ANTI CORRUTION

Top Kazakhstani Official Holds Stake in Secretive Transportation Empire

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For more than a decade, one mys­te­ri­ous trans­porta­tion com­pa­ny has been pri­mar­i­ly respon­si­ble for mov­ing Kazakhstan’s oil and gas by rail. Its rise was made pos­si­ble by a strong and lucra­tive part­ner­ship with the country’s largest oil and gas pro­duc­er. But despite its lead­ing role in the indus­try, it has con­tin­ued to fly under the radar. Even as it made mil­lions of dol­lars in prof­its, the iden­ti­ty of its own­ers has remained hid­den, dis­guised by a grow­ing net­work of off­shore com­pa­nies.

The secre­cy was not for noth­ing. As it turns out, this trans­porta­tion com­pa­ny, TTG Group, had friends – and share­hold­ers – in high places. For most of its his­to­ry, and pos­si­bly still today, one of its own­ers has been Sauat Mynbayev, Kazakhstan’s for­mer oil min­is­ter and now CEO of KazMunayGaz, the state oil and gas com­pa­ny, accord­ing to an inves­ti­ga­tion by the Organized Crime and Corruption Reporting Project (OCCRP).

The rev­e­la­tion comes from the Paradise Papers, an off­shore leak obtained by the German news­pa­per Süddeutsche Zeitung and shared with the International Consortium of Investigative Journalists (ICIJ), which orga­nized the glob­al col­lab­o­ra­tion of which OCCRP is part.

Built on the foun­da­tion of a for­mer state-owned enter­prise, TTG Group owns Kazakhstan’s largest pri­vate fleet of oil and gas rail cars, main­te­nance facil­i­ties, and a rail depot that ser­vices the country’s largest oil field. Its oper­a­tions are con­ve­nient­ly based in west­ern Kazakhstan, where most of the oil and gas indus­try is locat­ed.

TTG Group web site

And the group’s suc­cess large­ly depends on one key cus­tomer – Tengizchevroil (TCO), a Chevron-led con­sor­tium that includes ExxonMobil, LukArco (owned by Russia’s Lukoil), and KazMunayGaz, the very same state oil giant that Mynbayev now heads.

His lead­er­ship of the com­pa­ny and his for­mer role as oil min­is­ter make Mynbayev respon­si­ble for the stew­ard­ship of the oil wealth on which much of the country’s econ­o­my depends. But at the same time, his pri­vate busi­ness inter­ests in rail trans­porta­tion have earned him and his part­ners at least $260 mil­lion.

As a pub­lic offi­cial, Mynbayev had an oblig­a­tion to declare this con­flict of inter­est. There is no proof he ever did.

The deal may put the Western com­pa­nies at odds with the Foreign Corrupt Practices Act depend­ing what they knew about the con­flict of inter­est.

But what are the odds that he would ever be found out? TTG Group’s own­er­ship struc­ture is a con­vo­lut­ed maze of off­shore hold­ings. Even those with the patience to fol­low the trail as far as it goes – and the access to do so – would find no trace of Mynbayev and his part­ners.

The Paradise Papers leak pro­vid­ed OCCRP reporters with the first clue: Mynbayev’s stake in Meridian Capital, an invest­ment hold­ing com­pa­ny reg­is­tered in the tax haven of Bermuda. Even so, it took the for­tu­itous find of a sin­gle sen­tence in a finan­cial report filed this year to con­nect Meridian to the Kazakhstani trans­porta­tion con­glom­er­ate.

Meridian Capital did not respond to requests for com­ment, and rep­re­sen­ta­tives of KazMunayGaz ini­tial­ly denied that Mynbayev had any rela­tion­ship with Meridian Capital.

However, after the pub­li­ca­tion of an ear­li­er OCCRP sto­ry link­ing him to the off­shore firm, Mynbayev admit­ted that he had been its share­hold­er, but said that he had declared this in his tax doc­u­ments, and that he had giv­en up his stake “sev­er­al years ago.”

Contacted by OCCRP again for this sto­ry, Mynbaev’s office did not com­ment, but said that a lawyer would be in touch with reporters. No sub­se­quent com­mu­ni­ca­tion was received. No oth­er Meridian share­hold­ers respond­ed to requests for com­ment.

