Ernst & Young under scrutiny after second largest bankruptcy in Swiss history


In the years before the collapse of one of the largest Swiss companies in history, Ernst & Young’s auditors failed to sound the alarm about multimillion-dollar jewelry purchases and approving large payments to opaque offshore companies.

Zeromax is a corporate group headquartered in the Swiss canton of Zug. It has a business empire in Uzbekistan. Its business scope ranges from textile processing to natural gas extraction, making it the largest employer in Asian countries, accounting for 10% of GDP.

It went bankrupt in a political power struggle in Tashkent in 2010, leaving more than 5.6 billion Swiss francs (6.1 billion US dollars) in debt, which was only recently discovered. This makes it the second largest bankruptcy in Swiss history, second only to Swissair in 2001. According to creditors, at least 2.5 billion Swiss francs of assets remain unaccounted for.

Due to Switzerland’s well-known opaque legal system and corporate information disclosure system, the complex structure of the group and the details of the intricate network of offshore holding companies are only now exposed as frustrated creditors struggle to recover lost assets.

Dozens of documents seen by the Financial Times, including police reports, company bank statements, internal emails and receipts, as well as claims raised in ongoing litigation, all raised concerns about Ernst & Young’s work in the Swiss partnership. In particular, this provides Zeromax with a clean financial list. Health in 2005, 2006 and 2007.

The company continued to be employed as Zeromax’s auditor for three years until the company went bankrupt, but did not issue any further audit opinions on its annual accounts.

A lawyer familiar with the case told the British Financial Times that Ernst & Young Switzerland is now sued in Zug by the American hedge fund Lion Point Capital, seeking damages of US$1 billion, which received a batch of outstanding payments from the bankruptcy property in 2019 Zeromax debt. Lion Point declined to comment.

At the same time, hundreds of European creditors — including many small companies in Germany and Central Europe — still owe Zeromax billions of dollars in debt.

Ernst & Young declined to answer detailed questions from the Financial Times about its role in auditing Zeromax’s accounts.

The company said: “The 2010 court decision in Uzbekistan resulted in the de facto confiscated and bankruptcy of Zeromax’s assets. This matter is ongoing, and Ernst & Young Switzerland will actively defend its position on unreasonable troubles. We cannot comment further.”

Jewelry in the safe

Zeromax has worked with Gurnara KarimovaThe daughter of former Uzbekistan President Islam Karimov. The gorgeous socialite Karimova, once known as the “princess” of Uzbekistan, denied any connection with the company. After losing the favor of the new Uzbek regime, she has been imprisoned in Tashkent since 2015.

Zeromax was incorporated in Delaware in 1999 and moved to Switzerland in 2005. Its stated purpose is to introduce investment into a series of industrial sectors in Uzbekistan.

Investors got help from the company’s Swiss domicile and the fact that it was audited by one of the world’s largest accounting firms.

However, the accounts show that in the four years before its bankruptcy, many of the funds through the company flowed into a large network of opaque offshore entities. Many of them sent money to Uzbekistan, but many did not.

Some transactions seem to be particularly difficult to explain as business expenses.

For example, in 2006 and 2007, Zeromax spent more than US$13 million on luxury jewelry, of which US$2 million was spent at the Christian Dior store in Geneva alone. In the next two years, it spent another $25 million on jewelry, including $6 million from British jeweler Graff Diamonds.

Zeromax was once closely related to Gulnara Karimova © Yves Forestier/Getty Images for Style.Uz Art Week 2013

Karimova used at least some of the jewels obtained. In 2016, the Swiss Federal Police obtained a search warrant to search the safe she rented at Lombard Odier in Geneva. Inside, they found luxury jewelry paid by Zeromax-including a Boucheron diamond ring worth 2.5 million US dollars. According to police documents seen by the British “Financial Times”, the owner of a jewellery shop in Geneva told the police that Karimova personally purchased the jewels and transferred the money to the company from a bank account controlled by Zeromax.

Transfer of funds to an opaque offshore company

When funds were transferred to an opaque offshore company, Ernst & Young also failed to issue an alarm. Sometimes their business excuses seemed perfunctory, such as a general contract for “consulting services.” Between 2004 and 2007, the company transferred at least US$288 million to offshore companies.

In at least one case, the transfer involved sending millions of dollars to entities suspected of involvement in criminal activities. Between mid-2006 and 2007, Zeromax transferred US$180 million to Galat Enterprises, a wholly-owned subsidiary in the British Virgin Islands.

In turn, Garratt transferred at least $5 million to Takilant, a Gibraltar company controlled by Karimova. In the verdicts of criminal cases in the United States and Sweden, Takilant was found to be a company’s core channel. Mass bribery program The telecommunications company paid Karimova in this way in exchange for a lucrative Uzbek government contract.

According to Swedish court documents, Zeromax also transferred at least US$2 million to offshore companies Merkony and Belphil Capital, which transferred US$33 million to Takilant.

At least once, Ernst & Young realized the irregular nature of Zeromax offshore transfers.

In 2008, an email sent by a senior Ernst & Young executive to Zeromax management pointed out that Zeromax’s $5.5 million sent to a company called Ystral lacked documentation. The email highlighted the need for “commercial reasons” for the transfer to meet the requirements of the Swiss tax authorities.

“We understand that some of our issues may involve’sensitive issues’. If you want to discuss the points listed above with us (in person or by phone), please let us know and we will hold a meeting/teleconference,” the Ernst & Young executive wrote .

Zeromax’s management responded that the business reason was “self-evident”.

Football spending

While other illegal transactions were questioned by Ernst & Young and therefore cancelled, they did not raise any broader questions about the company’s operations or the credibility of its executives.

Ernst & Young discovered that in 2007, the CEO’s wife spent US$250,000 at the super exclusive Montreux nursing home Clinique La Prairie. After the CEO promised to repay Zeromax, the news is not subject to any further investigation. “We are not trying to hide anything, maybe just [sic] It was not done correctly,” he wrote to Ernst & Young.

Montreux Nursing Home Clinique La Prairie

Montreux Nursing Home Clinique La Prairie © Alamy

In 2008, Ernst & Young did not issue an audit opinion on Zeromax, but it was still its auditor’s year, and financial irregularities increased.

For example, the company spent US$29 million to purchase a penthouse in Hong Kong and announced that it would be used as office space. Four months later, it sold the apartment to Karimova’s boyfriend at the time, Rustam Madumarov, for $14 million.

It also spent US$27 million on football in 2008 and 2009, hiring some of the sport’s best-known names to work for Uzbek club FK Bunyodkor. These include a $15 million 18-month contract with Luiz Felipe Scolari, which makes him the highest paid football manager in the world. Zeromax also paid US$12 million to hire Brazilian player Rivaldo.

Since the bankruptcy, creditors have faced an uphill battle to recover their assets and understand the structure of Zeromax. Facts have proved that Karimova’s own complex financial and political situation is a major obstacle.

Karimova’s Geneva lawyer Grégoire Mangeat told the Financial Times that his client “has strongly denied any involvement with Zeromax” and pointed out that the Swiss prosecutor rejected a case in 2017 that tried to link her to the matter.

At least one U.S. official held a different view. According to a letter published as part of the WikiLeaks treasury, the State Department diplomat regarded Karimova as a “robber baron.” In January 2010, the US ambassador to Tashkent, Richard Norland, sent a telegram to Washington a few months before Zeromax collapsed, stating that the company was a “personal entity” of Karimova.

“The embassy’s message to those who propose to enter into business arrangements with Zeromax or its affiliates,” he wrote, “…is to conduct a full due diligence.”


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