BVI Offshore Business: Grey Area

We have already discussed in several blogs the course of investigation started by the Serious Fraud Office on bribery and corruption in the UK defence conglomerate BAE Systems. Currently there are six inquiries into BAE, the most serious allegations are concerned with BAE’s deals in South Africa. The case with £1bn commission passed through the BVI-registered Red Diamond Trading and Poseidon Trading Investments also catched the attention of the US Department of Justice, which is now seeking to pursue BAE systems.

The enormous scale of BAE’s deals reflects the place of the United Kingdom in the global arms exports and ’strong defence’ industry. According to the official statistics, Britain is the world’s second-largest arms exporter. On last Monday the non-governmental organization Saferworld published a report where documented the £45bn worth of arms delivered by the UK in the past 10 years.

Among the countries that received military aid from Britain there is Indonesia which used £400m worth of British military equipment for internal repressions since 1997. More than £110m worth of military equipment have been exported to Israel in the period of occupation of Palestinian territories and war with Lebanon. Further, despite an EU arms embargo, Britain exported military and dual-use equipment to China on the amount of £500m.

Another figure: over the past four years, 199 export licences have been approved to the British Virgin Islands, the Cayman Islands and the Channel Islands, which are actually territories without armies. So, it is difficult to know exactly where military equipment passed to these offshore territories is destined.

Three months before his election in 1997, Tony Blair wrote in BAE Systems’ newsletter that his government would champion country’s arms exports. Domestic economic benefits are not the only reason for arms exports. Academic research shows that the public subsidises arms sales by between half a billion and a billion pounds annually. There is also a big influence by big arms corporations, as reflected in the interconnections between them and the Ministry of Defence.

On May 21, 2007 the shares in the Sydney biotech company Novogen held by a little-known BVI company were confiscated. The NSW Supreme Court action is the first public move by the Australian Securities & Investments Commission in the five-agency, $305 million tax haven probe, Operation Wickenby.

The money that are to be traced were received by Novogen founder Graeme Kelly from selling Novogen options in the mid-nineties, following the company’s listing. In September 2005, Dr Kelly moved to the United States to run the company’s operations there.

The company is probing large transfers and loans involving secret trusts operated by Swiss advisory firm Strachans and companies controlled by those trusts in the British Virgin Islands.

The court gave interim orders to restrain a BVI company named Leominister from dealing in the 2.2 million shares it owns in Novogen – that is 2.2% of the company.

Leominister has long defied regulator’s demands to disclose the name of its ultimate controller. The BVI company was incorporated in 1997 and became a substantial Novogen shareholder in 1999, having 6.7% of the company. Since that time, it has steadily reduced the amount of its shares in Novogen company.

Vito Palazzolo came to the special attention of Namibian officials and media in March, 2007, when it emerged that his son had been appointed a director of Avilla Investments – a company which held a licence to buy rough diamonds for polishing by another related company, Marbella Investments. The director of these two companies was Zackey Nefungo Nujoma, youngest son of former President of Namibia Sam Nujoma.

Later on the controlling shareholding of Avilla Investments and Marbella Investments as passed to Ocean Diamond Mining Ltd., registered in the British Virgin Islands. Vito Palazzolo controls also some other companies that are domiciled in the BVI; some of these BVI companies presumably have interests in Namibia’s uranium industry, which is rapidly developing now.

The son of the former president said he had no information on his partners’ connections to Mafia. He also denied the breaking of Namibia’s Diamond Act, which actually forbids transfer of shares without the written approval of the Ministry of Mines and Energy. Meanwhile, according to Namibian Diamond Commission, no such approval was ever provided to the BVI companies.

The Commissioner Kennedy Hamutenya informed that licences for the companies were suspended, and all the case was passed over to the Nampol Diamond Branch for further investigation. It also awaked interest of the Organised Crime Unit in the Office of the Prosecutor General, however they could not prosecute the matter before the Organised Crime and Money Laundering Bill is brought before parliament.

In July 2006 Palazzolo was sentenced in absentia by the Palermo Tribunal in Italy to nine years in jail, in terms of Article 416 of the Italian penal code. His Cape Town-based lawyer Norman Schnitzer rejected the verdict on behalf of his client. However, the copy of the original Order of Preventive Detention issued by Judge for Preliminary Investigations of the Court of Palermo on November 26, 1998 confirms that Palazzolo is considered to be the main money launderer of the Cosa Nostra.

Seven people and four companies, among which there is a British Virgin Islands company, were charged last week with multiple felonies related to processing credit cards for gambling websites. The defendants are charged with bank fraud, violations of the wirewager act, and money laundering. They are accused of assisting gambling sites process $150 million in payments from U.S. bettors, by arranging Western Union wire transfers. The defendants created a Web service they called the Gateway, an automated collector and processor of illegal Internet gambling funding transactions; the Gateway misclassified the transactions to Visa and MasterCard, representing that the transactions have another purpose than gambling.

