grave secrecy offshore money-laundering

8/22/2019 Grave Secrecy Offshore money-laundering

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GRAVE SECRECY


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Please note that each shell company named in this

report is a reerence to that particular company reg-

istered in t he named jur isdiction only. For the avoid-

ance o any doubt, Global Witness does not reer to or

iner any link to other companies in other jurisdictions

which may have the same or similar names. Any such

similarities in the names o companies registered in

other countries are entirely coincidental.

This report contains some quotations rom press arti-

cles, documents and sources that have been translat-

ed into English rom the Russian or other languages.

These are clearly indicated in the reerences.


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CONTENTSExECuTiVE SummARY

RECOmmENDATiONS FOR POLiCY CHANGE

iNTRODuCTiON

CHAPTER 1: ASiAuNiVERSALBANk:COOkiNG THE BOOkS?

CHAPTER 2: THE uSE OF SHELL COmPANiESFOR SuSPiCiOuS TRANSACTiONS

CHAPTER 3: THE kYRGYz ECONOmY:iN THE HANDS OF A FEw mEN

CHAPTER 4: HOw AuB GAiNED ACCESSTO THE GLOBAL FiNANCiAL SYSTEm

CONCLuSiON

REFERENCES

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It is so easy to set up a company with hidden ownership in

Britain that even a dead man can do it. Global Witnesss

new investigative report Grave Secrecy shows the poten-

tial or companies in the UK, New Zealand and elsewhere

to be used as cover to launder the proceeds o corruption,

tax evasion and other crimes.

It is based on an investigation into a Central Asian bank

at the centre o major money laundering allegations, but

the ndings are much broader, highlighting the shocking

inadequacy o how some o the worlds major economies

monitor the registration o companies.

Kyrgyzstans largest bank, AsiaUniversalBank (AUB), was

nationalised and ound by the authorities to be insol-

vent ater a revolution overthrew the regime o President

Bakiyev in April 2010. The new Kyrgyz authorities allege

that AUB was engaged in large-scale money laundering

and an independent audit by a multinational rm sup-

ports these claims. However, the banks ormer manage-

ment deny the allegations and claim that the new regime

illegally expropriated AUB because it was a successul

business and that their indictments by the new authori-

ties are politically motivated.

To get beyond these contradictory claims, Global Witness

investigated dozens o companies that held accounts at

AUB, many registered in the UK, and ound signicant

indicators that suggest money laundering: hundreds o

millions o dollars seemed to be moving through their

accounts while they were not engaged in any real busi-

ness activity.

In the most egregious example, the shareholder o one

UK company was a Russian man who had actually died

some years beore the company was registered. His iden-

tity had been used to hide the real owner o a company

that appeared to have US$700 million owing throughits account at AUB while doing no business in the UK and

ailing to le accounts with the UK corporate registry as

required. It is scandalous t hat lax oversight and enorce-

ment over company registration in the UK allows such

behaviour to prosper.

Many o the companies in this report, even i incorpo-

rated onshore, eature shareholders and directors rom

oshore jurisdictions such as the British Virgin Islands

and the Seychelles. But these are not the companies true

owners. They are employees o corporate service provid-

ers who are paid, quite legally, to pimp their identity asnominee shareholders and directors, in eect hiding the

identity o their customers: the real owners o the com-

pany. Technically, police and tax authorities can request

company ownership inormation, but i it is cross-border

the legal processes are cumbersome and the investiga-

tors have to know what they are looking or a Catch-22

system that does nothing to prevent money laundering

and other criminal misuse o these companies in the rst

place.

The corporate service providers who set up these com-

panies and act as nominees are already required by the

anti-money laundering laws to identiy who they are act-

ing or and to report any suspicions to the authorities.

But the UK, like many countries, currently does little to

enorce this existing standard; it is time it did so.

Global Witness believes a urther dramatic change

is required: the identities o the real, beneicial

owners o all companies should be publicly availa-

ble in the country they are incorporated, and nomi-

nee directors and shareholders should be held liable

or their clients actions. The EU has the opportuni-

ty to take the lead on this over the next 18 months as

it updates its anti-money laundering laws.

This matters because shell companies entities that are

little more than just a name on a piece o paper are key

to the outow o corrupt money that keeps poor countries

poor. Those who loot state unds through corruption or

deprive their state o revenues through tax evasion need

more than a bank: they need to hide their identity behind

a corporate ront. Countries such as the UK might have a

company registry and consider themselves onshore, but

as long as they only collect shareholder inormation, they

are eectively permitting hidden company ownership

which means they are as oshore as any palm-ringed

island and will continue to acilitate corruption, tax eva-

sion and other crimes. This needs to change.

The report also shows how:

The Kyrgyz economy ell into the hands o just a ew

men, with up to US$64 million in state unds, including

pension unds, potentially missing rom AUB. Maxim

Bakiyev, the son o the ormer Kyrgyz president, was

riends with AUBs chairman, and is suspected by the

Kyrgyz authorities o being involved. Meanwhile, Maxim

has claimed asylum in the UK, saying that is being made

a scapegoat by the new authorities in Kyrgyzstan.

The billions o dollars in suspicious transactions that

apparently moved through AUB could not have beentranserred without the help o AUBs relationships

with banks abroad called correspondent relationships.

Though Swiss bank UBS was sufciently concerned about

ExECuTiVE SummARY

ExECuTiVE SummARY


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AUB to close its correspondent account, others kept their

doors open. The largest amounts o money rom AUB

went through Citibank in New York, the UKs Standard

Chartered and Austrias Raieisen Bank. Global Witness

has asked these banks what anti-money laundering

checks they did on AUB; Citibank didnt reply, the others

couldnt comment due to client condentiality.

AUBs international reputation was helped by the pres-

ence o three ormer US Senators, including ormer presi-dential candidate Bob Dole, on its board.

Global Witness believes that the identities o the

real owners o all companies should be publicly

available in the country where they are incorpo-

rated.

Countries who do not do this, such as the United

Kingdom and the USA, will continue to acilitate

corruption and remain just as much a part othe oshore system as any palm-ringed island.

April 2010, Protestors try to storm the Kyrgyz White House, but what was happening to the money in Kyrgyzstans largest bank?Photo: Vyacheslav Oseledko/AFP/Getty Images


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Specic recommendations relating to this case:

Clearly, there is a lot that the new Kyrgyz government

can be doing to continue to address the AUB case and

the potential loss o state unds. But given the allega-

tions that money has been laundered, including to oth-

er jurisdictions, Global Witness also makes the ollowing

recommendations:

An immediate investigation should be launched in

countries where the companies named in this report are

registered into their ultimate benecial owners, the ori-

gin o any money ound in accounts, and the role o the

company service providers who set them up and ronted

or them.

There should be an urgent review in the UK o Maxim

Bakiyevs asylum case, including investigations into the

allegations made in this report. I there is enough evi-

dence o wrong-doing, he should be tried in a British

court.

The authorities in the UK should more actively investi-

gate and prosecute potential breaches o the Companies

Act by nominee directors named in this report who:

ailed to le accounts;

signed dormant accounts while their companies

saw huge amounts o money pass through their bank

accounts.

The authorities in Latvia should investigate the US$30

million payment apparently received by a DoveparkLimited account at Aizkraukles Bank.

The authorities in Switzerland should investigate

the possibility o laundering relating to the Kyrgyz

Development Fund at Verwaltungs und Privat Bank, ol-

lowing the concerns raised by PwCs audit o the Fund.

Banks that possessed correspondent relations with

AUB should assist the Kyrgyz authorities in trying to

trace possibly laundered or stolen money.

The authorities in the US, UK and Austria, in theirrole as regulators o the correspondent banks through

which the largest portion o AUBs unds are alleged to

have passed, should investigate whether money alleged-

ly stolen rom the Kyrgyz state went through their banks,

and i necessary (and possible) should use their money

laundering laws to prosecute the Kyrgyz ofcials respon-

sible. They should also investigate whether the corre-

spondent banks that did business with AUB did sui-

cient due diligence checks on AUB, including on its links

to politically exposed persons, and penalise banks that

have ailed in these responsibilities.

1. New rules on benecial ownership

The EU should adopt a benecial ownership registries

standard as part o its review o the Third Anti-Money

Laundering Directive during 2012-2013, which includes

the ollowing elements:

Companies should be required to submit the name

and address o their benecial owner(s) to a national

registry which should make the inormation public.

