(Updates with detained U.S. citizen in 22nd paragraph.)
Feb. 5 (Bloomberg) -- Mongolia sits atop so much mineral wealth -- an estimated $1.3 trillion in gold, copper, coal and iron ore -- that it’s sometimes called “Minegolia.” It’s among the world’s fastest-growing economies.
Even so, some of its bigger foreign investors want out.
The recent turmoil at Golomt Bank LLC, one of Mongolia’s biggest lenders, illuminates some of the reasons.
Credit Suisse Group AG and Abu Dhabi’s sovereign wealth fund invested in Golomt in the past half decade, seeking a share of the country’s promised bounty. Those hopes have soured amid allegations that one of Golomt’s owners arranged loans he didn’t report, hid defaults for years and, as the bank’s board called for probes, oversaw the destruction of financial records, according to documents reviewed by Bloomberg News.
Both investors, claiming breach of contract, started arbitration efforts in recent months for repayment of loans, just as Mongolia’s leaders flew into Hong Kong and New York to drum up new investment.
Starting with Credit Suisse in 2007, Abu Dhabi and the Swiss bank extended a combined $35 million in convertible loans to Golomt. The agreements, reviewed by Bloomberg News, required the bank to provide prompt audited financial statements. Within five years of each deal, each investor was to gain Golomt shares as part of an initial public stock offering.
Later, Swiss multimillionaire Urs Schwarzenbach and trading firm Trafigura Beheer BV bought shares in closely held Golomt with expectations of the listing.
Come the end of 2012, no IPO had occurred. Instead, the foreign investors, some members of the bank’s board and its chief executive officer had learned the bank had missed payments on off-the-books debts to a Japanese trading company as far back as 2008, according to two people with knowledge of the bank and to documents reviewed by Bloomberg News.
Golomt failed to produce a 2012 audit in the first three months of last year as required in the loan deals.
Starting in late 2012, three companies examined the bank’s books, according to communications from the firms to Golomt’s board -- with one declining to sign off on the audit and two others alleging that some of the bank’s managers had deleted financial records.
In one probe commissioned by the bank’s board, PricewaterhouseCoopers LLP wrote that managers inside the bank deleted more than 6,800 files as well as records from the Swift interbank cash transfer system from August 2007 to May 2008.
“These individuals are still active within the bank,” PwC wrote in an Aug. 12, 2013, report.
Golomt vice president Bolormaa Luvsandorj said the bank stood by an audit of its 2012 results done late last year, which said the bank had resolved the Japanese company’s complaints.
“These are past issues,” Bolormaa wrote in a Jan 28. e- mail, adding that in 2013 the bank reported strong liquidity and “an extremely prudent loan-to-assets ratio of 57.1 percent.”
Golomt lawyer Bayaraa Battuvshin said in two January e- mails that any account of troubles at the bank was likely to be one-sided and that Golomt was unable to comment further because of an ongoing criminal investigation against a former employee.
Mongol Bank, the country’s central bank and financial regulator, investigated Golomt several times, according to its chief, Zoljargal Naidansuren. The results are confidential, he said. “The bank is safe and sound,” he said in a Jan. 29 interview in Mongolia’s capital, Ulaanbaatar.
Credit Suisse spokeswoman Josephine Lee said the bank wouldn’t comment on issues connected with Golomt. Mark Cutis, a representative of the Abu Dhabi fund, said by e-mail he isn’t permitted to speak on the matter.
The details of events at Golomt are based on interviews with people with knowledge of its operations as well as auditors’ reports and letters; loan agreements; communications among foreign investors, executives and board members; and investors’ requests for arbitration.
They illustrate the growing wariness of some foreign investors despite Mongolia’s economic promise. With a population of 3 million people in an area about three times the size of France, Mongolia ranked among the world’s three fastest-growing economies in both 2011 and 2012, with gross domestic product expanding by as much as 17.5 percent.
Yet foreign direct investment, after cresting in 2011 and 2012, fell by almost half in 2013. In the last five years, four of Mongolia’s top 10 banks have folded or merged to avoid bankruptcy.
The latest was Savings Bank, which defaulted on about $100 million of loans in July and sparked a London court case by South Africa’s Standard Bank Group Ltd. alleging fraud. Savings Bank officials couldn’t be reached for comment. Mongolian officials barred one of Standard Bank’s consultants, who was in the country for debt talks, from leaving the country for a month late last year.
