Recommendation and conclusion of the Parliamentary group
Jan 16, 2017, Ulaanbaatar
Parliamentary standing committee on legal issues set up working group to investigate fully the purchase of 49% common stake shares in “Erdenet Enterprise” LLC and “Mongolrostsvetmet” LLC owned by “Rostech” state owned corporation of Russian Federation and Russian Government by “Mongolian Copper Corporation” through its resolution no.06 dated Nov 8, 2016. The working group was chaired by Sh.Radnaased, lawmaker and its members included lawmakers J.Batzandan, D.Ganbold, B.Delgersaikhan, L.Munkhbaatar, Ts.Nyamdorj, L.Enkhbold and other relevant officials.
Working group held numerous meetings and reviewed relevant laws, regulations, agreements, results of sub-working group investigation and materials and determined following. These are:
One. About Agreement
1. 2004 Agreement between Mongolia and Russian Government concerning Erdenet Enterprise and 2007 Agreement of the two governments concerning “Mongolrostsvetmet” consortium are ratified by Mongolian Parliament and decisions of supreme state organs that ratified these agreement are still valid as of now.
2. The above agreements shows that Mongolian and Russian governments are the “Parties” of this agreement and Mongolian State property Committee and Russian “Rostech” consortium are “shareholders” that represent the Parties. When, Russian government didn’t officially ask Mongolia as a “Party” of the agreement, Mongolian government convened on June 13, 2016 based on official letter of the Chmozev, general director of the Russian shareholder and refused its right to buy 49% shares and agreed its sale to “Mongolian Copper Corporation” LLC. In another word, this decision was made based on request of entity that have no right to represent Government of Russian federation and deal with Government of Mongolia.
3. There are no documents or facts that tells some authorized officials conducted negotiation on behalf of Mongolian government regarding sale of 49% stake in the companies owned by other party or our government authorized some entity or officials to represent it regarding this issue.
4. When agreements ratified by parliament are valid and Mongolian government didn’t refuse its right to buy this 49% shares and Parliament didn’t provide any guidance about this issue, individuals representing private banks conducted negotiations and illegally violated full authority of Parliament and Government.
Following articles of Mongolians laws have been violated as following due to these illegal activities.
1.Item 15 of Article 25 of Mongolian constitution “ State Great Khural shall be the sole competent body for ratifying and denouncing international agreements to which Mongolia is a party,”
2.Item 2 of the article 16 of law on Mongolian government “ Government shall submit request to cancel international agreement to State Great Khural”.
3.Article 16 of the bilateral agreement on “Erdenet Enterprise” LLC signed between Mongolian and Russian governments /hereby, will be named “Parties”/ “ either party can sell its shares in the mine to other state and legal person through mutual negotiation with the other party”.
In this case, the either party will have preferential right to buy the shares. In another word, the parties and the Russian and Mongolian government shave to negotiate with each other. Discussion of this issue by Mongolian government after receiving the official letter sent by “Rostech” state enterprise is not complying with relevant article of the agreement.
4.Based on Article 8.1 of the law on state and local owned property “ State Great Khural shall be owner on behalf of all public,”, article 2.6 of the law on Company “ for state owned company, owner can be State Great Khural on behalf of state…... and shareholder can be government on behalf of these….” It is up to State Great Khural as owner of state property to decide issues “whether state to own the 49% stake of the above-mentioned enterprises or allow ownership of legal persons of private sector.
5.Item.6 of Article 29.2 of the law on Government of Mongolia “ draft agenda shall meet laws, regulations and decree of President and fully processed and evidenced by relevant estimation, relevant ministry recommendations etc. and article 9” draft agreed by responsible cabinet member and its rationale shall be presented to Prime Minister by cabinet secretariat and given out to all cabinet members at least 3 workdays before discussion of the draft agenda.
Cabinet meeting minute no.33 of 2016 and materials sent by Government shows that government violated the above articles of the law on Mongolian government during its cabinet discussion.
Government violated laws, regulations and 2007 agreement concerning Mongolrostsvetmet consortium as following when it made above decision.
