BVI Offshore Business: Grey Area

Last week, Russian state-owned enterprise Rosneft had to pay US$430 million to Yukos Capital, in compliance with the Dutch court’s decision.  Russian oil company had to pay this sum to the former subsidiary of Yukos after the court denied it the right to appeal the case two months ago.

The arbitration awards paid by Rosneft are related to loans Yukos Capital made to Yuganskneftegaz in 2004, which were subsequently defaulted upon.  YNG, the principal production subsidiary of Yukos Oil Company, was acquired by Rosneft in 2004.

However, Rosneft informed in a press release on its intention to get back control over the $430 million paid to Yukos Capital as a result of a long-lasting lawsuit between the companies. The state-owned company said that this sum is actually owed to companies registered in the British Virgin Islands. These companies are involved in lawsuits against Yukos Capital, and Rosneft claims its ownership over them  and their assets. Also, the company noted that Yukos Capital managers had pledged not dusburse the funds received, until final decision concerning ownership of the BVI companies.

According to Yukos Capital, the court did not recognize Rosneft’s ownership over the British Virgin Islands companies.

Two oil blocks in eastern Democratic Republic of Congo (DRC), located on the border with Uganda , were sold to the companies registered in the British Virgin Islands and owned by relative of country’s president. The presidential decree, according to which the blocks were awarded to companies Caprikat and Foxwhelp, was published on June 22, 2010. 

However, previously the DRC had signed contracts with two other companies to develop the blocks. After the contracts were awarded to the two new companies, one of the previous companies having contract with DRC, Tullow Oil, has not received presidential decree to begin exploration of its blocks and now is considering to start legal action.

Another company, Divine Inspiration Group (DIG), registered in South Africa, signed a competing contract for block 1 in 2008, and spent about US$4 million in signing bonuses and fees to secure the block. Andrea Brown, the executive director of DIG, said that “the developments with respect to the block 1 contract are not in line with principles of transparency and due process”. This company is going to appeal for compensation, looking forward to constructive engagement with the government on this matter.

The oil blocks have an estimated 2 billion barrels of reserves that have already been discovered. According to the DRC, exploration is to begin in the near future.

In the case of an Australian actor Paul Hogan, who had already been accused of defrauding the tax office by establishing loan scheme with an offshore company GB Film Finance registered in the British Virgin Islands, new allegations appeared against him and his advisers who “had the intention of breaching tax laws.” According to documents that were made public by the High Court, Hogan and his advisers concealed information from the tax office, failed to declare income and misled tax officials about his residence. The documents containing allegations and made by the Australian Crime Commission are to be used in a case against Hogan.

The documents include detailed tax advice from Ernst & Young on how the actor could minimize tax by moving tens of millions of dollars between companies and family trusts in US and Australia. The ACC alleges that Hogan’s advisers, on his behalf, “concealed relevant matters” from the Australian Tax Office, including the fact that Hogan was half-owner of the British Virgin Islands-registered offshore companies GB Film and Trelene Investments. According to the ACC, he failed to tell the taxman about a $US5 mln payment from Trelene; also, he avoided tax by failing to declare as income a $US4mln loan from GB Film. The ACC alleges that he even claimed a tax deduction on the US$910,000 in interest he paid the company.

Turkish telecoms-to-construction group Cukurova Holding, which controls Turkcell, last week won a case in the court of the British Virgin Islands against Russia’s Alpha Group that sought to seize 14 percent of the shares of Turkcell, which was put by Cukurova as security for a loan.

In November 2005, the Alfa Group finished a multi-agreement deal with Cukurova, acquiring a 13.2 percent of Turkcell and lending  to the Group $1.71 billion secured against a further 13.8% stake in the operator. In a year, Çukurova repaid $357 million of the total loan to Alfa and paid $217 million in interest. Alfa said that Cukurova did not pay the remaining sums on time, and demanded it to repay US$1.35 by Turkcell shares. The BVI court was asked to seize Cukurova’s 13.8 percent stake in Turkcell.

On Thursday, May 27, 2010, the BVI court ruled that the loan agreement was violated, and Alfa Group had no right to receive the shares for an alleged US$1.35mln debt. Altimo, a unit of the Alfa Group, is going to appeal the decision and wait for the final resolution of the dispute in the higher courts. 

Turkcell is the largest mobile-phone company in the country. According to Cukurova, Alfa Group specializes in telecommunications investments in Russia, and some neighbour countries. The Russian group is currently holding 44 percent stake in VimpelCom, one of Russia’s two biggest mobile-phone companies, which was in the centre of the dispute between Altimo and the Norwegian Telenor. It is also the holder of 25.1 percent of Megafon, 43.5 percent of Kyivstar, and 4.99 percent of Turkcell.