The ees charged on incorporation should be increased

to cover the extra costs o collecting this inormation.

National corporate registries should carry out due dil-

igence, on a risk based approach, to veriy that the ben-

ecial ownership inormation provided to them is cor-

rect. This need not be that onerous: company service

providers are already required by the global anti-mon-

ey laundering standards to do exactly this. The ees

charged on incorporation could be increased in coun-

tries where they are currently low to cover the extra

costs this would entail.

The use o nominees to record the ownership o shares

should be permitted, but only i the name o the bene-

cial owner is also recorded and in the public domain.

Those holding company oicer positions (i.e. secre-

tary, shareholder or director) who act in accordance

with the instructions o a third party should be obliged

to disclose this act and place a copy o their instruc-

tions on the public record and disclose who they are

acting on behal o.

Company directors, whether nominee or not, should

be held personally liable or intentional ailure to le

accounts, supplying alse inormation, and or any

actions taken by the company.

Those EU members with oshore connections should

use their inluence to extend this standard to those

jurisdictions.

RECOmmENDATiONS

RECOmmENDATiONS

FOR POLiCY CHANGE


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FATF should adopt this same standard as its level o

compliance or Recommendation 24 at the earliest pos-

sible opportunity.

At the very least, the EU should adopt a standard o

publicly available shareholder registries in each o its

member states, and its members should put pressure on

those oshore jurisdictions with which they have rela-

tionships to do the same.

2. Better regulation o trust and company service

providers

Countries that do not regulate trust and company serv-

ice providers under their anti-money laundering laws

should do so, with criminal penalties or the worst ail-

ures. FATF should penalise those countries that have

ailed to do this.

Those countries that already regulate trust and compa-ny service providers under their anti-money laundering

laws should make signicantly greater eorts to ensure

that these standards are enorced.

Countries should actively enorce their company laws

requiring accurate ling o accounts, and hold nominee

directors to a standard o responsibility which does not

permit them to claim ignorance o the activities o the

company they purport to direct.

3. More eective FATF evaluation process

FATF should develop a new methodology or assessing

compliance or use i n its mutual evaluations. It needs

to ocus on assessing whether laws and regulations are

being enorced, not just whether they are on the books. It

should also put signicantly more pressure on countries

that are not in compliance with its standards, either on

paper or in practice.

Who bears legal responsibility or a UK company

with oshore nominee directors?

Nominee directors o UK companies who are situated o-shore oten claim that they do not bear responsibility or

the companies that they represent because they are nom-

inees only and have little knowledge o the companys

activities and no access to its bank accounts. However,

the reality is that legally a nominee director has the same

duties to the company as any other real director and is

liable in exactly the same way.

An oshore nominee director or a UK registered com-

pany will thereore be liable or breaches o the UK

Companies Act 2006 such as ailure to keep adequate

accounting records and reports, or or wrongully signingdormant accounts. Ignorance is unlikely to be a deence

in these circumstances as it is not enough or a nominee

director to say that s/he did not have adequate inorma-

tion about the companys inancial activity when s/he

signed the accounts. A nominee director has the same

duty to exercise reasonable care, skill and diligence in

order to ull their legal responsibility as a director.

Sometimes the nominee directors may have signed an

agreement with their client the companys real owner

which purports to specically exclude them rom any

directorial liabilities. However, such attempts to exclude

a nominee director rom any responsibility or breach-

es o the Companies Act in relation to the company s/he

directs will not absolve the nominee rom statutory lia-

bility and may have no legal eect.

In practice, there are very ew consequences or nomi-

nee directors that breach their duties because these pro-

visions o this Act are not eectively enorced, either or

real directors or nominees. Until they are, lax enorce-

ment o UK company law will continue to be exploited

by those looking to hide their ownership and conceal the

true activities o their UK companies.

The UKs overseas territories and hidden company

ownership

Quite a ew secrecy jurisdictions are overseas territo-

ries o the UK, such as the British Virgin Islands, the

Cayman Islands and Anguilla. As seen in this report,

because o these jurisdictions strict secrecy laws, com-

panies and company ofcers are oten located there, pro-

viding convenient cover or those who want to hide their

identity behind corporate structures. The company reg-

istry o the British Virgin Islands, or example, does not

give any inormation regarding a companys directors or

shareholders.

Global Witness is oten told by British civil servants that

the UK has devolved commercial matters to the territo-

ries and has limited inuence over them. However, there

are indications that this is an over-simplication:

1) The UK took over control o the Turks and Caicos, ater

extensive problems with corruption there. 2) A recent

report into the UKs implementation o the OECD anti-

bribery convention says that: the UK can and has extend-

ed international treaties to OTs [overseas territories] andenacted legislation in these territories over their objec-

tion. As recently as 2000, the UK exercised these powers

to enact legislation in the OTs to ensure their compliance

with international human rights conventions [] the UK

acknowledged that rom a constitutional perspective

the UK has unlimited power to legislate or the OTs. 418

Given this, the UK should do more to ensure that its over-

seas territories are not used by criminals to hide their

identities behind companies. At the very least, the U K

should orce all overseas territories to have what the UK

currently has an open shareholder registry that lists thelegal owners o registered companies and ensure that

all laws governing companies registered in the territories

are being enorced.

RECOmmENDATiONS


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This is a story that shows the potential or UK-registered

companies to be used as money laundering ronts to

move billions o dollars o dirty money, with devastating

impacts or the countries where the money comes rom.

In the rst hal o 2010 the small Central Asian nation

o Kyrgyzstan1 imploded. An uprising ousted its pres-

ident, the second such violent change o government

in ive years, and parts o the country descended into

chaos. Apparent ethnic violence between Kyrgyz and

Uzbek communities resulted in the deaths o nearly

500 people.2

This let an already relatively poor country close to eco-

nomic collapse with the inancial sector hit especial-

ly hard. Kyrgyzstans largest bank, AsiaUniversalBank

(AUB), was taken over by the Kyrgyz National Bank

ater ofcials there alleged that AUB was insolvent due

to wide-scale money laundering schemes.3 According to

these ofcials, AUB was using a double book-keeping sys-

tem that had allowed it to record alse transactions and

make it appear as i it held signicantly more assets than

it actually did.4 An audit o AUBs activities unded by

the European Bank or Reconstruction and Development

(EBRD) appears to support these allegations. Money

was transerred out o AUB through its relationships

with banks abroad (known as correspondent relation-

ships), with the largest amount going through Citibank

in New York.5 Back in 2006, the Central Bank o Russia

had warned Russian banks about dubious transactions

through AUB, and as a consequence the Swiss bank UBS

stopped its correspondent relationship with AUB.6 But

plenty o other Western banks kept their doors open to

AUB and so the money was able to ow.

Global Witness has seen evidence to suggest that millions

o dollars were transerred through banks in Europe and

the United States. The origin o this money is unknownthough at least one Kyrgyz ofcial has alleged that some

state unds, including pension unds, went missing rom

AUB.7 The amount o the state unds possibly missing

up to US$64 million is considerably less than t he total

o some suspicious transactions through AUB, which

run into the billions and are a signicant proportion o

the GDP o Kyrgyzstan. This suggests that, i the allega-

tions o money laundering are accurate, AUB could have

been used by unknown launderers or their own purpos-

es as well as by those who might have been embezzling

state unds. As the origins o the money in the suspicious

transactions are unknown, it is not possible to draw aconclusion about whether or not this nancial activity

constitutes money laundering without urther investiga-

tion by competent authorities.

The problems with the UKs system o company

registration is shown by one company eatured in

this report that was legally owned by a man rom

a remote Russian region who had actually died

beore the company was registered.

Global Witness has spoken to many sources who attest to

a strong relationship between AUB and the ormer pres-

idents son, Maxim Bakiyev, which raises suspicions as

to whether the bank was working or the good o its cli-

ents or or the countrys ormer ruling elite.8 More than30 people have been indicted in Kyrgyzstan or money

laundering and other alleged crimes in its banking sec-

tor, including Maxim, AUBs ormer chairman Mikhail

Nadel and two other men who had been AUB board mem-

bers, Eugene Gourevitch and Alexei Yeliseev.9 These men

reject the indictments, saying that they are politically

motivated and unounded.

