The Fraud

Starting in 2006 (or earlier), Moldovan oligarch Anatolie Stati and his son Gabriel embarked on a fraudulent scheme that defrauded international investors of their money, falsified financial statements, and recruited the victims of the fraud to pursue international arbitration against the Republic of Kazakhstan to recoup from the state the monies the Statis had stolen themselves.

The Statis’ background and initial investment in Kazakhstan

Anatolie Stati (born in 1952) is a Moldovan oligarch who made his fortune through questionable transactions and projects in the oil and gas industry. In 1994, he founded Ascom Group SA (Ascom). In 1995, Ascom signed two service contracts with the Ministry of Oil and Gas of Turkmenistan, taking its first step into the oil industry. The service contracts were to expire by 2000, and no new contracts were secured to continue work in Turkmenistan.

In 1999, Anatolie Stati and his son Gabriel Stati entered the oil and gas sector in Kazakhstan. Ascom purchased shares in the local Kazakhstani company Kazpolmunay LLP (KPM), while another Stati company, Gheso SA, bought shares in Tolkynneftegaz LLP (TNG). Later, Gheso SA transferred its holding in TNG to Terra Raf Trans Traiding Ltd, a Stati company registered in Gibraltar. At the time of the acquisition by the Statis, KPM and TNG had contracts with Kazakhstan for exploration and extraction of hydrocarbons in the Borankol field, the Tolkyn field, and the Tabyl block located in the Mangistau region of Kazakhstan.

Initially, the Statis financed their business operations in Kazakhstan with loans obtained from Kazakhstani banks Kazkommertsbank and Halyk Bank. The Statis were given loans over $120 million for 7 years at an interest rate of 11% per annum. As customary business practice, the lender banks retained certain means of control and supervision of the manner in which the lent funds were spent. However, the Statis sought to avoid such supervision.

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The Tristan notes scheme
Oil sales scheme
The LPG Project
Other criminal activity organized by the Statis using financing diverted from Kazakhstan
The Statis used the arbitration to facilitate and cover up their criminal scheme
A turning tide: more evidence of the fraud emerges as the Statis are losing battles in courts

The Statis devised several criminal schemes to strip their Kazakhstani companies of their assets and defraud investors. In particular, these included: the Tristan notes scheme, the oil sales scheme, and the LPG project.

The Tristan notes scheme

The Tristan notes scheme traces its origin to 2006, when Anatolie Stati began borrowing on the financial markets. For this purpose, he registered Tristan in the British Virgin Islands. Tristan issued $300 million worth of 10.5% “Senior Secured Notes” (the Tristan Notes) in December 2006, with a further $120 million issued in June 2007. KPM and TNG were the Notes’ guarantors. Tristan lent $181 million from the first tranche of the Notes to TNG. $30 million were lent to KPM. Both loans bore an interest rate of 17.65% per annum. From the second tranche of the Notes, Tristan lent $94 million to TNG and $20 million to KPM at an interest rate of 16% per annum. Both sets of the Tristan loans to KPM and TNG bore significantly higher interest rates than the rate offered by the Kazakhstani banks. In fact, the Statis made their operating companies pay higher interest rates than the rate the Statis themselves undertook to pay to Tristan Noteholders. Had KPM and TNG been charged 10.5% interest on their loans from Tristan, i.e. the same interest rate that Tristan paid to its investors, the companies would have retained almost $62 million more in interest payments than the actual interest accrued by KPM and TNG on these loans during the period 2006-2009.

The Statis, however, did not put all their companies at a disadvantage. For example, Terra Raf received an interest-free loan of $76 million from the sale of Tristan Notes. This money was transferred to other Stati companies and never made it to KPM and TNG.

In addition, a third tranche of Notes, worth $111.1 million, was issued in June 2009.  The Statis’ BVI company Laren Holdings Ltd. (Laren) paid only $30 million for the Notes, i.e. a discount of 73%. This $30 million was part of the $60 million loan provided to Laren by six lenders at an interest rate of 35% per annum.

Oil sales scheme

Following the Tristan notes scheme, the Statis’ devised the Oil sales scheme – a complicated sales scheme involving other Stati related companies – to divert the proceeds of oil and gas from KPM and TNG out of Kazakhstan. This became the Statis’ primary method for diverting money out of Kazakhstan.

Instead of selling oil and gas products directly to Vitol SA (Vitol), KPM sold the extracted hydrocarbons to Stadoil Ltd. (Stadoil), a Stati company incorporated in Scotland, while TNG sold its oil and gas products to General Affinity Ltd. (General Affinity) registered in England. Stadoil and General Affinity, in their turn, sold the purchased hydrocarbons to Terra Raf, and from 2007, to Montvale, both belonging to the Statis. Only then were oil and gas products sold to Vitol. The designed sales chain allowed Anatolie and Gabriel Stati to divert more than $260 million in net sales proceeds from KPM and TNG between 2005 and 2010.”

