EY auditors did not raise 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 largest corporate collapses in Swiss history.
Zeromax, a conglomerate based in the Swiss canton of Zug, had a business empire in Uzbekistan with interests ranging from textile processing to natural gas extraction, making it the largest employer in the Asian country, representing up to the 10 percent of GDP.
It collapsed in 2010 amid a political power struggle in Tashkent, leaving debts, recently discovered, of more than 5.6 billion Swiss francs ($ 6.1 billion). This makes it the second largest bankruptcy in Swiss history, after Swissair in 2001. At least 2.5 billion Swiss francs are still missing from its assets, according to creditors.
Thanks to Switzerland’s notoriously opaque legal system and corporate disclosure regime, the details of the group’s complex structure and labyrinthine network of offshore holding companies are only now coming to light as frustrated creditors push to recover assets. lost.
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 particular questions about the work of EY’s Swiss association, which gave Zeromax a clean bill of finances. health for 2005, 2006 and 2007.
The company continued to serve as an auditor for Zeromax for a further three years until the company collapsed, but did not publish any 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 tranche of Zeromax’s outstanding debt from the bankruptcy estate in 2019, lawyers familiar with the FT told the FT. the case. Lion Point declined to comment.
Meanwhile, to hundreds of European creditors, including many small companies in Germany and central Europe, Zeromax still owes billions in total.
EY declined to answer detailed questions from the FT about its role in auditing Zeromax’s accounts.
The firm said: “The decisions of the court in Uzbekistan in 2010 caused a de facto expropriation of Zeromax’s assets and its bankruptcy. This matter is subject to ongoing litigation and EY Switzerland will vigorously defend its position against vexatious claims. We cannot comment further. “
The jewels in the safe
At one point, Zeromax was 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 redirected to Switzerland in 2005, with the stated purpose of channeling investment into a variety of Uzbek industrial sectors.
Investors benefited from the company’s Swiss domicile and the fact that it was audited by one of the largest accounting firms in the world.
However, the accounts show that in the four years before 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 at the Christian Dior store in Geneva alone. Over the next two years, she spent another $ 25 million on jewelry, including $ 6 million at British jeweler Graff Diamonds.
Karimova used at least some of the acquired jewelry. In 2016, the Swiss Federal Police obtained a court order to search safes rented by them at Lombard Odier in Geneva. Inside they found luxury jewelry, including a Boucheron diamond ring valued at $ 2.5 million, which had been paid for by Zeromax. A Geneva jewelry owner told police, according to police documents seen by the Financial Times, that Karimova had personally purchased the jewelry and transferred the money to the company from a bank account controlled by Zeromax.
Irregular offshore transfers
EY also didn’t sound the alarm when money was transferred to opaque offshore companies, sometimes under seemingly superficial business pretexts, such as generic “consulting 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 that ultimately went to an entity allegedly involved in criminal activity. Between mid-2006 and 2007, Zeromax transferred $ 180 million to a wholly owned subsidiary, Galat Enterprises, based in BVI.
Galat, in turn, transferred at least $ 5 million to the Gibraltar-based company Takilant, controlled by Karimova. Takilant was found in trials in US and Swedish criminal cases to have been the central corporate conduit in a massive bribery scheme through which telecommunications companies paid Karimova in exchange for lucrative contracts with the Uzbek government.
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 files.
On at least one occasion, EY was aware of the irregular nature of an offshore Zeromax transfer.
An email sent by a senior EY executive to Zeromax management in 2008 noted the lack of documentation for $ 5.5 million that Zeromax sent to a company called Ystral. The email highlighted the need for a “business reason” for the transfer, to satisfy the Swiss tax authorities.
“We are aware that some of our questions may touch on ‘sensitive issues’. In case you wish to discuss the above-mentioned points with us (in person or by phone), please let us know and we will arrange a meeting / call, ”wrote the EY executive.
Zeromax management responded that the business reason was “self-explanatory.”
Financing for football
In cases where EY questioned other irregular transactions and, as a result, reversed them, they resulted in broader questions about the company’s operations or the reliability of its executives.
EY’s discovery that in 2007 the CEO’s wife had spent $ 250,000 on Montreux’s ultra-exclusive sanitarium, Clinique La Prairie, was not the subject of any further investigation, after the CEO promised to reimburse Zeromax. “We are not trying to hide anything, maybe just [sic] it was not done correctly, ”he wrote to EY.
In 2008, a year in which EY did not issue an audit opinion on Zeromax but remained its auditor, financial irregularities increased.
The company spent $ 29 million on a residential penthouse in Hong Kong, for example, that it claimed was for use as office space. Four months later, he sold the apartment for $ 14 million to Karimova’s then-boyfriend, Rustam Madumarov.
He also spent $ 27 million on soccer in 2008 and 2009, paying to hire some of the biggest names in the sport to work for the Uzbek club, FK Bunyodkor. This included a $ 15 million, 18-month contract with Luiz Felipe Scolari that made him the highest paid soccer coach in the world. Zeromax also paid $ 12 million to sign Brazilian player Rivaldo.
Since its collapse, creditors have faced an uphill battle to recover assets and understand the structure of Zeromax. Karimova’s difficult financial and political situation has proven to be a major impediment.
Karimova’s Geneva lawyer, Grégoire Mangeat, told the FT that his client “has always steadfastly denied any involvement in the Zeromax company,” noting that Swiss prosecutors rejected a case in 2017 that sought to connect her with him.
At least one US official has taken a different view. According to correspondence that was made public as part of the WikiLeaks hoard, Karimova was regarded by state department diplomats as a “robber baron.” A January 2010 cable from Richard Norland, the US ambassador to Tashkent, sent to Washington a few months before the collapse of Zeromax, described the company as Karimova’s “personal entity.”
“The message of the embassy to those who propose to enter into commercial agreements with Zeromax or its affiliates,” he wrote, “. . . is conducting due diligence. ”