BVI Offshore Business: Grey Area

The two British Virgin Islands companies, – GlobalNRG and Arcadia Oil, - have funded $US130 million in the research to back up the costly and, actually, unproven stem cells treatment at one of South American clinics. It was also said by Mike Bartlett, who represents in Australia the organization calling itself International Clinics of Regenerative Medicine, that more than 300 patients had been successfully treated with this method for heart disease, diabetes and Parkinson’s disease in South America and Asia. This treatment is to be marketed by e-mail to the 32 mln members of FANZA Inc, a worldwide mobile phone owners club directed by Bartlett.

The cost of stem cell injections course in the San Nicolas Clinic near Buenos Aires, Argentina, is $US16,000. San Nicolas Clinic sends 250 milliliters of a patient’s blood to a laboratory located in Israel, where it is manipulated to yield stem cells; after that, they are sent back to the clinic to be injected. By the words of the clinic’s representatives, 89% of its patients have become insulin and medication-free 90 days after the treatment. However, leading scientists think it is very dangerous to undergo treatment not yet fully tested and proven. The president of the Australian Medical Association Rosanna Capolingua said that anyone who signed up might be putting at grave risk their health and finances.

Previously, the dispute between the French Group Danone SA  and its Chinese joint venture partner Wahaha Group was described. To remind, it resulted in Danone’s filing legal action against Ever Maple Trading Ltd., based in the British Virgin Islands. Later on, there was the counter-claim of Hangzhou Wahaha Group, the Chinese Group, which sued Danone for up to 5 billion euros for illegal business conduct. Just recently, the dispute escalated as assets of 8 BVI-registered companies were frozen at the request of Danone.

On December 10, Hangzhou Wahaha Group said that it had won a conflict-of-interest lawsuit against one of the French yogurt maker’s executives. This probably suggested a victory in the dispute with the French food giant’s business in China.

Accordin to Hangzhou Wahaha Group, François Caquelin named by Danone to the board of a venture with Wahaha participated in unfair competition as he sat on the boards of rivals – so he represented to sides. Similar claims will be considered against Emmanuel Faber who runs Danone’s operations in Asia, and Qin Peng who runs Danone’s operations in China.

A lawyer with Paul Hastings, Alex Wang, said that Danone’s joint ventures with Wahaha could lose what is the most important – the Wahaha trademark, which is a big victory for Wahaha.

Danone, having 51% of 39 ventures with Wahaha, expressed its shock caused by the ruling. It also explained that François Caquelin’s appointments were with related companies and they followed common practice in China. Also, Danone has accused entities related to the Wahaha chairman of unauthorized use of the Wahaha trademark.

The Chinese company, in turn, says it retains the brand because the agreement giving Danone trademark control violated Chinese law.

On November 26, 2007, the Russian Central Bank ordered to recall the banking licenses of the Bank of Investment Capital (Bikbank), Saturn bank, and Samoletbank, as these banks many times violated laws on countering money-laundering activities.

In a CB statement, it was said that one of these banks, Bikbank, failed to expose operations that are subject to compulsory control and failed to report on them to Rosfinmonitoring from late October to mid-November 2007. Economic residents transferred over 14 billion rubles under suspicious deals with goods that never crossed the Russia customs borders to the current accounts of eight companies, registered in the UK, the British Virgin Islands, and the Seychelles offshore jurisdictions. Later the money was transferred to accounts of other non-residents opened in Ukrainian, Kyrgyz, Moldavian, Latvian, and Cypriot banks.

Similar claims were launched against Samoletbank that failed to comply with CB’s demands and broke the cash order.

Bikbank (Moscow) was 898th on the Interfax-100 list of the beiggest banks in terms of assets as of the third quarter of 2007. The licenses were recalled from the three banks on November 27.

In November, the court of the British Virgin Islands announced its judgement in the case of Russia’s Alfa Telecom Turkey Limited, – an affiliate of Alfa Telecom, one of Russia’s leading private equity telecommunications, - versus Cukurova Finance International Limited; the decision against Alfa confirmed the ownership of Cukurova Holding over a contested stake in Turkcell.

The ruling of the British Virgin Islands court was just part of a series of legal dispute over Turkcell involving its major shareholders Cukurova, Russian private equity firm Alfa, and Nordic telecommunications giant TeliaSonera.

Under the November 2005 deal, Cukurova sold Alfa a 13.22% stake in Turkcell in return for a financing package of $1.7 billion. In November 2006, Cukurova repaid $357 million of the loan and paid $217 million interest. In May this year, Cukurova said it was suing Alfa Telecom Turkey Ltd because Alfa would not accept the early repayment of the remainder of Cukurova’s debts. This move followed Russian firm’s decision to start a court case against Cukurova claiming it had defaulted on the outstanding debt of $1.35 billion (13.8% stake). Alfa alleged Cukurova of trying to use its Turcell stake as collateral to raise new financial to repay the debt.  It is important to add that loan was secured and share charges had been granted under both British Virgin Islands law and English law over Cukurova Finance shares and shares of its British Virgin Islands incorporated subsidiaries.