The LPG Project

In 2006, the Statis decided to partner up with Vitol to construct a liquefied petroleum gas processing facility (the LPG Plant) on the Borankol field. Unknown to Vitol, this project turned out to be yet another criminal scheme designed by the Statis to steal money from TNG and Vitol. On 31 January 2006, the Statis’ companies Ascom and Azalia LLC (Azalia) purchased key LPG Plant equipment from a third party Tractebel Gas Engineering (TGE) for $34.2 million. Azalia then resold this equipment to Perkwood, another Stati company, for $115 million. On 17 February 2006, Perkwood, in its turn, resold the LPG Plant equipment to TNG for $115 million. Thus, the amount paid by TNG to Perkwood was $80.8 million (136%) higher than that charged by the third party supplier, TGE. In order to avoid scrutiny, the Statis did not disclose the related status of Perkwood to their own auditor KPMG. In 18 audit reports of KPM, TNG and Tristan for the years 2007-2009, which were withdrawn by KPMG on 21 August 2019, Perkwood is listed as an independent third party and not as a Stati related company.

In June 2008, the Statis decided to sell their operating companies. The sale project, which Kazakhstan later found evidence to show was another fraud scheme, was called “Project Zenith”. A “teaser” offer, distributed by the Statis’ financial advisor Renaissance Capital, stated that $160 million had been spent on the LPG Plant and a total of approximately $230 million was expected through the year 2008. In the Confidential Information Memorandum (the Information Memorandum), sent by Renaissance Capital on behalf of the Statis to interested parties, the amount invested by TNG into the LPG Plant as of July 2008 was stated to be $193 million. Both the teaser and the Information Memorandum incorporated the LPG Plant costs, which the Statis inflated by virtue of the resales of the LPG Plant equipment through the chain of their own companies.

The Vendor Due Diligence Report (the VDD Report), prepared by KPMG upon the Statis’ request and intended for use by potential purchasers of KPM and TNG under Project Zenith, also contained misleading information. It identified Perkwood not as a related party but as an unrelated third party. As was uncovered by Kazakhstan, Artur Lungu, the Statis’ CFO, specifically informed KPMG upon reading the draft VDD Report that Perkwood was not owned or controlled by the Statis and asked KPMG to change all references in the draft to Perkwood from related to unrelated third party. KPMG complied with the instructions and the Statis  succeeded in concealing the fact that Perkwood was in reality a shell company they secretly controlled and used to inflate the LPG Plant costs.

Thus, the prospective purchasers of KPM and TNG were offered false information regarding the Statis’ operating companies. The Statis’ attempt to sell KPM and TNG ultimately fell through. However, they made use of the received bids in the ECT Arbitration proceedings against Kazakhstan by submitting them as evidence in support of their allegations regarding the value of the assets allegedly expropriated by Kazakhstan. In later awarding the Statis $199 million for the LPG Plant, the Arbitral Tribunal expressly relied on the Indicative Offer submitted to the Statis by one of the potential purchasers within Project Zenith. The Statis knew that this Indicative Offer was based on false information that they had provided to the bidders, and did nothing to inform the Tribunal of this fact.

Other criminal activity organized by the Statis using financing diverted from Kazakhstan

In order to service other criminal activities, the Statis created an opaque web of numerous affiliated companies located in tax havens throughout the world. While the full extent of the Statis’ fraud remains unknown, the evidence obtained by Kazakhstan to date demonstrates that some of the funds, diverted from KPM and TNG, were spent on construction of the Stati castle in Moldova, purchase of premium class cars and diamond watches. The Statis also paid millions to politicians and state employees in Moldova, Romania, Congo, South Sudan and Kurdistan.

In 2005, the Statis, through their Ascom Sudd Operating Company (ASOC), acquired 95% of an oilfield in South Sudan. The funds paid to South Sudan’s national oil company for the oilfield had been diverted from the oil sales proceeds that were due to TNG. All further investments made by ASOC for oil exploration in South Sudan were diverted from TNG and KPM. However, ASOC was not able to persuade the Government of South Sudan to extend the term of the contract and all investments were lost. The reasons for the failure are unknown but the inclusion of ASOC on the US sanctions list in 2018 is a telling indicator that ASOC’s conduct or the Statis’ business in South Sudan was not completely legal. According to the US Government, ASOC was among the 15 entities “contributing to the ongoing crisis in South Sudan because they are a source of substantial revenue that, through public corruption, is used to fund the purchase of weapons and other material that undermine the peace, security, and stability of South Sudan rather than support the welfare of the South Sudanese people”.

Apart from South Sudan, the Statis diverted funds from Kazakhstan to Iraqi Kurdistan. In summer 2008, Anatolie Stati used $60 million, received as a payment from Vitol for KPM and TNG oil, to obtain the contract for the Barda Rash oil field in Kurdistan. The funds were diverted from KPM and TNG by the Statis’ company Montvale and channeled through several other Stati owned companies until they ultimately reached Kurdistan. Using the money paid by Vitol for the oil extracted in Kazakhstan, the Statis also made payments of over $10 million to state officials in Kurdistan. Whether these payments were legal remains to be verified by the Government of Kurdistan.

