BVI Offshore Business: Grey Area

On January, 22 Guernsey royal court approved an application by the government of Indonesia to freeze tens of millions of dollars allegedly hidden illegally by Hutorno Mandala Putra, the son of Suharto, the country’s former dictator. The court also approved Jakarta’s bid to become a third party in the case. The Channel Island court intervened in the case where Garnet Investment, a company incorporated in the British Virgin Islands and owned by Mr Hutorno (Tommy Suharto), is suing a branch of BNP Paribas for refusing to release at least €36m ($45.6m, £23.5m), and perhaps €75m from its account.

According to Marty Natalegawa, Indonesia’s ambassador in the UK, the action by the bank BNP Paribas and the Indonesian government is based on concerns that the money was obtained corruptly.

Tommy Suharto, the owner of the BVI company involved in the case, was released from prison last October, after serving five years of a 15-year sentence for ordering the murder of an Indonesian judge who had convicted him of corruption. During his father’s rule, Tommy Suharto is said to be given many profitable contracts and businesses to run, including a clove monopoly and the company developing a national car.

Salman Maryadi, a spokesman for Indonesia’s attorney-general, has noted on Monday the corruption issue was secondary and can be dealt later on, but currently the best result would be that the court recognises Tommy’s outstanding obligations and orders.

Mr. Salman also said Indonesia was willing to seize the €36m in the Guernsey account opened in the name of BVI-registered Garnet Investment, because the authorities were not aware of any other assets.  As regards this amount, Garnet deposited money with BNP Paribas in the Channel Islands on 22 July 1998, some weeks after the fall of President Suharto which happened in May. Four years later, in October 2002, Garnet asked to transfer €36m, but the bank rejected the request. Then, according to Transparency International, Garnet tried to transfer  £47,500 and €7,960 to Peter Amy, a Garnet employee. This request also was refused.

The head of Transparency International Indonesia has said that BNP Paribas must have had good grounds to refuse the transfer requests. BNP Paribas, in its turn, denies any knowledge of the case; the requests for comments from Tommy assistants do not receive answer.

Eon-Net, a patent holding company registered in the British Virgin Islands, has filed a patent suit in March 2005 in New Jersey against Flagstar – a $16 billion savings bank based in Michigan. This bank was one of 32 companies, each of them being sued separately by the BVI company for infringing a patent that covers technology that allows online shoppers to enter information into Web sites and have it transferred to the Web retailer’s computer.

Eon-Net method of enforcement involved filing a complaint followed by a letter offering a settlement of $25,000, $50,000, or $75,000. Taking into account the patent litigation costs which could make hundreds of thousands of dollars, most clients chose the cheaper variant of settlement.

However, Flagstar fighted the suit, and Flagstar’s attorney Melissa Baily has said that the company decided to challenge BVI-based Eon-Net’s lawsuit precisely because of the egregious nature of the company’s conduct. She noticed that the BVI company’s lawyers “had used nearly identical complaints and demand letters in all 32 suits”.

Flagstar suggested a lack of careful advance investigation. A Federal Judge of Western District of Washingyon, Marsha Pechman, has ruled in favor of Flagstar, and ordered Eon-Net and its New Jersey attorney Jean-Marc Zimmerman to pay the Flagstar bank’s defense costs in the amount of more than $100,000.

Pechman has indicated that Eon-Net’s complaint and claim chart were almost identical to  company’s complaints in the other cases. The judge also reasoned that the claim charts were broad enough to be sent to all kinds of Web-based business, and that no meaningful analysis was reflected in the claim charts.

Penchman has indicated that Eon-Net’s patent enforcement strategy violates Federal Circuit Rule 11, which requires patent plaintiffs to conduct a “reasonable pre-filing inquiry” to identify the accused device and conduct a preliminary determination that at least one if not all of the patent claims appear in the product.

Flagstar’s attorney Melissa Baily received even more than what she asked for. In addition to awarding Flagstar fees and costs, Pechman also ordered the BVI company to notify all other defendants accused of infringing its patent of her ruling.

Eon-Net, which also has had pending litigation against JetBlue Airways and Liz Claiborne Inc., had successfully extracted settlement money from ING Bank and Sony Corp. over the same patent.

The corruption investigation started on the purpose of defence conglomerate British Aerospace (BAE) Systems two years ago by the United Kingdom’s Serious Fraud Office (SFO) now includes new allegations of dirty money and influence-buying.

The SFO formal application asking for legal assistance of South African authorities contains information on more than £1bn commissions paid by BAE systems in the context of R-multibillion arms deal. Two anonymous offshore companies registered by BAE in the British Virgin Islands were used for commission transactions. The main front company was Red Diamond Trading, the other one was Poseidon Trading Investments. The SFO application states that in the period between 2000 and 2005, more than £70-million were received by South African Agents through BVI-registered Red Diamond. The same Red Diamond, according to the SFO request, was used to pay to the intermediaries in South Africa. No comments were given by BAE on the purpose of these two companies.

BAE itself has maintained that these are just normal commissions, not bribes. However, the facts say that BAE has developed an extensive web of influence in South Africa, and the system of commissions paying was held in such conditions of secrecy, which arose suspicions concerning the real purpose of the payments.

