BVI Offshore Business: Grey Area

British Virgin Islands-registered fund Auriga International Advisers has lost more than 400 mln Swiss francs ($350 mln) that were invested with the company’s main shareholder Bernard Madoff. According to the information provided by Jacques Rauber, the majority shareholder of the fund, as well as to the reports published in Swiss weekly SonntagsZeitung, funds of the company were wholly invested in Fairfield Sentry – the US fund which, in its turn, invested all of its assets, which made $7.3 billion, with Madoff.

Auriga is licensed to provide financial management services by the BVI authorities. There is no much information about Auriga’s investors, except for the fact that among them there are institutional investors and high net worth individuals. Jacques Rauber also said that another fund, Auriga Alternative Strategies, was affected much less.

This case is similar to the court case with transfering money of another BVI-domiciled company Repex Ventures into funds run by Madoff. The arrested money manager has confessed to losing up to $50 billion in a giant Ponzi scheme.

The State Customs Service of Ukraine reported that in 2008, a total amount of UAH 3.64 billion (USD 1 - UAH 7.79) has passed through offshore jurisdictions. 262 companies from Ukraine were involved in the export transactions, and the biggest volumes of the exported goods were addressed to companies registered in the British Virgin Islands (UAH 3.47bn), Gibraltar (UAH 106.7mn), Belize (UAH 25.7mln), the Bahama Islands (UAH 7mln). After reviewing copies of the customs freight declarations, in these operations actual non-resident receiver is mainly other country than the one which a Ukrainian company had contract with.

It was also revealed that, since the beginning of the year, 68 companies registered in Ukraine have performed import transactions via companies registered in offshore countries – to the total amount of UAH 64 million. Basic suppliers of goods from offshore countries are Liberian offshore companies (UAH 41.8mln); among other major importers, there are the Bahama Islands (UAH 7.65mln), Belize (UAH 4.96mln), the British Virgin Islands (UAH 2.78mln), Bahrain (UAH 2.12mln).

The special taxation system in Ukraine extends only to import operations with offshore jurisdictions – only 85% of charges for paying goods, works and services imported from offshores are included in gross expenditures of Ukrainian companies.

Many of the largest publicly traded corporations in the U.S., including major banks that now receive federal bailout money from the Government, are using subsidiaries in offshore tax havens, which let them avoid paying U.S. taxes. This information can be found in the new report by the Government Accountability Office (GAO) published last week.

GAO searched publicly available data on the companies filed with SEC, and found that 83 of the 100 largest publicly traded corporations and 63 of the 100 largest federal contractors maintain subsidiaries in countries considered to be tax havens. Citigroup has set up 427 tax haven subsidiaries in offshore tax havens including 35 in the British Virgin Islands and 90 in the Cayman Islands. In this list there are also Bank of America which has 115 subsidiaries in offshore countries, Morgan Stanley with 273 subsidiaries, the American International Group, etc. There are other well-known companies in the list  including Pepsi, Coca Cola and Ceterpillar. Other offshore tax havens mentioned in the report are Switzerland, Luxembourg, Hong Kong, Panama and Mauritius.

Meanwhile, Citigroup is expected to receive $50 billion from Government. Bank of America has already received additional $20 billion of Government aid, on top of previous $25 billion.

This report was severely criticized by the Treasury Department. In a letter included in the report it was noticed by the deputy assistant secretary for international tax affairs that there was no universal definition for an offshore tax haven. Thus, any list  of tax havens may be considered a blacklist and used for applying sanctions or other negative measures that would “inappropriately negatively affect our economic and other relations with listed countries.”

It should be said that GAO auditors did not verify the companies’ transactions in the named offshore jurisdictions including BVI, that the subsidiaries really helped the companies reduce their tax burden. The results of the report were based just on the fact that subsidiaries are located in the jurisdictions considered tax havens, and on the traditional purpose of those subsidiaries to cut tax costs.

From the documents received two weeks ago concerning the failed fuel technology company Firepower Operations Pty Ltd 2004-2005 and 2005-2006 profit and loss figures, it became clear that its director Tim Johnston, who was also the director and executive chairman of the parent company Firepower BVI, has spent incredible sums for the personal needs and the needs of his family. There was a huge rise in spending, particularly in the amounts spent on travel, hotel accommodation and phone bills.

This information revealed in documents obtained this week is related to the two years period before the company’s collapse, and includes, among others, the following facts:

Company’s expenditure on international flights rose from $157,062 in 2004 – 2005 to $1.1 million just one year later. In the same way, mobile phone bills of Mr Johnston and his family were all paid by Firepower investors. Hotel bills jumped dramatically from $37,292.61 in 2004-05 to $322,962.55 in 2005-06.

According to Firepower liquidator Bryan Hughes, Mr Johnston would claim the expenses were incurred “running round the world”, to firm up contracts for the sale of stock, which would be used to underpin an international stock exchange listing. In the opinion of Mr. Hughes, however, stock exchange listing was impossible for Firepower due to fatal flaws and misrepresentation related to the company’s property, of which its director should have known.

Last year, before his company collapsed, Mr Johnston and his family led a luxury life, using millions raised from investors. Almost $100 million was raised for Firepower, and its director faces charges brought by the Australian Securities and Investments Commission in the Federal Court that relate to the sale of shares without a prospectus, but ASIC has no power to force Mr Johnston to return to Australia.
Before any extradition application could be made, Firepower would have to be charged with a criminal offence.

