U.S. prosecution by paying $780 mln in penalties, and also admitted that in 2000 - 2007 Swiss private bankers helped Americans evade U.S. taxes through offshore companies in the British Virgin Islands, Panama, HK and other jurisdictions.