BVI Offshore Business: Grey Area

An investigation started three years ago by the United Kingdom’s Serious Fraud Office and concerning allegations on bribery and corruption by British defence conglomerate BAE Systems, has been widened to include deals with the Czech Republic.

In January the UK SFO requested the legal assistance of the authorities of South Africa, concerning the £1bn commissions paid by Europe’s largest weapons dealer through two anonymous British Virgin Islands companies. This amount is suspected to be channeled, through the BVI-registered Red Diamond Trading and Poseidon Trading Investments, to several countries including the Czech Republic.

Now SFO agents consider some part of that £1billion sum have been used to bribe the Czech public officials into buying JAS 39 Gripen jet fighters. These new allegations are based on a 2001 deal to purchase 24 jet fighters for 60 billion Kč – actually, the largest military order in Czech history. In 2002, Michael Žantovský – former Senate Chairman of the Committee on Foreign Affairs, Defense and Security of the Czech Republic – said that he had been offered £1 million for voting in favor of purchasing the fighter jets, but Czech police could not find any evidences.

The SFO released details of its investigation into BAE Systems on February 7. On February  19 Czech officials confirmed that the country has provided banking information to British authorities, but did not give further comments.

Beside South Africa and Czech Republic, the Serious Fraud Office is also investigating similar claims against BAE Systems in Romania, Tanzania, Qatar and Chile.

An airline company based in Johannesburg but registered in the British Virgin Islands has been involved in transporting al-Qa’ida recruits in Somalia, that directly challenged the interests of Western countries in East Africa. Recently published United Nations security council report has revealed the ways how Islamist fighters were flown from Somalia to Syria and Libya for military trainings, while other groups were taken to Lebanon to fight with Hezbollah.

BVI-registered company Aerolift, by words of its owner Mr Zakharov, became involved in providing military aid to the Islamists after the request of General Tambi of the Eritrean People’s Defence Forces. Eritrea is a neighbour of Somalia and a major supporter of the Islamists.

General Tambi offered to buy Ilyushin 76 transport aircraft belonging to Aerolift and having the Kazakhstan registration number UN76496, for $US1.5million ($1.9million). Normally an aircraft of that vintage and condition would cost just $US1million, and BVI company’s owner agreed, notwithstanding the unusual secrecy conditions stated in the contract.

Mr Zakharov included certain specifications in the contract that would prohibit to use the aircraft to make arms flights, but these contract terms were broken.

Mr Zakharov said in an interview: “We transported lots of men in uniform — Arab men with masks… They were disciplined men and although none of them had rank badges there were obviously people in charge. They got on the aircraft as if they had done it many times before.”

The information was provided by the BVI company’s owner when Western security services continued their investigation concerning foreigners suspected of fighting on behalf of Islamic forces in Somalia, and of joining al-Qa’ida last year. The security services’ officials have revealed that large number of foreigners went to Somalia, after the radical Islamic Courts Council movement took power from a weak UN-backed government. Under the rule of Islamic Courts Council , Somalia was allowed to be used as an al-Qa’ida terrorist training ground. The internationally recognised Government was restored in the country only in December.

An important loophole in the the international agreements specially designed to cancel the debts of  poor countries was exposed on February 15, by the decision of the UK High Court on the lawsuit between the BVI-registered investment fund and Zambia, which is one of the poorest countries in the world.

The suit was initiated by Donegal International: a company domiciled in the British Virgin Islands sued Zambia for failing to pay a debt that exceeded £28 million. The company was able to start this case against Zambia because the country borrowed £15 million from Romania in 1979.  Later the BVI-based investment fund paid £2 million to Romania, for the right to collect this debt from Zambia. So, this time Donegal claimed its right to get £28 million from Zambia – the amount representing a 1,400 % return on the initial investment.

Zambia has benefited from more than £3 billion of debt cancellation, and debt relief has saved the country about £20 million in annual interest payments. The company’s claim for Zambia to pay such a substantial sum would completely eliminate these savings.

Actually, Donegal sought an amount equivalent to the school fees of 30,000 Zambian children. The critics have immediately named this BVI company a “vulture fund”, which brought the case despite the provisions of multiple agreements designed to release from debts the poorest countries in the world. However, it is not possible to compel private companies to write off loans to poor governments, and for this reason private sector creditor could bring the government of Zambia before the court.

Mr Justice Andrew Smith ruled in favour of BVI investment fund but said the sum should be far less than £28 million. He said, “I am concerned, of course, with the legal questions which are raised by the applications before me and not with questions of morality or humanity”.

Caroline Pearce, from the Jubelee Debt Campaign, has commented it was “good news” that Zambia would not have to pay the full amount, but added: “It’s appalling that this is possible and it’s all totally legal… the debt relief system has many flaws and loopholes and this is one of them.”

