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Who is opening the gates for kleptocrats?

Pink graffiti spells 'End This Kleptocracy' on a grey wall

Flickr; Angeli's Photography

You’ve probably heard this story before. A “self-made entrepreneur” inherits or opens a company, perhaps gets a small loan, and soon wins a lucrative government contract. A few years later, they’re a millionaire – or even a billionaire – with investments and assets across different countries.

This type of entrepreneurship seems to be particularly possible if you are the son, daughter or relative of a person holding a high-level public position. Many known kleptocrats fit the profile, including Isabel dos Santos of Angola, Teodorin Obiang of Equatorial Guinea or Gulnara Karimova of Uzbekistan, all of whose lavish wealth have drawn public attention over the years and, more recently, triggered law enforcement action in multiple countries.

Last week, a new investigation led by the Organized Crime and Corruption Reporting Project (OCCRP) uncovered what appears to be a similar story. Journalists revealed the real estate and business empires of Anar Mahmudov and Nargiz Mahmudova – the children of Eldar Mahmudov, Azerbaijan’s Minister of National Security between 2003 and 2015. Before becoming a minister, Eldar Mahmudov led the economic crime unit within the Ministry of Internal Affairs for a decade.

Corruption Perceptions Index

Azerbaijan consistently performs poorly on Transparency International’s Corruption Perceptions Index. In 2019, the country received a score of 30 out of 100.

Azerbaijan in the CPI

Anar Mahmudov is also the son-in-law of Zamira and Jahangir Hajiyev, the couple who became infamous after Zamira Hajiyeva’s extravagant purchases in London led to the first ever use of an Unexplained Wealth Order by UK authorities. Jahangir Hajiyev is the former head of the International Bank of Azerbaijan. He was arrested in his home country in December 2015 and convicted of fraud and embezzlement.

Anar Mahmudov opened his first company when he was just 16. Now, at the age of 36, he is linked to companies that, in 2012, took in more than US$65.9 million, as well as properties in Lithuania, Spain and the UK. His sister Nargiz lists a flat on the shores of Lake Geneva as her address and is also the owner of a historical building in Mallorca, Spain. The joint investigation by OCCRP, Finance Uncovered and Transparency International UK identified over €100 million worth of companies and real estate jointly held by the family.

The family have offered different explanations for the origins of their fortune, from a wealthy ancestor to a successful aunt. Clearly, their father’s official government salary of no more than 1,500 Euros per month does not seem to be a sufficient basis for building such an empire.

Their investments would not have been possible without the close involvement of a network of professionals, such as real estate agents, corporate service providers, lawyers and bankers.

What did they think was going on?

Gatekeepers or professional enablers?

Bankers, real estate agents, notaries, lawyers, accountants and corporate service providers are all considered gatekeepers of the financial system. They are in a privileged position to identify, detect and prevent the flow of dirty money.

International anti-money laundering standards – such as those set by the Financial Action Task Force (FATF) – oblige them to take certain steps, including conducting checks on clients and their source of funds, identifying the real individuals behind legal entities and reporting suspicious transactions to authorities. When these professionals fail to do so due to negligence or complicity, they can end up enabling money laundering, corruption and other crimes.

The recent investigation shows that Anar and Nargiz have been relying on the work of several intermediaries along the way. However, despite the family’s political connections and the apparent lack of clarity regarding the source of their wealth, very few of them seem to have raised any red flags.

Spain

Since 2000, the Mahmudov family has been using the services of the same notary to register all their assets in Spain, where Anar owns companies and real estate and Nargiz owns a historic building worth €4.1 million.

All notaries in Spain have been subject to anti-money laundering obligations at least since 2010. While there is no evidence that the notary involved committed any wrongdoing, it does not seem that either they or the real estate agents involved noticed anything suspicious about deals for dozens of properties, including land plots, luxury villas, office buildings, parking and storage spaces, shops and a hotel acquired by Spanish companies linked to Anar.