Two. About financial sources for purchase of 49% shares of the named enterprises
Mongolian Copper Corporation transferred 400,27 million dollars to Russian Alfa Bank through 3 transactions originating from its account at Trade and Development bank for the purchase of 49% common shares of “Erdenet Enterprise” LLC and “Mongolrostsvetmet” LLC and following is financing sources for this payment. These are:
112.0 Billion tugrug allegedly transferred from personal savings account at UB City Bank owned by Ts.Purevsuren who was working as legal advisor of Trade and Development Bank (TDB) to capital fund of Mongolian Copper Consortium;
Initially in 2012, this company was set up by G.Khurelbaatar who was working at TDB as a company with sole member and with name Jumiere and in 2014, this company set up a daughter company named MDP and renamed itself as NDK. Then, in March, 2016, it became Mongolian Copper Consortium. There are no evidences or facts that the company operated between 2012-2016.
By early, 2016, the company increased its capital by 12.0 billion tugrug and then by 100.0 billion tugrug. These are transferred from savings account of Ts.Purevtuvshin at UB City bank. Ts.Purevtuvshin worked for 4 year period in the legal department of the TDB after graduation of law school in 2012 and he don’t have opportunity to earn 112.0 billion tugrug during this period. There is probability that this money is monetary assets of deposit holders of UB City bank.
75.0 million dollars borrowed from TDB on June 20, 2016.For this borrowing, Mongolian Copper Corporation used so-called “future revenue source” and 49% shares of Erdenet on June 30, 2016 as loan collateral and then, transferred 8.6 million dollars from Erdenet enterprise as 2013 dividend on July 25, 2016 and 47.1 million dollars as 2012 dividend on Aug 12, 2016 or during period it began to exercise control illegally in the enterprise to itself. Total of these transfers was 55.7 million dollars ;
62.9 Million dollars borrowed from QSC owned by D.Erdenebileg, shareholder of TDB in June, 2016.
This company was set up in 2008. It paid 2.8-18.0 million tugrug taxes between 2010-2012. In 2014, it signed 30-year concession agreement to use Darkhan Metallurgical Plan with Ministry of Economic Development and it got 100.0 billion tugrug from Mongolbank in 2014 and 2016 respectively or total 200.0 billion tugrug as loan. It also got 136.0 billion tugrug from the Genghis bond money. In 2015, it gave 35.1 km long rail road allegedly built with own funding to state for 90.3 million dollars. It got 71.3 million dollars in 2015 from Development bank and 160.0 billion tugrug from Mongolbank on June 30, 2016 as loan. As of its 4th quarter, 2016 financial statement, it has 336.5 billion tugrug short term loans and 339.4 billion tugrug long –term loans.
N.Zoljargal, who was working at TDB and then became President of Mongolbank provided 100.0 billion tugrug loan on Nov 28, 2014 and then 100.0 billion tugrug on April 6, 2016 and 160 billion tugrug on June 28, 2016 to QSC company as illegal loan, as the company transferred to ownership of TDB.
Here is one fact that draws attention. For example, 260.0 billion tugrug loan provided by Mongolbank coincided with the period during purchase of Erdenet shares and its payment.
70.0 Million dollars borrowed from Riverstone Properties Company on June 17, 2016 which is under sole ownership of Ts.Purevtuvshin and never paid taxes;
68.0 Million dollars borrowed from United Energy System. This company was set up on Dec 12, 2012 and paid 10.2-33.5 million tugrug tax between 2012-2015 and in 2016, paid 1.2 million tugrug taxes. On May, 30, 2016, it transferred 99.8% of its shares to QSC Company which is owned by D.Erdenebileg;
This company used alleged “investment for power plant” to be built in Umnugobi province as collateral for its loan from TDB on June 14, 2016.
68.0 million dollars borrowed from Singapore registered Kanetic company on June 17, 2016.
When Kanetic Company borrowed 68 million dollars from TDB on June 16, 2016, it used copper concentrates to be purchased from “Erdenet Enterprise” as loan collateral. For this, G.Khurelbaatar, who founded Jumeira company signed this loan agreement and then the loan was transferred to Mongolian copper corporation.
