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Feb 6, 2017 | 15:34 GMT

White Collar Crime in Central Asia: The Case of Kazakhstan

White Collar Crime in Central Asia: The Case of Kazakhstan
Partner Perspectives are a collection of high-quality analyses and commentary produced by organizations around the world. Though Stratfor does not necessarily endorse the views expressed here — and may even disagree with them — we respect the rigorous and innovative thought that their unique points of view inspire.

Editor's note: This is the fourth part of a series of four articles on white collar crime in Central Asian countries. The first article, on Kyrgyzstan, can be read here. The second article, on Tajikistan, can be read here. The third article, on Uzbekistan, can be read here.

By Douglas GreenThe Times of Central Asia

"Classical" cases such as the massive amounts of money embezzled by former BTA bank chief Mukhtar Ablyazov and ex-mayor of Almaty Viktor Khrapunov have been haunting Kazakh law enforcers for well over a decade. But white collar crime, meaning not bribes and extortions but straightforward swindle and theft, have become endemic in Kazakhstan during the last couple of years.

Law to Catch Up

One of the latest scandals involving the head of the much-haloed Expo-2017 project has made the Kazakh government realize that the law has to catch up. Not an easy task – since it appears that the problem of kickbacks and other forms of uppity crime stretches far beyond the country's national borders.

At present, Kazakhstan has two former prime ministers serving prison terms for embezzlement of state funds. Almost by the week, entrepreneurs are being arrested for fraud, along with state officials for condoning it – often for a share in the benefit. Racketeering was already a problem in Soviet times, but now it appears that white collar crime in the former USSR has been "privatised" along with legitimate asset transfers to private owners.

White-Collar Crime and Corruption

White-collar crime is often identified with "corruption" in and regarding former Soviet republics. Yet, corruption is only part of a problem which has become endemic, especially in countries which have witnessed a cash boom in recent times. Kazakhstan with its massive inflow of petrodollars when prices were above all reasonable levels, followed by spendthrift which, looking back, did not demonstrate much foresight.

The country was unable to create an ideal atmosphere to develop a sense of decency taking the law seriously. This was particularly true especially among those engaged in "western"-style business, under the impression that a "free" economy meant that anything is allowed as long as it generates revenue.

The Real Estate Fraud

According to the Kazakh General Prosecutor's Office, in 2015 the number of reported real estate fraud schemes in the country exceeded 700, over 500 became subject to investigation over the New Year. One of them resulted in a conviction to six-and-a-half years behind bars for a female broker, Firuza Ordabayeva, who had defrauded buyers of apartments using false certificates of municipality guarantees to lure her clients into paying deposits and even obtain bank mortgages for the total sum of $5 million. After that, the money had gone and the ownership documents proved not to be worth the paper they were printed on.

The White-Collar Criminal

So who is the average white-collar criminal? One could observe that he or she is rather well-educated, not unsuccessful in making a career, and clever though not wise – even naive. In contrast to the typical cloak-and-dagger criminal who commits his act of burglary, robbery or other while fully aware that he is about to break the law but judging that the reward is worth the risk, the standard white-collar criminal does not work in this momentary manner. The usual "method" is to start with "irregularities" thinking "everybody doing it" in his or her immediate surroundings. He or she only realises the seriousness of his or her acts when it is too late.

Bad for Business

There are two main types of white-collar crime, usually defined as fraud. The first consists of one or more employees, varying from simple desk clerks to top executives, diverting money that belongs to the enterprise to their own benefit. Managers tend to solve such queries discretely, since bad publicity is bad for business. There is also corporate fraud, meaning that an enterprise as such defrauds customers, partners, the tax authorities or any other third party.

But on different levels, fraud takes a different shape and involves perpetrators and their accomplices hard to distinguish and even harder to apprehend. This includes Kazakhstan's lifeline, namely oil sales. It was after the gradual recovery from the 1998 oil crisis when prices had dropped below $10 per barrel that what must have been going on for a decade was finally exposed.

The Oil Fraud

"According to official figures, some crude was exported in the second quarter of 1999 for just $7.90 per barrel, while the price of Brent crude oil, a global price benchmark, was $15.40 per barrel. The true Kazakh oil export price to the end consumer was probably around $12.00 per barrel lower than Brent because of transport costs and blending, meaning that there was $4.10 per barrel difference for undeclared exports," Eurasianet reported back in 2000, after the Kazakh Parliament had sounded the alarm.

Shortcomings of the Law

So why these huge discounts? Very simple: an oil producer in Kazakhstan sells its crude on the cheap to an offshore firm (often under the producer's control) and buys it back for the international benchmark price. This allow the producer to avoid taxes in Kazakhstan and diminishing the "profit oil" share in sales, which in contrast to net returns on investment is subject to royalties to be paid to the host countries.

Such kickbacks have cost Kazakhstan billion after billion, and still nobody seems to know what can be done about them. Yet, they are a typical example of white collar crime: due to shortcomings of the law, something can be legal but no less dishonest for it.

A much more recent scheme in this category was recently revealed by Russia's independent newspaper Novaya Gazeta. It concerns the sale of about a million tons of gas condensate per annum in the period from 2004 to 2014 from the hydrocarbon field of Karachaganak in the northeast of Kazakhstan, operators of which are Italy's Eni and the Royal Dutch Shell, which obtained the asset through its purchase of British Gas a year ago.

On paper, the Karachaganak consortium sold (and may still sell) its unprocessed condensate to a Canadian firm called Industrial Investments & Participations SA (IIP). According to Novaya Gazeta, given the fact that the average end price for gas condensate in Europe stood at $700 per tonne while IIP paid no more than $300, the "Canadian detour" must have cost Gazprom up to 4 billion and Russia's tax collectors up to a billion dollars.

Who Is guilty?

So who is guilty: those who executed the actual act or those who secured it? The answer by President Nazarbayev has been simple: all of them. It will not bring Karachaganak executives to court, let alone to jail, but a sum of $1.6 billion to "settle" the issue, after that practice of "too big to fail" (read: too rich to jail). That is less than half of the kickback scheme's value. Justice is equal for everybody, only not everybody is just as equal.

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