Another side of SFO investigation concerns the agents who received these commissions. The same SFO document informs that probably no funds at all were paid to South African bank accounts, and the majority of payments was made to offshore companies; some of them are registered in the jurisdiction of BVI.

The amount of R1-billion went to the eight entities in terms of “consultancy agreements”. In one case, the deal took place as far back as 1992. Among other beneficiaries of the suspected bribes, which entered into consultancy agreements with BAE and/or the aforementioned BVI companies, there is the company Huderfield Enterprises, incorporated in the British Virgin Islands in 1997.  The SFO investigation suggested that the company’s beneficiary was Richard Charter – major and most publicly known agent of BAE in South Africa, who actively assisted in the run up of R30-billion order for Hawk jet trainers and Gripen fighters. It is stated in the SFO document that BVI-based Huderfield got  R350-million ( £25-million) between 1999 and 2005. This amount included also a “final settlement” of £5,5-million.

Another company, Osprey Aerospace, was founded and run by Richard Charter as the “overt” agent for BAE in South Africa. The SFO considers that, while South African company was the “overt” agent, there was also a “covert” agent, and possibly it is BVI-registered Huderfield. To compare transferred amounts: by the SFO document, Osprey received from BAE just less than £2-million (about R27-million) between 2002 and 2005.

Richard Charter , beneficiary of both companies, was the chairperson of BAE Systems South Africa, established in 1997. He had a long relationship with the old South African Defence Force; also he had a stake in SA Airlink, which was sold after his death, as a result of an accident in January 2004. One of his estate executors denies the mentioned facts, including Huderfield’s affiliation to Charter.

It is hard to indicate when it started, but for sport fans it definitely started in November 2006, when the chairman of a Perth-based fuel technology company Firepower became known as the main sponsor of the South Sydney Rabbitohs. The Rabbitohs’ part-owner Russell Crowe was the one to unveil the reported USD 3 million. The next step was Firepower’s announcement that it would be throwing its financial clout behind the Sydney Kings basketball team, which changed its name to the Firepower Sydney Kings. Later, Tim Johnston bought the Kings. So, in three smooth steps, Tim Johnston, standing behind the company, entered the world of Australian sport.

What is peculiar is the fact that the Australian Securities and Investments Commission (ASIC) has no record of a company called Firepower Group Pty Ltd, presented by the taxpayer-funded Austrade as an export success story in Russia; no record of a company called Firepower International Pty Ltd that represented Australia in another Austrade investment mission to Malaysia in August 2006; and no record of a company called Firepower Technology Ltd that appears on the Firepower website. However, Firepower Operations Pty Ltd, listed in the phone book, is first registered in December 2004 and owned by the British Virgin Islands-based Firepower Holdings Group Ltd.

Firepower is working in a technical capacity with General Motors Holden and, according to Johnston, is about to list on the London Stock Exchange.

How does Tim Johnston with its Firepower make his money? This seems rather suspicious and the number of versions and rumours is quite impressive – from a multi-level marketing scheme based in New Zealand and links to a Russian winner of a multimillion-dollar legal suit against The Times in London over claims about his involvements in a large money-laundering scandal, to the involvement of the KGB and the NASA. There seems to be no much point to describe all those as far as the mystery has not been unveiled by anyone yet.

A British Virgin Islands holding company Starway Management Limited and a Nevada shell corporation Rim Holdings, Inc. are involved in the transactions through which China Energy Savings Technology, Inc. and the company’s undisclosed control person, Chiu Wing Chiu, with the assistance of the company’s Corporate Secretary, devised a wide-ranging stock manipulation scheme. The action against China Energy was filed in the beginning of December by the Securities and Exchange Commission which alleged fraudulent obtaining Nasdaq National Market System (NMS) listing by the company, artificial inflation of China Energy’s stock price, and selling millions of company shares into the US capital markets. So, the case involved classic ‘pump and dump’ shares scheme, an offshore BVI company Starway Management Limited, and the use of false identities.

Other participants of the scheme were the company’s former purported Chairman and CEO Sun Li, a former company employee, and major shareholder of China Energy – New Solomon Consultants. The scheme resulted in China Energy winning a listing on Nasdaq last year.

The scheme was comprised of four stages and started in 2004 with the acquisition by Hong Kong-based Mr. Chiu and Ms Sim of a Nevada shell company, later renamed as China Energy. Then China Energy acquired a BVI holding company Starway Management whose sole asset was a Chinese company manufacturing energy-related products. By the Commission’s complaint, the defendants caused China Energy to purchase the BVI-domiciled company at an excessive price, in order to facilitate the issuance of large quantities of China Energy shares to entities controlled by Chiu. To file a listing application with Nasdaq, Mr. Chiu also hired a middleman to obtain the names and addresses of individuals to receive free China Energy stock.

Then, Mr Chiu and others artificially inflated the value of China Energy’s stock by generating false deals to give the appearance of “real market activity” in company shares.
The Commission alleged the defendants in reaping tens of millions of dollars, and is going to acknowledge the assistance afforded by the Hong Kong Securities and Futures Commission in this matter. The Commission investigation is continuing.