Maxim, described beore the revolution by the US embas-

sy in a Wikileaks cable as smart, corrupt and a good

ally to have,10 arrived by private jet in the UK some

weeks ater his ather was ousted. He has claimed asy-

lum in the UK,11 though he is, as o June 2012, still listed

on Interpols website as a ugitive wanted by the Kyrgyz

authorities. 12 Rosa Otunbayeva, who was interim presi-

dent o Kyrgyzstan until December 2011, has complained

that the West ailed to respond to her governments

request or assistance in extraditions or tracking down

money, unlike its reaction to the potential loss o unds

rom Libya.13

Central Asia suers rom high levels o corruption and

eatures a host o iron-sted dictators o varying degrees

o ability, venality and thuggishness, and so an alleged

money laundering scandal involving the presidentsamily may not raise too many eyebrows. Yet this report

is not just about a ar o country o which we know

little.14 There is a strong international public inter-

est because it implicates the global nancial system to

which AUB gained access through a network o relation-

ships with some o the worlds biggest banks, including

Citibank, Standard Char tered and Austrias Raieisen

Zentralbank.15

And ar rom involving only local players, AUBs reputa-

tion was buttressed by Western companies: due diligence

rm Kroll investigated its anti-money laundering meas-ures and did not ind major causes or concern, while

Washington PR rm APCO advised the bank and helped

recruit three ormer US Senators, including ormer presi-

dential candidate Bob Dole, to AUBs board.16

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The ability o an allegedly corrupt Kyrgyz bank to gain

access to the global inancial system and the endorse-

ment o respected international gures and rms matters

because it shows how easily the system could be abused

by those wishing to move dirty money. Global Witness is

concerned about this because our research on the global

inancial system repeatedly shows that those who loot

the public purse or launder money are enabled to do so

by a combination o banks willing to take the money, and

hidden company ownership arrangements that help to

hide the looters identities.17

The Kyrgyz authorities allege that AUB was a money

laundering operation; the ban ks ormer management

and owners claim it has been expropriated by the new

regime and that the indictments are politically motivat-

ed, unounded and legally unstable. In the absence o

any clarity, Global Witness has conducted its own exten-

sive investigations including close analysis o documents

that show suspicious transactions o many companieswith accounts at AUB in the months beore the Kyrgyz

uprising in April 2010. This resulting report presents

disturbing evidence that shell companies registered in

the UK, New Zealand, Belize and Bulgaria, among oth-

er places, may have acilitated an extensive money laun-

dering scheme at AUB that took advantage o its corre-

spondent banking relationships to transer money out o

Kyrgyzstan to banks all over the world. This inormation

is o public interest internationally, as well as to t he peo-

ple o Kyrgyzstan.

This story highlights the shocking inadequacy o how

some o the worlds major economies monitor the reg-

istration o companies. One UK company, whose AUB

account, according to documents seen by Global Witness,

saw about US$700 million ow through it in just under

two years, was legally owned by a man living in a remote

Russian region. That might be surprising in itsel, but

what makes it suspicious is the act that the man had

actually died beore the company was registered.18

In just two and a hal years it appears that a staggering

US$1.2 billion passed through the AUB accounts o just

three UK-registered companies, yet they never led any

account inormation at all beore dissolving.19

Two urther UK companies appear to have had millions

going through their AUB accounts while declaring to the

UKs corporate registry that they were dormant, a breach

o the Companies Act.20

In relation to all o the companies in this report, the ori-

gins o the money are still not known, nor its nal des-

tination ater it let Kyrgyzstan. The secret ownership

arrangements o these companies mean it is also unclear

who stood behind these and other shell companies.

According to documents seen by Global Witness, theKyrgyz authorities believe that some o these compa-

nies may have potential direct links to Maxim Bakiyev,

the ex-presidents son, and to ormer AUB chairman

Mikhail Nadel.21

In an interview w ith Global Witness, Nadel denied the

money laundering allegations made by the Kyrgyz

authorities and that Maxim had any involvement with

the bank.22 Despite several eorts, Global Witness has

been unable to contact Maxim Bakiyev in order to get his

response. The British authorities need to work with their

Kyrgyz counterparts in order to ascertain the truth o the

matter and prosecute those responsible or any wrong-

doing i such evidence is ound.

The act that many o these companies were registered in

the UK shows that this is not just a story about the prob-

lems o oshore jurisdictions: there are just as many

problems with opaque shell companies onshore, includ-

ing in the UK. Current lax regulation does not provide

adequate oversight over company registration and allows

iNTRODuCTiON

The real owners o companies can hide their identitiesbehind legal structures.

Photo: Mortal Coil Media


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iNTRODuCTiON

shady individuals to hide their identity and their activ-

ities behind a veil o corporate secrecy with ease, while

using our nancial system with impunity. The privilege

o a limited liability company is being abused by those

who wish to hide their identity.

The many ways in which hidden company own-

ership can be achieved are used quite deliberate-

ly by those wishing to shield their activities rom the

public eye: one respondent to Global Witnesss enquir-

ies concerning a company that eatures in this report

said he was asked to advise his client on jurisdic-

tions where the beneiciaries are conidential. 23

The resulting companies were set up in Belize, which

lists no ownership inormation, and New Zealand, which

does list legal shareholding, but in this case the share-

holder was a nominee someone paid to act as the share-

holder, thus hiding the name o the real person who

actually owns the company. It is no coincidence that

people choose such jurisdictions and structures or theircompanies.

The global anti-money laundering standard requires the

corporate service providers who set up these shell com-

panies and act as their directors, shareholders and com-

pany secretaries to know who they are acting or, and to

report any suspicions they have about these businesses to

the authorities.24

There are three problems with the current regulatory set-

up. Firstly, some countries have not incorporated this glo-

bal anti-money laundering standard into their laws, such

as the USA and Russia. Secondly, many o those countries

that have, like the UK, do little to enorce it.

Thirdly, it is currently quite legal or company service

providers to pimp their identity as nominee directors and

shareholders to customers about whose business they

know little, even i they have been able to tick the anti-

money laundering laws box that requires them to have

a copy o their customers passport and proo o address.

I the company is later ound or suspected to have been

used or money laundering or other criminality, they

explain that they knew nothing about it. Yet the eect o

their actions has arguably been to provide a ront behindwhich that criminal behaviour can take place.

This means that companies registered in the UK and

elsewhere are not just vulnerable to misuse by the cor-

rupt, but can also be used or tax evasion and other seri-

ous crimes not discussed in this report such as human

trafcking, drug trafcking, illicit weapons sales and the

movement o terrorist nance. The system is in serious

need o an overhaul.

The international community must opt or a system

where companies are required to disclose the real personwho controls a company known as the ultimate bene-

cial owner and where company service providers are

held responsible or their clients act ions. There was a

recent opportunity to make this happen, but the worlds

richest nations lunked it. The Financial Action Task

Force (FATF), the inter-governmental body that sets the

global standard or anti-money laundering laws, spent

the last two years reviewing its standards, including the

ownership inormation that countries should require

rom companies incorporating in their jurisdiction.25 In

the end FATF made ew changes; beneicial ownership

registries remain only optional and so the current crim-

inogenic system prevails.

But the European Commission is now re-examining its

rules, and this is where the opportunities or change now

lie. Brussels must take heed o this problem, and use its

2012-13 review o its anti-money laundering system to

change the rules. An EU Internal Security Strategy pub-

lished in 2010 has already called or change in this direc-

tion, suggesting that the EUs anti-money laundering

rules should be used to improve transparency on com-

pany ownership.26 Europe should take the lead in optingor a system in which countries must have a registry o

ultimate benecial ownership o companies incorporat-

ed there, and those EU countries with oshore connec-

tions, such as the UK with its Crown Dependencies and

Overseas Territories, should use their inuence to extend

such a standard to those jurisdictions.

The irst chapter o this report outlines the events

that took place in Kyrgyzstan rom April 2010,

the nationalisation o AUB and the claim made by

the new authorities that all was not as it seemed at the

bank, as well as the version o events according to AUBs

Mikhail Nadel and other key gures.

Chapter 2 sets out Global Witnesss investigation o a

number o shell companies with accounts at AUB, whose

management arrangements and transactions suggest

alarming red lags or money laundering. This chap-

ter examines the role o the company service providers

that set them up, and looks at the loopholes in the global

standards or company registration.

Chapter 3 introduces some o the main characters asso-ciated with the bank who are now under suspicion by the

Kyrgyz authorities, and sets out the extraordinary control

they gained over the Kyrgyz economy and public nanc-

es in the last years o President Bakiyevs regime. It then

sets out some intriguing links between a ew o these

characters and several o the shell companies identied

inchapter 2.

