Written evidence submitted by Professor Kristian Lasslett (ECA0019)

Corruption, Russian Undue Influencing Operations and AML Weaknesses in Uzbekistan: How the United Kingdom Can Help Uzbekistan to Respond

Introduction

1. My name is Kristian Lasslett.[1] I am a Professor of Criminology at Ulster University in Northern Ireland. In addition, I am a co-Director of UzInvestigations a specialist research centre focusing on large-scale investigations into corruption, human rights and the abuse of power in Uzbekistan.[2] I also sit on the Board of the International State Crime Initiative, and I am Co-Editor in Chief of the academic journal State Crime.

2. Since 2015 I have conducted eight large scale studies into kleptocracy, corruption, abuse of power, and transnational enabling structures in Central Asia, with a primary focus on Uzbekistan and a secondary focus on Kazakhstan. Furthermore, I have collaborated in some of the most significant recent exposés on political and economic impropriety in Uzbekistan.[3] Through this work I have built detailed data-sets on the parallel power structures that operate behind the formal state facade in Uzbekistan (a phenomena referred to in the scholarly literature as ‘shadow states’), and how these parallel structures have been used by powerful political dynasties and their corporate clients for self-enrichment, enabled by onshore and offshore secrecy structures.[4] This work has also allowed me to understand how a broader climate of secrecy and internal repression has created a fertile opportunity structure for undue influencing operations conducted by sanctioned actors tied to the Putin regime in Russia.

3. I am making this submission in order to document for the Foreign Affairs Committee the shadow political structures that operate in Uzbekistan, the forms of corruption they precipitate, the undue influencing operations conducted by Russian actors exploiting national/transnational secrecy vehicles, the geopolitical implications of these intersecting processes, and potential ways the United Kingdom government can contribute to reform efforts that will advance the both the national interest and interest of the people of Uzbekistan.

Shadow State Structures in Uzbekistan and Corruption

4. Uzbekistan is a constitutional republic. On paper it has: strong legal protections for human rights/property rights, institutions set up for democratic accountability, and structures in place to prevent and censure the abuse of entrusted power by office holders.

5. However, there also exists alongside these formal structures a parallel set of shadow structures, wherein a number of senior figures in the political administration and their families enjoy unconstrained, dynastic political authority.[5] This authority can be used in an arbitrary manner to sustain their family’s share in authoritarian rule and to use it in order to curate markets.

6. Historically speaking senior figures within the security services, the presidential family, heads of powerful government committees and departments, alongside family members and close business affiliates, have been recognised within the Uzbekistani state as significant political authorities with the power to effect decisions and actions well beyond their formal portfolio. In the case of family members they may have no formal public office whatsoever, yet they are still able, for example, to order action from government departments, the prosecutor general and the courts.

7. This parallel power structure has been exploited to curate market structures and business in a manner that personally enriches family dynasties. This can occur in two principal ways. Through expanding their own business groups, or by acting as gatekeepers over particular markets and business opportunities, which are only granted to investors following payment of large bribe payments.

8. These rackets are sustained through state secrecy in Uzbekistan, including through the clamping down of civic freedoms, with journalists facing harassment and imprisonment for reporting on corruption. They are also sustained through offshore secrecy structures, including opaque legal structures and the discrete provision of legal, financial and advanced business service by providers who frequently fail to meet rigorous anti-money laundering standards.

9. The most well-known individual example of this corrosive system is Gulnara Karimova, the daughter of Uzbekistan’s first President, Islam Karimov. Karimov died in office on 2 September 2016. Although a minor administration figure in Uzbekistan, in reality Gulnara Karimova amassed wide-ranging political authority in government during the 2000s, which she used to curate her own business interests and the interests of clients, within industries such as telecommunications, hydrocarbons and media. The Karimova group used political secrecy structures in Uzbekistan and offshore secrecy structures primarily in the British overseas territories of Gibraltar and the British Virgin Islands. It was later found bribes paid to Karimova were channelled into accounts held with UK private bank Standard Chartered and Swiss bank Lombard Odier. Ms Karimova was prosecuted in Uzbekistan for a range of organised crime offences. International attempts to seize and return offshore assets in Switzerland, Belgium, and Ireland linked to telecommunications bribes, have been beset by claims made by Karimova’s counsel that she was not a public official and thus could not be bribed, an argument which has been approved of recently by a lower appeals tribunal in Switzerland. This is a sobering reminder of how even well documented cases can prove excessively slippery, particularly for prosecutors who have to document shadow state dynamics in Uzbekistan often with limited resources and little expert support.