“I’ve been coming here for nine years. I’ve been a real cheerleader for Mongolia,” the banker, Chris Bradley, said in a telephone interview in December before returning to his home in Australia. “Now I feel embarrassed.”
U.S. citizen Justin Kapla has been blocked from leaving Mongolia since October 2012, when investigators designated him a witness in a criminal case against D. Batkhuyag, the former chairman of Mongolia’s Mineral Resource Authority. At the time, Kapla was president of SouthGobi Sands, a coal mining unit of a Hong Kong-listed company controlled by Rio Tinto Group.
Golomt -- a word that in Mongolian shamanism refers to a place where heaven and earth meet and in common usage describes a welcoming hearth -- was founded in 1995, part of a holding company formed by Bold Luvsanvandan, who is now Mongolia’s foreign minister.
Bold and his siblings got their start in business as Mongolia emerged from seven decades of Soviet oversight, raising about $6.5 million from abroad as startup funds, said Bold’s brother, Boldkhuyag Luvsanvandan. Bold brought in two friends from his student days as partners. Each took a 33 percent stake in the company, now known as Bodi International LLC, which controlled Golomt.
After Bold won a seat in parliament in 1996, he handed daily management of Bodi International to his brother, Boldkhuyag, and to co-founder Bayasgalan Danzandorj, according to bank documents.
Golomt’s troubles, according to several of the documents, began with $65 million in letters of credit the bank issued starting in 2007 to guarantee payments to a Japanese trading company for third-party transactions. Bayasgalan, as CEO, oversaw the committee that signed off on the deals, according to a report dated March 2013 by FSI Capital, a Dubai-based private equity and advisory firm that the bank’s board commissioned to investigate defaults that began emerging in 2012.
Golomt defaulted on several of those letters starting in 2008, FSI wrote. “All subsequent defaults were not reported to any management or board committee,” it said. Bayasgalan, by then the bank’s chairman, and other top officers had engineered the deletion of letters of credit from the bank’s records, FSI reported, a finding later echoed by PwC.
Bayasgalan declined several requests for an interview sent through an assistant, who asked not to be identified. Golomt vice president Bolormaa, responding to written questions directed to Bayasgalan, said the issue with the Japanese loans had been resolved and that the bank hadn’t defaulted. Bolormaa didn’t address questions about record-deletion.
Bold and his brother haven’t been accused of wrongdoing. Bold didn’t respond to e-mails seeking comment. Boldkhuyag said his brother, as a government official, is unable to comment.
The third partner, parliamentarian Zorigt Munkhchuluun, said in an e-mail that he couldn’t comment on Golomt because of his political position.
Golomt is a cornerstone of Mongolia’s financial life. Its green neo-Classical headquarters sits between the Mongolian Stock Exchange and City Hall on Ulaanbaatar’s Chinggis Khaan Square. The bank’s 1,600 employees work in more than 80 branches in cities and towns across Mongolia’s steppes and deserts.
By the mid-2000s, the founding partners sought an international banker to lead Golomt’s expansion and woo foreign investors. In 2007, they hired John Finigan -- a U.K. national and trial attorney with almost four decades in banking -- as chief executive officer. Finigan had served as CEO of Middle Eastern lenders from the Qatar National Bank Group to the National Bank of Oman.
By the end of 2007, Credit Suisse extended a $10 million convertible loan to Golomt at nominal interest rates, premised on the bank selling shares to the public inside the facility’s five-year term, according to letters between the banks.
Credit Suisse expected a 20 percent internal rate of return once the loan was converted to shares, said a person with knowledge of the deal.
The Abu Dhabi Investment Council, the emirate’s sovereign wealth fund, came in with a $25 million loan on similar terms in June 2010, according to its correspondence with Golomt.
Golomt attracted others. In 2011, Swiss-Mo Investment AG, a fund controlled by U.K.-based multimillionaire Schwarzenbach, paid $20 million for a 10.7 percent stake, according to a Nov. 9, 2011, Moody’s report. In 2012, trading company Trafigura Beheer bought 5 percent of the bank. Together, those two investors also loaned about $55 million to parent company Bodi, according to loan documents.
Golomt’s assets reached 2.5 trillion tugrik ($1.5 billion) by the end of 2012, an almost fourfold increase from 2007, according to the bank’s website. Its annual return on equity was as high as 26.6 percent in 2010, according to the website.
Then came the default allegations.
