BVI Offshore Business: Grey Area

K1 Invest Ltd., the British Virgin Islands-based hedge fund operated by German K1 group - one of the two BVI hedge funds believed to be used in a network of investment firms to transfer the money received from reputable banks, - is to be liquidated after its assets were frozen.

This information was provided by the fund’s director who said in a letter to distributors that the BVI fund has hired accountancy firm Grant Thornton to liquidate it. The freezing of assets and the resulting inability to pay its obligations have led K1 Invest to voluntary liquidation “in the best interest of the company and the investors.”

K1 Invest Ltd. is managed by K1 Group’s founder Helmut Kiener who is now suspected of committing fraud and breach of trust. Kiener now remains in jail, although his diplomatic status would provide him with immunity.

In 2004, German regulator BaFin tried to ban K1 Invest Ltd from operating in Germany.

Stefan R. Seuss, German financial manager, was arrested in his home in Miami charged of money laundering as part of global criminal investigation into the German hedge fund. The K1 Group, whose business activities became the reason of losses about US$400 million for major banks, is headed by Helmut Kiener who is now in custody after being arrested by German prosecutors in his house 40 km from Frankfurt.
The K1 Group is alleged of organizing “circular transactions” with a network of investment firms and offshore companies in many countries, including BVI, to make an illusion of having enough money for backing up loans from the banks. Among the banks involved in the case there are Barclays, JPMorgan Chase & Co. and BNP Paribas.

Bank’s money were then transferred to offshore companies in the British Virgin islands and other jurisdictions, and from their accounts - to the accounts in foreign banks. Seuss is said to have ties with various Swiss financial institutions.

In the allegations against Mr. Kiener, the relationship with Barclays is described that began in 2005 when he allegedly agreed to set up K1, a fund of hedge fund. Mr Kiener is said to have ignored the rules for investments agreed with Barclays and used other firms to channel about US$114m provided by the bank into two other hedge funds based in the British Virgin Islands and managed by him.

It is remarkable that the German arrest warrant for Mr Kiener, for some unclear reasons, describes Mr Seuss as a witness. The arrest warrant includes information that the Swiss bank lent US$31.7m to a firm connected to Mr Kiener, and some part of this money went into one of his BVI-based hedge funds.

Mr Kiener is represented by the Munich law firm Lutz Libbertz, which said that they were going to appeal against his arrest. The law firm described allegations against Mr Kiener as thin and based on police inquiries rather than real evidence.

This month, after the end of the Ukrainian-Russian gas conflict, deliveries of gas were restored to Bulgaria, and Bulgarian officials announced that they would still try to remove two middleman companies -  Overgas, Inc., and Wintershall Erdgas Handelshaus Zug AG (WIEE) – from the gas supply chain between Russia and Bulgaria. Their purpose is to deal directly with Gazprom Export, a fully owned subsidiary of Gazprom. Formerly, the head of Gazprom Export argued that these companies were not middlemen but suppliers.

Wintershall has been a close partner of Gazprom for many years. Overgas, Inc., however, is a more complex structure. According to the Overgas Annual Report for 2007,   Gazprom owns 0.49 percent of the company, Gazprom Export 49.51 percent, and the London-based Overgas Holdings, Ltd, 50 percent. The chairman of the board of Overgas, Inc., is Alexander Medvedev who is also the head of Gazprom Export, the company that technically sells Gazprom’s gas to Overgas. Bulgarian law apparently does not regard this as a conflict of interest.

Overgas Holdings, Ltd, known as DDI Holdings, Ltd, the 50% owner of Overgas, Inc., was first registered in 1999 under the name Energy Consultants, Ltd, according to the registration certificate. The shareholders of DDI Holdings are now listed as British Virgin Islands-registered corporation South Eastern European Energy, Limited. It was impossible however to identify the names of company’s principles due to BVI confidentiality laws. According to an Internet search report dated February 5, 2008, the ultimate holding company of DDI Holdings, Ltd is another company, DDI Management, JSC, based in Bulgaria. There is the possibility that this complex web of holding companies and BVI-registered corporations with nominal directors may be used by Overgas, Inc. to hide the identities of the real beneficiaries of the company.

After an eight-day trial at the UK Portsmouth Crown Court, an Island businessman of Sudan origin Mohamed Ahmed Elobeid is found guilty of not paying the largest part of taxes from his £400,000 profit, by setting up BVI offshore trust and bank accounts. He was accused of having cheated HM Revenue and Customs of the amount more than £196,000 over eight years, by having his income lodged overseas and withdrawing it in cash.

Elobeid had denied the fact that he avoided paying income tax and National Insurance relating to his company, Sayf International Aviation Services, and that he tried to cover up bank accounts during a Revenue investigation, by not including them on tax forms.