10. Since the death of Islam Karimov in 2016, the dynamics typified by the Karimova case have intensified and expanded, taking advantage of the Mirziyoyev government’s New Uzbekistan reforms, which focus on modernising the economy and public administration, to strengthen integration into the global economy and prime private sector led growth. Privatisation of state assets, the opening up of markets to state supported private capital flows, the strengthening of infrastructure for finance and commerce, have all been mediated through the aforementioned parallel power structures, which have enabled political dynasties and their business groups to grow rapidly, via preferential state treatment, while bribery remains a commonplace requirement for foreign investors looking to access lucrative business opportunities in country.

11. In the next section, I will examine how cultures of secrecy and unaccountability, which are sustained by authoritarian politics and corruption, have created an opportunity structure for what appears from the evidence to be a degree of market capture in Uzbekistan’s gas and oil sector. These efforts have been organised in part by Kremlin aligned actors in collaboration with affiliates in Uzbekistan closely tied to prominent security service families.

Energy Capture? Russian infiltration of Hydrocarbons in Uzbekistan

12. In collaboration with the Uzbek language investigative media service Radio Ozodlik, over the past two years I have conducted an investigation into allegations that malign Russian actors have in effect captured Uzbekistani energy resources.[6] My media partners and I were in receipt of thousands of leaked corporate and governmental documents, pertaining to this alleged scheme. The subsequent investigation revealed that many of the weaknesses documented in the previous section of this submission, including lack of transparency, closed decision making, offshore secrecy structures, etc, have enabled a closely knit network of sanctioned Russian actors and actors in Uzbekistan with ties to the security services, to seize significant hydrocarbon market positions upstream (extraction), midstream (storage), downstream (refining/processing) and in trading, with the corporate operation anchored most notably in the UK Crown Dependency of Jersey.

13. This dynamic is set against the policy backdrop of President Mirziyoyev’s 2030 energy strategy, which seeks to expand the extractive, processing and refining capabilities of Uzbekistan with a view to assuring energy security in an expanding economy. The principal beneficiaries of the market opportunities this policy has opened up since 2016, includes Natural Gas-Stream, Sanoat Energetika Guruhi (SEG), Surhan Gas Chemical Operating Company, Gazli Gas Storage, Eriell, Enter Engineering, and Pinolio Pte Ltd.

14. The joint-investigation with Ozodlik uncovered concerning information suggesting that these beneficiaries cited above, are in fact ventures that are closely tied and part of what appears to be the same business consortium, whose public face is an executive from Samarkand, Bakhtiyor Fazilov. Mr Fazilov is the Chairman of drilling multinational Eriell, the ultimate parent company of which is Eriell International Group Limited incorporated in Jersey. The other stakeholders in this consortium are concealed by nominee shareholders and nominee companies, with one exception. The sanctioned Russian financial institution Gazprombank holds a 25% shareholding in Eriell (it is also the principal financier of this consortium of affiliated companies). 

15. Careful examination of leaked documents and offshore filings revealed a number of concerning features of the consortium’s nominee share ownership structure. First, nominee entities which hold a 25% interest in Eriell and a 60% interest in Gazli Gas Storage, are connected to sanctioned Russian businessman Gennady Timchenko. In addition, the other nominee entities holding shares are primarily furnished by Cypriot corporate service provider Epamina. An examination of the companies which Epamina manages in Cyprus, indicate its principal clients are Bakhtiyor Fazilov, Ravshan and Erkin Ubaydullaev and Sharif Inoyatov. Our investigation found both Ravshan Ubaydullaev and Sharif Inoyatov are also business partners of Bakhtiyor Fazilov (Eriell’s Chairman), in a number of significant ventures incorporated in Russia and Uzbekistan. Sharif Inoyatov is the son of Colonel General Rustam Inoyatov, who headed Uzbekistan’s feared SNB until 2018 (the SNB, which is now known by the acronym SSS, was Uzbekistan’s national security service). Ravshan Ubaydullaev is the son of General Umar Ubaydullaev, who was also a senior SNB operative. Finally, while the sanctioned Russian banker Alexey Matveev sits on the Board of Eriell as a representative of Gazprombank, our investigation found his son is a business partner of Bakhtiyor Fazilov in Uzbekistan.

