How seigniorage can be siphoned off a public bank: BTA Bank

The extraordinary cases of the Hajiyev and Ablyazov families shine a light on the massive scale of money-laundering in the UK.

October 12, 2018

https://euanticorruption.com/2018/10/12/the-extraordinary-cases-of-the-hajiyev-and-ablyazov-families-shine-a-light-on-the-massive-scale-of-money-laundering-in-the-uk/

Jahangir Hajiyev

Jahangir Hajiyev worked for Azerbaijan’s largest bank between 1993 and 2015, rising to become its chairman. It was a nationalised company, and his official salary was never high – in 2008 he received £54,000.
Surprising then, that he managed to send his wife in London at least £20,000 every single month, at the same time as amassing a UK property portfolio worth £22 million. Now serving time in an Azerbaijan prison, Hajiyev is still listed on the UK’s official register, Companies House, as the controlling interest in a company that in 2012 and 2013 secured loans of more than £42 million to purchase a private jet.
You might think it would be hard to imagine a better candidate for the UK’s first ever Unexplained Wealth Order than Hajiyev’s London-based wife, Zamira, officially named in the courts this week.

Mukhtar Ablyazov arrested in France

However, the case is hardly unique. Take former Kazakh Minister for Energy, Industry, and Trade, Mukhtar Ablyazov. He is accused of embezzling £7.25 billion from the bank he once chaired, making it the largest case of financial fraud in history. Money was funnelled from the BTA Bank in Kazakhstan through an enormous, worldwide network of shell companies under Ablyazov’s ownership, more than a thousand of which have been identified to date.
In the High Court of Justice in London, there are now $6 billion (£4.6 billion) in outstanding judgments against the oligarch – again, the biggest fraud case ever in the UK. In February 2012, after “failing to disclose assets, lying in cross-examination and dealing with assets in breach of the Freezing Order,” Ablyazov fled to France to avoid three consecutive 22-month prison sentences.
Also evading punishment is Ablyazov’s associate and son-in-law, Ilyas Khrapunov. He now resides in Switzerland, and claims he is in danger of extradition to Kazakhstan or Russia if he returns to the UK – a claim with “no merit whatsoever,” according to the High Court. However, with a fine of about $500 million waiting for him – imposed by the Court in late August – there is little to attract him to the UK. Among other crimes, Khrapunov is thought to have laundered some of the stolen funds through Donald Trump’s property empire.

Ilyas Khrapunov.jpg

Victims of what the presiding judge, Mr Justice Teare, has called “fraud on an epic scale” include Kazakh home buyers whose properties were never built, and pensioners who saw their retirement funds disappear. Among various British organisations which were hit was RBS. It sustained losses of over £1.3 billion, helping to bring the bank to its knees before its rescue by the British taxpayer.
Although there are still many, many mysteries around the Ablyazov affair, what we do know provides a picture of how the UK has become a safe haven for ill-gotten gains of oligarchs and kleptocrats.

