BVI companies allegedly targeted by Russian oligarch

Proponents of offshore finance often argue that jurisdictions like Cayman and the British Virgin Islands help people from corrupt countries protect their wealth against theft and other forms of unlawful confiscation.

A recent case coming out of the BVI may be a textbook example for this argument.

The case involves the territory’s government attempting to transfer financial records of two BVI-registered companies to Russia in response to a law enforcement request from the Investigative Committee of the Russian Federation – the country’s main federal investigative authority.

In May 2016, the companies – Magnum Investment Trading Corporation and Niteroi Limited – sued government to prevent the records transfer, claiming that they were being targeted by a Russian oligarch with ties to the Kremlin in a “corporate raiding” attempt. Corporate raiding entails a raider obtaining a minority shareholding in the victim company and using abusive legal proceedings to devalue the company and put pressure on its shareholders and officers in order to obtain their shares.

In July, the BVI High Court quashed government’s decision to obtain the documents through a search warrant, as well as its decision to transfer them to Russia. While the court did not explicitly find that the companies were indeed being targeted in a corporate raiding scheme, it did state that the BVI attorney general and the magistrate who granted a search warrant should have more carefully considered Russia’s request.

Court documents outline the corporate raiding allegations and other details of the case.

According to Russian officials, the records of Magnum and Niteroi could contain information about the activities of three individuals under investigation for allegedly stealing $3 billion from the Russian chemical company TogliattiAzot (ToAZ) between January 2008 and December 2011.

Those three individuals allegedly transferred ToAZ shares to Magnum and Niteroi in December 2012, which makes the records of those companies “very important to the case,” Russian authorities claimed in their request to the BVI.

After the Investigative Committee of the Russian Federation made its request to the BVI, a magistrate there granted a search warrant to obtain the records. But before the records were transferred to Russia, Magnum and Niteroi filed a lawsuit seeking a court order prohibiting the BVI government from transferring the records, as well as an order to have the records returned.

The companies’ lawsuit and subsequent arguments in court told a far different story than what was claimed by the Russian law enforcement authorities.

According to the companies, corrupt Russian officials have targeted ToAZ with bogus legal proceedings in other courts around the world for years, all in an attempted hostile takeover of the company.

“They claim that a Russian oligarch, Mr. [Dimitri] Mazepin currently owns a minority stake in ToAZ through OJSC United Chemical Company Uralchem (“Uralchem”), a commercial rival to ToAZ,” states the High Court judgment on the matter. “The Claimants state that Mr. Mazepin is the controller and guiding force behind the most recent unlawful acts being brought against the directors and shareholders to ToAZ as part of his attempted ‘raid’.”

Magnum and Niteroi claimed that ToAZ has been subject to corporate raiding attempts since 2005, when “unjustified criminal, civil and tax cases” were brought against the company’s chairman, Vladimir Makhlai.

In 2008, Russian authorities attempted to extradite Makhlai from the United Kingdom to face these cases, but an English judge said the evidence supporting the criminal allegations were “naïve” and politically motivated. The English judge found further that given the weaknesses in Russia’s criminal justice system, there was “no sense that the courts will protect ToAZ from an unscrupulous raider such as Mazepin.”

After this iteration of the corporate raiding attempt failed, Mazepin allegedly obtained a minority stake in ToAZ through its rival company, Uralchem.

“Mr. Mazepin (through Uralchem) has orchestrated another attempted raid (widely reported in the press) employing substantially the same tactics, instigating a further series of unjustified criminal and regulatory proceedings against ToAZ and its officers and directors,” the High Court judgment states. “Those acts are designed to place pressure on ToAZ, and its shareholders and trading partners, in order to reduce the value of ToAZ, and encourage those holding shares in ToAZ to sell those shares, quickly, and at a low price, or alternatively to procure the forced sale of those shares, in satisfaction of lawfully procured judgments.”

Magnum and Niteroi told the court that they raised these corporate raiding concerns with the BVI Attorney General Baba Aziz, but that Aziz did not investigate the concerns, and instead proceeded to process Russia’s request for the records.

Attorneys for the BVI government, for their part, argued that making the attorney general investigate the companies’ concerns would be “impracticable” considering how many international law enforcement requests the territory receives each year, and how many companies are incorporated there. Government also argued that the law doesn’t oblige them to take into account the corporate raiding concerns.

The proper forum for Magnum and Niteroi to file their challenge in is the Russian courts, the BVI government argued.

“Counsel for the [BVI government] has also argued that it is not for the Attorney General to determine whether or not the letters of request are lawful,” the High Court judgement states. “He contends that once a request meets all of the requirements sat out in the relevant convention, (and he submits that the Request in the case at bar has done so) then there is no basis for delaying to provide the cooperation which the requesting state is entitled to receive and the Territory is obliged to provide.”

The High Court justice said she found this argument persuasive, but that government must not become “nothing more than a rubber stamp” in processing foreign requests for records. In this case, the attorney general acted as that rubber stamp, the court found.

“The facts of this case reveal that not only did the Attorney General ignore the Claimants’ representations, he also failed to investigate fully the allegations and evidence produced by the Claimants which may present compelling reasons why a request should not be processed, and in doing so he failed to take into account relevant considerations,” the judgement stated.

The High Court did not rule that Russia made the request as part of a corporate raiding ploy. The court did, however, remit the matter to the attorney general, and directed him to reconsider and reach a decision in accordance with the judgment.

The court also made an order prohibiting the records from being transferred to Russia pending the reconsideration of the request.

Paul Dennis QC, an attorney for Magnum and Niteroi, hailed the case as a “landmark win for BVI companies’ right to privacy and confidentiality of information.”

“The case is a landmark victory for the fundamental right of a citizen – individual or corporate – to due process, and specifically, to the right to privacy and confidentiality of information,” stated a press release from Dennis’ office.​​