Another Wirecard? EY Slammed Over Work With Swiss Conglomerate Looted By Oligarch’s Family

Across Europe, the credibility and integrity of the Big Four accounting-audit powerhouses – EY, KPMG, Deloitte and PwC – is being questioned, and not just in Germany, where the collapse of Wirecard has left an indelible blemish on the reputation of its hapless auditor/accomplice (well, alleged accomplice) Ernst & Young.

Regulators, prosecutors and lawmakers are still sifting through the wreckage of Wirecard and how the payments darling, which endured years of speculation that its business might be a fraud, only to implode after its shares were added to the DAX, a gauge of German-traded blue-chip stocks. Ultimately, some 2/3rds of the firm’s business turned out to be a mirage.

Ernst & Young was found to have repeatedly ignored warning signs during its decade-long auditng relationship with Wirecard, and it’s pretty clear that the auditor looked the other way instead of verifying some $2 billion that was said to be held in the Philippines, but ultimately turned out to be a mirage.

On Monday, the FT – which was credited with breaking the Wirecard story and even saw one of its reporters targeted by German regulators in retaliation – published some shocking new details about another bankrupt European firm that was aided and abetted by EY: it’s called ZeroMax, and it collapsed more than ten years ago. But thanks to Switzerland’s opaque legal system, details of the bankruptcy proceedings are only just reaching the public – and only after a cache of documents detailing EY’s failures was leaked to the FT.

Karimova

ZeroMax was a conglomerate based in Zug that was controlled by Gulnara Karimova, the daughter of Uzbekistan’s former President Islam Karimova. Although the firm reportedly had interests ranging from textile processing to natural gas exraction, that didnt’ stop Karimova from using it like her own personal slush fund – even transferring millions to another corporate entity that was implicated in organized criminal activity.

Dozens of documents seen by the Financial Times, including police reports, corporate bank statements, internal emails and receipts, as well as claims made in ongoing litigation, raise particular questions about the work of EY’s Swiss partnership, which gave Zeromax a clean bill of financial health for 2005, 2006 and 2007.

Per the FT, EY reliably signed off on transfers and expenditures that made little sense for ZeroMax’s businesses, including buying millions in jewelry for Karimova. It’s little wonder the firm, after being sapped of money by Karimova, the firm filed for bankruptcy protection in 2010.

EY’s work for ZeroMax has led to a lawsuit filed by a US hedge fund that’s seeking $1 billion in damages. The fund is called Lion Point Capital, which acquired a tranche of outstanding Zeromax debt from the bankruptcy estate in 2019. Many other creditors, including many small businesses have yet to recover any of their money.

The American accounting giant refused to comment to the FT beyond saying that court decisions in Uzbekistan led to the “de facto expropriation” of the firm’s assets. So what they’re saying is that Karimova essentially stole the money and jewelry she bought from the firm, with the firm’s money.

The firm said: “Court decisions in Uzbekistan in 2010 caused a de facto expropriation of Zeromax assets and its bankruptcy. This matter is subject to ongoing litigation and EY Switzerland will vigorously defend its position to vexatious claims. We cannot comment further.”

EY’s presence, and the fact that ZeroMax was redomiciled in Switzerland was supposed, was supposed to help western investors feel more comfortable investing in ZeroMax and lending it money. Yet, it’s pretty clear from the beginning that Karimova and the rest of the firm’s management largely saw it as a slush fund.

Zeromax was incorporated in Delaware in 1999 and redomiciled to Switzerland in 2005, with the stated purpose of channelling investment into a range of Uzbek industrial sectors.

Investors took succour from the company’s Swiss domicile and the fact it was audited by one of the world’s biggest accounting firms.

Yet, accounts show that in the four years before its collapse, many of the funds that passed through the company went into a sprawling network of opaque offshore entities. Many of these funnelled money to Uzbekistan, but many did not.

Some of the company’s most egregious expenditures included $13MM spent on luxury jewelry in 2006 and 2007.

Some transactions seem particularly hard to explain as business expenses.

In 2006 and 2007, for example, Zeromax spent more than $13m on luxury jewellery, including $2m in the Christian Dior store in Geneva alone. The following two years, it spent a further $25m on jewellery, including $6m at British jeweller Graff Diamonds.

At least some of the jewellery acquired was used by Karimova. In 2016, Swiss Federal Police obtained a warrant to search safety deposit boxes rented by her at Lombard Odier in Geneva. Inside they found luxury jewellery — including a diamond ring from Boucheron worth $2.5m — that had been paid for by Zeromax. The owner of one Geneva jewellery shop told the police, according to police documents seen by the FT, that Karimova had personally bought the jewellery and had the money wired to the business from a bank account controlled by Zeromax.

Several offshore transfers of millions of dollars through the company should have probably also raised red flags, especially considering the recipient of several transfers was later linked to an organized crime ring.

EY also failed to raise the alarm when money had been moved to opaque, offshore companies, sometimes with business pretexts that look perfunctory, such as generic contracts for “consulting services”. Between 2004 and 2007, the company transferred at least $288m to offshore companies. In at least one instance, transfers involved sending millions that ultimately went to an entity alleged to have been involved in criminal activity. Between mid 2006 and 2007, Zeromax transferred $180m to a wholly owned subsidiary, BVI-based company Galat Enterprises.

Galat, in turn, transferred at least $5m to the Gibraltar-based company Takilant, controlled by Karimova. Takilant was found in judgments in US and Swedish criminal cases to have been the central corporate conduit in a massive bribery scheme through which telecoms companies paid Karimova in exchange for lucrative Uzbek government contracts. Zeromax also transferred at least $2m to offshore companies Merkony and Belphil Capital, which between them sent $33m to Takilant, according to Swedish court files.

With this in mind, it’s clear EY was essentially helping ZeroMax’s management to misled investors, helping to lull their doubts and concerns, allowing ZeroMax to separate them from their capital, and funnel it to a corrupt oligarch. Although the FT’s story on ZeroMax didn’t mention Wirecard, the fraud at that company started a few years after most of the events described in the paper’s report on ZeroMax.

As EU regulators continue to ponder what to do, we’re starting to wonder if maybe the dissolution of Arthur Andersen in the wake of the Enron scandal didn’t send a strong enough message to the complacent accounting and audit giants.