BVI Offshore Business: Grey Area

The Duke of York has provoked crytics and even indignation after he urged the UK Government to preserve a controversial loophole that allows Britain’s wealthy residents to avoid paying millions of pounds in tax each year. Now he is condemned for supporting wealthy foreigners and their tax advisers who are interested in protection of the ‘non-domicile’ loophole.

The political debates started when UK Premier Gordon Brown has proposed to toughen the rules allowing wealthy ‘non-domiciled’ foreigners living in Britain to escape UK tax on foreign earnings which they keep abroad.

The main reason why the comments of the Duke of York sounded controversial, was his friendship with affluent tycoons who could incur losses from any rule change. One of the close friends of Prince Andrew, who would benefit from the present tax regime is Goga Ashkhenazi, a 29-year-old businesswoman. She is registered at companies House as a Russian citizen, but is in Britain for many years, being listed as living in a £3million apartment in Belgravia, Central London. The British Virgin Islands-incorporated company owns the leasehold of this property.

However, in the opinion of the Buckingham Palace, the proposed change to the non-domicile tax rules is “something that many overseas companies raise with His Royal Highness as an issue that may impact on their future plans to invest in this country,” and it is his duty to inform the Government about these concerns.

The Australian Securities and Investments Commission issued an urgent interim stop order to Trio Capital (also known as Astarra Capital) to remove the product disclosure statements for the funds it manages from its website.  The order followed charges filed last week by ASIC against Astarra managers Mr Richard and Mr Liu. Information about filing the case in the New South Wales Supreme Court was not publicly disclosed. 

The Astarra funds were among the top-performing funds during the financial crisis at the end of 2008. One of the funds, the Alpha Strategic Fund, delivered 11.67 per cent over three years to November 2008. This fund, later renamed into Astarra Strategic Fund, was founded in Sydney by Mr Richard and Mr Liu. It is a $118 million hedge fund that operated under a structure that held its assets through the British Virgin Islands entity EMA International.

The Government’s Transaction Reports and Analysis Centre had granted the investment management company run by the managers of the Astarra funds an exemption from all sections of the Anti-Money Laundering and Counter-Terrorism Financing Act, meaning the company did not verify the identity of its customers or report certain transactions. The Strategic Fund allowed retail investors with just $1000 to invest in the complex hedge fund-of-funds product, which had reported only three months of negative returns since its inception in 2005.

Earlier this year, the custody of the Strategic Fund was transferred from ANZ to NAB’s National Australia Trustees (NAT) unit. The Hong Kong branch of Standard Chartered is said to be the custodian of the assets in the British Virgin Islands, but it would not confirm or deny this. Also, unlike other Astarra Funds, the Strategic Fund had not updated its performance since the end of June 2009.

The unusual structure of the Strategic Fund, including the so-called “deferred purchase agreement”,   was said to have tax purposes. The Strategic Fund did not provide information on who provides guarantees for the agreement, just noted that the BVI company EMA International was a special-purpose vehicle, and there was counter-party risk in case of its insolvency or failure to comply with the obligations of the agreement. Court hearing of Astarra managers’ case is scheduled for November 9.

The Norwegian telecom company Telenor and its Russian partner, the telecommunications arm of the Russian financial and industrial group Alfa, settled their longtime dispute, both sides agreeing to set aside their lawsuits and instead merge their assets into a joint venture. 
The dispute between Telenor and Altimo, which is resolved now, was centered on corporate control of the Russian mobile company VimpelCom. It is also partially controlled by minority shareholder Farimex Products, registered in the British Virgin Islands, which actually brought a lawsuit against Telenor, as a result of which the Omsk court seized the Telenor stake in VimpelCom. 
A condition for closing the current agreement is the settlement or withdrawal of all current legal proceedings between the companies. It means that, before the present deal will close, the Farimex case should be closed too. The BVI company is not party to the current agreement. It seems even that it decided to withdraw from a lawsuit even before the agreement between Telenor and Altimo was publicly announced. By words of Telenor lawyers, a lawyer for Farimex agreed in a filing in the U.S. District Court to suspend its lawsuit.
Now Telenor and Altimo agreed to merge their assets in Vimpelcom, the second largest telecoms operator in Russia, and Kyivstar, the largest mobile phone operator in Ukraine of which Telenor had a controlling stake, and to create VimpelCom Ltd., which will be incorporated in Bermuda and based in the Netherlands. After the deal closes, VimpelCom Ltd. will be listed on NY stock exchange.
This seems not to be the optimal solution for Telenor, which loses control of the Kyivstar board, but  the Norwegian company was forced into it. It resembles situation with BP, the British oil company, which, after a struggle with Russian partners including the Alfa group, was compelled to surrender control over its joint venture in Russia, TNK-BP.