On February 7, 2007 the Nasdaq stock market has approved the request of DayStar Technologies Inc., for an exemption allowing it to make a new stock issue without shareholders’ voting. The stock issue is part of the restructuring of a $15 million convertible note, which had been originally held by Castlerigg Master Investments Ltd., a company registered in the British Virgin Islands, and a private placement of common stock.

The note held by the BVI-based Castlerigg was sold to LC Capital Master Fund Ltd., registered on the Cayman Islands. Under the terms of this deal, LC Capital agreed that DayStar Technologies would defer payments of interest and principal on the note for 30 days. Both companies have also agreed to a formula under which the note will convert to stock.

DayStar Technologies will also issue 825,181 shares of common stock to the BVI company, to pay for outstanding principal and interest. DayStar also agreed to issue a class A warrant to Castlerigg , to purchase an additional 317,394 shares of the company’s common stock at $2 per share.

DayStar is also going to sell  2,500,000 shares of Common Stock to an investment group that includes local investor Michael Dura, and four New York City groups. DayStar is seeking to raise $30 million from institutional investors to place this amount into a new manufacturing plant in the Saratoga Technology and Energy Park in Malta, N.Y.

The British Virgin Islands, together with other Caribbean territories, fell within the list of countries with the highest prison populations, when compared to national populations. BVI are in the 9th place in this list, with 464 per 100 000 of the national population. The first place belongs to the United States, which have the highest prison population rate in the world, with 738 per 100 000. They are followed by Russia with 611, St. Kitts & Nevis with 547, US Virgin Islands (521), Turkmenistan (489), Belize (487), Cuba (487), Palau (478), and BVI. Bermuda with 464 keeps the 10th place in the rating, followed by Bahamas (462), Cayman Islands (453), American Samoa (446), Belarus (426), and Dominica (419).

The rating is based on the World Prison Population List, prepared by the King’s College London International Centre for Prison Studies. The report also found that prison population is growing in many parts of the world.

It was also noted that prison population rates vary considerably between different regions of the world, and even between different parts of the same continent. For example, in the American continent the middle rate for South American countries was 165.5, while for Caribbean countries it was already 324.

In this region, to which BVI belongs, the highest prison population is in Cuba. Oslo University researchers estimated the figures for Cuba at 55 000, out of a national population of 11.3 million.

In September 2006 the US Congress passed a law that actually shut down online gambling, and the shares of many online gambling companies, including many based in the British Virgin Islands, fell dramatically. For example, among such BVI-based companies there are Empire Online Ltd. and Playtech Ltd. Empire Online Ltd., which also has arrangements to market Casino On-Net (part of 888.com, registered in Gibraltar), is one of the major London-listed internet gambling companies, and one of the leading providers of marketing services to the online gaming industry.

After gambling operators including Empire Online have stopped taking bets from the US, they actually became separated from their revenue sources. US players accounted for about 65% of Empire’s sales, when the company stopped accepting wagers from American gamblers. Now the BVI company is selling its gambling business; it started with selling the gambling web sites to the largest London-listed online gaming company PartyGaming, based in Gibraltar. Empire Online separately stated that it will receive about $38 million from this sale, and confirmed that it will continue the discussions on sale of company’s gaming business and assets.

This transaction between the online gambling companies based in BVI and in Gibraltar was confirmed on January, 10. On January 18 another company closed its US Internet gambling services, which made over 65 percent of its business.

British money transfer firm NETeller Plc, registered in the Isle of Man, could be considered to be the latest victim of the US crackdown on online gaming business. Closing of British group’s business in America followed the arrest in U.S. Virgin Islands of its two founders who are accused of illegally laundering Internet gambling proceeds. Stephen Lawrence and John Lefebvre, both citizens of Canada, are charged with conspiracy to transfer funds to promote illegal gambling.

It was said by prosecutors that NETeller processed more than $7.3 billion in transactions in 2005, and more than 95% of its revenue from transfers involved Internet gambling companies. It was founded by Lawrence and Lefebvre in 1999. Lawrence holds a 5.91% company share through his investment vehicle Corvina, while Lefebvre holds 5.54% through Eagle Medallion Fortress.

A US judge set bail at $5 million for Lefebvre, which was conditioned on his turning over all travel documents. Each defendant can face a maximum prison sentence of 20 years in prison.

NETeller said in its statement following the arrest that it was seeking immediate temporary suspension of its stock, which trades in the UK, and that the two company shareholders arrested do not have any current connection to the company.

It should be noted that shares of the company have fallen 60 percent since September 2006, when the online gambling crysis has started to develop. The change of the US legislation has led most operators to withdraw from the US Internet gambling market.

Another victim of US government fight against online gambling was BVI company InterBill Ltd. recently accused of fraudulently debiting funds from thousands of consumers’ bank accounts.