The inal chapter briely examines the ways that AUB

was able to access the global nancial system, including

its correspondent banks, and t he role o a Washington

PR rm that put three ormer US senators on the banksboard. The report concludes with a discussion about what

governments must do to end the problem o hidden com-

pany ownership.


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CHAPTER 1.

ASiAuNiVERSALBANk:COOkiNG THE BOOkS?T h i s c h a p t e r s e t s o u t w h a t h a p p e n e d a t

AsiaUniversalBank (AUB) rom April 2010, its nation-

alisation and the al legation o the new authorities

that AUB was alsiying its inancial records and

acting as a money laundering vehicle. It also looksat the ndings o an independent audit on AUB and

covers the response o the banks ormer chairman

Mikhail Nadel and other key gures, who deny the

allegations made against AUB.

When the t hen-president o Kyrgyzstan, Kurmanbek

Bakiyev, was orced to ee the capital Bishkek in ear or

his lie because o a popular uprising on 7 April 2010, of-

cials quickly took steps to prevent a possible outow o

capital rom the country. The ollowing day, the National

Bank o Kyrgyzstan replaced the management o sev-

eral banks, including AUB, the countrys largest bank,

because o the circumstances o thet and a threat o

thet.27 Global Witness understands rom a number o

sources that AUB in particular was targeted due to a long-

standing and widely-held belie in Kyrgyzstan that the

Bakiyev amily enjoyed a close relationship with AUBs

senior managers.28

According to statements given to the press by Kyrgyz

National Bank ofcials, these eorts were too late as the

money had already gone.29 AUB was declared insolvent in

October 2010 and subsequently nationalised.30 According

to the International Monetary Fund (IMF), Kyrgyzstans

nancial system was deeply aected by the crisis, pri-

marily through the impact on the systemically impor-tant Asia Universal Bank.31 The World Bank also cit-

ed the restructuring o AUB as one o the reasons why

Kyrgyzstans economy shrunk in 2010.32

Ofcials investigating the bank ater the nationalisation

were in or a big shock: at rst glance the books appeared

to show that around US$240 million had been withdrawn

and moved out o Kyrgyzstan in the week beore the revo-

lution.33 An October 2010 IMF report also shows massive

withdrawals (see diagram below).34

The ormer chairman o AUB, Mikhail Nadel, justiied

some transers in a press interview, acknowledging a

surge in withdrawals at the time o the government col-

lapse, but arguing it was only clients rescuing their unds

rom a coup: One has to remember that this is the sec-

ond revolution in Kyrgyzstan in ve years. [] In hind-

sight, clients were right to panic [...]. It was clients who

withdrew their money and, I believe, it was a normal

reaction.35 Nadels lawyer told Global Witness that Nadel

did not withdraw his own personal unds.36

CHAPTER 1: ASiAuNiVERSALBANk: COOkiNG THE BOOkS?

SOURCE:IMFCOUNTR

YREPORTNO,

10/336,

OCTOBER2010.

imF DiAGRAm SHOwiNG LARGE DOLLAR wiTHDRAwALSFROm AuB TO ABROAD BEFORE THE 2010 REVOLuTiON


12/80

However, the story did not end there. Ater urther

research, senior ofcials rom the National Bank alleged

in the press that AUB had been systematically trans-

erring money out o the country or a period o years

and had covered this up by manipulating bank trans-

action records to hide the act that the money was gone.

Baktygul Jeenbaeva, then-acting governor o the National

Bank and now a deputy chair, commented: Now we can

say with conidence that the management o AUB had

been alsiying their data over the course o 10 years. 37

Ulan Sarbanov, who was head o the National Bank o

Kyrgyzstan rom 1999-2005 and a credible source38

according to a leaked US government cable, made similar

allegations, telling the Wall Street Journal that during his

tenure he was suspicious o AUBs activities, as it could

produce dierent balance sheets on the same day.39

A Kyrgyz newspaper, citing National Bank deputy chair

Abdybaly tegin Suerkul, reported that such huge trans-

ers had not actually taken place in the week o the upris-

ing: a check has shown that no-one removed US$240

million [rom AUB] a day beore the events in April. That

sum simply did not exist, as it was only a ction written

down on paper.40 Global Witness understands that mil-

lions did leave AUB in the irst week o April, but how

much in total, and where it went to, remains unclear.

According to the article, AUBs system recorded thou-

sands o ctitious payments and in reality AUB owned

much less than what was shown on its accounts and inpress reports: 80% o the banks own capital was made

up o air, it was virtual.41

An investigative report by Kyrgyz inancial magazine

Finansist alleged that on the day o the uprising AUB

claimed to have 12 billion Kyrgyz som (US$265 million)

more in correspondent accounts at other banks than it

actually held.42

Why did the bank appear to have so little mon-

ey? According to the National Banks then governor,

Jeenbaeva, speaking in 2011 in a Kyrgyz press interview:

ormer shareholders and directors had withdrawn the

banks assets. [] AUB showed large amounts o money

on its balance sheets, but ater a cross-check o 60 corre-

spondent banks it became clear that the money was taken

out o the bank almost immediately ater it came in.43

In other words, AUB had, according to National Bank of-

cials, tried to make its books appear balanced in the week

beore the uprising by creating nancial statements that

showed around US$240 million being transerred out o

the country. But this money had already been transerred

out o the bank at a much earlier time, ofcials alleged.

So when the National Bank launched its investigation, itdiscovered that AUB was insolvent as virtually all o its

capital had been transerred out o the bank. The bank

was taken over by the Kyrgyz authorities and restruc-

tured as a result.

The Kyrgyz prosecutor has since alleged that corrupt

schemes [at AUB] used alsication o accounts and cli-

ent transactions, and that the maintenance o accounts

o ictitious companies and the manipulation o the

banks balance sheet involving large sums served as an

instrument or the illegal extraction o revenue [and] the

embezzlement o budget unds []. 44

Following the uprising, the investigative article in

Finansist documented the unknown war rom around

2000 between AUB and the National Bank o Kyrgyzstan

regarding AUBs ailure, according to the latter, to comply

with reporting requirements.45 Former chairman o the

National Bank o Kyrgyzstan, Ulan Sarbanov, has also

gone on the record in the press with his concerns about

the way AUB was run, and alleged that when as chairman

he tried to help the Russian Central Bank investigate sus-

picious transactions between AUB and Russian banks, he

was orced out o his job by President Bakiyev.46

The claims that AUB was involved in illegal activity

are supported by an independent audit, unded by the

European Bank or Reconstruction and Development

(EBRD), completed around February 2011. Global Witness

understands that the audit, by multinational account-

ancy rm BDO, ocused on transers immediately prior

to the April 2010 events and concludes that it is proba-

ble that AUB was predominantly being used or criminal

purposes, that AUB knowingly acilitated money laun-

dering, that the banks IT system, BANK++, was probably

manipulated to disguise payments and that more than

80% o transactions reviewed were not corroborated bySWIFT, the international payment system. It also said

that the banks market value was nil, and that its liabili-

ties outweighed its assets.47

President Bakiyev did little to curb corruption andnepotism in Kyrgyzstan while in power.Photo: ASSOCIATED PRESS / Alexander Zemlianichenko



13/80

The BANK++ system was provided by a Russian irm

called Fininor, a company that has close ties to AUB

through its shareholders and personnel. Mikhail Nadel

conrmed to Global Witness that BANK++ was AUBs core

banking system and explained that Alexandra Katrin, an

AUB employee, was responsible or it.48 It is not clear i

Alexandra Katrin was involved in the alleged manipula-

tion o BANK++. However, she was an AUB board member

rom 1999 and, crucially, chair o its audit committee, so

arguably she could be expected to have an oversight role

o the banks nances. She worked closely with Fininor,

one o whose shareholders was her husband, who also

held shares in AUB.49 Katrin has been indicted by the

Kyrgyz authorities in regard to the money laundering

allegations; her husband has not.50 Neither Alexandra

Katrin nor her husband responded to questions posed by

Global Witness.