Liquidators of South African company Petter Trading are involved in a legal battle with Schweppes Zimbabwe Limited concerning the rights over the assets the company bought before it was placed under reconstruction. The dispute between the two companies involves ownership of injection moulding equipment, blow moulding machine and bottling equipment.

Petter Trading was a South Africa incorporated company whose role in the project was pursuant to an agreement it concluded with Africa Resources Limited - the parent company registered in the British Virgin Islands.

In 2003, Fidelity Life Asset Management entered into an agreement with Coca-Cola Central Africa  and Schweppes Zimbabwe Limited by terms of which it would purchase SZL for a price of US$1 on top of a 100 per cent equity ownership price. This upgrade was to meet international standards. Since FLAM had no access to hard currency it approached ARL which then instructed Petter Trading to procure the equipment.

It is the contention of Petter Trading that the letter claiming that FLAM was in default was written  after the reconstruction laws had taken effect, and they were just hiding behind the letter to seize equipment. It was submitted that Coca-Cola Central Africa’s rights to recover the shares in SZL from FLAM arose not from the implementation of the reconstruction laws but rather from the breach of the agreement.

In papers filed before the court, SZL argued that Peter Trading had no legal right to bring the case as SZL had entered into the agreement with Fidelity Life Asset Management, which had the obligation to procure the equipment, according to their agreement.

British Virgin Islands company Allerca Inc., also known as Lifestyle Pets Inc., is sued by a man called Andrew Reale for breach of contract, consumer fraud and intentional misrepresentation. By words of this man, on September 11, 2007 he ordered one of hypoallergenic cats which are produced by this BVI company, and has paid extra for expedite delivery. However, after two years the cat has been not delivered yet.

In the complaint filed in Superior Court in Somerset County, Reale claims he paid $7,900 for one of the cats, including extra $1,950, and expected to receive the cat after eight months. After receiving the payment, company officials changed the date of delivery several times, and in February 2009 they informed the plaintiff that the kitten would be delivered “as soon as possible.” Up to this date, Reale has not received a hypoallergenic kitten from defendants. Reale has demanded a refund on several occasions, but the BVI company refused to pay.

Allerca is a BVI company currently located in Las Vegas; it was formerly registered in California and located in San Diego. It is focused on breeding the unique hypoallergenic cats that produce a different version of glycoprotein, which is not allergic for humans. They started with producing these cats in 2006.

Company founder Simon Brodie, who has since sold his share of the business, but remains a consultant, would not comment on this litigation, but noted that in 2007 the standard delivery time was more than two years. Now the company which is expected to be under new ownership this month is trying to reduce the delivery time down to a year or less.

It became known that BVI company’s attorneys will file a response and a counter-claim against Reale. The company is going not to deliver the cat until the legal situation is finally resolved.

Chinese beverage giant, joint venture Wahaha Group, finally settled the long-lasting legal dispute with the French food and beverage group Danone SA, which started in 2007 with Danone’s complaint that Wahaha Group was running separate businesses selling Wahaha-branded products.  Since that year, the French group has filed more than 21 lawsuits in several countries – the British Virgin Islands, France, Sweden, Italy and the U.S. – to receive control of the $2.4 billion Wahaha brand.  Its claims were rejected by all courts, including the BVI court, which, however, had  once brought several BVI firms registered under Wahaha group into receivership and froze their assets, but later on revoked the decision.