The Seattle City Employees’ Retirement System (SCERS), the pension fund which is holding $1.6 billion to pay the pensions of 15,000 Seattle city workers, is trying to get back $20 million of its investment money through a several hedge funds in the U.S., Europe, the British Virgin Islands and the Cayman Islands.

In 2003-2004, SCERS invested in Epsilon Global Active Fund II; the Epsilon “feeder fund”, incorporated in BVI and domiciled in Switzerland, was supposed to channel money to a larger fund based in the Cayman Islands. According to the lawsuit filed by SCERS, about 90 per cent of money invested in Epsilon was withdrawn in 2006-2007, and only a liitle more was left except what was invested by retirement system. Also, Epsilon Fund did not produce an audited financial statement for 2008.

According to the recent account statement, SCERS’s investment is worth about $24 million, but the SEC inquiry and the delayed audited financial statement put this sum under suspicion. SCERS Executive Director Carter mentioned in a court filing that the fund “has suffered very significant losses in the past in short periods of time.”

In February, the hedge-fund manager Steven Stevanovich, who is controlling the Epsilon Fund, informed Epsilon investors about the suspension of all payouts, blaming of the halt the SEC investigation into another of his funds, called Westford Special Situations Fund. SCERS officials were not aware that Epsilon money had been channeled into the Westford fund, and, moreover, they rejected Stevanovich’s invitation to invest into the Westford fund. Last month a court in the British Virgin Islands was asked to declare the insolvency of Westford fund.

The Epsilon fund investment is just a small part of the SCERS portfolio, but the rest of the fund has not done well during the last two years.

Gulfside Minerals Ltd. has filed a writ in the District Court of Ulaanbaatar, Mongolia, to cancel the transfer of shares of  ECM LLC, the company holding the Erdenetsogt exploration License, to the British Virgin Islands company Mangreat Group Ltd. In this litigation, Gulfside is seeking to have ninety five percent of ECM now owned by the BVI-registered Mangreat Group returned to Mongolia and offered to Gulfside.

The complaint is based on the fact that Gulfside is a shareholder of ECM, holding 5 percent of its shares, and, under an Agreement of June 17, 2007, it has a right of first refusal to purchase any shares of the company offered for sale by other shareholders. Under an Agreement signed with Monrospromugoli LLC on June 17, 2007, Gulfside has been awarded 5% of ECM shares. In November 2007, the shares were transferred by MRPU for five million dollars, and Gulfside alleges that as a shareholder of ECM it had the right to buy these shares.

Once the court action is initiated, the BVI company will be invited to  the court proceedings as a Respondent.

Kludjeson International Limited (KIL), the company which issued a legal suit against a HK-based Hutchison Telecommunication Limited, accusing it of fraud, is currently in a legal showdown with institutions and personalities to win the ownership dispute of the mobile telecommunication company in the court.

In the ownership struggle over KIL’s subsidiary Celltel Limited, a BVI company which is now conducting business as Kasapa Communications Limited, both companies have descended on the institutions and personalities manning the affairs of the company, and accused them of fraudulent actions. The names mentioned in the joint legal suit of KIL and Kasapa Communication include the Standard Chartered Bank Limited, Pricewater House Coopers, an Accountancy and Management Consultancy firm, Bentsi-Enchil, Lesta and Ankomah, a private partnership company providing legal services and Sudan Telecommunications Limited of Sudan. Among other defendants there are Trustee Services Limited, a company issuing secretarial duties, and its General Manager Philip Dosoo, British Virgin Islands-registered offshore companies Certwell Limited, Kuwata Limited and EGH International Limited, and Expresso Group Limited of United Arab Emirates. Also, the list of defendants includes Emad H. Ahmed, Emad Sukker, both of United Arab Emirates, Ihab Ibrahim Mohammed Osman of Sudan and Lung Hien Ching, a resident of Ghana.

Among other decisions, plaintiffs are seeking a court declaration that BVI companies Certwell Limited, Kuwata Limited and EGH International Limited, as well as some other defendants, are not direct or indirect shareholders of Kasapa Telecommunication Limited, and Emad H. Ahmed, Emad Sukker, Ihab Ibrahim Mohammed Osman and Lung Hien Ching are not and never been directors or alternate directors of the mobile telecommunication. Also, KIL and Kasapa are seeking a restraining order against each of the defendants and their agents apart from Trustee Services Limited and Philip Dosoo, from holding themselves as directors, shareholders, officers and offering and receiving banking services to the telecommunication company.