On July 9, 2012, Tokyo-based Itochu Corp. filed a claim in Ulaanbaatar alleging that Golomt hadn’t paid it on 18 letters of credit to the value of 3.42 billion yen -- worth $43 million on that day. The claim was equal to more than 30 percent of Golomt’s capital as of Dec. 31, 2011.
It wasn’t until October 2012 that Finigan, several board members, the bank’s auditors and the overseas investors became aware of the Itochu court case, according to two people with knowledge of the discussions.
The subsequent probe by Dubai-based FSI found Golomt had acted as an agent in 2007 and 2008 for a Mongolian gold miner to purchase equipment. Itochu, Japan’s third-largest trading house, helped arrange the deal, with Golomt issuing letters of credit to Itochu.
FSI said Bayasgalan, who became Golomt’s chairman after Finigan’s arrival, had authorized the credit, calling it an “unusual transaction of dubious nature.”
When asked to comment, Itochu spokesman Katsuhiko Hoshikawa referred to reports on his company’s website that cited an internal investigation into a Mongolian corporate matter that didn’t name the entities involved.
The trading house found that an Itochu sales manager and staff in the Ulaanbaatar Itochu office had colluded with Mongolian parties to carry out “financial assistance” to boost the cash flow of an unnamed company under the disguise of sales transactions, according to a Jan. 28, 2009, report on Itochu’s website. People working for Itochu in Mongolia forged transportation documents to record the sales, Itochu said.
An Itochu staff member in Ulaanbaatar told Golomt that Itochu would guarantee the letters of credit, FSI said. It said the commitments were removed from bank records before the end of 2008, with Golomt’s credit committee assuming the deal carried no risk for the Mongolian lender.
According to the final report on Itochu’s site, the firm had to correct annual trading revenue for at least five years and write off at least 4.3 billion yen in costs associated with the Mongolian transactions. Itochu contacted Golomt and the gold mining company to collect on the debt, FSI said.
Bayasgalan led Golomt’s talks with Itochu and the gold company over unpaid credit in 2009 and 2010 without notifying management or the board, FSI said. After three years of intermittent debt negotiations, Itochu sued.
When Finigan revealed the Itochu court case to the board at an Oct. 9, 2012, meeting, Bayasgalan protested and denied the existence of letters of credit between Itochu and Golomt, according to two people with knowledge of the board.
Finigan began debt-settlement talks with Itochu and reported the matter to the central bank, these people said. Mongol Bank governor Zoljargal asked Finigan and Golomt to delay disclosure of unpaid loans, as Mongolia was about to sell its first international debt via U.S. dollar bonds, the people said.
Zoljargal, who became bank chief in September 2012 after serving as a deputy central banker, said in the interview that the central bank knew of the Itochu suit at the time it was filed but declined to discuss it, citing the confidentiality of the bank’s investigations. He declined to comment on whether he sought to delay any disclosures.
At Golomt’s board meeting in December 2012, foreign investors voted to oust Bayasgalan as chairman. He was replaced by Bold’s brother. The empty board seat went to Bayasgalan’s wife. After the meeting, Finigan departed for family reasons, the bank said in a Dec. 14 statement.
Finigan is suing the bank in London for wrongful dismissal, according to two people with knowledge of the suit. Golomt has filed a criminal defamation case against Finigan in Mongolia, according to bank lawyer Bayaraa.
As the new board turned to wrapping up the 2012 financial year, it enlisted auditors Ernst & Young and then PricewaterhouseCoopers, who uncovered other problems.
In early 2012, Golomt extended debt guarantees to a budget airline, now known as Hunnu Air, PwC said in an August report to the board. Golomt acted as guarantor for the airline’s lease of two airplanes, E&Y and PwC said in their reports. The guarantee was made without board members’ knowledge, according to e-mails between members, reviewed by Bloomberg News.
Bayasgalan owned a controlling stake of the airline at the time, said a person with knowledge of Hunnu’s operations.
The guarantees, which the bank didn’t report among its liabilities, would have pushed Golomt’s credit exposure to Hunnu above the 20 percent capital limit to a related party as outlined by Mongolian law, according to the auditors’ report. The auditors noted transactions of a similar nature with other companies.
Hunnu said by e-mail that it couldn’t comment on transactions with Golomt. Bolormaa, responding to questions addressed to Bayasgalan, didn’t address the airline issue.