Records from Appleby, the law firm whose doc­u­ments form much of the Paradise Papers leak, list him as being an “active PEP” – a “polit­i­cal­ly exposed per­son” – as recent­ly as April 2016. This means that, as of that date, he was like­ly still a share­hold­er of an off­shore firm under its man­age­ment. (See: Kazakhstan’s Secret Billionaires)

Inside the Matryoshka Doll

Kazakhstani busi­ness records are incom­plete, and those that were found con­tra­dict TTG Group’s own claims about its ori­gins, mak­ing it impos­si­ble to defin­i­tive­ly estab­lish its his­to­ry and its own­ers. That’s why com­ing to under­stand how it came under the con­trol of Meridian Capital – and how that con­nec­tion helped ensure its suc­cess – requires div­ing into its com­plex off­shore hold­ing struc­ture.

The com­plex struc­ture of TTG Group

TTG Group is a Dutch hold­ing com­pa­ny that owns TengizTransGaz, the group’s Kazakhstani oper­a­tional com­pa­ny, and five more sub­sidiaries. But that’s not all. TTG Group itself is owned by anoth­er Dutch com­pa­ny, which in turn is owned by a Cyprus com­pa­ny owned by a BVI com­pa­ny – fol­lowed by even more lay­ers of off­shores.

None of these lay­ers include Meridian Capital, the com­pa­ny of which Mynbayev is a share­hold­er.

But a finan­cial report filed this year by TTG Group reveals that on Sept. 16, 2011, an unusu­al secret deal took place. That deal gave one of Meridian’s com­pa­nies the option to pur­chase all of TTG Group’s shares for $1.

Exercising this option would have made Meridian Capital show up with­in the group’s own­er­ship struc­ture – and run the risk of being dis­closed to the pub­lic. This nev­er hap­pened – on paper, the struc­ture remained the same.

Since the con­tract that gov­erns the 2011 deal is not avail­able, the oth­er terms it estab­lished are unclear.

But the finan­cial report filed this year reveals that, since that day, “the ben­e­fi­cial own­er­ship” and “all eco­nom­ic ben­e­fits” of TTG Group have ulti­mate­ly belonged to Mynbayev and his part­ners. This means that the deal must have includ­ed some kind of mech­a­nism that enabled Meridian to receive TTG Group’s prof­its with­out becom­ing its for­mal own­er.

By this point, TTG Group had already become mas­sive­ly prof­itable, with annu­al rev­enues of $100 mil­lion and prof­its of over $40 mil­lion in 2010 alone. And no won­der – Kazakhstan’s oil indus­try was in the mid­dle of a mas­sive boom.

The fact that Mynbayev and his part­ners appear to have received such a prof­itable com­pa­ny for noth­ing strong­ly sug­gests that the deal they made was with them­selves – TTG Group had been theirs all along, and the agree­ment was a clever way to move mon­ey across juris­dic­tions.

There are oth­er pos­si­ble expla­na­tions for such a deal. For exam­ple, it could have been a cor­po­rate raid, which would mean that Mynbayev and his part­ners had tak­en TTG Group over from some­body else. Or it could have been an inside takeover, sug­gest­ing a falling out among part­ners. But OCCRP reporters were able to obtain addi­tion­al evi­dence for the most like­ly expla­na­tion – that Meridian Capital’s founders had con­trolled TTG Group from the begin­ning. (A review of the company’s web­site, includ­ing archived old­er ver­sions, revealed no announce­ments that it had ever changed hands.)

Sauat Mynbaev, chair­man of Kazakhstan’s state oil and gas com­pa­ny, KazMunayGaz

TTG Group claims to have been estab­lished in 2001. At that time, accord­ing to his biog­ra­phy, its board chair­man was a man named Yevgeniy Feld – a Meridian cofounder and for­mer exec­u­tive at one of Kazakhstan’s largest banks, Kazkommertsbank. As it turns out, this was the same bank that pro­vid­ed cru­cial financ­ing for TTG Group in its ear­ly days. Several oth­er for­mer Kazkommertsbank exec­u­tives, includ­ing Mynbayev, also became Meridian share­hold­ers.

There is fur­ther evi­dence of con­ti­nu­ity in the trans­porta­tion company’s own­er­ship. TengizTransGaz, the local oper­a­tional com­pa­ny, was acquired by TTG Group, the Dutch hold­ing com­pa­ny, in 2008, in a trans­ac­tion that was described as being part of an “intra-group restruc­tur­ing.” This finan­cial term indi­cates that the oper­a­tion did not involve a change of own­er­ship – mean­ing that who­ev­er owned the com­pa­ny before 2008 also owned it after­wards. Both ends point to Meridian Capital.

If it is indeed true that Meridian Capital con­trolled TTG Group dur­ing this entire decade, this would go a long way towards explain­ing the company’s stun­ning suc­cess. (And a 2013 loan of $85 mil­lion giv­en to Meridian by a local sub­sidiary of TTG Group, and appar­ent­ly nev­er repaid, pro­vides fur­ther evi­dence that Meridian con­tin­ued to prof­it from its suc­cess­ful Kazakhstani endeav­or.)

