US bank freezes $22.6bn in Kazakh National Fund assets as part of dispute with Moldovan investor

US bank freezes $22.6bn in Kazakh National Fund assets as part of dispute with Moldovan investor
The government in Astana finds itself dealing with the small matter of nearly $23bn of its funds frozen by Bank of New York Mellon.
By bne IntelliNews December 22, 2017

Bank of New York Mellon has frozen $22.6bn in assets owned by Kazakhstan's National Fund as part of a legal battle between the government in Astana and Moldovan businessman Anatolie Stati, Reuters reported on December 21. The move leaves the Kazakh government unable to access 40% of the fund’s total holdings, mainly derived from the country’s hydrocarbon exports.

Stati is trying to recover money he invested in two companies holding operating licenses for natural gas fields Borankol and Tolkyn in Kazakhstan, and in developing a liquefied petroleum gas (LPG) plant. He has claimed his firms in Kazakhstan were nationalised with incomplete compensation and that he, his son and other businessmen were subjected to substantial harassment from the Kazakh state, with the ultimate aim of forcing them to sell their investments cheaply.

In 2010, Stati asked for supplementary compensation under the Energy Charter Treaty (ECT), an organisation Kazakhstan has been a member of since 1998. The ECT’s Arbitral Tribunal issued its final decision in 2013, ruling that Stati was entitled to $500mn worth of compensation. The Kazakh authorities have denied the allegations and refused to pay supplementary compensation.

The Kazakh justice ministry alleges that the Stati parties fraudulently inflated the construction costs of an LPG plant in Kazakhstan through a series of undisclosed related party transactions, and prepared falsified financial statements. The Stati parties then allegedly used these falsified costs and financial statements to illicitly obtain a bid for the LPG plant from the Kazakh state oil and gas company, the Kazakh statement said. It is claimed that the Stati parties later used the fraudulently obtained bid, and their falsified costs and falsified financial statements, as evidence of the LPG plant’s value in the international arbitration. The allegedly fraudulent scheme affected the arbitral tribunal’s determinations on jurisdiction, liability and damages, according to the Kazakh justice ministry’s statement.

The justice ministry has previously said it had filed a civil racketeering complaint in the US District Court in Washington, DC, against Stati, his son Gabriel Stati, and two of their companies – Ascom Group, S.A. and Terra Raf Trans Traiding Ltd – based on the controversial Racketeer Influenced and Corrupt Organisations Act (RICO) law. Suing Stati and his son was part of an attempt to stop the sale of Kazakhstan’s assets already attached in West European countries—that approach has so far been successful in attempts to recover money invested in Kazakhstan before 2010.

The Swedish Supreme Court on October 24 issued a final ruling in favour of Ascom in its $500mn dispute with the State of Kazakhstan. In principle, the Swedish Supreme Court’s decision should pave the way for the sale of part of the assets held by the Kazakh state and attached by courts in Sweden, the Netherlands and Belgium at the request of Ascom. Overall, $5.6bn has been attached, Ascom claims.

Kazakhstan had asked the Supreme Court to check alleged irregularities committed by Svea Court in Stockholm, which confirmed last December that Ascom is entitled to the $500mn award ruled for by the Stockholm Chamber of Commerce in 2013 in an Energy Charter Treaty (ECT) tribunal.

After the Swedish ruling was announced, Astana reminded once again of the US case based on RICO.

“The lawsuit seeks to recover compensatory and punitive damages arising from a sophisticated and wide-ranging illegal pattern of racketeering undertaken by the Stati Parties through an enterprise of individuals and corporate entities. The lawsuit also seeks injunctive relief,” according to the Kazakh ministry of justice. RICO is a law that was passed in 1970 to prosecute persons who instigated crimes, but were not directly involved in criminal activities.