KAZAKHSTAN: BAD SUMMER FOR BANKING BECOMES A WINTER OF

UNCLAS SECTION 01 OF 04 ASTANA 002264 SENSITIVE SIPDIS STATE FOR INL/AAE, INL/C, SCA/CEN, EUR/RUS, EEB E.O. 12958: N/A TAGS: PGOV EFIN KCRM KZ SUBJECT: KAZAKHSTAN: BAD SUMMER FOR BANKING BECOMES A WINTER OF DISCONTENT REF: A. ASTANA 1915 ¶B. ASTANA 2197 ¶C. ASTANA 1762 ¶D. ASTANA 2258 ASTANA 00002264 001.3 OF 004 ¶1. (U) Sensitive but unclassified. Not for public internet. ¶2. (SBU) SUMMARY: A dreary summer has become a cold, dark winter for the banking system in Kazakhstan as investigations into three banks have led to criminal charges and convictions for embezzlement, fraud, and money laundering. The Financial Police (FinPol) have opened embezzlement and illegal use of funds investigations against former managers of Alliance bank. On December 25, a court in Almaty found 12 former officials from BTA Bank, Temir Bank, and affiliated companies guilty of fraud, embezzlement, and concealing evidence, but not guilty of money laundering. In August, former co-chairman of the Valyut-Transit Bank was found guilty of illegal entrepreneurship and money laundering. As a result, the Financial Supervision Agency (FSA) announced the introduction of a new requirement for transactions conducted with offshore companies. As in the anti-corruption campaign (ref A),questions remain about whether the sudden increase in cases against commercial banks resulted from the economic crisis or whether the banks are being used as surrogates for political battles. END SUMMARY. ALLIANCE BANK ¶3. (U) The summer banking scandals began on July 3 when the Agency for Regulation and Supervision of Financial Markets and Financial Organizations (FSA) removed Zhomart Yertayev, Chairman of the Managing Board of Eurasian Bank, and his deputy, Alexei Ageyev. FSA based its actions on allegations that Yertayev and Ageyev violated banking laws during their 2005-2007 tenures at Alliance Bank. The City Court of Almaty suspended the decision of the FSA regarding Yertayev. One day later the court reversed itself on the grounds that it lacked jurisdiction over the issue, because such a case can only be heard by the court in Astana due to the Presidential Administration's oversight of the FSA. Grigoriy Marchenko, the head of the National Bank, subsequently announced that all materials concerning the case had been submitted to law-enforcement agencies for further investigation. ¶4. (U) In mid-July, the Financial Police (FinPol),following an investigation conducted by the Prosecutor General's Office (PGO), began initiating a series of cases against bank officials for embezzlement and illegal use of bank funds. Allegedly, five loans totaling $143 million were made without collateral, and $1.1 billion was withdrawn through four offshore companies. U.S. Treasury bonds were legally purchased 2005-2007 through two Russian investment banks -- Metropol and Renaissance. The bonds were then used as collateral for Alliance Bank loans to four offshore companies (Acquinta, Bazora, Xilliana and Serbina) through investment banks. When these offshore companies defaulted on their loans, the investment banks seized the bonds. According to the National Bank and FSA, no one, not even the auditors or board of directors, knew about financial transactions involving the bonds, and no documentation was found at Alliance Bank. FinPol arrested Yertayev on August 25 for embezzlement and offered Ageyev immunity in exchange for his testimony. On September 10, FinPol arrested Abylkasym Mamyrbekov, a former deputy chairman of the Board of Directors, for his alleged part in the embezzlement. In late October, Berik Sultankulov and Dauren Keribayev, former Chairmen of the Executive Board, and Anuar Beisebayev, the former Chairman of the Executive Board of Seimar Alliance Financial Corporation which owns 75% of Alliance Bank, were charged in abstentia for embezzlement. All three are subject of Interpol warrants. Assets in the amount of $4 million have been seized. ¶5. (U) The current Chairman of the Board of Directors and former ASTANA 00002264 002.3 OF 004 primary shareholder of Alliance bank, Margulan Seisembayev, has stated his ignorance of the transactions and lack of suspicious signals. Because of the bad loans, Seisembayev sold a 76% stake in the bank to the government for 100 tenge (less than a dollar). According to Seisembayev, Yertayev and Avgeyev negotiated the terms of funding directly with the Moscow banks, and he only learned about the financing scheme in 2008. Yertayev has cast doubt about Seisembayev's ignorance of the transactions. Seisembayev asserted that he personally notified the FSA, National Holding Company Samruk-Kazyna, and current bank management about the loans. However, the bank's current management claims no knowledge of the loans before March 