Fininors General Director said that allegations put to

him by Global Witness that BANK++ may have been used

raudulently by AUB, acilitated by close connections

between the two companies, were groundless, and that:

it is just impossible to use the Bank++ or any alsica-

tion or raud. [] Bank++ has been subject to IT security

audit numerous times. Not once did any o the interna-

tional auditing companies accuse Bank ++ o any impro-

prieties. [] Fininor has never been and could not be

involved in AUB operations, as it is not a bank, but sepa-

rate independent sotware-development entity. He alsosaid the BANK++ system was developed in a way that did

not allow any operations which were not within ofcially

approved bank procedures, in line with National Bank o

Kyrgyzstan requirements, and added that the allegations

made against Fininor were part o the political attack

against AUB.51

Nadel also denies BANK++ had been misused, and main-

tains his own innocence, vigorously disputing the allega-

tion that AUB was a money laundering vehicle.

He alleges that the authorities at the National Bank

o Kyrgyzstan intentionally bankrupted AUB in order

to take over its assets illegally. In response to Global

Witnesss enquiries, Nadels lawyer stated that the tempo-

rary administration installed by the interim government

at AUB improperly wrote o substantial debts owed to

AUB and created a alse picture o its nancial worth.52

When Global Witness interviewed Nadel he brought one

o his ormer AUB colleagues, Denis Slobodyan. The lat-

ter commented that because AUB was the countrys big-

gest bank with the most easily identiable assets, under

the pretext o preserving assets o the country, they [of-

cials rom the National Bank o Kyrgyzstan] took over thebank and actually destroyed it.53 Nadels ull rebuttal is

overlea. As ar as Global Witness is aware, the Kyrgyz

authorities have not indicted Denis Slobodyan and there

is no evidence that he was himsel involved in money

laundering or any illegal activity.

This report examines these competing claims about AUB

using the evidence available to us, and comes to the con-

clusion that, despite Nadels denials, there is evidence o

very suspicious nancial activity at AUB, and it centres

on dozens o companies which held accounts there which

are apparent shell companies that is to say companiesthat exist in name only and are not involved in any legiti-

mate business activity. One o the reasons we are present-

ing this evidence is that these companies were incorpo-

rated in other jurisdictions, including the UK and New

Zealand. Full investigations should be undertaken by the

authorities in all o the countries involved.


AsiaUniversalBanks ormer headquarters in Bishkek. The bank is alleged by the new authorities to have been a moneylaundering vehicle.


14/80

ANOTHER SiDETO THE STORY:

THAT mONEYLAuNDERiNGDiD NOT TAkEPLACE AT AuB

Former AUB chairman Mikhail Nadel and other key

gures mentioned in this report have told Global Witness

that they believe the events o April 2010 in Kyrgyzstan

were not an uprising but a coup orchestrated by the

opposition which had no constitutional oundation and

that the accusations against AUB are baseless. Nadel

maintains that the nationalisation o AUB was part o the

coup, and similarly in breach o the law o Kyrgyzstan.

On the takeover o AUB, Nadels lawyer told Global

Witness that a group o heavily armed men arrived at

AUBs head oice without notice in the early hours o

the morning o 8 April 2010 and demanded immediate

and unrestricted access to AUB computer servers.

Nadel claims that the consequent placing o AUB into

temporary administration, the replacement o AUB

management and the purported nationalisation o AUB

shares, including his own personal shareholding, were

all contrary to Kyrgyz law. He argues that these acts were

carried out by the new government in order to illegallyobtain the banks unds and due to a mistaken perception

that AUB had been close to the previous regime.54

Global Witness wrote to the National Bank o Kyrgyzstan

to get its side o the story. In an emailed response a

senior ofcial explained that the initial plan had been to

recapitalise AUB, but urther investigation revealed what

the oicial described as aked inancial reporting at

AUB. The same ofcial believed that as Nadel may have

been complicit in the alleged schemes, the rehabilitation

and the return o the bank to the person who [is] suspected

o committing serious economic crimes against our

country or us is not acceptable.55

Nadels lawyer stated: [Nadel] also believes that money

rom AUB sae deposit boxes which belonged to clients

o AUB were split between (and signed or by) members

o the new government and provided Global Witness

with documentation that in Nadels opinion shows such

signatures. Money rom AUBs saety deposit boxes,

according to a news article orwarded by Nadels lawyer,

was not transerred to the Kyrgyz budget.56 The National

Bank ofcial commented to Global Witness: we assure

you that seizure o unds rom the bank o cells was

conducted in compliance with the procedural rules oour country. [] All the money is saely deposited in the

National Bank as evidence.57

The stealing o money rom saety deposit boxes, while

a serious crime i true, would not in Global Witnesss

view explain the disappearance o millions o dollars

that the bank supposedly held as o April 2010. Nadels

explanation to the press o the disappearance o AUBs

asset base was as ollows: I anyone is to be accused o

embezzlement, I would like to pose an open question

as to how a bank which was audited and conirmed

by the new regime to have more assets than liabilitiessuddenly suers a tremendous loss in assets and is

pushed towards technical bankruptcy, which served

as a pre-text or nationalization. This, in my opinion,

is embezzlement. 58

Was the international community too quick to lavishawards on Mikhail Nadel and his AUB?Photo: The Asian Banker



15/80

However, the above-quoted press interviews with

National Bank ofcials suggest that the alleged schemes

in place at AUB took some time to reveal: Nadels open

question regarding how a supposedly a sset-rich bank

can suer a loss in assets could, in Global Witnesss view,

potentially be explained by the alleged manipulation o

its banking system that was only discovered some time

ater the revolution. The EBRD-unded audit o AUB

which supported the view that the bank actually had

very ew assets and was manipulating its transaction

reporting system was only completed some ten months

ater the uprising.

Nadel argues that this orensic audit was conducted

ater more than six months o government control o

AUB by which time the temporary administration had

purposeully r un down t he banks condition. However,

Global Witness understands that the audit, though

completed in February 2011, ocused on a review o AUBs

nancial records during the period immediately prior tothe April 2010 events. Nadels lawyer commented: At the

time o our clients last involvement with AUB i.e. pre-

revolution in April 2010, AUB was both solvent and, as

ar as our client was aware, run in accordance with AML

[anti-money laundering] procedures. The lawyer added

that by April 2010 AUB held one-third o the total assets

in the Kyrgyz banking system, and that, until the bank

was taken over, the unds remained in AUBs account.59

Nadel also rejects the claim that AUB was used to launder

or steal money. His lawyer commented: As recently as

31 December 2008, the [National Bank o Kyrgyzstan]

provided a certicate attesting to AUBs compliance with

all the relevant regulatory requirements. [] Mr Nadel

and the other directors o the bank placed a high value on

the importance o anti-corruption policies overseeing

the implementation o the extensive AML procedures at

AUB. [] During the time that our client was involved in

the running o AUB, such corrupt schemes did not take

place, or i they did, our client was not aware o them.60

Another ormer AUB board member, not named in this

report, told Global Witness that: as board members, we

have done all we can to ensure AUB activities were as

transparent as possible [] As a board member, it wouldbe difcult to know exactly each and every transaction

eected. However, with the help o reports rom Kroll

Associates [see page 62] and the Management Board, we

careully scrutinised the banks activities to the best o

my knowledge, we are not aware o any o the allegations

that have been put orth by the Kyrgyz prosecutors

regarding illicit activities.61

The current Kyrgyz authorities do not agree with the AUB

managers version o events. In February 2011 the Kyrgyz

Prosecutor publicly revealed that over 30 people had been

indicted in relation to alleged money laundering andraud schemes at Kyrgyz banks, including AUB.62

However, the independence o the legal system in

Kyrgyzstan and other Central Asian countries has long

been a concern o many observers, including the US

State Department.63 Global Witness has been given

documents by one o those indicted showing that the

Bishkek District Court had ordered the case to be sent

back to the prosecutor to remedy the deiciencies and

procedural irregularities t hat were in contravention o

Kyrgyz law.64 For example, many people were indicted

without being present.

At a urther hearing in December 2011, the matter was

sent back once more to the prosecutor or illing in

the investigator gaps. Again, this centred around

procedural and evidential deciencies. It was ound that

allegations o money laundering were made without any

evidence and the criminal case is completely missing

any statutory procedural documents rom which it will

arise that the deendants have received any income by

illegal means and in what amount. [] The charges are

mainly based on investigation suppositions, but not

on the criminal case materials [] [the case has been]investigated supercially with accusatory bias.65 Global

Witness understands that the investigation continues.

In April 2011, Mikhail Nadel was ound guilty in absentia

by a Kyrgyz court o money laundering and other crimes.