Altimo, which is the telecommunications investment arm of Alfa, said the court had recognised Altimo’s security rights over the contested shares, however, Cukurova was blocking the company’s appropriation of them. It is said in Altimo’s statement that the Court admitted the appropriation of the shares made by Altimo earlier this year was not technically possible, since Cukurova Group has intentionally blocked the registration of Altimo as the owner of the shares in the share register.

The unlisted Cukurova has a total 21.3% stake in Turkcell. TeliaSonera which is also involved in a legal dispute over its bid to increase its stake, is the holder of 37.1% of Turkcell.

In the beginning of this week, the Securities and Exchange Commission (SEC) said it had found fraud, and other violations of securities laws committed by Philippine-registered trading firm PIPC Corp., its officers and agents.

The Singaporean owner of parent company of PIPC Corp., - Performance Investment Products Corp. (PIPC) is registered in the British Virgin Islands, - reportedly vanished with at least $250 million of investors’ money. Both Philippines trading firm and its BVI parent company were also charged in August by the National Bureau of Investigation with syndicated fraud, along with 32 officers, incorporators and employees.

In the complaint filed with the Department of Justice, the SEC found that the Philippines company was liable for fraudulent transactions and violation of provisions of the Securities Regulation Code (SRC), concerning the illegal sale of unregistered securities, registering brokers and agents to solicit investments. The Commission said that the fraud, “chicanery” and other violations of securities laws were “orchestrated and executed by the officers and agents of PIPC Corp. against their unsuspecting investors.

The allegations are based on the fact that neither PIPC Corp. nor its officers, employees and agents were registered as brokers or dealers, so they made their transactions of offering and selling securities to the public a “violation of the provisions of the SRC.” The illegal offer or sale of securities in the form of a “Portfollio Management Partnership Agreement” to the public was continuing for nine years, masked by a supposed offshore foreign currency trading scheme promising profits at an annual rate of 12 - 18%.

According to SEC documents, while PIPC Corp. was registered with the commission, the solicitation and sale of securities was contrary to the purpose for which it was established – just a financial research.

There were 32 complaint-affidavits filed with the SEC, with total investments amounting to roughly $3.8 mln. SEC violations are punishable by a fine of between P50,000 and P5 million or imprisonment of between 7 and 21 years.

On Thursday November 29, the High court of Hamilton (Bermuda) validated a matter settlement agreement between Bermuda company IPOC International Growth Fund Limited and  BVI-registered LV Finance Group Limited, owned by Alpha Group. The court’s validation finally brings to an end a series of global litigations and arbitrations which took place during the last years.

The dispute between the companies, which was more than USD 2 billion worth, included arbitrations in Zurich and Geneva, related actions in the British Virgin Islands, Bermuda and other jurisdictions. The last suit discussed in our blog was brought by BVI Public Prosecution’s Office against Russian Telecom Minister Leonid Reiman. Also, recently, as a result of legal battle between the Bermuda and BVI-based companies, a civil tribunal in Switzerland has concluded that Reiman secretly owns stakes in Russian telecoms through the IPOC fund. This ruling of the BVI court is said to be a politically-motivated attack against M.Friedman who controlled Alpha Group.

The actions that started in September 2003 caused much response in the international press. The initial dispute was over a 25% stake in Russian mobile phone operator MegaFon. IPOC claimed to have bought the stake in 2001 from LV Finance Group, while the BVI company still owned this stake.

The settlement agreement required Court approval, which was obtained from Justice Jan Kawaley. SJ Berwin partner Justin Michaelson acting on behalf of LV Finance Group Limited said: “This represents a terrific result for LVFG and is a vindication of our client’s position in response to all IPOCs claims.” Other lawyers acting on behalf of the BVI group were Jeffrey Elkinson of Conyers Dill and Pearman, and Dr Balz Gross of Homburger Rechtsanwälte.

Last week, the head of the Tokyo Stock Exchange Atsushi Saito talked about the need to consider new rules for share issues that unfairly dilute minority shareholders, and in some cases are close to criminal. By his words, some firms are using a framework that allows them to issue new stock to a third party, often to a little-known fund in one of offshore jurisdictions.

The head of the Tokyo Stock Exchange said that Japanese companies needed to find the ways to improve corporate disclosure when changing their capital structure. He pointed to cases when firms issue stock to vehicles in the British Virgin Islands, Cayman Islands, and then disclose very few information about those entities even though they are purchasing a large share in a company and significantly diluting the value of existing shares.

The recent cases mentioned by Saito involved wedding ceremony firm MOC Corp., and the failed English-language school NOVA Corp. To rescue itself from bankruptcy, NOVA Corp. issued share warrant stock 70 mln yen (about $610,000) worth that would allow the two BVI-registered funds to purchase all the shares. However, the plan failed, and NOVA had to apply for protection from creditors.

On a corporate governance seminar organised by investment bank UBS, Saito told: “In principle, third-party stock allocations shouldn’t happen even if there is a system in place”, ”Stricter rules would boost trust in the Japanese market.” He also said, “From our perspective, there is a smell of criminality to all this. These people are very minor players, but their actions violate Japan’s capitalist system.”