The above-mentioned companies or QSC, Riverstone, United Energy System, Kanetic immediately re-lent the large US dollars loan they got from TDB to Mongolian Copper Corporation. These loan agreements are all same and have same format to the letter and the issuance of large USD dollar loans without any collateral shows, these are just disguise documents.
In sum, the above 400.0 million dollars transferred for the payment are loans disbursed by TDB and UB City bank owned by someone D.Erdenebileg to companies set up by major shareholder of these banks or in the name of people that work under direct supervision of the above-shareholder under pretense of disguised agreements and without collateral.
Three.Capacity of the banks that made the payment, future risks
1.According to information provided by Mongolbank, 99.1% of the UB City bank, 93.1% of the TDB are owned by one individual named Erdenebileg Doljin (or D.Erdenebileg).UB City bank is estimated to have 86.0 billion tugrug own asset and 44.0 billion tugrug equity‚ TDB have 745.0 billion tugrug own asset and, 50.0 billion tugrug equity, according to Mongolbank. Now under the current law restriction, if assumes that 20% of own assets will be used as loan for one borrower, TDB is required to disburse 149.0 billion tugrug loan to one borrower and UB City bank is required to disburse 17.0 billion tugrug loan to one borrower.
In another word, TDB and UB City bank had no capacity to lend 400.0 million dollar loan under its own assets/capital/, especially without collateral and no repayment sources. Based on these, there is probability that above-loans are provided from following sources. These are:
1.3.7 billion Yen /Japanese/, 160 billion tugrug deposited by Development bank of Mongolia in TDB.
2.Following Mongolbank loans:100.0 billion tugrug loaned to QSC company which is transferred to ownership of main shareholder of TDB in 2014, 100.0 billion tugrug loaned in April, 2016, 16О.0 billion tugrug loaned in June 28, 2016 to TDB /Mongolbank has no legal right to disburse commercial loans to commercial entities and then, its president N.Zoljargal was working at TDB before his appointment/;
3.Following Genghis bond money: 84.0 billion tugrug lent to Khotol cement plant which is owned by main shareholder of TDB and 137.0 billion tugrug lent to Darkhan Metallurgical plant;
4.183.6 billion tugrug or 90.1З0‚577.78 dollars, repayment for 36 km long railway built under concession agreement with above QSC company.
5.Cash deposits of individuals and businesses at TDB and UB City bank.
In sum, Mongolian copper corporation, QSC, Riverstone Properties, United Energy System, Kanetic companies which took 400 million dollars loan have no property or financial capacity to pay back the large sum of US dollar loans taken from TDB.
Four. Violation of banking laws and regulations
Violation of currently effective banking laws, regulations, its main concepts and certain articles have become norm for TDB, UB City bank and its shareholders. For example:
1.Articles 3, 6, 7 of the current banking law sets restrictions for banking activities and prohibited activities other than these.
To be specifically, article 3.1.1 of the banking law says “bank is to engage in financial intermediary services such as providing loans and making payment settlements” and outlined 12 types of services in article 6.1 and in article 6.2, outlined 6 types of financial services that can be engaged under permit of Financial Regulatory Committee.
Main shareholder of TDB and executive managers that work under his direct supervision established number of businesses in their names and conducted illegal activities through these companies such as taking part in privatization of large state owned enterprises, sign concession agreement and purchase. For this, they used sources of their bank, illegal loans provided by Mongolbank, funds embezzled from state budget and bond loans and sources with Government guarantee.
2.Article 3 of the Banking law calls for accountability of bank shareholders up to extent of their share ownership.
TDB have 745.0 billion tugrug own asset. 50.0 billion tugrug equity‚ 93.1% of its shares are owned by D.Erdenebileg. Now, this bank has provided 400.27 million dollars or 900.2 billion tugrug loan for payment of 49% of stake share of Erdenet Enterprise and Mongolrostsvetmet consortium or loan that exceeded accountability limit of major shareholder.