16. Our report, therefore, concluded that this consortium has ties both to Russian businessmen sanctioned as Kremlin aligned actors, and to the sons of senior operatives from Uzbekistan’s security services.

17. In addition, our joint investigation also found that half of the management board overseeing Uzbekistan’s state oil and gas operator Uzbekneftegaz, were former employees of Eriell, Enter Engineering and Natural Gas Stream, while an Uzbekistani government report claimed: ‘The main composition of the middle and senior management personnel [at Uzbekneftegaz] are former employees of the contracting companies “Eriell” and “Enter” or relatives of the management of these contracting companies, which for several years has formed work in a conflict of interest to the detriment of the interests of the State and energy security’.[7] Our investigation also received internal government records indicating that the Ministry of Energy in Uzbekistan was energetically lobbying on behalf of the above consortium to award their companies significant business opportunities, even when other ministries protested that this process was circumventing open competition.

18. Turning now to gas field development, which was principally entrusted by the Government of Uzbekistan to the joint venture Natural Gas Stream, our investigation documented a number of concerning dynamics. Natural Gas Stream shares are held by the state-owned Uzbekneftegaz (50%), Swiss entity Gas Project Development Central Asia AG (0.1%), and Cypriot entity Altmax Holding Ltd, which has a 49.9% stake. Gas Project Development Central Asia and 50% of Altmax Holding are owned by Eriell Chairman, Bakhtiyor Fazilov, while the other 50% of Altmax Holding is owned by a nominee company. However, Russian businessman Andrey Filatov claims to be the ultimate beneficial owner of this 50% stake.

19. Natural Gas-Stream has been allocated the right to conduct exploration work at the Sechankul, Oqjar and Chimboy gas fields, and to develop fields at Urga, Akcholoq and Chandyr. Field exploration and development has been primarily financed through loans provided by the sanctioned financial institution, Gazprombank. Gazprombank it has been noted already is also the chief financier of the aforementioned consortium and a shareholder in Eriell. An examination of offshore financial filings, revealed that a significant amount of this finance ostensibly from Gazprombank was in fact being provided by a Cypriot subsidiary of Eriell, through internal loans provided to it by another subsidiary Eriell Oilfield Services Middle East DMCC. This financing of Natural Gas Stream by Eriell was organised through the purchase of Gazprombank issued Euronotes for the Natural Gas Stream venture. Drawing on Gazprombank and Eriell finance, over US$1.5 billion in contracts for field development were then awarded to Eriell Oilfield Services Middle East DMCC (although government documents indicate in total US$3.9 billion in contracts were awarded to Eriell and its close affiliate Enter Engineering by Natural Gas Stream).

20. Our investigation uncovered a major report produced by an interdepartmental committee in Uzbekistan, which indicated that the prices charged by Eriell for this drilling work are significantly higher than equivalent services provided by other market participants. The interdepartmental report also observes that the ‘general contractors [Eriell and Enter Engineering] hire the enterprises of [state owned] Uzbekneftegaz JSC as subcontractors for drilling and workover of wells at prices lower than in the contract with the general contractor’.[8]

21. This interdepartmental committee report indicated that the cost of international finance for this work contracted out to Eriell and Enter Engineering was being repaid through the provision of discounted gas sales to Natural Gas Stream by the state-owned Uzbekneftegaz, which Natural Gas Stream would then export for a significant profit. This profit earned through price arbitrage would, in turn, be used to repay the loans. Despite the alleged premium price paid for drilling work, the interdepartmental committee claims that the anticipated increase in gas flow in fields operated by Natural Gas Stream were well below what had been projected.

22. To summarise, gas field development at fields entrusted to Natural Gas Stream was being financed in part by the same company awarded the drilling contracts, i.e. Eriell, with the awards being made by a public-private joint venture, Natural Gas-Stream. The private partner in this joint venture, Altmax Holding, is owned in part by Eriell’s principal shareholder and Chairman, Bakhtiyor Fazilov, who is a business partner of Sharif Inoyatov and Ravshan Ubaydullaev. Eriell’s other two shareholder are Gazprombank and the Russian company AMGA Consulting, which our investigation tied back to Gennady Timchenko. The alleged above market price charged by Eriell, was covered through finance provided to Natural Gas Stream by Eriell and its shareholder Gazprombank, which was paid off, the interdepartmental committee, claims through the provision of cheap gas by Uzbekneftegaz for sale abroad.