Peter Markey, managing partner of Ernst & Young Mongolia Audit LLC, confirmed by e-mail that his firm had been asked to audit Golomt’s results but declined to comment further, citing client confidentiality.
In March 2013, Ernst & Young Mongolia declined to sign off on Golomt’s 2012 results, citing a lack of “appropriate audit evidence” and hidden liabilities regarding related companies. The uncovering of the debts meant that Golomt misrepresented its off-balance sheet exposure since 2008, the report said.
“This is a devastating development which can potentially lead to a dire outcome for the bank,” Cutis, Abu Dhabi’s representative on the Golomt board, wrote to the board and central banker Zoljargal on April 15. Citing “grave concerns” about bank management, Cutis resigned from Golomt’s board.
In a June 28 report to Golomt’s board, PwC said it found evidence that bank files and e-mails had been deleted. In August, it asked for board support to delve deeper, saying some Golomt managers were obstructing their work. That month, Golomt’s board terminated PwC’s services.
Matthew Pottle, a partner at PwC’s Ulaanbaatar office, said he couldn’t comment on client projects.
By September 2013, Golomt had yet to produce 2012 financial results audited by a top-four global accounting firm, a violation of the terms of both the Credit Suisse and Abu Dhabi loans, according to terms of those deals.
Golomt owes the Swiss bank more than $22 million in all for failing to execute an initial share sale in the agreed time, according to a Sept. 11 letter to Bodi and Golomt from Credit Suisse. Then in an Oct. 4 letter, the Swiss bank said it was seeking arbitration to recoup from Golomt its $10 million loan with interest.
Bodi International has paid Credit Suisse $10.05 million, which covers the loan, according to David Norman & Co, Bodi’s Hong Kong-based legal counsel. Credit Suisse said that money is part payment on the failure to do the IPO, according to its letters.
In November, the Abu Dhabi Investment Council also alleged breach of contract, notifying Golomt in a Nov. 11 letter that it is seeking $36.2 million in total from Golomt, including compensation for the lack of an IPO.
Golomt lawyer Bayaraa said the Abu Dhabi dispute is nothing more than “the result of a disagreement regarding the meaning and effect of certain terms which appear in the bank’s loan agreement” with the Abu Dhabi fund.
Seeking $90 Million
Loans by Swiss-Mo and Trafigura to Bodi are also in default, according to loan documents and three people with knowledge of the situation.
Trafigura spokeswoman Victoria Dix said the company doesn’t have any comment on Golomt. Swiss-Mo’s vice president Gerhard Harnischberg said the fund doesn’t comment on its investments.
In all, the foreign parties seek about $90 million from Golomt and Bodi, said the two people with knowledge of the bank’s board. That’s six times Golomt’s 2012 post-tax profit.
Golomt delivered its 2012 audit on Nov. 8, when a Mongolian franchise of London-based BDO International Ltd. signed off on accounts provided by Golomt management. BDO’s audit noted that Golomt had paid Itochu $1.2 million to settle the claim against it.
BDO didn’t have access to the bank’s financial status at the start of 2012, its report said, so it couldn’t vouch for the “fair presentation” of Golomt’s profit.
Altansukh Dalanbayar, the CEO of Ulaanbaatar-based BDO Audit LLC, said in a Jan. 22 interview that BDO had been “unable to access” previous auditors’ working papers.
In November, Moody’s Investors Service and Standard & Poor’s both stopped assessing Golomt’s credit, citing lack of data.
The next month, Bodi’s three founding families divided up the business, Boldkhuyag said, with Bold’s family taking Bodi’s insurance company, a high-rise tower in Ulaanbaatar and a financial institution called Sar Shine International.
Bayasgalan and Zorigt, the parliamentarian, retain Bodi International and the companies that fall under it, including Golomt, Boldkhuyag said. The asset division hasn’t been officially announced.
The split came the same month that Mongolia sold nearly $300 million in yen-denominated Development Bank of Mongolia LLC bonds. In a Nov. 20 interview in Hong Kong, where Zoljargal had traveled for a roadshow to pitch the bonds, the central banker said Mongol Bank was satisfied with the results of Golomt’s 2012 audit.
“The audit was questioned by the board. Now the issue is resolved at the board level,” he said. “I think everything is going to settle down. It’s not that there’s something wrong with the bank itself.”
--With assistance from Michael Kohn in Ulaanbaatar and Michelle Yun in Hong Kong. Editors: Peter Langan, Jeffrey D Grocott, Anne Reifenberg