The final settlement of the dispute was achieved with “the support of both the Chinese and French governments” by Danone agreeing to sell its 51 per cent stake in the Danone-Wahaha joint venture to Chinese partners. 

Neither of companies discussed a price of the sale, which made about $438 million, according to Chinese media. This sum makes less than a fifth part of the $2.6 billion that Wahaha lawyers said Danone demanded in the beginning of arbitration to end the dispute.

By this sale agreement, upon its approval by the Chinese government, Wahaha and Danone will conclude their joint venture relationship, and all legal proceedings related to the disputes between them will come to their end.  The joint venture was established by the Chinese and French groups in 1996 to produce bottled water and other beverages under the Wahaha brand.

Frank Riboud, CEO and chairman of Danone, said that since Danone entered the Chinese market in 1987, it has been highly committed to its Chinese business, and will accelerate its growth in the country despite the end of the French-Chinese joint venture.

Canada-based Gulfside Minerals Ltd. announced its intention to proceed with its arbitration proceedings in London against the named owner of the shares of ECM LLC, Mangreat Group Ltd., which is a British Virgin Islands company wholly owned by one of ECM partners and held through a private HK company. The BVI-registered Mangreat executed a sales agreement with Gulfside in March 2007, but failed to complete the agreement.

Now the Canadian company, along with its Mongolian legal counsel, is going to determine the next round of legal action against the vendors in Mongolia. It will review all methods available to it to assert its right for additional shares of ECM LLC, the Mongolian company which owns the exploration License to the Erdenetsogt coal project.

Some days ago, the company announced that it has won the final round in its legal suit to acquire 5 per cent of ECM LLC. Previous rounds, the first of which was commenced by the Canadian company in April 2009 to secure its 5% interest in the Erdenetsogt, ended in vendors agreeing to the company expending funds in exploration, in exchange for a share in the property, paying funds to the vendors for an interest in the property, and also agreed to the company acquiring 100% of the project. The vendors however failed to deliver on their commitments, and several times even refused to execute the agreements after all the terms were agreed upon.

Craig Hall, a well-known businessman from North Texas, attempts to get back more than $150 mln of the $180 mln which he has lost by loaning or investing in several natural gas partnerships. Two of the companies in which he is majority shareholder, Hall Phoenix/Inwood Ltd. and Hall Performance Energy Partners 4 Ltd., are now plaintiffs in the court case. Hall claims that both limited partnerships
provided financial support to various drilling partnerships based on lies by the senior executives running them. Three partnerships and four individual defendants are alleged of falsely portraying the  situation, and enticing Hall’s partnerships into loaning or investing huge sums.

In court filings, Hall said that business relationships and friendships made him invest more than $150 mln into loans and equity for drilling partnerships, and he is trying to get back the losses that are tied to misleading information from the partnerships.

The events leading to the lawsuit started in 1986, when Hall, through affiliates of his company Hall Phoenix/Inwood Ltd., started to invest in business ventures of his friend Anthony J. Gumbiner. Now Gumbiner and petroleum engineers William H. Marble and Meduna are the defendants in the lawsuit. Other defendants are  Dallas-based Hallwood Group Inc (HWG), controlled by Gumbiner;  William L. Guzzetti, president and CEO of HWG; and British Virgin Islands-registered companies Hallwood Investments Ltd. and Hallwood Financial Ltd., both established and controlled by Gumbiner. The only other officers or owners of the BVI companies are Gumbiner’s family members. According to the lawsuit, these companies also do not have any employees.

Attorney Mark Werbner, who represents most of the defendants, said he will prove in court that Hall was not misled into investing or loaning money for the drilling ventures. By his words, “Craig Hall was a sophisticated investor and was fully informed about the Hallwood Energy drilling program,” and his lawsuit is just an attempt to recover a loan that he made understanding and knowing the risks of the oil and gas business.