EY under surveillance after second bankruptcy in Swiss history

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EY auditors did not sound the alarm over multi-million dollar jewelry purchases and approved huge payments to opaque offshore companies in the years leading up to one of the world’s biggest business collapses from Switzerland.

Zeromax, a conglomerate based in the Swiss canton of Zug, had a business empire in Uzbekistan with interests ranging from processing textiles to extracting natural gas, making it the largest employer in the Asian country, representing until to 10% of gross domestic product.

It collapsed in 2010 amid a struggle for political power in Tashkent, leaving debts, it was only recently discovered, of over 5.6 billion Swiss francs ($ 6.1 billion ). This makes it the second largest bankruptcy in Switzerland, after Swissair in 2001. At least 2.5 billion Swiss francs of its assets are still missing, according to creditors.

Due to Switzerland’s notoriously opaque legal system and corporate disclosure regime, details of the group’s complex structure and labyrinthine web of offshore holding companies are only now revealed as frustrated creditors attempt to recover lost assets. .

Dozens of documents seen by the Financial Times, including police reports, corporate bank statements, internal emails and receipts, as well as claims made in ongoing litigation, raise specific questions on the work of EY’s Swiss partnership, which gave Zeromax a healthy financial bill. health for 2005, 2006 and 2007.

The firm continued to be employed as Zeromax’s auditor for another three years until the company collapsed, but did not publish further audit opinions on its annual accounts.

EY Switzerland is now being sued in Zug for $ 1 billion in damages by US hedge fund Lion Point Capital, which acquired a slice of Zeromax’s outstanding debt from the bankruptcy estate in 2019, told the FT lawyers close to the case. Lion Point declined to comment.

Meanwhile, hundreds of European creditors – including many small businesses in Germany and Central Europe – are still owed billions of dollars in total by Zeromax.

EY declined to answer the FT’s detailed questions about its role in auditing Zeromax’s accounts.

The company said: “The court rulings in Uzbekistan in 2010 led to a de facto expropriation of Zeromax’s assets and its bankruptcy. This matter is the subject of an ongoing litigation and EY Switzerland will vigorously defend its position in the face of vexatious claims. We cannot comment further.

Jewelry in the safe

Zeromax was once closely associated with Gulnara Karimova, a daughter of former Uzbek President Islam Karimov. Karimova – a flamboyant socialite once known as the “princess” of Uzbekistan – denies any connection to the company. She has been imprisoned in Tashkent since 2015, after falling out of favor with the new Uzbek regime.

Zeromax was incorporated in Delaware in 1999 and re-domiciled in Switzerland in 2005, with the stated purpose of channeling investment in a range of Uzbek industrial sectors.

Investors took advantage of the company’s Swiss headquarters and the fact that it was audited by one of the world’s largest accounting firms.

Yet accounts show that in the four years leading up to its collapse, many of the funds that passed through the company went into a sprawling network of opaque offshore entities. Many of them funneled money to Uzbekistan, but many did not.

Some transactions seem particularly difficult to explain as business expenses.

In 2006 and 2007, for example, Zeromax spent more than $ 13 million on luxury jewelry, including $ 2 million in the Christian Dior boutique in Geneva alone. Over the next two years, she spent an additional $ 25 million on jewelry, including $ 6 million at British jeweler Graff Diamonds.

Zeromax was once closely associated with Gulnara Karimova © Yves Forestier / Getty Images for Style.Uz Art Week 2013

At least part of the jewelry acquired was used by Karimova. In 2016, the Swiss Federal Police obtained a warrant to search safes rented by them at Lombard Odier in Geneva. Inside, they found luxury jewelry – including a Boucheron diamond ring worth $ 2.5 million – which had been paid for by Zeromax. The owner of a Geneva jewelry store told police, according to police documents seen by the FT, that Karimova personally purchased the jewelry and transferred the money to the company from a bank account controlled by Zeromax .

Money transferred to opaque offshore companies

EY has also not sounded the alarm when money has been transferred to opaque offshore companies, sometimes with seemingly superficial business pretexts, such as generic “advisory services” contracts. Between 2004 and 2007, the company transferred at least $ 288 million to offshore companies.

In at least one case, the transfers involved sending millions which ultimately went to an entity suspected of having been involved in criminal activity. Between mid-2006 and 2007, Zeromax transferred $ 180 million to a wholly owned subsidiary, BVI-based Galat Enterprises.

Galat, in turn, transferred at least $ 5 million to Gibraltar-based company Takilant, controlled by Karimova. Takilant has been recognized in judgments in US and Swedish criminal cases as having been the central intermediary in a massive corruption scheme whereby telecommunications companies paid Karimova in exchange for lucrative Uzbek government contracts.

Zeromax also transferred at least $ 2 million to offshore companies Merkony and Belphil Capital, which between them sent $ 33 million to Takilant, according to Swedish court records.

On at least one occasion, EY was aware of the irregular nature of a Zeromax offshore transfer.

An email sent by a senior EY executive to Zeromax management in 2008 noted the lack of documentation for $ 5.5 million sent from Zeromax to a company called Ystral. The email stressed the need for a “business reason” for the transfer, in order to satisfy the Swiss tax authorities.

“We are aware that some of our questions may touch on ‘sensitive issues’. If you would like to discuss the points listed above with us (personally or by phone), please let us know and we will arrange a meeting / call, ”wrote the EY manager.

Zeromax management responded that the business reason was “explicit”.

Football expenses

In cases where other irregular transactions have been questioned by EY and canceled as a result, they have not given rise to broader questions about the operations of the company or the reliability of its management.

The discovery by EY that in 2007, $ 250,000 had been spent at the ultra-exclusive Montreux Clinique La Prairie sanatorium by the CEO’s wife was not further investigated, after the CEO said promised to reimburse Zeromax. “We’re not trying to hide anything, maybe just [sic] it was not done correctly, ”he wrote to EY.

The Montreux sanatorium Clinique La Prairie

The Montreux sanatorium Clinique La Prairie © Alamy

In 2008, a year when EY did not issue an audit opinion on Zeromax but was still its auditor, financial irregularities escalated.

The company spent $ 29 million on a penthouse residential apartment in Hong Kong, for example, which it said was used as office space. Four months later, he sold the apartment for $ 14 million to Karimova’s boyfriend, Rustam Madumarov.

He also spent $ 27 million on football in 2008 and 2009, paying to hire some of the sport’s best-known names to work for Uzbek club FK Bunyodkor. This included an 18-month, $ 15 million contract with Luiz Felipe Scolari which made him the highest-paid football manager in the world. Zeromax also paid $ 12 million to hire Brazilian player Rivaldo.

Since its collapse, creditors have faced an uphill battle to recover assets and understand the structure of Zeromax. Karimova’s complicated financial and political situation proved to be a major obstacle.

Karimova’s Geneva lawyer, Grégoire Mangeat, told the FT that his client “has always firmly denied any involvement in the Zeromax company”, and stressed that Swiss prosecutors had rejected in 2017 a case which sought to link it to that -this.

At least one American official has taken a different point of view. According to correspondence made public as part of the WikiLeaks treasury, State Department diplomats viewed Karimova as a “thief baron.” A January 2010 cable from Richard Norland, the US ambassador to Tashkent, sent to Washington just months before the Zeromax collapse, described the company as Karimova’s “personal entity”.

“The embassy’s message to those who propose to enter into trade deals with Zeromax or its subsidiaries,” he wrote, “.. Is to exercise due diligence.

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