Blind faith and golden visas

Madiyar Ablyazov

Mukhtar Ablyazov sent his son, Madiyar, to London when he was ten. The young boy lived with his aunt and uncle in one of his father’s sumptuous London properties – Carlton House on The Bishops Avenue in Highgate – a street often called Billionaire’s Row. Here young Madiyar lived a life of luxury, apparently often availing himself of the indoor leisure complex, complete with swimming pool and a 10-person Turkish bath.
By 2008 however, the vast hole in BTA Bank’s finances had been discovered, and the Kazakh government’s investigations were all pointing to Ablyazov senior. So the family looked for ways to keep Madiyar in the UK after his student visa expired, and decided the best option was the Tier 1 Investor scheme. At that time, the visa granted individuals residency as a path towards citizenship if they made an investment of £1 million in the country. The sum, along with any interest accrued, would be returned to the applicant at the end of the investment period.
Between 2008 and 2015, the Home Office issued Tier 1 Investor visas without any due diligence checks – they assumed these would be carried out by the bank when the applicant opened an account. However, the banks took the fact that the visa had been approved as demonstrating that due diligence had already been carried out by the Home Office. Those seven years came to be known as the “blind faith” period and resulted in three thousand “golden visas” being issued.
The idea for the Golden Visa was born on the tiny Caribbean islands of St Kitts and Nevis in 1984. In return for a $250,000 investment in the Sugar Industry Diversity Fund, you could apply for citizenship.
However, in Europe the Golden Visa really took flight following the financial crash of 2008, particularly in countries most affected by the collapse who urgently needed to generate revenue and were quite prepared to sell passports to achieve that aim.
Cyprus requires a 2m euro investment in property or 2.5m euros in government bonds to be eligible for citizenship. Apart from the money, the only requirement is to visit the island once every seven years.
The cost of Irish residency is half that of Cyprus, 1m euros. In Portugal the Residence Permit for Activity Scheme requires a 500,000-euro investment in Portuguese property, 1m in the wider economy or setting up a business that employs 10 or more people.
Since its introduction in 2012, more than 6,400 people who have invested 3.9 billion in the Portuguese economy have been granted a residency permit and the freedom to travel throughout the European Union. Eighty per cent were from China. Only 11 of those 6,400 applicants opened a business.
Nearly all the money went into property in Lisbon and Oporto. As Luis Lima, the general secretary of Portugal’s largest estate agency association, APEMIP, told the BBC: “Without the Golden Visas, the construction industry in Portugal would have collapsed.’
Documents released in March showed that Cyprus has earned at least 4.8 bn euros from its visa scheme which has granted citizenship to 1,685 foreign investors, mainly from Russia, China, Iran and Saudi Arabia.
One of those was the Russian aluminium billionaire, Oleg Deripaska, who has been accused of acting as the link man between Vladimir Putin and Donald Trump’s campaign manager, Paul Manafort, during the US Presidential elections.
Malta’s Golden Visa programme which has raised 850m euros in four years, was being investigated by the journalist, Daphne Caruana Galizia when she was assassinated by a car bomb in the north of the island.
Keith Schembri, chief of staff to the prime minister, Joseph Muscat, was forced to issue a denial he had been involved in the corrupt issuing of Maltese passports that enable its bearer to travel visa-free to 44 more countries than the holder of a Russian passport.
Back in the UK, after £1.1 million had been deposited into an account in Madiyar Ablayzov’s name at EFG Private Bank in London, the Ablyazov family registered a “memorandum of gift” with the UK Border Agency, stating that his father was the source of the funds. In May 2009, about the same time as Mukhtar absconded from his homeland, Madiyar was awarded a Tier 1 Investor visa with, apparently, no awkward questions asked.
By September 2013, the briefest of Google searches would have revealed Mukhtar Ablyazov as the chief suspect in a massive embezzlement case, and a wanted man in Kazakhstan. However, this didn’t stop Madiyar being granted indefinite leave to remain in the UK that month, even with the government holding the memorandum identifying Mukhtar as the source of the £1 million.
“It beggars’ belief that when the Home Office granted Ablyazov his Tier 1 visa in 2009 and then indefinite leave to remain in 2013, they did not know about his father and the allegations made against him by the bank,” says Naomi Hirst, Senior Campaigner at Global Witness.”