In the eight years ending in 2004, Elobeid declared an income of £35,713 when reconstruction of his dealings by a financial expert showed it should have been £435,180. When he was living in St Helens, he organized the following scheme: through the Dominion Trust in Guernsey he set up the trust in a third tax haven, the British Virgin Islands. Customers paid into the trust while he instructed the trust to pay money into Jersey bank accounts. Also, large cash sums were drawn by him from British branches of the bank.

The businessman had told the court he believed his actions were legitimate. The case was adjourned for sentencing until December 5. Elobeid was granted unconditional bail.

The British defence company and arms manufacturer BAE Systems, which is under investigation in several countries for alleged bribery, using secret payments system and running the funds through the BVI offshore companies, paid at least £20mln to a company which is linked to a Zimbabwean arms trader close to President Robert Mugabe.  The documents reported by the Financial Times concern John Bredenkamp known for his controversial career. British properties of Bredenkamp were raided by the Serious Fraud Office almost two years ago as part of an ongoing investigation into BAE’s arms deal with Saudi Arabia, when several African National Congress officials allegedly received bribes. Currently discovered payment of at least £20m is the most significant evidence of a financial relationship between Bredenkamp and BAE.

The payments linked to Bredenkamp were made in the period between 2003 and 2005 by Red Diamond Trading, a British Virgin Islands-registered subsidiary of BAE Systems, from a London-based Lloyds TSB account. The money was transferred to another BVI company Kayswell Services, owned by Bredenkamp (he is the beneficiary of the company).

BVI company Red Diamond Trading was liquidated on May 30 last year, and now BAE’s ethical conduct and compliance with anti corruption rules are conducted. BAE, Bredenkamp and BVI company Kayswell’s representatives declined to confirm the payments or comment on what the money was for. In his turn, Bredenkamp claimed his compliance with EU arms sanctions, which ban the provision of financial related to military activities, and are in force against Zimbabwe since 2002. He also denied any involvement in the South African sale.

Asif Ali Zardari, the controversial politician who took over the leadership of the party of his murdered wife Benazir Bhutto, spent more than eleven years in jail, being charged with corruption. Now, when he has been elected the new president of Pakistan.

Benazir Bhutto who came to power in 1988 was swept out from her post after two years, on allegations of incompetence and corruption. Most of these charges were directed against her husband Zardari, who was jailed, but came from prison directly into the office of minister of investment when his wife was reelected in 1993. Her government fell again in 1996, and he was rearrested being charged of murder. This remained unproven, but he stayed in prison until 2004 due to a range of other charges, including money laundering.

Money laundering cases included revelations of more than a dozen bank accounts in London and Swiss banks, and various properties in the UK, US, France and Dubai. The trail lead to offshore jurisdictions from Liechtenstein to the British Virgin Islands, but all the charges tumbled because of the lack of evidence. It was said by judge Lawrence Collins that, although there was “no direct evidence”, the government of Pakistan had a “reasonable prospect” of proving corruption in a civil case. Now it is unlikely to be pursued.

Like its German competitor Siemens, a French company Alstom Group is has purpotedly used a bribery system in order to buy contracts worldwide. However, politicians and the media in France have shielded the company.

In 1998, long before the corruption scandal with German electronics and engineering giant Siemens, the fax from a bank in Liechtenstein was sent to a Liechtenstein foundation Oehri Treuhand and its head Gerry Oehri. The letter from the bank asked for an explanation from Oehri as regards a few things on one of his discreet companies. It should be noted that Crofthill Consulting, a company managed by Oehri, had an account with the bank, but its mailbox and registered address was located on the British Virgin Islands. So, when the bank receives an incoming wire transfer for USD 4 million from an unknown source unknown, it gets suspicious of money laundering.

Auditors from the accounting and consulting firm KPMG, hired by the Swiss Federal Banking Commission, concluded that “the Swiss investigative authorities strongly suspect that senior officials at the Alstom Group systematically embezzled money for years and horded it in so-called ‘black funds’.”

The investigation into the case continues.

Almost a year ago, BVI Offshore Business: Grey Area discussed a bribery scandal with Siemens. It is peculiar that in its bribery scheme Siemens also used a BVI offshore company. The same as with the case with Siemens, the active role is played by Swiss offshore services and banking system as well as KPMG that has participated in the investigation of both bribery cases – German Siemens bribery scandal and French competitor’s Alstom bribery scandal.

The High Court of London has granted the Consent Order to the Assets Recovery Agency (ARA) to recover £5.375 million of criminal assets. This order was the result of an agreed settlement between the Agency and John Szepietowski, Susan Ann Szepietowski both of Ashford House, Four Winds Park, St Georges Hill, Weybridge, Surrey, British Virgin Islands-registered Merchant Taylor Company Limited, Cobham Investments Limited and Cobham Investments Leisure Limited.