Nadel denies the charges on the basis that they were

completely baseless and politically motivated. He

believes that he does not eature on the wanted persons

section o the Interpol website because Interpol shared

this view. He told Global Witness that my unlawul

conviction in absentia was undermined by the Kyrgyz

Court o Appeal in June last year, ater it determined

that the evidence the prosecutors oice had relied on

was not conclusive. His lawyer added urther: The

law o Kyrgyzstan does not permit charging people in

absentia. To do so directly contradicts established legal

procedure [] [Nadel] has never been charged, served

with proceedings or even inormed o the investigations

[] For the charge o money laundering to be brought, the

prosecution must rst demonstrate that the laundered

unds were indeed the proceeds o illegal activities. No

such evidence was provided by the prosecution []

He was incorrectly convicted and sentenced and is

now appealing. Mr Nadel denies any wrongdoing or

involvement in the alleged corrupt schemes.66

Following the response rom Nadels lawyer, Global

Witness contacted a senior oicial in the Kyrgyz

Prosecutors ofce in May 2012. In answer to a question

about whether Nadels conviction was overturned, the

senior oicial stated that the verdict o the Leninsky

District Court is not repealed but remains in orce66b

It is because o the uncerta inties over the indictments

and prosecution o these cases, and the claims that they

are politically motivated, that Global Witness carried out

its own investigation into the companies with accountsat AUB. Since our powers are limited, it is a ll the more

important that competent authorities o countries with

a nexus to this case conduct their own investigations to

discover the truth o the matter.



16/80

CHAPTER 2.THE uSE OF

SHELL COmPANiES FORSuSPiCiOuS TRANSACTiONSThis chapter sets out Global Witnesss investigation

o a number o shell companies with accounts at

AUB, whose management arrangements and trans-

actions suggest alarming red ags or money laun-

dering. It examines the role o the company serv iceproviders who set them up, and looks at the loop-

holes in the current global standa rds or company

registration.

i. Transactions through shell companies: an intro-

duction to the evidence

Global Witness has seen three documents which

detail the transact ions o various companies with

accounts at AUB. This section introduces the doc-

uments, assesses the possibility that they could

have been orged by those seeking to implicate

AUB, and concludes that this is very unlikely.

It then sets out the reasons or Global Witnesss

belie that the structure and activities o these

companies constitute signicant red ags or poten-

tial money laundering.

The rst two documents emerged rom the Kyrgyz inves-

tigation into AUB. According to a source knowledgea-

ble about the case in Bishkek, they record transactions

between June 2008 and April 2010 made by six compa-

nies with suspicious transactions through the bank. The

documents include conirmation o the tran sactionsrom the SWIFT international bank payments system.67

As this inormation was produced by the authorities in

Kyrgyzstan, Global Witness cannot conirm it is accu-

rate, though we have obtained conrmation o a ew o

the payments rom companies that received them. We

reer to these two documents as the SWIFT documents.

(Note: these documents were not compiled by SWIFT

itsel, but by the Kyrgyz authorities using inormation

rom the SWIFT system.)

The third document appears to be an AUB transaction

record or the week beore the revolution. At this timethe bank was still chaired by Nadel.68 It lists the trans-

actions o seven companies with accounts at AUB, and

lists dozens o other companies which made payments to

or received payments rom these seven. We will reer to

this as the AUB document. I the allegation regarding

manipulation o AUBs BANK++ system to create icti-

tious payment records is true, the problem is that we can-

not say whether a particular payment listed on this docu-

ment actually happened or whether it was a transaction

on paper only to cover up money already transerred. Thesource in Bishkek knowledgeable about the AUB case told

Global Witness that this document includes a mixture o

ake and real transactions.

There would be two ways to veriy which transactions

were real by accessing inormation rom the interna-

tional correspondent banks which are necessary or any

cross-border payment, or rom the SWIFT system. Global

Witness does not have the authority to gather inorma-

tion rom either o these sources. However, one company,

Sorento Resources Ltd, is listed on both the SWIFT and

the AUB documents and so the transactions as record-

ed by each document can be compared. This SWIFT

document also compares the date o the transactions

as recorded by the SWIFT system and by AUBs own

BANK++ system.69

Sometimes both the amount o money transerred and

the date on which it was transerred matches exactly in

both the AUB and SWIFT documents. The act that

some transactions appear in both documents which

Global Witness obtained rom two dierent sources

means that this is either a highly sophisticated co-ordi-

nated orgery or that some o the transactions did actu-

ally take place.

Sometimes, the SWIFT documents and the AUB

document match on the amounts o money transerred,

but the dates dier by up to 75 days. I the SWIFT

document contains authentic inormation rom the

SWIFT system, this date discrepancy would support the

allegation that AUB was producing inaccurate nancial

reports.

Other comparisons reveal that the AUB document

eatures some payments that are not on the SWIFT

document. I the SWIFT document is genuine and theAUB document is a record o transactions as logged by

BANK++, then it would seem these payments may never

have taken place, giving urther weight to the allegation

(as made by the EBRD-unded audit) that AUB was alsi-

ying its nancial statements.

CHAPTER 2: THE uSE OF SHELL COmPANiES FOR SuSPiCiOuS TRANSACTiONS


17/80

Many o the companies mentioned on these documents

are apparent shell companies organisations that are

not engaged in genuine business other than the transer-

ring o money. However, the AUB document also indi-

cates payments made by some o these shell companies

to real companies, i.e. to companies engaging in genuine

business: a well-known law rm, a subsidiary o a major

international oil and gas company, a logistics company

and a PR rm. The SWIFT documents do not list the

payments or six out o the seven companies on the AUB

document, so Global Witness contacted the real compa-

nies in question to see whether these transers had taken

place. Each replied that they had conducted no business

with the rms in question and had received no such pay-

ment.70 I the AUB document was created by BANK++

then this is more evidence supporting the allegation o

manipulation o the BANK++ system, that is to say AUB

logged payments to genuine companies that simply did

not occur in reality, on any date.

All o this presumes, however, that the SWIFT inorma-

tion provided by the Kyrgyz authorities is accurate. So,

turning now to the SWIFT documents, these also list,

among thousands o transactions, some real companies

as receiving payments. Global Witness contacted some

o these real companies, and unlike those on the AUB

document, this time they conrmed they had received

the payments (see box overlea or why these transac-

tions raise urther questions about suspicious activity).71

Although the volume o transactions means it is not

practical to veriy them all, the act that some o these

real companies received the payments is urther indi-

cation that the transactions listed on the SWIFT doc-

uments genuinely took place. Meanwhile, Nadel has

claimed that any evidence used to justi y the national-

isation could have been created by the National Banks

new management.72

To summarise, we have three documents which list doz-

ens o companies making payments through AUB. Two

were compiled by and came rom the Kyrgyz authorities

and so are subject to Nadels concerns that ofcials were

playing with the numbers to justiy nationalising AUB

on the alse pretext that it was insolvent. The third doc-

ument appears to have been produced by AUBs BANK++system and thus, i the allegations made against the bank

are true, may include transactions that did not take place

at that time but were created by a manipulated system to

cover up transactions made at an earlier date.

There is a key to the riddle, though, and it lies in the

companies themselves. Global Witness sea rched or

the companies listed in all the documents to nd out

where they are incorporated and what business they

are involved in. For many companies, no inorma-

tion is available beyond corporate registry listings;

we cannot nd them engaged in a ny legitimate busi-ness activity and most submitted no account inor-

mation to company registries. A ew o them, identi-

ed in the sections below, led dormant accounts in

the UK, indicating that they had not done any busi-

ness at all.73

These companies were incorporated mainly in the

UK, New Zealand and Belize, and all o them were

registered ater President Bakiyevs rise to power

in March 2005. Most importantly, many o them a re

linked to each other via the company service provid-

ers that registered them, which immediately makes

the companies suspicious since they are purport-

edly carrying out commercial trading transactions,

(i.e. the sale o consumer and industrial goods)

with each other. This is covered in more detail on

pages 36 to 42 and on the chart on pa ges 22 and 23.

Global Witness considers that or the inormation in

the documents to have been aked by someone seek-

ing to implicate AUB, the aker would have had to

have gone to some extreme lengths. This is because:

There are complex links between a signicant number

o the companies in these documents: they share direc-

tors, shareholders and company service providers whoset them up. These links exist independently o the

transactions recorded on the transaction documents.

These links could not be created simply by search-

ing on corporate databases or companies that share

the same director, as some o the inormation is not

available in publicly searchable databases and can

only be obtained by purchasing the documents rom

the registry itsel, such as in Belize, in which case the

aker would either need to know what he was look-

ing or, or to have set all the companies up himsel.

