Mr. Speaker, as the G-8 meets in St. Petersburg this weekend to discuss important international issues, we should be mindful that the host nation Russia hardly deserves to be included in this accomplished group. The seven other…
Mr. Speaker, as the G-8 meets in St. Petersburg this weekend to discuss important international issues, we should be mindful that the host nation Russia hardly deserves to be included in this accomplished group. The seven other participating countries are mature democracies with proven market economies that use the rule of law as the basis for civil society and display mutual respect across borders.
Unfortunately, Russia has yet to subscribe to these same principles. Russian President Vladimir Putin has placed energy security at the top of the G-8 agenda. However, with Russia being the dominant supplier of gas to Europe, leaders throughout that continent feel anything but secure. And for good reason. Just this week, Rosneft, the Russian oil company, is seeking validation through a public offering to raise $11 billion from mostly Western investors.
What makes this offering controversial is how Rosneft acquired its assets and that it is a state-owned entity. Rosneft's asset once belonged to the YUKOS Oil Company, a private company that prospered until the Kremlin directed attacks against its chairman, Mikhail Khodorkovsky. Using the pretext of past tax claims the Russian government put Mr. Khodorkovsky and other company of officers in prison and then arranged for the state takeover of the company. The case and subsequent actions were highly controversial and widely reported in the Western media at the time.
My Energy and Resources Subcommittee under the House Committee on Government Reform, recently conducted hearings on energy security and received credible testimony about the extra-legal, if not outright illegality, of the Russian government's actions regarding the YUKOS Company. We should remain concerned about how the Kremlin, which clearly controls almost all oil and gas exports to European and CIS countries, might use energy for political and foreign policy purposes.
My colleague, Mr. Lantos, shares my concerns and this week sent a letter to several U.S. financial institutions that may be contemplating participation in the Rosneft lPO, questioning whether investing in a state entity which has acquired its main assets under other than legitimate circumstances may be in violation of U.S. laws and the Sarbanes-Oxley Act.
For the benefit of my colleagues, I would like to ask that Mr. Lantos' letter be placed in the Record at this time.
Congress of the United States,
House of Representatives
Washington, DC, July 10, 2006.
Mr. James Dimon,
Chairman and CEO, J.P. Morgan Chase,
New York, NY.
Dear Mr. Dimon: I write regarding recent news accounts that
J.P. Morgan Chase may serve as an investment advisor or
otherwise participate in the initial public offering of
Russia's state-owned oil company, OAO Rosneft Oil Company
(``Rosneft''). I understand from these news reports that the
offering, currently estimated to be $8 billion to $13
billion, is to take place in mid-July 2006.
I am concerned that such transactions may violate federal
anti-money laundering laws and the Sarbanes-Oxley Act.
According to published reports, the largest portion of
Rosneft's assets was acquired in a transaction of
questionable legality I question whether financial
institutions that have access to the U.S. payments systems
should be engaged in transactions involving assets acquired
by a state entity under circumstances that are contrary to or
in violation of U.S. laws and acceptable market practices.
Given the source of Rosneft's assets, there are questions
about whether the proposed IPO would involve prohibited
proceeds as specified under 18 U.S.C. 1956 (``laundering of
monetary instruments''). Specifically, any financial
institution involved in the IPO could be at potential risk of
violating federal anti-money laundering laws aimed at
preventing the proceeds of theft, corruption or other forms
of unlawful activity from entering the payments system.
Rosneft's acquisition of assets from a publicly traded
company, OAO NK Yukos Oil Company (``Yukos''), in which
Americans had invested through American Depository Receipts
traded on the New York Stock Exchange, violated basic
principles and norms of free markets. Public accounts of the
transaction strongly suggest that Rosneft's senior officers
and directors, some of whom are senior officials of the
Russian government, personally profited from the theft of
these assets through their involvement in a sham transaction.
In that transaction, a front-company of unknown ownership
acquired the assets at billions of dollars below their market
value in a forced auction arranged by these very officials,
who in turn secured the prompt transfer of these assets from
the front-company to Rosneft--a sequence of events that have
raised serious questions of corruption.
Significant financial institutions and analysts have raised
ethical and legal concerns about the planned IPO due to the
history of the Rosneft assets. As you may know, F&C Asset
Management (``F&C''), based in London, on April 27, 2006
publicly announced that the Rosneft IPO raised serious
questions of governance and legal risk, which made it
impossible for F&C to be a participating investor. According
to F&C, the Rosneft IPO is burdened by its lack of
transparency and no ``credible assurances that it has
identified, and made adequate provisions for any liabilities
stemming from the acquisition of its Yuganskneftegaz asset
[the assets taken from Yukos].''
Independently, George Soros, an experienced investor in
Russia, has also found serious ethical issues pertaining to
the Rosneft IPO. As Soros wrote in The Financial Times on
April 26, 2006, Rosneft acquired its Yukos assets through
non-transparent sale by a front-company that ``won'' a rigged
auction of Yukos assets engineered by Russian authorities
under circumstances that made it impossible to determine who
profited 0 the transaction. As Soros wrote, the assets were
``not acquired directly. The auction was won by unknown
Russian company that sold itself within days to Rosneft.''
According to Mr. Soros, ``[t]he unknown owners made an
unknown amount of money on the transaction. The question is:
`Should an IPO be allowed to go forward without disclosing
the pertinent information?'.''
In amending the Bank Secrecy Act in 20 1 with the USA-
PATRIOT Act, the Congress emphasized the policy of ensuring
that every financial institution determine the beneficial
ownership of the assets involved in a transaction in order to
ensure that they are not illicit proceeds. We established a
risk-based system for due diligence in which we asked federal
regulators to ensure that financial institutions exercise
greater due diligence in high risk cases, such as when assets
are controlled by political figures, or those close to them,
sometimes known as ``politically exposed persons,'' in order
to guard against the risk that the financial institution
could be used to handle the proceeds of corruption.
I recognize that Bank Secrecy Act and Sarbanes-Oxley
compliance has become a continuing focus of all publicly
traded U.S. financial institutions and that your institution
has policies and procedures in place designed to protect the
institution from the risk of handling illicit funds. In
recent years, however, federal regulators have repeatedly
found cases in which major U.S.-regulated financial
institutions failed to undertake risk-based assessments
across every area of their business, with the result that
some significant risks had not been recognized in a timely
fashion.
There is no information publicly available to enable
Congress to assess the kind of due diligence that
participating U.S. financial institutions have done regarding
the underlying assets involved in the Rosneft IPO. We cannot
assess ow such institutions have determined that neither
corruption nor theft have been involved in Rosneft's
acquisition of this property. I recognize the Rosneft IPO is
only weeks away, but I urge you to take into account the
concerns outlined above, particularly as they relate to the
Bank Secrecy Act and Sarbanes-Oxley concerning any
transactions you contemplate in this regard.
Sincerely,
Tom Lantos,
Member of Congress.