23. Accordingly our joint-investigation concluded, based off this evidence, that (1) this consortium of closely affiliated companies had obtained a dominant market position in Uzbekistan’s gas and oil sector, (2) the consortium has ties to a range of sanctioned and politically exposed individuals, and (3) the arrangements won by this consortium appear to be to the disadvantage of the Uzbekistani state and public, and to the particular benefit of the consortium.

24. These findings came during a bitter winter in Uzbekistan, where there were systemic gas shortages leading to immense national suffering. While I am not in a position to assert a causative relationship between the above arrangements and the gas shortages. However, it is fair to hypothesise that such a causative relationship may exist and ought to be seriously scrutinised. Furthermore, it is also notable that the hardship Uzbekistan faced this winter, was capitalised on by the Kremlin, who has proposed inserting Uzbekistan into an energy union with Russia and Kazakhstan. The Republic of Uzbekistan’s ability to independently consider these and other proposals made by Russia, is seriously compromised by the significant control which Russian financial and corporate interests have obtained directly and indirectly over Uzbekistan’s energy production, refining, and storage facilities.

The UK as an Offshore Enabler

25. The previous two sections have noted examples of international secrecy structures associated with corruption, and what appears to be potential undue influencing operations, all of which have been anchored in the United Kingdom and its overseas territories.

26. This echoes the findings of previous and ongoing investigations I am involved in. These investigations indicate that the United Kingdom is being used by kleptocrats, money launderers, security services and organised crime figures from Central Asia, primarily as a discrete location through which to set up corporate and financial structures, and to reinvest the proceeds of crime into assets, including real-estate.

27. In some cases this is hiding in plain site. That is, figures intimately associated on the public record with money laundering and organised crime, have holding companies in the UK with significant global interests. In some notable cases these individuals are openly on the PSC register– though the use of proxies remains a widespread problem. And these figures own British real-estate, while their children attend UK universities.

28. This is a reminder that while laudable and extremely important, enhanced transparency measures alone will not prevent the United Kingdom from being used as enabling structure for corruption and organised crime, which undermines the rule of law, sustainable development, and democracy in Central Asia, while also at the same time priming the opportunity structure for Russian undue influencing operations. This presses home the importance of investing more resources here in the United Kingdom into AML systems, regulatory bodies, and anti-corruption assets, to ensure proactive prosecution of offenders and the recovery of unexplained wealth.

29. This arguably requires a joined up, multi-angle approach. First, it is important that effective laws are in place that enable authorities in the UK to target unexplained wealth, to punish regulated institutions in breach of their AML duties, and to prosecute anyone or any organisation proactively involved in corruption, including through money laundering. Second, there is a need to invest more resources into law enforcement agencies and regulatory bodies (e.g. National Crime Agency, Serious Fraud Office, Financial Conduct Authority, Companies House), who are the frontline actors charged with responsibility to tackle corruption, money laundering, and enablers. The illicit actors have significant financial resources at their disposal, which must be matched by commensurate investment in law enforcement. Third, there needs to be greater investment in research and intelligence capabilities. We need a joined-up ecosystem where those empowered to act against international corruption and their enablers, are working in collaboration with experts in the public and private sector, who understand precisely how the United Kingdom and its overseas territories are being abused by malign transnational actors.

30. To press home the urgency of the challenge, it is notable that Gulnara Karimova’s business empire was anchored offshore in Gibraltar and drew on financial facilities provided to it by the UK’s Standard Chartered bank. While we have seen law enforcement in the United States, the Netherlands, Switzerland, Sweden and Norway take actions against either Karimova or her corporate clients, to my knowledge no prosecutorial action has been taken in the UK. After I submitted a formal complaint to the Royal Gibraltar Police (RGP) over local companies owned by Karimova implicated in foreign bribery, I was informed by a senior officer: ‘The RGP can confirm it does not have an investigation open in this matter and does not intend to [do] so’.[9] The Financial Conduct Authority confirmed no investigation has been conducted into Standard Chartered regarding Karimova bribe proceeds that passed through accounts at the bank, though it has noted more generally the fines levelled against the institution for AML failings. While a recent report authored by Freedom for Eurasia notes: ‘No known investigation has taken place of any of the professionals located in the UK or its overseas territories who provided services to Karimova’s proxies’.[10]

How can the United Kingdom Contribute to Reform Efforts in Uzbekistan?