BVI-registered company Repex Ventures SA filed a lawsuit in Manhattan federal court against Bank Medici AG, an Austrian private bank that was taken over by regulators. The BVI company invested $700,000 in Herald (LUX) U.S. Absolute Return Fund, which was controlled by the Austrian offshore bank, and now Repex alleges Medici of misleading investors by not disclosing that it was pouring money into funds run by Bernard Madoff – the money manager arrested last month for $50 billion Ponzi scheme. According to the complaint, 100% of the Herald Funds were transferred to Madoff without informing investors.

Bank Medici, which is 25% owned by UniCredit SpA, is the European bank with the largest potential losses related to the Madoff investments. Its clients invested $3.2 billion in funds run by the alleged manager. Last week, after the offshore bank was taken under control by Austrian regulator, the new management board was appointed.

The lawsuit of the BVI company against Bank Medici, which now seeks class action, or group status, is the latest to seek damages from the funds that invested in Madoff’s scheme.

The Chinese joint venture Wahaha Group, which is involved in a long-lasting dispute with Danone, announced that it has received a new adjudication order from the High Court of the British Virgin Islands. By the decision of the BVI court, the claim of Danone was rejected, and the interim freezing of Chinese group’s assets was revoked, along with the order that would allow KPMG to take over the assets of Wahaha’s non-joint ventures as the receiver.

The previous decision of the BVI Court on asset freezing was based on the words of the Chairman of Danone Asia Pacific Management, while the defendant – Wahaha Group – was absent from the court. KPMG then allegedly violated China’s judicial sovereignty by sending BVI and Samoa court orders without the permission of the Chinese authorities. Now, after another claim was made in the BVI High Court and the judgment was pronounced more than one month ago, KPMG is still yet to apologize and provide the required financial compensation to Wahaha.

On December 17, 2008, the BVI High Court opened the court case which overruled Danone’s claim. The adjudication order, which went into effect on December 19, not only made the freezing and receiving orders invalid, but also requested Danone to pay related fees that Wahaha incurred during the case. Additionally, the Chinese group will have the right to decide whether or not to cease if Danone fails to submit a stay pending appeal to the appellate court within 2 weeks.

Legal councel of Wahaha Yang commented on the new verdict of the High Court of BVI, saying that it showed fairness and justice of the international judicial environment and that it will definitely affect the results of the Stockholm arbitration case.

The Finance Minister of Uganda, Dr Ezra Suruma, in the documents submitted to investigating House committee stated that country’s President Yoweri Museveni oversaw the sale of Uganda Telecom Limited’s (UTL) shares to Libya in 2006, at a price below market value. For this reason, on February 26, 2006 the President met the Chief Executive of Ucom – a company incorporated in the British Virgin Islands and holding 51% of UTL.

In the written document submitted to the Parliamentary Public Accounts Committee (PAC)  on November 18, 2008, Dr Suruma tried to distance himself from the deal; he also insisted that President Museveni discussed the sale of UTL with the BVI-registered company. Dr Suruma named the President as one of the persons involved in the deal after he was asked by the Committee to explain the sale of UTL’s shares for Shs25 billion.

In October 2007, PAC Chairman applied to Dr Suruma, asking why UTL’s shares were divested without advertisement and without independent valuations, so without enough transparency. Dr Suruma answered that the transaction was not a sale but a dilution of shares which arose from a capital call. He also said that during the State House meeting, it was decided that government should give priority to investments in the energy sector which needs it, and so it was not possible to raise resources for the telecommunications.

However, the PAC Chairman said that “As a minister, Dr Suruma should have advised the President on technical and policy matters of UTL sale without clear valuation…. we are not happy with this State House meeting and Dr Suruma should have known what to do before selling UTL to Libyans at a give-away price.”

The Ugandan public’s majority stake in the formerly wholly government-owned telecommunications firm UTL was acquired by the Libyan company Greencom through Libya Africa Investment Portfolio (LAP) agency – a billion dollar Libyan government instrument through which the government is spreading investments and influence across Africa. Greencom took over UTL in 2006 after acquiring the BVI-registered Ucom. Under the terms of the arrangement, the Libyan company would take over 69% of UTL, only 31% to be sold by the government on the stock exchange.

Dr Suruma told PAC that despite significant portfolio of UTL, the firm had reached a critical stage where it needed further substantial investments of approximately $86 mln to enhance its operations, so the shareholders approved raising of additional $26.4 mln from equity “in equal proportion to the shareholding (Ucom) raises $13.5 mln and government of Uganda $12.9 mln. The balance of $10 mln is supplier credit.”

Last month, 21 companies were blacklisted by the US President for supporting the regime of Robert Mugabe in Zimbabwe. Of these companies on the list issued by America’s Office of Foreign Assets Control (OFAC), 14 are British, two are registered in the Isle of Man, one in the British Virgin Islands, one in Jersey, and three in the Democratic Republic of Congo, Florida and Zimbabwe.

At the meantime, the three businessmen which are under sanction by the US Treasury are operating freely in the UK, and on the top of the list of alleged Mugabe allies is John Bredenkamp. There are evidences of financial relationship between Bredenkamp and BAE systems, as the payments linked to Bredenkamp were made between 2003 and 2005 by then-liquidated BVI subsidiary of BAE, Red Diamond Trading, and transferred to another BVI company Kayswell Services, whose beneficiary is Bredenkamp.

Mr Mugabe and his companions try to stay in power using the help of the British-based businessmen and some London-based companies. Mr Bredenkamp is one of these businessmen with British connections, whose influence has grown under Mugabe ruling. The US Treasury calls him a “well-known Mugabe insider involved in various business activities.”

A spokesman for the UK Treasury, when asked what action Britain is going to take against Mr Bredenkamp, told the Times that, “in response to the continuing impasse in Zimbabwe”, they are considering a range of measures with European Union partners. Representative of Mr Bredenkamp denied all the accusations.