Increased Russian activity in the British Virgin Islands

A boom in Russian involvement in the BVI is leading to a flood of work for local litigators. Simon Gray reports

Litigation specialists in the British Virgin Islands (BVI) report that half or more of their work now consists of cases involving international business companies owned by, or investing in, Russian interests. The litigation boom is one factor pushing the BVI government to establish a new commercial court.

For example, a battle for control of MegaFon, Russia's third-largest mobile phone operator, is being fought out in the BVI courts. The legal tussle, which has been underway for more than a year, involves a swathe of the islands' law firms.

On 19 October 2005, IPOC International Growth Fund, an entity based in Bermuda, announced that it had won an injunction from the BVI Court of Appeal preventing Russia's Alfa Group from disposing of a 25.1 per cent stake in MegaFon, over which it claims ownership rights.

IPOC argues that Alfa's purported acquisition in 2003 of CT Mobile, the company that held the 25.1 per cent stake, was invalid because IPOC held a valid option to acquire CT Mobile from its then owner LV Finance. Since then, ownership of the MegaFon shares - which Alfa says are now worth as much as $1.2bn (£670m) - has been fought over in legal forums, including arbitration in Switzerland and a court in the Bahamas, as well as the BVI courts.

However, Alfa retorted that IPOC's announcement was nonsense. In fact, according to CT Mobile chief executive Dmitri Vozianov, the stake in MegaFon has been frozen since court proceedings began in 2003. What the BVI Court of Appeal actually decided, he told Dow Jones Newswires, was that it would not prolong the freeze order beyond 18 November. IPOC, as it acknowledges itself, is now applying to the Privy Council in London to extend the freezing of the stake after 18 November.

The courtroom contest is not only extremely complex, but politically charged. Alfa has alleged, for instance, that Leonid Reiman, Russia's telecommunications minister, continues to stand behind Telekominvest, a company that he helped found in 1994 and which owns 31.3 per cent of MegaFon.

Reiman has also been linked to IPOC, which already owns a further 6.5 per cent of the mobile phone operator. Alfa and LV Finance have sought to have the claim dismissed on the grounds that IPOC is a criminal enterprise and that money which it used to fund the BVI case came from corruption and money laundering. This has prompted investigations into the role played by leading German and Swiss banks, including Commerzbank, in the alleged looting of assets from the Russian state.

It is the stuff of lurid headlines, but increasingly all in a day's work for lawyers in the BVI, where Russian-related cases represent an increasingly large chunk of the litigation workload.

"It's not an exaggeration to say that 70 or 80 per cent of my time, particularly over the past four or five years, has been dealing with these very big former Soviet bloc cases," says Phillip Kite, head of litigation for BVI-based firm Harney Westwood & Riegels. "Going back to the late 1990s, we've had a regular flow of very big Eastern European litigation, primarily concerning natural resources such as oil, aluminium and gas."

Michael Fay, a predecessor of Kite as head of litigation at Harneys and now a partner at Walker Smiths, tells a similar tale. "Between 40 and 50 per cent of my time over the past three years has gone on litigation where there are Russian-related parties," he says.

Both firms have been involved in the IPOC-Alfa litigation, a case that stands out not only for its duration, but for the sheer number of BVI lawyers it has employed. Kite says: "There are 16 defendants in four groups, all of whom have their own lawyer. There are also lots of other interested parties who retained their own lawyers to go down and listen to the court hearings."

The IPOC-Alfa litigation is also notable, Fay says, in that it involves two Russian-related parties, whereas most cases feature joint ventures or investments by Western companies. However, the common threads running through nearly all cases are disputes over the ownership of assets and/or alleged abuse of the rights of minority shareholders.

Kite says: "A fairly typical area of dispute is where joint ventures between local interests and Western investors for some reason break down. A lot of the time, the joint venture vehicles, or the assets held by the joint venture vehicles, or both, are held through BVI companies."