Her Majesty’s Government

Lord Wallace of Saltaire

“We have preferred as a country not to look too closely at where money is coming from” says Lord Wallace of Saltaire, previously a UK government whip as well as House of Lords spokesman for the Foreign Office.
The government did bring in enhanced due diligence checks to the Tier 1 Investor scheme in 2015, and the minimum investment has been doubled – although of course £2 million is still scarcely enough to make serious money launderers bat an eyelid.
In the financial year 2015-2016, the number of Tier 1 Investor visas declined sharply, especially for the two largest national groups. The total for Chinese citizens fell from 488 to 35, while the number of Russians dropped from 196 to 34. However, increased due diligence was only partly responsible for the drop, with other factors including Brexit uncertainty and the success of competing citizenship-through-investment schemes operated by other EU members like Portugal, Cyprus and Malta.
Still today, no retrospective due diligence has been carried out on any golden visas. “We’ve long had concerns that applicants who came through in the ‘blind faith’ period were not subject to proper security checks,” says Hirst. “Three thousand people came through, some of them could be citizens by now, [and] we are completely in the dark about the extent to which the UK government actually knew who these people were and where their money was coming from.”
The UK Home Office rejects the phrases “golden visas” and “blind faith period”, saying it believes banks have always undertaken due diligence, meaning retrospective action is superfluous. It also points out that anyone who was granted a “golden visa” would have been required to apply for an extension within three years in order to stay, and these would have been subject to increased due diligence during this procedure. Then there are the changes to the Tier 1 visa, which the Home Office says include new powers to refuse applications and address concerns about the source of funds for the £2 million investment requirement.

Glittering property portfolios

Mukhtar Ablyazov

At one stage, Mukhtar Ablayzov owned three other properties in and around London, apart from the mansion on Billionaire’s Row. There were two apartments in St. John’s Wood, and a 12,000 sq. foot country house in Surrey, Oaklands Park. Bought using a shell company in Seychelles 2006 for £18.15 million, the hundred-acre estate includes four cottages, two log cabins, stables and a full-size polo pitch.
Ablyazov is far from alone in acquiring valuable UK real estate. In 2017, Transparency International calculated the number of properties purchased by individuals with “suspicious wealth” as 40,000, worth a total of £4.2billion, in London alone. And in 2016, the UK Parliament’s Home Affairs Select Committee estimated that £100 billion is being laundered through the UK property market every year.
All this activity is helping to create collateral victims: Londoners. House prices in Kensington, Chelsea and Belgravia have been pushed ever higher, and that filters right down through the market. According to UBS, property in London is more unaffordable for local buyers than any city in the world apart from Hong Kong, leaving most unable to get their feet on the lowest rung of London’s housing ladder.
Meanwhile, huge swathes of the exclusive parts of west London are virtual ghost towns as rich foreign buyers generally look on UK property simply as somewhere to park their cash, ill-gotten or otherwise. A spokesman for the Empty Homes charity calls the “lights out London” phenomenon “a scandal”, and even many estate agents are unhappy. “You sell some of these beautiful properties to these people and then they don’t do anything with them – it’s rather disappointing,” says Patrick Bullick, managing director of premium estate agents Stanley Chelsea and London chairman of the National Association of Estate Agents.
In From Russia with Cash, a documentary from 2015, an upmarket London estate agent reveals: “Eighty percent of my transactions, actually more I’d say now, are to international overseas based buyers, and I’d say fifty to sixty percent of those in various stages of anonymity, whether it be through a company or an offshore trust.”