31. Over the past five years the United Kingdom in Uzbekistan has prioritised building good relations with government and expanding trade/investment, as the primary mechanism through which to advance the UK national interest. There has been a reluctance to engage substantively with issues of human rights and grand corruption. I have been informed by a credible source that there is an unofficial moratorium with regards to raising any issue relating to grand corruption, because of the perceived harm it would do to the UK bilateral relationship with the Mirziyoyev government.

32. While on first reflection this may appear to be an expedient approach, it has long term consequences that undermine the UK’s security, economic and human rights interests in the region. The stark reality is that high levels of corruption and unremedied human rights abuses, prevent most UK investors and companies from conducting business in Uzbekistan. Anyone seeking to do substantive business in Uzbekistan needs to have a significant risk appetite, and even if resources are allocated to due diligence, companies still face the reputational risk of being tied unintentionally to corruption, sanctioned individuals, and human rights abuses. The economic dividend for the UK of inaction with regards to corruption and human rights, is therefore fairly minimal. Furthermore, it has also been noted that the enabling environment for grand corruption in Uzbekistan, is also fertile soil for Russian undue influencing operations. Finally, while grand corruption continues to be conducted intensively in Uzbekistan, it continues to enrich political dynasties in country with a strong commitment to deeply authoritarian politics, and who in notable cases are closely aligned with the Kremlin.

33. The United Kingdom government can respond to these forces by advocating and supporting reforms that strengthen transparency, accountability and democratic structures, and which champion organisations and processes that advance anti-corruption and anti-money laundering efforts. The Government of Uzbekistan is far from a uniform entity, it contains different groupings with different perceptions of how to advance the national interest and how to advance the interests of political and economic elites. Within this landscape, there are powerful factions supportive of further reform efforts, which the United Kingdom can positively support. Examples of positive actions that can be taken by the United Kingdom include:

1. Working with governments in Central Asia to strengthen corporate transparency through a Companies House style register, which publicly retains corporate filings and declares essential information such as ultimate beneficial owners. For example, if Uzbekistan is to further integrate into the international economy and attract investors beyond those with large risk appetites, it needs to build transparent market structures that can give investors’ confidence. A robust, open corporate register is one essential component of such a structure. The UK as a leading global example of good practice in this regard is positioned to advocate and support such a reform, both in Uzbekistan and in the Central Asian region more widely.

2. Anti-money laundering regulation, AML oversight and AML practice in Uzbekistan is in parlous state. Some banks are in fact run by malign actors involved in corruption and money laundering. There is very little focus in Uzbekistan on holding other institutions such as law firms, corporate service providers, accountants, etc to account for breaches of AML duties. Furthermore, Uzbekistan’s AML laws are themselves in need of significant strengthening to be in line with FATF guidance. Therefore, the current situation in Uzbekistan’s financial sector poses a serious threat to national economic security. Were there to be any serious scrutiny done of the country’s parlous AML regulations and controls, Uzbekistan could face grey and black listing. To prevent this situation occurring, significant action is required. The UK has been in a number of key respects a global leader in AML practices, with experience in the challenges associated with regulatory frameworks, market oversights, and enhancing compliance. This constitutes transferable knowledge that can benefit Uzbekistan. It should be an area the UK government proactively champions with interlocutors in Uzbekistan.

3. While there are many democratic shortcomings in Uzbekistan, the government is concerned by and responsive to public opinion. It is critical that there is an enabling environment for journalists, activists, and scholars, to investigate and report publicly on corruption, undue influence, and money-laundering.  Currently, anyone writing on these topics faces the real risk of imprisonment. The United Kingdom has can contribute to the enabling environment for civil society, by attending trials, formally raising concerns with interlocutors in government, making public comment where needed, supporting a freer environment for NGO registration, and providing support to individuals and organisations looking to build capacity in country for civil society investigations and oversight.

4. The United Kingdom has a vibrant media, civil society and research environment, where there is significant expertise with regard to good governance, anti-corruption, AML and human rights compliance. Activists, researchers and journalists in Uzbekistan, lack funded access to training and development opportunities abroad. The United Kingdom could help address this gap, by making available funding specifically for individuals to obtain training, and professional/research qualifications, in areas related to economic crimes, anti-corruption, human rights monitoring, and investigative journalism/research.

March 2023