Aug 24 2011

Shell company fraud: is the UK Serious Fraud Office doing its job?

Posted by: Nick Shaxson in: Thoughts

(Sorry for the recent lack of posts; I was holiday in the UK.)

Reuters has run another excellent article about shell companies and tax havens, as part of its groundbreaking Shell Games series. It’s an interesting and unusual, if rather involved, tale about how investors got fleeced in a very weird deal involving oil-backed debt issued by the tiny and autonomous Russian republic of Bashkortostan.

The Reuters article is worth reading in full: I will really just highlight this part:

In late 2009, under pressure from investors, the UK’s Financial Services Authority referred the DDCM case to the Serious Fraud Office, which launched a criminal investigation.

Eight months later the office decided there wasn’t enough evidence to prosecute. Minutes from a stakeholder meeting held by Zolfo Cooper in 2010 say the SFO “indicated that they had not received much support from investors” for the probe.

Reuters has found some key parties — including Zolfo Cooper — offered to help but were not contacted by the Serious Fraud Office. Reuters presented the office with its findings and offered to discuss the documents it uncovered, but the SFO has so far not taken up this offer.

The SFO, whose resource budget has been cut by 34 percent since 2008-2009, declined to comment for this story.

Complicating investors’ attempts to investigate DDCM is the company’s domicile in the Cayman Islands. The tax haven is the world’s fifth-largest financial center and hosts almost two-thirds of the world’s hedge funds. But its secrecy laws are tight.”

Interesting. When I wrote Treasure Islands, I heard a similar story from someone else who, it seems,  got a similar-sounding brush-off from the UK crime-fighting authorities – but for reasons of confidentiality I couldn’t (and still can’t) write about it. And I don’t even know how that story ended. Still, all this does seem to fit into a UK pattern of turning a blind eye to murky business, in the hope of attracting as much of it as possible (often via tax havens as conduits).

Now Bashkortostan, and also a big link to oil-backed debt, comes up in my previous book Poisoned Wells when I interview the financier Arkady Gaydamak, who was in the business of helping provide the Angolan government with secretive oil-backed loans that were used (among other things) to buy weapons to fight Jonas Savimbi’s UNITA rebels. As it happens, I was on the ground in the early 1990s as the Reuters correspondent watching those freshly equipped Angolan troops go into battle. I particularly remember one rainy night in early 1994, I think it was, when I asked an Angolan grunt – he looked as if he was not much more than a child – to explain all those strange contraptions on his AK rifle. We chatted about stuff and I remember him telling me how scared he was: that very night they were headed out for an attack a UNITA-occupied town called Ndalatando. Casting aside journalistic impartiality, I wished this kid the best of luck, and a few days later I found out that they captured the town but then came up against a ferocious UNITA tank-led counter-attack, yet held out and kept control of Ndalatando in the end. I will never know if that kid survived the war.

Anyway, sorry, that’s a complete (and slightly self-indulgent) aside.

I am merely wondering whether this very curious, shady oil-backed, Bashkortostan-linked deal was anything to do with the very curious individual Arkady Gaydamak. There may well be no link at all. But even so, given that republic’s tiny size, and the likelihood that anyone who’s anyone in such a small place is likely to be he may well know who was behind it.

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