H�l�ne Anne Lewis, a partner with Morgan & Morgan and former head of the BVI Bar Association, notes that the rise in firms' litigation caseloads can be traced back to a surge in the use of BVI international business companies (IBCs) nearly two decades ago. "Many of these companies have now been in existence for as long as 20 years and involve commercial transactions that have become sore issues," she says. "The IBC legislation in the BVI was introduced in 1984, but the big growth in offshore companies started around 1988. There would also have been a surge in incorporations from the former Soviet Union in the mid-1990s."

Fay says that, while Hong Kong is by far the biggest market for BVI offshore companies, Russia remains the pre-eminent source of new litigation business, although "Hong Kongers can be litigious as well".

There are important differences in approach between the two groups, he believes. "Once you start litigating, among the Chinese the question of who wins and who loses is significantly more important than how much you win," Fay says. "This isn't something that's applicable to the Russians. There, litigation is all about the money rather than saving face."

Almost as spectacular as the IPOC-Alfa affair is a case in which Sibir Energy, a UK-based oil firm 51 per cent owned by Russian billionaire Chalva Tchigirinski, is suing another oil company, Sibneft, over the allegedly fraudulent dilution from 50 to 1 per cent of its stake in a joint venture to develop the $3bn (£1.69bn) South Priobskoye oilfield in Siberia.

Sibir scored a highly-publicised coup in July when it obtained a BVI court order requiring Sibneft's then majority shareholder, Chelsea Football Club owner Roman Abramovich, to disclose all his individual assets, valued at more than $1m (£560,000), and ordering Abramovich and Sibneft each to ringfence $1bn (£560m) worth of assets until ownership of the rest of Sibir's former stake was resolved. Abramovich has since agreed to sell his stake in Sibneft to state-owned energy company Gazprom for as much as $14bn (£7.86bn).

The case bears a striking similarity to a lawsuit brought by Irish mining firm Celtic Resources, which pledged 30 per cent of its 50 per cent stake in a gold and silver mine to a Russian bank as security for a loan. However, when Celtic repaid the loan in 2002, it discovered that the stake had been transferred via a Cayman Islands company to one in the BVI. Last month it relaunched legal action in the BVI against the new owner of the shares.

Earlier this year, UK-based Russian businessman Oleg Deripaska, chairman of Russian Aluminum, settled a seven-year dispute over the alleged wrongful termination of a joint venture to trade metals in London and New York. Deripaska resolved the dispute after Trans-World Metals, his partner in the venture, obtained a ruling that the case would be heard in the BVI rather than in Russia.

According to Fay, this is par for the course in the BVI, where he says the decisions that are actually handed down in Russian-related actions are overwhelmingly about jurisdiction. "Typically, in a dispute between Russian parties and outside investors, the Russians are anxious to get the case back into the Russian courts, while the outside investors want to keep it out," he says. "Substantial issues don't go to a hearing - we haven't had a trial here on any of these Russian cases. They're either settled, or the High Court decides to stay proceedings here while the litigation proceeds elsewhere."

Although cases originate from disputes in the former Soviet Union, typically BVI firms are instructed out of London, according to James Hilton, a litigator with Appleby Spurling Hunter. "Most cases are run out of London offices, even if the original instruction is in Moscow," explains Hilton. "Just as with any case in a foreign jurisdiction, we tend to be relied upon quite significantly because we have the local knowledge. But in the same way as any magic circle firm in London would go to the commercial bar and ask for a pretty hefty silk to present the case, we avail ourselves of the same luxury here. It enables us really to punch above our weight."

Kite says there are around 25 full-time litigators in firms on the island, plus others at smaller firms who do a mixture of work, including litigation. He argues that the sector has been boosted by the arrival over the past few years of a number of firms with bases in other offshore centres, such as Walkers from the Cayman Islands and Applebys from Bermuda.