For disbursal of this 400 million dollars loan, in order to make it look like it did not violate article 17.3 of the banking law that says” the total value of loans provided to one person shall not exceed 20 percent of the capital of the bank”, signed disguised agreement with companies set up in the name of D.Erdenebileg and managers that work under his direct supervision and disbursed 68-70 million dollars loans and then, these companies transferred these to Mongolian Copper Corporation.
3.TDB used 49% shares of the Erdenet Enterprise when it disbursed loan to Mongolian Copper Corporation and then, O.Orkhon, executive director of TDB sat as a board member of Erdenet Enterprise on behalf of Mongolian Copper Consortium and this violated article 3.1.2 of the banking law.
If these above-mentioned companies and individuals who have no financial sources to make payment, are unable to make payment, TDB will face bankruptcy and state have to be responsible for this. If 360 billion tugrug provided by Mongolbank and 3.7 billion Yen deposited by Development bank of Mongolia can’t be repaid, state have to be responsible for these at the end, according to legal rationale.
4.D.Erdenebileg owns 93-99.1% stake of TDB and UB City banks. This violates article 36.12 of the banking law that says “ it shall be prohibited for an influential shareholder with voting rights of the bank to be an influential shareholder with voting rights of another bank” and Mongolbank put requirements about this and so far, this has been same.
Five. Recommendation and conclusion
Based on above situation, the working group decided to present following recommendation and conclusion to State Great Khural. These are:
1.Purchase of 49% shares of Erdenet Enterprise and Mongolrostsvetmet consortium violated Mongolian constitution and other laws, regulations and illegally attacked full authority of State Great Khural and Government and violated currently valid agreement. Therefore, revoke article 1 of government resolution no.330 dated June 13, 2016 and transfer 49% of these enterprises to state ownership and run under status of 100% state owned enterprise.
2.Signing of various disguised agreements, illegal loans disbursed by Mongolbank in the name of companies artificially set up in the name of the shareholder of TDB and UB City bank and few managers that work under his direct supervision, large sums of money obtained from government budget by illegally revising concession agreement signed with some business entities/90.0 mill dollars/ and cash assets of deposit holders have been used for purchase of 49% shares of these enterprises. Also used illegal, disguised or non-existing assets such as “ future revenue”, “ Copper purchase agreement” signed with Erdenet enterprise, “49% of Erdenet Enterprise” and “Power plant to be built in Umnugobi province “as collateral for the loan agreements and this shows financing sources for purchase of 49% shares of these enterprises are illegal and have no guarantee of repayment and final risk is to be carried by state.
Therefore, it is appropriate for government and Mongolbank to deal with the shareholder of TDB and UB City bank within the framework of sources mentioned in this report and make relevant settlements.
3.It is interesting to note that large chunk of revenue of Erdenet enterprise have been transferred to companies related to D.Erdenebileg and revenue to state coffer have been drastically reduced since latter imposed illegal control in the enterprise. For example, between June 27-Nov 21, 2016, 8.6 million dollars, allegedly 2013 dividend and 47.1 million dollars, allegedly 2012 dividend, 2.6 million dollars as advance payment of contract to Mongolian Copper Corporation /total 58.3 million dollars/ and 17.0 billion tugrug to advance payment of supply contract to QSC company and 2.7 billion tugrug to Khotol cement as advance payment for supply contract.
Also tax office concluded that 2016 tax of Erdenet enterprise to state budget will likely be reduced by 230.0 billion tugrug.
4.Review TDB and UB City bank, Khotol cement plant privatization and illegal revision of concession agreement with Darkhan metallurgical plant under legal framework and if the privatization process and financing sources were similar to activities and sources of purchase of 49% shares of Erdenet and Mongolrostsvetmet consortium, immediately take measures to set justice and law.
Recommendation and conclusion made by
Sh.Radnaased, head of the working and chairman of Parliamentary standing committee on legal issues,
Lawmakers of the parliament,
B.Delgersaikhan (MPP) (Disagreed with the conclusion and didn’t sign)
B.Lkhagvasuren, Vice-Governor of Mongolbank (MPP)
B.Enkhbayar, Vice Justice Minister (MPP)
B.Nyamaa, State secretary of Ministry of Finance (MPP)