Forging either the SWIFT or AUB documents would

thereore require prior knowledge o the links between

these entities, or would need the orger himsel to set

them up in the irst place. This is unlikely as it would

have required our years o planning; some o the compa-

nies were registered as ar back as 2006.

Thereore, Global Witness believes that although these

documents were obtained rom the Kyrgyz authorities,

the details o the companies that did business at AUB

have not been aked. This suggests that urther investi-

gation is required, investigation that we believe is in the

public interest.

What we can say rom our own investigations is that a

set o companies exist, as set out below, which do not

have obvious business purposes and which all have

links to others in the group. Evidence rom several docu-

ments suggests that many o these companies had bank

accounts at AUB. In addition, the SWIFT documents in

particular appear to show that some o these companies

have repeatedly transerred large sums o money to each

other. Repeated transactions between related companies

are an acknowledged red ag or money laundering activ-

ity, as explained in the box overlea. Given their links toAUB, these companies and the correspondent banking

records should be investigated by the relevant authori-

ties to ascertain the acts.



18/80

SuSPiCiOuS SHELLCOmPANiES: A HOST

OF RED FLAGSOur analysis o the shell companies and the SWIFTand AUB documents has highlighted the ollowing indi-

cators which, taken together, suggest to Global Witness

that suspicious activity was taking place:

Virtually a ll o the corporate ofcers o these compa-

nies (directors, shareholders, company secretaries) are

acting as nominees people who are paid to take legal

responsibility or these companies, thus hiding the name

o the real person to whom the company actually belongs,

reerred to as the ultimate benecial owner. This person,the true owner, thus does not necessarily eature on any

public documentation and his or her identity remains hid-

den. This is a widespread and entirely legal practice; or a

company to have a nominee director or shareholder does

not indicate dubious activity in itsel, but when coupled

with the other red ags below it raises serious concerns.

Many o the companies eature company ofcers rom

countries that do not list ownership o companies, such

as Belize, Vanuatu, the Seychelles, the Marshall Islands

and the British Virgin Islands.

The bank transer documents oten log payments

as apparent purchases o sports equipment, clothing

or building materials, sometimes totalling hundreds

o thousands o dollars in separate payments made

over several days (or the transactions are listed as loan

repayments). This is a classic laundering technique since

these are inconspicuous items commonly traded in large

quantities.

Many o these transactions that look like payments

or commercial and industrial goods between compa-

nies trading with each other in the open market are in

act between companies that are related to each otherthrough the company service providers that set them up.

In some cases, the documents show money transerred

rom one company to another, and then back again.

The cumulative size o some o these transers is equiv-

alent to a signicant proportion o the GDP o Kyrgyzstan.

For example, just three companies, which appeared to be

doing no real business in Kyrgyzstan, had US$1.2 billion

move through their AUB accounts in less than two years

more than a quarter o the countrys GDP in the year o

the revolution.74

The majority o the UK and New Zealand companies

mentioned below led no account inormation at all to

their company registries, despite, in the case o three UK

companies (see case study 2), appearing to handle over a

billion dollars o transactions.

The ew remaining companies in the UK, as indicat-

ed below, actually told Companies House that they were

dormant. Two o them (see case studies 1 and 2) appear

to have handled millions o dollars during their period

o dormancy.

The majority o the payments in the bank documents

appear to be transers between shell companies and there

is little record o any o these companies themselves car-

rying out legitimate real business, e.g. manuacturing,

selling, advising.75 According to a source knowledgeable

with the case in Kyrgyzstan, investigations revealed at

least 3,000 shell companies with accounts at AUB.76

Global Witness has evidence that suggests that at least

one o these companies may have been used as a pay-

ment vehicle in a possible tax avoidance scheme. A NewZealand company mentioned below, Lenymar Limited,

appears to have made over 1,300 transactions in just over

a year.77 The majority o them appear to be suspicious

transactions with other shell companies, some o which

eature in this report. However, the SWIFT documents

indicate that some payments were also made to legiti-

mate companies whose businesses encompass a wide

range o products and services.

Global Witness contacted some o these rms. One com-

pany, a Germany cleaning equipment company, said

that a Russian chemical company had purchased clean-

ing materials rom them and paid using unds rom an

account held by Lenymar at AUB. However, another legit-

imate German company that was also paid by Lenymar

told Global Witness that it had no business with this

Russian chemical company, and that its client in this

case was another company based in Russia that had pur-

chased uorescent light tubes.78

I this inormation is accurate, it suggests that a range o

dierent companies were using Lenymar to pay or goods

and services in Europe or transportation to Russia. Why

would Russian companies buying goods rom Germany

use a Kyrgyz bank account in the name o a New Zealandcompany? One possibility might be in order to avoid tax.

In 2006, the Russian Central Bank suggested that certain

AUB transactions concealed payments or grey import

schemes a way or clients in the ormer Soviet Union to

avoid import tax (see page 59).

The act that Lenymar a shell company registered in

New Zealand79 had an account at AUB which was used

by various Russian companies suggests that these pay-

ments may all into this category. It also raises the pos-

sibility that companies such as Lenymar could have

been used or a variety o suspicious deals through AUB,including tax avoidance, and, potentially, because o the

vast amounts o cash owing through them, as launder-

ing vehicles. Obviously, it would require the powers o

competent authorities to investigate this ully.



19/80

In summary, our investigations show that these

companies were oten transacting with a group o

companies not only whose ownership is hidden but

who are related through the use o the same ofcers

or same company services provider, and thus are

likely to have been set up by one individual or group

or a particular purpose.

In an interview with a Kyrgyz news agency, Nadel deend-

ed the act that many o his clients were oshore compa-

nies: Oshore companies arent a carte blanche or steal-

ing. The companies are [used] worldwide [] to minimize

taxation o [these] structures owners. Look at the owner-

ship structure o the ten largest banks in the world: their

principal owners are oshore unds.80

Nadel is not wrong about the extensive use o oshore

companies or tax avoidance. The cross-border tax avoid-

ance strategies o major multinationals are current-

ly receiving growing media and policy attention. Theshell companies in this report do not obviously t into

this category, since they do not appear to be subsidiaries

o major businesses (unless any links to them are excep-

tionally well hidden). They may, as the Lenymar example

above shows, t into the category o smaller import-ex-

port companies apparently using such payment vehicles

to avoid their tax obligations.

The point remains, though, that these companies do

not appear to be carrying out any business in the real

sense o oering a product or service and employing peo-

ple; they are vehicles or moving money. Tax avoidance

is one reason or moving money, and while it may all on

the legal side o the illegal-legal divide, the mechanisms

used to achieve it create pipelines or the movement o

money that is denitely illegal: tax evasion, corruption

and organised crime. I a shell company structure can be

used or technically legal tax avoidance purposes, it can

also be used to move entirely dirty money, as Raymond

Baker so clearly pointed out in his book Capitalisms

Achilles Heel.81

This is why Global Witness believes that the shell com-

pany structures that eature in this report are at the very

least suspicious and support the allegations o money

laundering at AUB. While no conclusions can be drawn

as the origins o the money are unknown, t hey are cer-

tainly worthy o urt her investigation. Unless otherwiseexplained, the red lags above suggest that these com-

panies were mere shells and may have been created to

hide other, perhaps illegal, activity. Nadels lawyer

explained to us that, given Nadelss supervisory role as the

chairman o AUB, he is unable to conrm or deny wheth-

er the companies mentioned in this report had accounts

at AUB.82

Vanuatu: a paradise especially or those looking to set up a company anonymously.Photo: Atlantide Phototravel/Corbis


20/80

ii. How the companies are linked to each other

This section sets out the evidence or one o the

main red lags indicating suspicious activity by

these companies: the way they are closely related

through the service providers that set them up. Two

case studies involving UK-registered companies pro-

vide compelling examples o these connections, and

demonstrate classic techniques o achieving hid-

den company ownership. They also show how the

nominee director industry makes a mockery o the

UKs Companies Act. The legislation requires direc-

tors to take responsibility or iling accurate com-

pany accounts, yet nominees oten know next to

nothing about the activities o the companies they

represent.

The AUB document lists the supposed transactions

o seven companies. Five o them were registered in

Kyrgyzstan: Tez Mobile, CTC Distributors, FurniservGroup, Eurohouse and Ganytime Goods.83 Under

President Bakiyev, it became very di icult to discover

even legal shareholding inormation (which some coun-

tries list), let alone the real, benecial, owners o Kyrgyz-

registered companies, and so proving links between these

companies is impossible without urther inormation.