Fay notes that incoming firms have often moved into the BVI by acquiring existing law practices, in many cases those with a strong reputation for commercial work. However, he says there has been a number of new additions to the litigation field over the past few years, including Conyers Dill & Pearman, Martin Kenney & Partners, a specialist in fraud and asset recovery which has moved from Dublin to the BVI, and his own firm, Walker Smiths.

Lawyers in the BVI are convinced that the Russian cases have not only helped both local practitioners and judges to develop expertise, but that they have given the islands' reputation a boost as a transparent jurisdiction that is not a black hole into which legal proceedings can disappear without trace.

Mark Fort�, who joined Conyers in June last year as head of litigation for the BVI and Anguilla, says: "We've seen large-scale, multi-party cases with large numbers of lawyers hosted here, despite attempts by one or more parties to remove it to a larger jurisdiction for convenience's sake. This jurisdiction seems to be reacting to the sophistication of the work that's coming here, both in private practice and in the government."

According to Hilton, the BVI compares favourably as a jurisdiction with many other offshore centres. "We've had a succession of extremely able judges who've become very responsive," he says. "The quality of the judiciary has really taken off in the past five years. It's very positive for a jurisdiction to have a reputation for the quality of its justice. The BVI is a transparent jurisdiction when it needs to be."

Fort� argues that this reputation will be enhanced further when, as is increasingly likely, the government establishes a dedicated commercial court for the territory - an initiative that has been under discussion for several years. He says: "We're now at the stage of a consultative process with experts being brought in to assess how the court would be set up."

Simon Gray is a freelance journalist and the former editor of International Money Marketing

http://www.thelawyer.com/cgi-bin/item.cgi?id=117412&d=122&h=24&f=46

aviation maintenance and articles

A new tax haven? KASHMIR

Aatif Ahmed Mehjoor comments on the need to develop Economy of Kashmir and ways to do it

Nature has blessed Kashmir with some of the most beautiful and breathtaking natural beauty in the
world, as well as endowing it with many natural resources such as water power and forests. Kashmir's
people are known throughout South Asia for their entrepreneurial skills, their exquisite
craftsmanship and their brilliant salesmanship. The region has tremendous potential to develop into
a major industrialised economy with living standards comparable to many middle-income countries.

During the time of the Maharajas, Kashmir's economy suffered immensely due to excessive taxation at
the hands of these rulers, who even tried to scupper attempts by local businessmen to develop the
textile trade. After 1947, the government followed the communist and socialist models of
development, that gave more importance to the state sector and discouraged individual initiative. A
massive system of subsidies was put in place for food, essential commodities and for businesses,
making Kashmiris inordinately dependent on state support and suppressing the individualistic trait
in the Kashmiri, thus ensuring that Kashmir would never become economically self-sufficient. This
socialist model also resulted in rampant corruption, as the funds meant for distribution to the
public were consumed by corrupt officials, and when the licence Raj imposed by the government
resulted in only a few cronies and toadies being awarded licences. The socialist model has failed
throughout the world. Experience has shown that the best way to generate wealth, provide employment,
and improve standards of living is to allow people to go into business without let or hindrance,
with the government's role being confined to regulating essential infrastructure such as
transportation and energy and exercising general supervision over the economy. Many of the trappings
of the old socialist system continue to languish in the current economic structure of Kashmir.
Unless these shibboleths are discarded once and for all, there is little hope of Kashmir's economy
experiencing the upturn it direly needs.

Privatisation
Many of the state-owned enterprises in Kashmir are loss-making entities that rely on heavy subsidies
from the government. These businesses are also grossly inefficient, relying on outdated production
techniques and management policies, and often awash with corruption. Although it is true that they
provide employment to many people, such employment would equally be provided by efficient private
enterprises. We should, therefore, privatise state-owned enterprises like the JK Road Transport
Corporation, JK Cements, the Government Silk Factory, and many other industrial units that were
begun under the Soviet communist model. These businesses should be auctioned off as soon as possible
with adequate measures being taken to rehabilitate any laid-off workers. There are also many
co-operatives that are operated in Kashmir under government patronage and support. Subsidies to
these units should be withdrawn.