A lack of political will?
Meanwhile, Mukhtar Ablyazov is a free man. He spent three years in a French jail, but in December 2016 France’s highest administrative court cancelled an order to extradite him to Russia, citing grounds that the request was made for political reasons.
Many are dismayed at what they see as a politically motivated climb-down by the French authorities and point to a low point in Franco-Russian relations at the time – a situation which shows no sign of lifting. The Prime Minister, Manuel Valls, had signed the extradition order in 2014, and in 2015 regional advocate-general, Solange Legras had said hopefully, “When you have so much money, you can buy everything, but you cannot buy the French justice system.”
Madiyar Ablyazov now keeps a low profile, working at a start-up and a financial services firm, both based in Switzerland. Meanwhile, his father, Mukhtar, still maintains that he is being politically persecuted, although a spokesperson for BTA Bank responds cynically: “All the funds poured into [the UK] by so-called “political victims” successfully fuel the UK economy, which I think is very convenient. London has become a centre of attraction for fraudsters.”
Unexplained Wealth Orders
The UK does now have a tool to tackle money laundering by the super-rich: the Unexplained Wealth Order. It gives authorities the right to demand that owners of assets prove the legality of the money used to purchase them. Should they refuse, or if their response is unsatisfactory, those assets can be frozen, seized and forfeited.
On October 10th, ten months after Unexplained Wealth Orders were introduced, the name of the suspect in the first case was released. Zamira Hajiyeva had been given a Home Office Tier 1 Investor visa in 2010 – during the “blind faith” period – after her husband, gave her a “gift” of £1 million to invest in UK government bonds. Jahangir Hajiyev is currently serving a prison sentence for embezzling more than £100 million.
The first Order against Mrs Hajiyeva covers her £11.5 million home in Knightsbridge, bought in 2009 by a company registered in the British Virgin Islands. The property is just a few minutes’ walk from Harrods, the shop where she spent an average of £1.6 million a year between 2006 and 2016.
The second Order covers Mill Ride golf club in Ascot, Berkshire, which investigators believe is owned by Jahangir Hajiyev and his wife. The club was bought in 2013 by a finance company operating from Guernsey – a company set up the same year and dissolved in 2017.
This problem with anonymity is probably the biggest fly in the ointment of the new law. It’s revealing to look at corruption cases involving property which are being investigated by the Metropolitan Police Proceeds of Corruption Unit. Three quarters of these involve anonymous companies and a true beneficial owner who is effectively concealed.

The Future
The Portuguese Golden Visa system has been condemned by MEPs such as Ava Gomes, vice-chairman of the EU’s financial crime committee, as ‘absolutely immoral and perverse. . .I don’t mind granting citizenship but not selling it.’
It is also in trouble. In July there was a record low of 47 applications with some commentators blaming the eight months it sometimes took to process a visa – and more attractive offers from Ireland and Greece.
The steepest decline has come in the country that seemed tailor-made for the oligarchs. Latvia is an hour and a half from Moscow, Russian is widely spoken and if you bought a rural property you needed only 71,150 euros to acquire a five-year residency permit. After an IMF bailout in 2009, the country was desperate for cash and not picky where it came from.
Between 2010 and 2017, more than 98 per cent of Golden Visa issued in Latvia were to applicants from the former Soviet Union or China. In the peak year, 2014, more than 6,000 applications were handled.
Then came Russia’s annexation of Crimea and the Latvian government began to feel uneasy about whom it was letting in from across the border. By last year, applications had been reduced to 10 a month.
Ints Ulmanis, the head of the Latvian Security Police, told a parliamentary committee in December: “Sixty to 70 per cent of all refusals are related to the risk of spying. Look at the source of the applications and how the secret services in those countries work. For us to let people into Latvia and then try to catch them would be absurd.”
Most observers of the UK anti-money laundering scene recount a mixture of institutional failure, a lack of political will, and government attempts to dilute EU anti-tax haven legislation. Yet there is cause for optimism, not least in a long-awaited draft bill finally published this July. If passed, the bill will establish a register revealing those benefitting from the overseas companies that own UK property.
Hames believes, “The bill should eventually leave corrupt individuals one less place to stash their dirty money. Once this consultation concludes we expect the Government to make this legislation an urgent priority.”
That still leaves what many fear is the ticking time-bomb of the “blind faith” period. Hames again: “The three thousand individuals who benefitted from the Tier 1 Investor system between 2008 and 2015 represent ongoing money laundering risks… Retrospective source of wealth checks should be carried out on these individuals to ensure the UK does not continue to harbour those benefitting from corrupt wealth.”
Lord Wallace agrees that retrospective action would be a step forward, but believes it would be “inconvenient” for the powers that be. “One of the things that you rapidly discover when you get into this world is that there a lot of people in London who make very good incomes out of servicing all this offshore business: the estate agents, the accountants and others who service the super-rich who come in this way.”
There is of course a cautious welcome for Unexplained Wealth Orders, with all eyes now on the case of Zamira and Jahangir Hajiyeva. Ablyazov, his family and his associates are less likely to face justice any time soon. But at least they have helped to shine a spotlight onto high-level corruption and money laundering, across the world and in the UK.