BVI Offshore Business: Grey Area

Telenor plans to appeal a decision of the Omsk Appeal Arbitration Court in Russia, which satisfied the claim of the British Virgin Islands-based company Farimex Products, and said that the Norwegian telecoms operator should pay approximately $1.7bn in damages to Farimex. The court also ruled against Farimex’s attempts to seize Telenor’s Vimpelcom shares.

The BVI corporation had alleged that Telenor’s nominees on Russian mobile operator VimpelCom’s Board delayed VimpelCom’s acquisition of Ukrainian mobile operator Ukrainian Radio Systems, and prevented Vimpelcom from purchasing Ukrainian mobile group Kyivstar. About a year ago, Farimex filed a $3.8bn lawsuit in the Khanty-Mansiysk Autonomous District court, which in its turn ruled that Telenor should pay damages of approximately $2.8bn.

Jan Edvard Thygesen, executive vice president and head of Telenor’s central and eastern European operations, said that the decision of the court was ‘a serious violation of Telenor’s lawful rights and interests as a strategic investor in Russia.’ By his words, Telenor will continue to defend its investment in VimpelCom using all legal means available: ‘Since 1998, Telenor has acted in the interests of VimpelCom, and we have repeatedly pointed out that this suit is an illegal attempt to steal Telenor’s investment in Russia.’

The case of Bernard Madoff, the notorious Wall Street manager who is now sued by many investment funds (including those registered in BVI) whose shareholders invested money in his companies, continues to grow. The special US trustee who tries to find all the assets linked to the accused manager informed about his plans to hire lawyers in Ireland, to get them involved in lawsuits for more than $1 billion of investments which flowed to Madoff.

Last month, three investment funds - Thema International Fund Plc, AA (Alternative Advantage) Plc and Fortis Prime Fund Solutions – filed separate suits in Dublin’s High Court. Thema and AA sued HSBC Institutional Trust Services Limited of Ireland, while Fortis sued HSBC Securities Services of Ireland and British Virgin Islands-registered firm Defender Limited. The investors are willing to get cash recovery of $1.2 billion.

It is stated in the court filing that the Irish cases of HSBC and BVI-based Defender are related to the money that the investment funds – part of a large group of so-called feeder funds – consider HSBC is holding that arose out of Madoff’s business.

It is noteworthy that one of these investment companies, Thema International,  has been linked in an unrelated federal lawsuit in Manhattan court to Bank Medici AG, whose clients reportedly lost billions of dollars in the Madoff affair.

It is unclear how much money involved in Irish lawsuits actually remains in the accounts. The trustee disclosed that he had accounted for more than US$943 million in the accounts of Bernard Madoff Investment Securities Llc. He hopes to begin paying recoveries to customers by July 2009.

This month, after the end of the Ukrainian-Russian gas conflict, deliveries of gas were restored to Bulgaria, and Bulgarian officials announced that they would still try to remove two middleman companies -  Overgas, Inc., and Wintershall Erdgas Handelshaus Zug AG (WIEE) – from the gas supply chain between Russia and Bulgaria. Their purpose is to deal directly with Gazprom Export, a fully owned subsidiary of Gazprom. Formerly, the head of Gazprom Export argued that these companies were not middlemen but suppliers.

Wintershall has been a close partner of Gazprom for many years. Overgas, Inc., however, is a more complex structure. According to the Overgas Annual Report for 2007,   Gazprom owns 0.49 percent of the company, Gazprom Export 49.51 percent, and the London-based Overgas Holdings, Ltd, 50 percent. The chairman of the board of Overgas, Inc., is Alexander Medvedev who is also the head of Gazprom Export, the company that technically sells Gazprom’s gas to Overgas. Bulgarian law apparently does not regard this as a conflict of interest.

Overgas Holdings, Ltd, known as DDI Holdings, Ltd, the 50% owner of Overgas, Inc., was first registered in 1999 under the name Energy Consultants, Ltd, according to the registration certificate. The shareholders of DDI Holdings are now listed as British Virgin Islands-registered corporation South Eastern European Energy, Limited. It was impossible however to identify the names of company’s principles due to BVI confidentiality laws. According to an Internet search report dated February 5, 2008, the ultimate holding company of DDI Holdings, Ltd is another company, DDI Management, JSC, based in Bulgaria. There is the possibility that this complex web of holding companies and BVI-registered corporations with nominal directors may be used by Overgas, Inc. to hide the identities of the real beneficiaries of the company.

Some offshore analysts are warning that thousands of hedge funds registered in offshore tax havens probably will fold in 2009. The restructuring company Zolfo Cooper that makes such forecast is preparing for a surge of activity in offshore tax havens.

Zolfo Cooper has a presence in the offshore jurisdictions like British Virgin Islands and the Cayman Islands where many hedge fund holding companies are incorporated. By words of company’s head Simon Freakley, in the British Virgin Islands there are 10,000 hedge funds registered, and as many as 4,500 of them will close this year. He also said that in case of court procedure the provisional liquidation in the BVI or Cayman Islands is needed to be able to handle the activities that may be located in the US or Europe.

The Government Corporate Councel (GCC) of Philippines was asked by Supreme Court Justices on the legality of the P6.2 billion compromise agreement between the Philippine National Construction Corporation (PNCC) and Radstock Securities Limited Inc, a special purpose asset vehicle registered in the British Virgin Islands.

Former PNCC President applied to the high court to abolish (nullify) the PNCC-Radstock deal. At the hearing the PNCC was represented by Alberto Agra from GCC who was questioned on the following points: the expired tollway contract between the national government and PNCC, the issue that the PNCC will be insolvent upon implementation of the compromise agreement, and alleged fraud committed by PNCC officials in approving the compromise agreement with the BVI company.

In defending his petition to nullify the agreement with Radstock, former PNCC President argued that the corporation’s board violated the corporation code when it entered into the agreement with the BVI company without holding stockholders meeting.

The guarantee, allegedly issued by CDCP in relation to a loan obtained by its subsidiary is the basis for Radstock’s collection claim. The lawyer of the BVI company, Pacifico Agabin, said that Radstock’s evidence included a letter of guarantees and a certificate authorizing signatory to the guarantee in the trial court. But Agra said that the PNCC Board of Directors decided to compromise instead of losing the case and taking a risk of paying large sum to the BVI company.

The compromise agreement included also the transfer of P1.8 billion worth of real estate owned by the PNCC to Radstock, so the question of whether this BVI company could legally own land in the Philippines was also discussed during the court hearings. While Radstock has not yet found a qualified nominee, Agra said PNCC will be holding on to the land, but he was immediately answered that the provision allowing PNCC to temporarily hold the property was not included in the compromise agreement.