Bureaucratic Inefficiency
One of the major problems facing Kashmir today is the existence of an excessively oversized army of
bureaucrats. Most of these officials are an unnecessary burden on society. The bureaucratic system
of administration in Kashmir has changed little since the days of the Maharajas. The Deputy
Commissioner and his hangers-on have the same powers and duties that they had during the colonial
era. New bureaucratic posts have been created that serve no purpose. These surplus civil servants
should be laid off and expected to find jobs in the private sector. We should also privatise the
provision of many services that are currently being provided by government employees. For example,
engineering services are currently supplied by engineers in the state's employ. Many of these are
notoriously corrupt and widely known to practise all sorts of scams. We'll be better off buying
engineering services direct from private engineering firms, including foreign firms. The local
state-employed engineers will be forced to join up and start their own firms, offering their
services for a market price just like any modern consultancy business, with all the efficiency and
modernisation it brings. The Zaenakoot' incident in which two children were electrocuted by falling
overhead cables shows how low our engineering standards have fallen due to lack of competition.

Banking and Finance
The Indian banking scene is changing fast with the permission of direct investment by foreign banks.
HSBC and other Western banks are investing in India and offering excellent products at fair prices,
thereby impelling India's native banks to follow suit. In Kashmir, the Jammu and Kashmir Bank has a
kind of monopoly on banking services, although its dynamic leadership has allowed it to invest a lot
of money into improving its services and image. Foreign banks should be encouraged to invest in
Kashmir in both commercial and retail banking services. Apart from banks, other financial
institutions can also be encouraged to invest, such as insurance and investment firms. These will
not only generate employment for Kashmir's youth, but also improve the quality of banking and
insurance services for the general public. With greater fiscal autonomy, we'll be able to offer tax
incentives for wealthy foreigners who wish to deposit large sums of money in offshore accounts. An
offshore financial industry flourishes in countries like Barbados, Aruba, Cayman Islands and other
Caribbean islands, where the government has enacted special tax laws designed to attract foreign
private funds, and also special trust laws that make these regions centres for offshore trust
companies. The funds that will flow into our state will be more than sufficient to supply the credit
that Kashmir's entrepreneurs will need.

Diplomatic Centre and Conference Tourism
There was a time when Srinagar was counted among the most beautiful cities in Asia - the Venice of
the East. The imposing grandeur of the Zabarwan mountains reflected in the vast and still expanse of
the Dal Lake and the fresh air of the Mughal gardens make Srinagar an attractive resort for holding
international political, diplomatic and commercial conferences, and an ideal seat for the
headquarters of international organisations. In Switzerland, Geneva, with its beautiful lake, has
become the centre of many international organisations. Some people are already talking of housing
the SAARC Secretariat in Srinagar. We should offer special incentives in order to make Srinagar
attractive for international organisations, such as offering land at discounted prices or rents.
These organisations will generate employment for our skilled graduates and create demand for
ancillary services. However, Srinagar will only remain attractive as long as it boasts the Dal Lake.
We must do everything we can to save the Lake and reclaim the areas lost to encroachment. Otherwise,
no one will be interested in setting up office next to a stinking swamp.

Medicinal Plants and Oils
Despite holding enormous promise, Kashmir's medicinal plants industry remains a neglected and
underdeveloped sector. This branch of industry requires an intimate knowledge of production methods
and marketing opportunities. Those of us who want to see the medicinal plants potential tapped
should get together and set up an organisation dedicated to promoting awareness about this sector,
disseminating knowledge about individual plants and oils, and about production methods, and helping
members find markets for their products. If it is fully developed and exploited, the medicinal
plants industry will boost Kashmir's exports and reduce the chronic deficits in our balance of
payments. Apart from medicinal plants, there are various other export-oriented sectors that have to
be developed such as automotive leather (i.e. for cars), jewellery, handicrafts, perfumes,
floriculture, fruit processing, dairy processing, culinary preparations, furniture manufacture, and
luxury watches. Our endeavour must be to boost Kashmir's exports so that we don't have to keep
relying on subsidies from outside to pay for our excessive imports.