Luxembourg

Anar is linked to four companies in Luxembourg: one incorporated in 2000 and the other three more recently in 2015. The new investigation by OCCRP shows that one of the companies’ past directors, Farhard Rahimov, was also involved in the Hajiyevs’ UK dealings. Rahimov signed the documents to purchase a US$42.5 million private jet and was the sole director the company used to purchase one of the Hajiyev properties — now targeted by the Unexplained Wealth Order. In response to OCCRP, Rahimov said he was “only a nominee director” and his involvement was “very brief and carried barely any responsibilities”.

Providing formal services as nominee director is not illegal for lawyers in many countries, but that does not mean it does not bear responsibilities.

Corporate service providers, lawyers and other professionals offering such services should be subject to strict anti-money laundering obligations.

UK

In the UK, Mahmudov’s children were able to buy stakes in a range of British businesses – including a high-end Mayfair restaurant – as well as luxury London property, often using a network of companies registered in Cyprus, St Kitts and Nevis and Isle of Man, allowing them to obscure the true ownership of the assets.

Authorities in the UK should investigate whether UK professional intermediaries fulfilled their gatekeeper role and conducted the necessary anti-money laundering checks.

From the reporting, it appears that some important connections were not made. In mid-2018, Anar transferred all his shares in holding company 8-10 Dover Street to Michail Skordis at the same time the UK was defending its Unexplained Wealth Order against his mother-in-law, Zamira Hajiyev. Michail Skordis appears on documents of other companies formed in Cyprus that are linked to Anar.

Red flags at the bank

OCCRP journalists worked with data hacked from Cayman National Bank (CNB), where at least eight companies linked to the siblings held accounts from March 2014 until July 2016. Unlike the other intermediaries in the Mahmudovs' business dealings, the bank’s compliance department did flag many of the transactions, reported suspicious activities to the Isle of Man financial intelligence unit and subsequently closed the accounts. The fact that the two siblings are relatives of politically exposed persons and could not give convincing explanations for their source of funds (in the case of Nargiz this was simply listed as “personal savings”), seems to have been sufficient to suspect the transactions could be linked to money laundering. Even so, it took the bank more than two years to close the accounts.

Many of the companies linked to these accounts listed the same directors, despite being registered across the Isle of Man, Saint Kitts and Nevis, and Cyprus. Two of these directors were, in turn, linked to Northern Wychwood Limited, a trust management firm previously implicated in high profile investigations in Zimbabwe. The name of a man linked to Cypriot auditing firm KPST and his associate also appear several times across jurisdictions, both as directors and as beneficial owners. While most of the accounts listed Nargiz as the beneficial owner, CNB suspected Anar was the real owner for at least one of them, to which he transferred several million pounds between 2014 and 2016.

Gatekeepers asleep on the job

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These new signs that those who are supposed to help stop the flow of dirty money may have actually facilitated it unfortunately do not come a surprise. Despite strong evidence that gatekeepers should be doing much more, governments around the world have been very slow to ensure they implement their money laundering obligations and are punished for enabling or directly facilitating money laundering.

Only six out of 102 countries that have been assessed by the Financial Action Task Force (FATF) as of 30 April 2020 are considered compliant with recommendations that extend customer due diligence requirements to non-financial professional intermediaries. Only nine countries are fully compliant with recommendations to oblige lawyers, accountants, notaries and other professions to submit suspicious transaction reports. When it comes to the effectiveness of these measures, none of the countries assessed are considered highly effective.

Relying only on lawyers, accountants, corporate service providers, real estate agents and notaries is not sufficient to prevent and detect dirty money is laundered and invested.

It would be easier to identify potential wrongdoing if key information such as company ownership, including historical data and beneficial ownership information, as well as real estate data, is easily and directly available to authorities and the public.

Register authorities should be empowered and resourced to conduct further checks to ensure the accuracy and reliability of the data in the register.

Making up for lost time

The recent revelations of European assets belonging to the family of Azerbaijan’s former Minister of Security must trigger investigations.

  • The competent authorities in Spain and the UK should investigate whether investments into companies and properties in these countries are clean.
  • Authorities and professional bodies should also ensure that the different professionals involved in these transactions fulfilled their anti-money laundering obligations, conducting all the necessary checks and reporting suspicious transactions if identified.
  • If it becomes clear that they submitted false information to authorities or failed to perform their tasks, they should be duly sanctioned.

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