In 2011, Anatolie Stati sold a 60% stake in the Barda Rush field through his company Komet Group SA to Afren Plc. for $418 million. However, bank records show that Afren only paid $270 million of the $418 million asking price. It is unclear what happened to the remaining $148 million. Three years after Afren bought the 60% share in the Barda Rush field, the company declared the project unprofitable and wrote the field off as an asset after receiving a report on its reserves. In Spring 2015, Afren’s CEO, Mr. Osman Shahenshah, and Chief Operating Officer, Mr. Shahid Ullah, were found guilty of fraud and money laundering and sentenced to 16 and 14 years of imprisonment respectively.

The Statis used the arbitration to facilitate and cover up their criminal scheme

The Statis’ claims were based on the core representations that KPM and TNG were solvent, highly profitable companies that operated legally within Kazakhstan. All three of these representations were false and based on fraudulent accounting, as well as false and fraudulent evidence in the form of witness affidavits, witness testimony and expert opinions.

Relying on the false documents and information provided by the Statis, the arbitral tribunal awarded them over half a billion US dollars in compensation in 2013.

The Statis also successfully defended against the appeal of the arbitral award before the Svea Court of Appeal in Sweden in December 2016. At the time, many of the material facts and evidence of the fraud had yet to emerge, though Kazakhstan had some initial evidence on the fraud.

Armed with the arbitral decision in their favour, the Statis began a campaign to enforce the ruling by applying to various courts around the world to enforce the decision by seizing Kazakhstan’s assets held abroad. Proceedings were initiated in England, the United States, Belgium, the Netherlands, Italy and Luxembourg, leading to the freezing of over 22 billion of dollars’ worth in Kazakhstan’s assets. Today, over $6 billion in assets remain frozen, mostly in the Netherlands.


A turning tide: more evidence of the fraud emerges as the Statis are losing battles in courts

After some early successes, the Statis started to suffer repeated setbacks as more and more evidence of the fraud emerged and awareness of it grew. The first major blow to the Statis came in June 2017 when Mr. Justice Knowles of the Commercial Division of the High Court in London ruled that there was sufficient prima facie evidence to conclude that the arbitral award was obtained by fraud. Justifying his decision, Mr. Justice Knowles said:

It will do nothing for the integrity of arbitration as a process or its supervision by the Courts, or the New York Convention, or for the enforcement of arbitration awards in various countries, if the fraud allegations in the present case are not examined at a trial and decided on their merits, including the question of the effect of the fraud where found. The interests of justice require that examination.

Mr. Justice Knowles offered the Statis the opportunity to rebut his findings, but instead of doing so, the Statis withdrew their enforcement application in England in an attempt to prevent the judge from considering the matter further, a move which cost the Statis over £1.3 million in legal costs. The Statis notably pretended that they lacked sufficient funds to continue proceedings in England, despite continuing their campaign of litigation across multiple other jurisdictions.

Adding to the mounting evidence against the Statis, in 2019 KPMG took the rare step of withdrawing its audit reports which had been used by the Statis in the various lawsuits, on the basis that these were based on false representations. In total, KPMG Audit withdrew 18 audit reports covering three years of financial statements issued by companies controlled by the Statis between 2007 and 2009.

The Statis and their co-conspirators subsequently also suffered additional blows in Sweden, Belgium, Gibraltar, the Netherlands and Luxembourg. In the latter, an initial enforcement order was overturned on appeal on the basis that the lower court did not deal appropriately with the fraud allegations and the evidence presented by Kazakhstan.

Moreover, Kazakhstan’s fraud allegations against the Statis are now supported by independent opinions issued by leading experts in the field: Professor George Bermann, Professor Catherine Rogers, Professor Christoph Schreuer, Dr. Patrik Schöldström (now a judge on the Swedish Court of Appeal), Mr. Alex Layton QC (a respected English barrister), Mr. Stefan D. Cassella (a leading expert in money laundering and former federal prosecutor at the US Department of Justice), and top international accounting firm PriceWaterhouseCoopers.

Finally, the Statis’ main co-conspirator is now also in the crosshairs of American justice. Daniel Chapman and his company, Argentem Creek, are subject to a lawsuit before a New York Court for their role in conspiring with the Statis to perpetrate and conceal the fraud against Kazakhstan. Mr. Chapman is being sued not only by Kazakhstan but also by an investor in the Statis’ companies who was damaged by the fraud.

As the Statis and their co-conspirators face setback after setback, they have now embarked on a desperate strategy which aims to pursue enforcement actions only in jurisdictions where they hope the evidence of fraud will not be considered. In parallel, the Statis have launched a massive black PR campaign to spread disinformation about the case and damage Kazakhstan’s international reputation in the hope of bringing the country toward a settlement.