Entrepreneurship
We will be unable to achieve economic growth unless we change the age-old attitudes about business
and enterprise that have become an ugly feature of our collective consciousness. We should value
enterprise and entrepreneurial risk-taking especially among the youth. Individual initiative should
be encouraged, and dependence on jobs in the state sector or on state subsidies should be
eliminated. Many people in Kashmir still look down upon business and enterprise as vocations, and
some feel inversely snobbish about the wealthy (the "khwajas"). This has to change. We should put
the idea out of our minds that it is better to be a daily-wager for the government than an
independent businessman. Innovation and development can only be possible in an environment in which
everyone works hard and on his or her own initiative, and where the possession of wealth is not
considered a sin. So everyone who desires the prosperity of Kashmir should work to change our
anti-business and anti-enterprise attitudes.

(Author can be mailed at aatifahmad@hotmail.com)

© 1998 - 2005 GreaterKashmir.com GK Communications Pvt. Ltd. All Rights Reserved.
http://www.greaterkashmir.com/full_story.asp?itemid=9241&cat=12

Africans caught in hawala money laundering bust

Kohima, Sept. 11: Drugs, fake passports and records of hawala deals worth millions of dollars popped out of the bags of three Africans arrested in Nagaland on Friday.

The trio — two Nigerians and a Gambian — were stopped in Dimapur for entering the state without the “restricted area permit”, mandatory for foreigners visiting the Northeast. A routine check of their luggage yielded signs of their involvement in bigger offences — two fake passports, a small pouch containing brown sugar and a diary that mentioned three recent hawala transactions amounting to $15 million, $12 million and $11 million.

The accused, who illegally transferred cash from South Africa to India, had wrongly identified themselves as Ngumah, Alegie and Ez Ealoaku at the time of arrest. The police later found out their real names: Chedozie Martins, Sunday Elealaku and Alagie Gawaneh.

The trio told interrogators the kingpin of their hawala network was based in Mumbai, after which the police sent photographs and other details to Interpol and Mumbai police.

“We already have evidence of their involvement with international hawala and drug-trafficking gangs. But we are waiting for more information so that we can build a strong case against them,” an officer said.

Before arriving in Nagaland, Martins had contacted one Bossikato on September 5 through email. Bossikato is suspected to be the group’s conduit in Nagaland.

Lahorijan in Assam’s Karbi Anglong district, bordering Dimapur, is known to be a transit point for drug smugglers and the police suspect the trio of having established contact with the gang that smuggles contraband items from Myanmar to Assam and Nagaland via Manipur.

Crocodile Dundee swept up in tax net

One of Australia's most famous entertainers, Paul Hogan, has been caught up in the Australian Crime Commission's special investigation into the use of offshore tax havens.

Millions of dollars in royalty payments from Hogan's Crocodile Dundee films were channelled from Hollywood's 20th Century Fox, owned by News Corporation, to complex offshore tax structures in Chile and the Netherlands Antilles - a Caribbean tax haven.

The Herald understands that the Crime Commission wants to question Hogan relating to any knowledge he has of tax avoidance schemes. They are also interested in the former Sydney Harbour Bridge rigger's bank statements, receipts, credit cards, debit cards and computer records.

According to a source close to Hogan, it was more likely that the Crime Commission was examining possible criminal activities of some of Hogan's then tax advisers rather than Hogan himself.