With access to financ­ing from Kazkommertsbank and the ben­e­fit of Mynbaev’s many influ­en­tial posi­tions – includ­ing Deputy Prime Minister, Minister of Finance, Minister of Energy and Mineral Resources, Minister of Oil and Gas, and final­ly, CEO of KazMunayGaz – the group had every­thing it need­ed to use their author­i­ty and con­nec­tions to make the com­pa­ny a star.

Rising Star

The Tengiz field, stretch­ing for miles along the north­ern shore of the Caspian Sea, has one of the world’s largest reserves of oil and forms the core of Kazakhstan’s ener­gy indus­try. (The field is Kazakhstan’s biggest, pro­duc­ing over a third of all Kazakhstan’s oil. Kazakhstan has the 12th largest proven reserves in the world).

The field has been oper­at­ed by Tengizchevroil, the joint American-Russian-Kazakhstani con­sor­tium, since 1993. The com­pa­ny uses dif­fer­ent oil export routes – but most of the crude goes through a thou­sand-mile pipeline from the field to Novorossiysk, a Russian port on the Black Sea. The rest is shipped by rail, also to Black Sea ports, from which it is then sold on the world mar­ket.

Shipping the oil and gas by rail is a mas­sive and expen­sive under­tak­ing. Though Tengizchevroil owns the rail­road – one of the world’s largest pri­vate tracks – it doesn’t own the rail­cars nor any of the sup­port facil­i­ties.

This is where TTG Group comes in.

Acquiring rail cars and leas­ing them to the inter­na­tion­al oil con­sor­tium was the first thing the com­pa­ny did, and for years this was its most lucra­tive busi­ness. After ini­tial­ly buy­ing only oil cars, the com­pa­ny soon diver­si­fied into gas, sul­phur, and oth­er prod­ucts car­ried by Tengizchevroil.

How TTG Group’s rail­car fleet grew

Its first batch of 796 rail­cars, acquired in 2001, came from Alautransgaz, a region­al trans­porta­tion monop­oly which held for­mer state assets.

Mynbayev like­ly helped too. In 2002, while he was chair­man of the Kazakhstan Development Bank, the bank gave TTG Group an $11.7 mil­lion loan to pur­chase anoth­er 300 rail­cars. All of the cars had a guar­an­teed cus­tomer – Tengizchevroil. Over the years, TTG Group con­tin­ued acquir­ing more cars and leas­ing them to their favorite cus­tomer. By today, the fleet has grown to over 6,000 cars.

The cars are not the only valu­able asset TTG Group scored from Kazakhstan’s for­mer state monop­o­lies. One of its most valu­able assets – a facil­i­ty the group itself describes as the foun­da­tion of its busi­ness – was RIP-Gaz, Kazakhstan’s only ser­vicer of gas tank rail­cars, which it also bought from Alautransgaz. Furthermore, Tengizchevroil requires every com­pa­ny that it leas­es cars from to car­ry out a pre-inspec­tion at the facil­i­ty every time they’re filled with gas – more mon­ey into TTG Group’s cof­fers with every ship­ment.

The group soon made oth­er acqui­si­tions. In 2005, it bought anoth­er main­te­nance com­pa­ny, Ak-Zhayik-7. The fol­low­ing year, it won a Tengizchevroil ten­der to build a large rail­car park­ing depot.

Another busi­ness oppor­tu­ni­ty soon pre­sent­ed itself. After years of pres­sure, the gov­ern­ment fined Tengizchevroil $609 mil­lion for stock­pil­ing sul­phur, a byprod­uct of oil pro­duc­tion, in vio­la­tion of envi­ron­men­tal reg­u­la­tions. This meant that the con­sor­tium would have to begin export­ing its con­sid­er­able stocks – and TTG Group was there to help ship it away. The com­pa­ny start­ed buy­ing cars that shipped sul­phur, leas­ing them to Tengizchevroil, and charg­ing for main­te­nance. Since 2010, TTG Group has trans­port­ed over 3 mil­lion tons.

As of April 2012, TTG Group has also been act­ing as Tengizchevroil’s freight for­ward­ing agent.

A Loan With No Repayment Schedule

Between 2008 and 2015, Meridian Capital received at least $176 mil­lion in div­i­dends out of its arrange­ment with TTG Group.