The Supreme Court of Philippines in its resolution denied the P6.2-billion compromise agreement between government-owned Philippine National Construction Corporation (PNCC) and Radstock Securities, Ltd., a British Virgin Islands-registered firm with HK office address. Under the agreement, PNCC agreed to assign to the BVI company all its rights and interest over a 10-hectare prime property which has transfer value of only P3.82 billion, as well as other prime properties. Also, the agreement binds the PNCC to give up in favor of Radstock 50% of PNCC’s 6% share in the gross revenue of the Manila North Tollways Corporation, with net value of P1.2 billion, and to cede 20% of its outstanding capital stock with the assigned value of shares at P713 million to Radstock.

According to the ruling of the high court as of December 2009,  the contract violates the Section of the Constitution banning the release of public funds without a legislated appropriation. In the 90-page consolidated decision issued last year, the high court pointed out that the compromise agreement would have cost the Philippines government billions in terms of prime real estate properties.

Radstock Securities, Ltd. appealed to the high court saying that the PNCC was still a private corporation even if it was a government-owned or controlled. Radstock denied there was a violation of the constitutional ban. However, the high court threw out BVI company’s appeal, saying no arguments were raised that would warrant a reversal of its earlier decision of December 2009.

The credit obligation of PNCC was assigned on January 10, 2001 by Marubeni Corporation to Radstock, and after the due date demands for payment were made to PNCC by Marubeni and Radstock, PNCC failed and refused to pay the obligation. Then, Radstock filed suit against PNCC for the sum of money and damages.

The Financial Services Authority (UK) is going to challenge a last year ruling in favour of BVI and Panama-based companies which said the FSA overstepped its powers by carrying out a request from the Securities and Exchange Commission (US) to recover documents.

The case relates to SEC investigation into Rhino, the NY-based investment adviser, when the SEC asked the FSA to recover 20 boxes of correspondence created over almost ten years and held by the London accountant Goodman Jones, which the SEC said might be relevant to its investigation. His accountancy firm held documents on behalf of two companies - the British Virgin Islands-based Creon Management and Panama-based financing company Amro International. There was no SEC investigation concerning these Panama and BVI companies, also they were not party to any SEC action. These two companies won a legal challenge against the FSA, saying it was “acting unlawfully in agreeing to appoint inspectors … to obtain the documents”.

In the opinion of the head of banking, finance and regulatory litigation at Allen & Overy Calum Burnett, the current case would help clarify the powers of the FSA to seek information on behalf of another regulator.

There is a memorandum of understanding between the Financial Services Authority and the Securities and Exchange Commission to exchange supervisory information and a history of close co-operation.

Companies linked to the property magnates Robert and Vincent Tchenguiz have filed creditors’ claims  against the Icelandic bank Kaupthing.  The entrepreneurs lost a substantial part of their wealth when the bank suddenly collapsed in October 2008.

In summer 2008 Robert Tchenguiz, one of the UK’s major investors, whose business was controlled by British Virgin Islands- and Cayman Islands-registered family trusts, had borrowed €1.7 billion from the bank, while his brother’s loans in the bank amounted to €208.7 million. Robert  Tchenguiz also was on the board of an investment company Exista, which was one of the bank’s largest shareholders. Then, the bank’s winding-up committee sued one of companies linked to the businessman for an unpaid overdraft of £643 million, and also attempted to seize proceeds from its sale of stake in the supermarket Somerfield. Also, due to the bank’s efforts Robert Tchenguiz was forced to sell his positions in the pubs group Mitchells & Butlers and the supermarket chain J Sainsbury, and lost hundreds of millions of pounds.

Now, probably as an answer to the bank, two offshore companies linked to the brothers – British Virgin Islands-registered Euro Investments Overseas, and Investec Trust, based in Guernsey, have submitted separate claims against the bank saying they are creditors, and the bank owes them money.  The claim of Vincent Tchenguiz amounting to £1.65bn, and the claim of Robert Tchuenguiz (£650m) together make more than 5 per cent of the total submissions to the bank.

The claims of the brothers probably will be contested by the bank’s winding-up committee but their validity is not likely to be examined until after creditor’s meeting which is planned on this week. If the claims are not successful, the BVI and Guernsey companies could challenge the decision in the court, or sue the bank in a separate legal challenge.

The exact details of the claims are not known, it is suggested only that they could be based on allegations that there were serious problems at the Icelandic bank before it failed. They said that this invalidated their contracts ad caused them financial damage (consequential loss).