The companies that faced charges are CurrenC, also named as CurrenC WorldWide, based in the British Virgin Islands; Gateway Technologies and Hill Financial Services, based in Utah and Las Vegas; and BetUS, based in Canada.

It should be said that most online gambling is illegal in the United States. Investigators of the scheme stated that it “purposefully misclassified credit card transactions to fool banks into processing Internet gambling charges”, and thus allowed the US bettors to spend money on the gambling websites. Some of the charges may carry criminal penalties of up to 30 years in prison.

Some years ago the investigation was started by the SFO  concerning the alleged bribery and corruption in the British defence conglomerate BAE Systems. The UK Serious Fraud Office has six continuing investigations into BAE, including company’s deals in South Africa and  the Czech Republic.

All the case is about channelling the £1bn commission sum through Red Diamond Trading and Poseidon Trading Investments, both registered in the British Virgin Islands, into various countries. Now there is information that the SFO has met the US Department of Justice (DoJ) to discuss allegations of corrupt practices by BAE.

The DoJ is looking into whether it has the jurisdiction to launch a formal inquiry to pursue BAE over payments allegedly made to win defence contracts from foreign governments. Similar investigation which could cause a breakdown in relations with Saudi Arabia was terminated by the SFO in December 2006.

The DoJ’s discussions with the SFO are focused on payments made by the BVI-registered Red Diamond to middlemen and officials in various countries. If the Corporate Fraud Task Force, operated by the DoJ, establishes that money or communications from Red Diamond entered the United States, even as electronic data, then BAE Systems will be pursued under the Foreign Corrupt Practices Act.
Under this Act, companies can be fined millions of dollars, forced to pay back corrupt profits and deprived out of all the US government contracts.

In March we have discussed the selling of Elland Road, which is the home stadium of the football team Leeds United, to the little-known BVI company Teak Trading Corporation, and the following discussions on buying back the stadium and the Thorp Arch training ground, by the football team. Club’s chairman Ken Bates made the reacquisition of these assets one of his main objectives.

On Friday last week Bates put Leeds into administration and immediately formed a new company to buy the club back again. Going into administration and subsequent purchase of the club for an undisclosed fee leaves Bates and his Swiss backers Forward Sports Fund in charge of the club and remaining assets.

Revenue and Customs are to investigate Leeds’ offshore investors after the club went into administration. In his statement Bates said that three companies, Astor Investment Holdings, Krato Trust and Forward Sports Fund, “will collectively lose in excess of GBP 22 million”.

Bates used finance companies registered in the British Virgin Islands (BVI), and Swiss companies to provide investment for his initial takeover of Leeds. He will also be one of directors of Leeds United Football Club Limited, a new company which has bought the business and its assets from the administrators.

Astor Investment Holdings, which is registered in the British Virgin Islands, last month secured its loans to Leeds through a mortgage debenture. That development is expected to make it a preferential creditor in administration. Currently tax authorities will seek to uncover the identity of the individual who is behind the company.

In his statement Bates said that three companies, BVI-domiciled Astor Investment Holdings, Krato Trust and Forward Sports Fund, “will collectively lose in excess of GBP 22 million”. However, despite being leading creditors, they should not lose too much because Forward Sports Fund will be the owner of the newly formed  Leeds United Football Club Limited; there is also information that BVI-registered Astor Investment is the holder of a stake in Forward Sports Fund.

Filipino taxpayers have lost P18 billion in cash, real estate, future cash earnings and shares of stock of Philippine National Construction Corporation (PNCC)  that runs the country’s toll roads, to a little-known company registered in the British Virgin Islands. By words of the PNCC officials, the BVI firm named Radstock Securities Ltd. has received the amount that could be limited to “only P6.1 billion”, through a scheme that, as claimed by critics, undervalues PNCC’s assets.

The amount that PNCC will pay to the BVI company includes half of its cash earnings from toll road operations for the next 27 years. The PNCC-Radstock deal was planned since 2000, and affirmed by the Court of Appeals in January 2007. Currently it is opposed by at least two senators and a civil society advocate who used to chair PNCC. The opponents of the transaction argue that it puts a private firm with an inferior credit standing ahead of the national government, which has outstanding and unpaid claims on PNCC worth at least P36 billion. They also want to know who stands behind the BVI-domiciled Radstock Ltd.

PNCC and Radstock entered into agreement on August 17, 2006, and it was approved by the Court of Appeals on January 25, 2007. The value of the “compromise deal” was put by the Senator Franklin Drilon at P17.6 billion. The Senator became interested in the case when he noticed how other lawmakers were trying to have PNCC’s franchise renewed in December 2006. He considers that this is not a valid contract or an agreement for a project, but just an agreement to cede assets.