But direct prof­its aren’t the only ben­e­fit Meridian sees. One deal OCCRP reporters found pro­vides an exam­ple of how they move mon­ey to Meridian.

On Sept. 4, 2014, TTG Group took out a loan from its Kazakhstani sub­sidiary, TengizTransGaz, for $85 mil­lion. On the very same day, it lent the exact same amount to Meridian Capital International Fund, a Cayman fund that belongs to Meridian.

It does not appear that either of the com­pa­nies ever paid the mon­ey back. “There is no repay­ment sched­ule in place regard­ing this loan,” reads the finan­cial state­ment. A gen­uine loan between inde­pen­dent enti­ties would not have required using an inter­me­di­ary in this man­ner. The com­plex arrange­ment – as well as the fact that the loan appears nev­er to have been repaid – is anoth­er piece of evi­dence sug­gest­ing that Meridian and TTG Group are con­trolled by the same peo­ple, and that Meridian is prof­it­ing hand­some­ly from the arrange­ment.

TTG Group web site

More Profits In Sight

With an ongo­ing Tengiz expan­sion project and the devel­op­ment of new oil fields, along with the prospect that Kazakhstan will increase its pro­duc­tion of nat­ur­al gas, TTG Group’s future (and Meridian’s) seems bright.

But TTG Group is not the only com­pa­ny Meridian con­trols.

On Feb. 2, 2011, through anoth­er Dutch com­pa­ny, Freight International Holding, Meridian gained con­trol of a Kazakhstani com­pa­ny called the Caspian Freight Company for a nom­i­nal price of €1,000. Meanwhile, accord­ing to the Dutch company’s 2015 finan­cial state­ment, Caspian Freight Company was worth over 1 bil­lion KZT (€2.7 mil­lion). The fact that Meridian acquired it for just €1,000 may indi­cate that it was theirs all along.

Just as with TTG Group, the name Meridian itself appears nowhere in the own­er­ship struc­ture. And just as with TTG Group, Caspian Freight Company appears to have begun build­ing anoth­er Kazakhstani trans­porta­tion empire. In 2014, it acquired major­i­ty stakes in two Kazakhstani trans­porta­tion com­pa­nies, Alautransservice (for­mer­ly part of Alautransgaz) and Germes Capital Management.

Within the coun­try, there are no pub­lic reports, news arti­cles, or web sites that would indi­cate that these com­pa­nies all belong to the same secre­tive group. But giv­en the savvy and aggres­sive tac­tics used by Mynbayev and his banker part­ners, it is like­ly that there are more lucra­tive deals in their future.

Legal Questions?

According to experts on the US Foreign Corrupt Practices Act, Chevron and ExxonMobil’s involve­ment may vio­late the act, which bans US com­pa­nies from mak­ing pay­ments to for­eign offi­cials in exchange for pref­er­en­tial treat­ment in busi­ness. This would depend on whether the com­pa­nies knew, or could rea­son­ably have been expect­ed to know, that Mynbayev would per­son­al­ly ben­e­fit from their deal with his gov­ern­ment – and whether these deals could be con­strued as ben­e­fits pro­vid­ed to him for the pur­pose of obtain­ing busi­ness.

Merely claim­ing ‘we didn’t know about the con­flict of inter­est, we didn’t know that this enti­ty was owned in sig­nif­i­cant parts by the min­is­ter’ is in itself not a defense,” said Andy Spalding, pro­fes­sor at the University of Richmond School of Law in Virginia and senior edi­tor at the FCPA blog. “The analy­sis is [whether] you have rea­son to believe that mon­ey going through your sub­sidiary to this com­pa­ny was going to be used to bribe him or any­body else.”

However, Spalding said, for a com­pa­ny to be in vio­la­tion of the act, “we have to have evi­dence of some­thing of val­ue giv­en [to TTG] with a cor­rupt intent.”

It is not known what ExxonMobil or Chevron knew about TTG Group’s own­er­ship or Mynbayev’s involve­ment.

In response to inquiries for this sto­ry, TTG Group declined to com­ment and ExxonMobil referred reporters to Tengizchevroil and Chevron.

A Chevron spokesper­son wrote that the com­pa­ny “abides by a strin­gent code of busi­ness ethics” and “com­plies with all applic­a­ble laws.” Tengizchevroil declined to com­ment on what it described as a “com­mer­cial issue,” cit­ing com­pa­ny pol­i­cy.

Additional report­ing by Aubrey Belford, Olga Gein, Vlad Lavrov, and OCCRP Kazakhstan.

by Miranda Patrucic and Ilya Lozovsky

Top Kazakhstani Official Holds Stake in Secretive Transportation Empire

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