2009, and FSA Chairwoman Elena Bakhmutova denies receipt of full information from Seisembyaev. Yertayev has questioned the release of information during Alliance's restructuring, and not in 2008, when allegedly known by regulators and the bank's management. While arguing his ignorance, Seisembayev confessed to a different violation -- the disbursement of borrowed funds to increase the bank's equity. Following Yertayev's arrest, Seisembayev announced on August 27 his willingness to cooperate with the investigation. ¶6. (U) Despite Seisembayev's willingness to cooperate, he has also not returned to Kazakhstan from his August vacation. In October, FinPol initiated an additional case against Seisembayev for the alleged embezzlement of $155 million. The newest investigation also includes Seisembayev's brother Yerlan, who was a stock-holder, and Arsen Saparov, the Chairman of the Credit Committee. Allegedly, the Seisembayev brothers used land as collateral for loans through affiliated companies. After the bank reported payment of the loans, it cleared the land title for sale. FinPol claims the report was fraudulent, but Saisembayev's attorney asserts the loans were transferred to other companies. Seisembayev's lawyer, who had previously complained about access to case materials, recently was allowed to review the materials. She believes that FinPol cannot prove the embezzlement charges. ¶7. (U) In September, FinPol and FSA opened a joint audit to trace all loans from issuance to recipient, specifically checking for recipients affiliated with bank management. They sought to confirm allegations that the owners of Alliance bank abused their authority by taking loans via affiliated companies. As a result, FinPol initiated a case against Askar Galin, another brother of Seisembayev, who received loans in the amounts of $1 million and 653,000 euros. Galin is also subject of an Interpol warrant. ¶8. (U) Arlan Rimpoche, a journalist at the geokz.tv website, alleged that Alliance Bank used more than 50 unsecured loans in the amount of $35 million to bribe senior government officials since ¶2002. Alleged recipients include Sarybai Kalmurzayev, former head of the FinPol and now a senior official in the Presidential Administration, and Kairat Mami, former Supreme Court Chief Justice and current Procurator General Minster of Justice. Seisembayev has denied these allegations, claiming that the story is designed to ruin his relationship with the Presidential Administration or impede the bank's restructuring. BTA BANK ¶9. (U) Mukhtar Alblyzov, ex-chairman of the BTA bank Board of Directors, and Zhaksylyk Zharimbetov, ex-deputy chairman of the Managing Board, allegedly laundered over 83 billion tenge ($550 million) through nine shell companies. An interagency investigative group transferred the criminal case against BTA Bank and its subsidiary, Temir Bank, to the PGO in Almaty to file charges on August 3. The criminal case alleges Alblyzov and Zharimbetov led an organized criminal group, which embezzled BTA and Temir Bank funds. ¶10. (U) The investigation led to indictments of 12 people, ASTANA 00002264 003.3 OF 004 including Deputy Chairman of BTA Genrig Kholodzinskiy, Managing Director of BTA Bagdatkali Tassibekov, Chairman of the Board of Directors of Temir Bank Ablakhat Kebirov, a Deputy Director at BTA, two members of Temir Bank's Board of Directors, and six executives of other companies. The investigation resulted in the seizure of bank accounts and property, including 136 pieces of land, 12 houses, 924 apartments, 83 luxury cars, and three planes. The PGO has petitioned for the return of 172 billion tenge ($1.1 billion) from foreign borrowers. ¶11. (SBU) The investigation continues into the activities of Ablyzov, Zharimbetov, and the former Chairman of the Managing Board of BTA bank Roman Solodchenko, who are believed to have fled Kazakhstan. One of Ablyazov's alleged accomplices, former Director General of Betpak-Dala LLP Rifat Rizoyev, was arrested in April in Ukraine, but appealed the extradition request to the European Court of Human Rights in Strasburg. On September 26, he unexpectedly and voluntarily returned to Kazakhstan. Rizoyev allegedly helped Ablyazov launder money through various offshore companies. Some believe he only returned because of threats to his family in Kazakhstan from either Ablyazov or law enforcement authorities. His attorney denies these allegations. Law-enforcement agencies may be particularly interested in Rizoyev due to his alleged involvement in both the BTA and Kazatomprom (ref B) cases, although his Ukrainian lawyer denies these allegations. Rizoyev was not charged in the BTA case, but offered immunity in exchange for his testimony (see para 12). Another accomplice, former head of the corporate-business division Veronika