The sixth company, Brasort Limited is registered in

Belize, according to the AUB document. Belize also

does not list owner inormation. This company was

registered on 9 August 2007, according to Belize registry

documents.84

The nal company, Sorento Resources Ltd, is registered

in the UK (see case study 1 below). According to docu-

ments rom the Kyrgyz authorities seen by Global Witness

in August 2010, all seven are suspected o being involved

in suspicious nancial activity, although the authorities

have not made public statements about them. Between

them they supposedly sold shoes and clothing, metal

products, cars and car parts, and nancial and consult-

ing services.85

The AUB document lists the transactions o these seven

companies, which thereore gives us the names o dozens

o other companies that these seven supposedly did busi-

ness with. Global Witness has searched through various

countries corporate registries to see i any o t he names

match. O these dozens o other companies:

At least ten match the names o companies registered

in the UK. Global Witness is concentrating on ive o

these which are lin ked to ot her companies mentioned

in the AUB document through directorships, date or

place o registration or through the company and indi-

viduals that registered them. (The remaining ive also

appear to be shell companies but do not have links to

other companies that can be drawn through publicly


Some o the UK companies were registered at mail-orwarding ofces, such as this one in London.Photo: Global Witness


21/80


available documents.) The ive we concentrate on are:

Delanco Limited, Malvin Commodities Ltd, Sois Untek

LLP, Sorento Resources Ltd and Velion Limited. O these, at

least the last three appear to have had accounts at AUB.86

Four companies appear to be registered in New Zealand

(Cratur Viss Limited, Economic Group Limited, Lenymar

Limited, Magali Limited) and one in Bulgaria (Rideks

Consult).87 Again, these companies can be linked to the

same company service providers that registered or admin-

istered other companies mentioned in this report.88

Five o them match the names o entities registered

in Belize: Grexton Capital Ltd, Dovepark Limited, Merel

Marketing Ltd, Leader Pro Limited, Aron Capital Ltd.89

All six Belize-registered companies (including Brasort,

whose transactions are listed in the AUB document)

were registered between June 2006 and October 2008

and appear to be linked to each other in two groups: all

six share just two company service providers and tworegistered addresses: 1 Mapp Street and Suite 102, Blake

Building, Belize.90 This second address orms a link to

two UK companies, one mentioned by the Kyrgyz author-

ities in a document seen by Global Witness and one on

the AUB document.91 Suite 102, Blake Building is also

the registered address o a shell company involved in

another controversy in which it is alleged Maxim Bakiyev

and his associates took over Kyrgyzstans largest mobile

phone service provider (see page 56).

The Kyrgyz authorities include the ollowing companies

that held accounts at AUB as part o their investigation

into suspicious nancial activity:

A urther eleven companies registered in the UK which

appear to have transerred money out o Kyrgyzstan

as part o the alleged scheme at AUB: Aqvenor Ltd,*

Avatroniks LLP, Demetra Consulting Ltd, Mastequest

LLP, Mediton Limited, Nedox Limited, Novelta Limited,*

Perect Partner Ltd, Taleord Limited, Velcona Limited*

and Vestengold LLP*.

Another our New Zealand-registered companies:

Jorgentur Limited, Lenymar Limited,* Piar Active

Limited,* and Merbayer & Co Limited.*92

The asterisked companies also eature on the SWIFT

transer documents. The others are not mentioned in

the SWIFT or AUB documents, and we are there-

ore relying on the Kyrgyz authorities investigationsthat they may be involved in suspicious transactions.

However, Global Witness has ound links between all o

these companies and others mentioned on the transac-

tion documents independently rom the Kyrgyz author-

ities or the SWIFT and AUB documents. This list is

not even exhaustive: the SWIFT documents highlight

many more companies that link to these entities. Global

Witness has concentrated on the ones that appear to be

signicant in terms o money transerred.

The Blake Building, Belize City, Belize where some o the companies with suspicious transactions were registered.Photo: Global Witness


22/80

registered onthe same date



THE COMPANYSERVICE PROVIDERSSEE PAGE 34

Elisana Labonte Joahna AlcindorCinthia Alcindor

Taleford Ltd(UK)

Velion Ltd(UK)

Novelta Ltd(UK)

Mediton Ltd(UK)

Nedox Ltd(UK)

Velcona Ltd(UK)

Dovepark Ltd(Belize)

UnitedServices Ltd

(Belize)

Harris Overseas Ltd &Sky Management Company Ltd

(Vanatu)

Eriksonnel LLP(UK)

Leader Pro Ltd(Belize)

ParkvaleIndustries LLP

(UK)

Kintex Ltd(NZ)

Nastek Ltd(NZ)

Magali Ltd(NZ)

EconomicGroup Ltd

(NZ)

Avatroniks LLP(UK)

VestengoldLLP (UK)

MastequestLLP (UK)

Sofis UntekLLP (UK)

MalvinCommodities

Ltd (UK)

Ian Taylor

103 Sham Peng Tong Plaza(Seychelles)

Suite 102, Blake Building(Belize)

Apollo

International(Seychelles)

Chaplin, Bnddicte & Co

(UK)

GT Group Ltd(Vanuatu)

registered NZ companies (including Kintex,Nastek and Magali) for Midland until October 2009

registered atsame address

registeredon same date

director andshareholder

employeeemployeeemployee

initialdirector

initialdirector

initialdirector

initialdirector

secretary

initialdirector

initial directorwas employee of

involved inregistration of

worked for

members of members of members of

members of

members of

registered address was care of GT Group

shareholders addresswas care of GT Group




registeredaddress

registeredaddress

registeredaddress

registeredaddress

has two membersregistered at

provided address forshareholders meeting

provided address forshareholders meeting

possibly works together,Seychelles offices situated

next door to

has a company secretary whoseaddress is

head officelocated at


CHART SHOWING THE LINKS BETWEEN THE COMPANIES WITH SUSPICIOUSTRANSACTIONS, THE MEGACOM COMPANIES (SEE PAGE 56)AND THE SERVICE PROVIDERS INVOLVED IN THEIR REGISTRATION

In short, by analysing registration

details Global Witness can nd links

between more than twenty companies

in the UK, New Zealand, Belize and

Bulgaria, companies that at rst glance

do not appear linked. All o t hem were

registered in the same relatively short

period o time, the majority rom 2006

to 2009. This is an extraordinary situ-

ation: many o these companies were

supposedly carrying out commercial

transactions such as the purchase o

consumer goods, yet Global Witness

has not been able to nd any ev idence

that they were engaged in any mean-

ingul real business. Moreover, they

were linked to each other. The ollow-

ing two case studies serve as a more

detailed illustration; both show the

extent to which the UK is acilitating

such suspicious behaviour.


23/80

share same registeredoffice and registration

agent

share same registeredoffice and registration

agent

share same registeredoffice and Belize

registration agent

share sameregistered address

Izeth Tapia

SouthfieldManagement

Ltd (Belize)

MegaCom

Vestatel UnitedLtd (NZ)

MerelMarketing Ltd

(Belize)

Brasfort Ltd(Belize)

GrextonCapital Ltd

(Belize)

AronCaptial Ltd

(Belize)

Perfect PartnerLtd (UK)

Delanco Ltd(UK)

DemetraConsulting Ltd

(UK)

Mita Consulting(BVI)

SorentoResources Ltd

(UK)

Ridex Consult(Bulgaria)

Aqvenor Ltd(UK)

Lenymar Ltd(UK)

Lenymar Ltd(NZ)

Merbayer & CoLtd (NZ)

Craftur VissLtd (NZ)

Jorgentur Ltd(NZ)

Mario Castillo

Office 401, CenturyTower, Panama

The Company Net(NZ)

Midland Group

(Cyprus, Russia, Panama)

Piar Active Ltd(NZ)

Volnegar Ltd(NZ)

registeredon same date



director and

shareholder

director and

shareholder

director and

shareholder

director and

shareholder

director and

shareholder

director and

shareholder


used asnomineedirector

has used thisaddress in

correspondance

used as his address whenregistering companies

directordirectordirectordirector

employee

shareholder shareholder shareholder shareholder

indirectshareholder

involved intakeover

according toKyrgyz

authorities

indirectshareholder


registered onsame date



similarname

registeredaddress


involved inregistration of

involved inregistration

grave secrecy offshore money-laundering

Documents