Swiss EY under scrutiny over major bankruptcy

Collapse of Uzbekistan conglomerate Zeromax at centre of law suit

EY auditors in Switzerland failed to raise the alarm over multimillion-dollar jewellery purchases and approved huge payments to opaque offshore companies in the years before one of the country’s biggest ever corporate collapses.

Zeromax, a conglomerate based in the Swiss canton of Zug, had a business empire in Uzbekistan with interests ranging from textile processing to natural gas extraction that made it the Asian country's largest employer, accounting for as much as 10 per cent of GDP.


It collapsed in 2010 amid a political power struggle in Tashkent, leaving debts, it has only recently been discovered, of more than SFr5.6 billion (€5.1 billion). This makes it the second-largest ever bankruptcy in Switzerland, after Swissair in 2001. At least SFr2.5 billion of its assets are still missing, according to creditors.

Thanks to Switzerland’s notoriously opaque legal system and corporate disclosure regime, details of the group’s complex structure and labyrinthine network of offshore holding companies are only now coming to light as frustrated creditors push to recover lost assets.


Dozens of documents , 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.

The firm continued to be employed as Zeromax’s auditor for a further three years until the company collapsed but did not publish any further audit opinions on its annual accounts.

EY Switzerland is now being sued in Zug for $1 billion (€840 million)in damages by US hedge fund Lion Point Capital, which acquired a tranche of outstanding Zeromax debt from the bankruptcy estate in 2019, lawyers familiar with the case said. Lion Point declined to comment.

Meanwhile, hundreds of European creditors – including many small businesses in Germany and central Europe – are still owed billions in aggregate by Zeromax.

EY declined to answer detailed questions about its role auditing Zeromax’s accounts.


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.”

Zeromax was at one time closely associated with Gulnara Karimova, a daughter of former Uzbek president Islam Karimov. Ms Karimova – a flamboyant socialite once known as the “princess” of Uzbekistan – denies any connection to the company. She has been imprisoned in Tashkent since 2015, after falling from favour with the new Uzbek regime.

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 transactions seem particularly hard to explain as business expenses.


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

At least some of the jewellery acquired was used by Ms 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 $2.5 million – that had been paid for by Zeromax. The owner of one Geneva jewellery shop told the police, according to police documents , that Ms Karimova had personally bought the jewellery and had the money wired to the business from a bank account controlled by Zeromax.

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 $288 million 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 $5 million to the Gibraltar-based company Takilant, controlled by Ms 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 $2 million to offshore companies Merkony and Belphil Capital, which between them sent $33 million to Takilant, according to Swedish court files.

On at least one occasion, EY was aware of the irregular nature of a Zeromax offshore transfer.

An email sent by a senior EY executive to Zeromax management in 2008 noted the lack of documentation for $5.5 million being sent from Zeromax to a company called Ystral. The email highlighted the need for a “business reason” for the transfer, to satisfy Swiss tax authorities.

“We are aware that some of our questions may touch ‘sensitive matters’. In case you wanna discuss the above listed points with us (personally or by phone), please let us know and we will set up a meeting/call,” the EY executive wrote.

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


In instances where other irregular transactions were questioned by EY and reversed as a result, they did not result in any wider questions being asked about the operations of the company or the trustworthiness of its executives.

A discovery by EY that in 2007, $250,000 had been spent at the ultra-exclusive Montreux sanatorium Clinique La Prairie by the wife of the chief executive was not subject to any further inquiry, after the CEO promised to reimburse Zeromax. “We are not trying to hide anything, maybe just [sic] it was not done properly,” he wrote to EY.

In 2008, a year when EY did not issue an audit opinion on Zeromax but was still its auditor, the financial irregularities increased.

The company spent $29 million on a penthouse residential apartment in Hong Kong, for example, which it declared was for use as office space. Four months later it sold the apartment for $14 million to Ms Karimova’s then boyfriend, Rustam Madumarov.

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

Since its collapse, creditors have faced an arduous battle to reclaim assets and understand Zeromax’s structure. Ms Karimova’s own complicated financial and political situation has proved a major impediment.


Karimova’s Geneva lawyer, Grégoire Mangeat, said that his client “has always strongly denied any implication in the company Zeromax”, and pointed out that Swiss prosecutors rejected a case in 2017 that sought to connect her to it.

At least one US official has taken a different view. According to correspondence that was made public as part of the WikiLeaks trove, state department diplomats regarded Karimova as a “robber baron”.

A January 2010 cable from Richard Norland, the US ambassador to Tashkent, sent to Washington just months before Zeromax’s collapse, described the company as Ms Karimova’s “personal entity”.

“The embassy’s message to those proposing to enter into business arrangements with Zeromax or its affiliates,” he wrote, “. . .is to carry out full due diligence.” – Copyright The Financial Times Limited 2021