Efimova, was arrested in Russia, but her extradition has been suspended awaiting a decision on her appeal to the European Court of Human Rights. ¶12. (U) The PGO launched an additional investigation into BTA bank's international activities, including loans made in Georgia and Ukraine, and announced that Russia and Ukraine also are investigating possible fraudulent activities committed by Ablyazov. On September 30, Russian law-enforcement authorities arrested co-owner and former Director General of the joint-stock company Lizingovaya Companiya Delo Dmitriy Pak for fraudulent activity and the embezzlement of more than $70 million from BTA bank. In November, BTA's current management seized a 20% share in an aquarium being built in Moscow. ¶13. (SBU) On August 13, a British Court froze the assets of Ablyazov, Zharimbetov, and Solodchenko, as well as the assets of three British citizens and a company, in response to a lawsuit for $300 million filed by the current management of BTA. Ablyazov announced his happiness that England took action against him because it allows him the opportunity to fight Kazakhstan in a British Court and "air Kazakhstan's dirty laundry." Nonetheless, he appealed the decision. On September 30, his appeal was denied, and the former senior management of BTA was required to disclose their assets worldwide. On November 16, the KNB reported the return of $1 billion in BTA assets. TRIAL ¶14. (U) On December 25, the Almalin District Court in Almaty city found the first 12 defendants guilty, as members of a criminal group, of fraud, embezzlement, and concealing evidence. However, prosecutors were unable to prove the charges of money laundering. Six of the defendants were officials of BTA and Temir bank, and six headed affiliated companies. Managing Director of BTA Bagdatkali Tassibekov, Deputy Director of the Bad Loans Department Yermek Dikanbayev, Member of the Board of Temir bank Aidos Mukatayev, and Zhanibek Djumamukhambetov were sentenced to eight years' imprisonment. Alexei Domashenko, Yermek Zhanybekov, Janna Bekbayeva, and Yerlan Beisekeyev -- all from affiliated companies -- were sentenced to five years. Chairman of Temir bank's Board of Directors Ablakhat Kebirov and Daulet Dashev were sentenced to 2 ASTANA 00002264 004.3 OF 004 years. The judge handed down longer sentences than requested by the prosecution. The defense attorneys are filing appeals on this and other grounds. Deputy Chairman of BTA bank Genrig Kholodzinskiy was sentenced to only five years' probation because of evidence that he had voted against some of the bad loans, his age (63),and his many state awards, including medals from President Nazerbayev. ¶15. (U) This trial also is considered important as a source of additional evidence against Ablyzov, Zharimbetov, and Solodchenko. The prosecution granted immunity to Rifat Rizoyev and up to 40 others in exchange for their testimony, which will likely also be used in the subsequent trials. As a result, Ablyazov's attorney Salimzhan Mussin had complained about access to the evidence. VALYUT-TRANSIT BANK ¶16. (U) Indira Sagindykova, the former co-Chairperson of Valyut-Transit Bank (VTB),was tried on charges of illegal entrepreneurship, money laundering, and abuse of power. A Karaganda District Court sentenced Sagindykova's ex-partner, Andrey Belyayev, to three and a half years in prison for the same charges in July ¶2008. Nonetheless, Belyayev continues to allege Sagindykova's sole responsibility for crimes committed at VTB and her personal issuance of loans to shell companies. In August, a Karaganda Regional Court found Sagindykova guilty of illegal entrepreneurship and money laundering and sentenced her to three years in prison. PREVENTIVE MEASURES TO BE PUT IN PLACE ¶17. (U) The FSA plans to introduce new bank requirements in January 2010 for offshore loans. According to Chairwoman of the FSA Elena Bakhmutova, these regulations will prevent future schemes, such as those allegedly used at BTA Bank, in which loans made to offshore companies were transferred between other offshore companies before they finally funded businesses in Russia. ¶18. (SBU) COMMENT: Certainly, the connections of many senior banking officials (ref C) cause some, including those accused, to argue a link between the explosion in cases against commercial banks and a bloody political battle. However, egregious practices in the banking system, including significant theft, occurred, for which the Kazakhstani government now is paying. Therefore, the government's bail-outs of Alliance and BTA banks probably played a stronger role than political infighting. Along with the conclusion of restructuring (ref D),the government certainly sees these criminal cases as an important step toward the rehabilitation of its financial sector. END COMMENT. HOAGLAND