Speaking on behalf of Hogan, the source stressed that his involvement in tax havens had been organised by his then US lawyers, and that any failure to pay tax was the result of ignorance rather than dishonesty.
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The source said Hogan was "put into" offshore structures by top-line Los Angeles lawyers and advisers in about 1986, and those advisers may not have understood Australia's complex and changing tax laws.

The Crime Commission is interested in the connection between Hogan and brothers Philip and Richard Egglishaw, of the Swiss-based firm of tax haven specialists, Strachans. The Herald has previously revealed that Strachans is the central focus of Australia's biggest tax investigation, Operation Wickenby.

The Crime Commission is examining why a large proportion of Hogan royalties ended up offshore in tax havens administered by Strachans, which recently moved its headquarters from Jersey, in the Channel Islands, to Geneva, Switzerland. Those offshore entities included secret trusts which did not disclose the ultimate controller or beneficiary.

When required, funds were drawn down by Hogan and family members from automatic teller machines in Australia, using credit or debit cards issued by tax haven banks.

The tax haven affairs of Strachans and some of their Australian clients became known to the Crime Commission in November 2003, when agents from the commission entered Philip Egglishaw's hotel suite at Sydney's Sheraton on the Park and seized three key promotional documents featuring the firm's distinctive double "S" logo and pinstripe backdrop.

Documents, seen by the Herald, emphasise secrecy and promote the use of "blind" and "mobile" trusts aimed at minimising tax, or avoiding it altogether. They strongly promote the use of tailored offshore "employment companies" for film stars.

"Our employment companies have proved particularly attractive to entertainers (including actors and pop stars), film directors and producers"," says one Strachans document, Tax Planning and Offshore Administration.

Then, in February last year, Crime Commission agents seized Philip Egglishaw's computer from a Melbourne hotel room and downloaded client lists, documents and hundreds of emails containing intimate financial details of his client's tax affairs.

David Rydon, a Sydney litigation lawyer acting on behalf of Hogan, said he could not confirm or deny the tax investigations because of secrecy laws governing crime commission investigations, "which may or may not apply" to his clients.

"As I emphasised at our meeting, because of the operation of the ACC Act, I could not confirm or deny that any person for whom my firm acts had received any formal notice or otherwise from the ACC or was the subject of any investigation by the ACC," Mr Rydon wrote in a subsequent email.

In 1985 Hogan co-wrote the script for Crocodile Dundee, starring himself, while his business partner John "Strop" Cornell raised $9 million to make the films through their joint production company, Rimfire Films.

The film went on to take $US350 million at the box office and remains the most successful Australian movie of all time.

Hogan and Cornell are thought to have received 20 per cent of the profits from Crocodile Dundee and a larger profit share from the sequel in 1988 - which earned more than $US200 million at the box office. Earnings went 70 per cent to Hogan and 30 per cent to Cornell.

The Australian financial backers for Crocodile Dundee received another 20 per cent of profits, while the Hollywood distributor and exhibitor took the remaining 60 per cent.

The Rimfire Films prospectus, used to raise funds for the first Dundee movie, says companies controlled by Hogan and Cornell were to split profits 50-50 with the film's Australian financial backers, who had invested to qualify for Part 10BA tax concessions.

By July 1988 those investors had received an 860 per cent return on their original $9 million investment, according to a source who distributed the profits. The returns have since expanded to well over 1000 per cent, and the annual royalty cheques did not dip below $1 million until 1999.

Since then, all profits were required to flow to Hogan's family company, PH Enterprises, and Cornell's family company, Cornell Holdings, according to the Rimfire Films prospectus.

Fox was granted a licence from Paramount Pictures to distribute Crocodile Dundee outside the US.

Hogan and Cornell also received acting, script writing and production fees.

The combined earnings of the pair from the Crocodile Dundee films are thought to be about $150 million. The third film, Crocodile Dundee in Los Angeles, was released in 2001 but barely broke even.

The films also earned hundreds of millions of dollars from licensing the rights to television, video, DVD and merchandise.

smh.com.au