Szepietowskis’ are charged of having amassed large property portfolio through fraudulent mortgage claims, and laundering of rental income through the accounts in offshore jurisdictions including BVI. Also, the Agency contended that their lifestyle greatly exceeded their known legitimate income, and they evaded their tax liabilities.

The initial case involved criminal assets held by an offshore Trust and was referred to ARA by the Police of Surrey in October 2004, following its investigation into Mr Szepietowski’s alleged money laundering of the proceeds of drug trafficking. When ARA opened an investigation into the Trust, soon a separate and complicated web of fraud, money laundering and tax evasion was uncovered over a period of 15 years.

In 2005, the Agency was granted an Interim Receiving Order (IRO) freezing the assets held by Mr Szepietowski on behalf of the offshore Trust. Also, based on this additional evidence, in October 2005 the Agency successfully applied for a second Interim Receiving Order freezing the assets held by the Szepietowskis’ and their companies - BVI-based Merchant Taylor Company Limited, Cobham Investments Limited and Cobham Investments Leisure Limited.

The negotiations between the respondents and ARA continued since October 2007, and in the mid of January 2008 all claims of the Agency were settled by agreeing to transfer properties £5.375 mln worth to the Agency. However, the Agency still continues to pursue its civil proceedings against the assets of the original offshore Trust.

A connoisseur of artwork Michael John Milne has been charged by Sydney court with laundering $30 million as part of Australia’s largest tax fraud investigation. The director of the company who claims to have earned just $3397 in 13 years probably used “fraud and intimidation” to get access to  much larger amount for just $1. If found guilty of the offences, he will face up to 25 years in jail. By the words of Crown prosecutor Dean Jordan, $30 million in total “were returned back to Australia by a number of means, by a number of companies and entities controlled by the accused”.

The complicated series of offshore transactions ended in Mr Milne allegedly removing $30 mln worth of shares from a Swiss bank account, and returning the money back to Australia through a number of offshore companies that he is said to control. It started when the company Clairmont Holdings and Finance, registered in the British Virgin islands, bought a $7.9 million debt owed by Admerex for $1. The sole director of the BVI company is Urs Meisterhans, who is at the same time a partner in a Swiss-based financial services company called Sinitus. Now it is alleged that Mr Meisterhans ran offshore companies on behalf of Mr. Milne.  

One of Australia’s top law firms, Atanaskovic Hartnell, has been implicated in the scandal, with one of its former lawyers Anne Harley who was responsible for setting up overseas companies for Mr. Milne and now is accused of telling a Swiss bank to destroy documents that were connected to the alleged transactions. According to the court documents, in 2004 she told a Swiss bank, SwissFirst, to destroy paperwork naming Mr Goodall as the sole signatory to an account, and instead she forwarded the bank documents naming Mr. Milne and Mr. Meisterhans as signatories. Then Mr. Meisterhans allegedly moved the$30 mln worth of shares to one of Mr. Milne’s companies.

Told of the document-destroying allegations, Ms Harley denied them, as well as setting up companies for Mr. Milne for the purpose of money laundering or any other wrongdoings.

The Swiss bank UBS AG refused to co-operate with Indian authorities, to unravel a multinational trail of money transfers across Switzerland, New York, the British Virgin Islands and Pune, between Indian stud farm owner Hasan Ali Khan and a fugitive Saudi arms dealer. That not only cost the Swiss bank its deal to buy the Indian mutual fund business of Standard Chartered Bank for $118.2 million, but also the presence in the booming Indian banking market.

It was reported last December that the Reserve Bank of India (RBI) decided to turn down the UBS proposal to acquire Standard Chartered Asset Management Co Pvt Ltd over possible money laundering through UBS by Khan. Standard Chartered, the parent company of Standard Chartered Bank in India, sent a notice to stock exchanges in London and Hong Kong in the end of December, saying it will not proceed with the proposed sale.

The Reserve Bank of India (RBI) put on hold a banking licence to UBS, issued just a year ago and allowing it to open its first branch in Mumbai. Now, by information from unofficial sources, RBI will not release the licence until it gets certain clarifications from UBS. Meanwhile, with this branch licence UBS was ready to commence its banking operations in India. At the moment, the Swiss bank is present in India through its broking and investment banking arm UBS Securities India Pvt Ltd.

From the same sources, it became known that RBI and the Indian government acted in close co-ordination in seeking the UBS plan to buy the mutual fund business of Standard Chartered Bank. The finance ministry had reservations about clearing the mutual fund deal, and it had communicated the same to RBI. The home ministry approval is mandatory for any bank licence, and after the banking regulator approves the entry of a foreign bank in India, it is checked by the ministry for security reasons.