14 June 2016
by Neil Chenoweth

Behind Malcolm Turnbull's deal for a tax haven payout

For two decades, Malcolm Turnbull's great Russian gold adventure has been the stuff of legend – an exotic but largely untold story.

"There's nothing new here," Turnbull said last month when The Australian Financial Review revealed that the prime minister appeared in the Panama Papers as a director of a British Virgin Islands company, Star Technology Systems.

In October 1993 his merchant bank, Turnbull & Partners helped an Australian listed company, Central Mining, to acquire Star Technology, which held a stake in a huge gold deposit in Siberia. Turnbull and his partner, the former NSW Premier Neville Wran, ended up on the boards of both companies.

That was Turnbull's only link with Panama law firm Mossack Fonseca, as the Prime Minister told it on May 12 – he had held an entirely conventional and uncontroversial role as director of an Australian publicly listed company.

"If it made any profits, which it did not, regrettably, it would have paid tax in Australia," Mr Turnbull said.

But new documents show the Prime Minister's firm earned an estimated $7 million from his time with Central Mining, including a $1.8 million commission paid in shares held in Mossack Fonseca companies, that an independent director says was he was unaware of.

The tax haven holdings are revealed in the Panama Papers – a massive leak of files obtained by Munich newspaper Süddeutsche Zeitung and accessed through the International Consortium of Investigative Journalists.

The web of tax haven shareholdings in Central Mining (which was renamed Star Mining Corporation in December 1993) included six million Star Mining shares held for Turnbull & Partners.

The question is, how did Turnbull's firm get the shares, and why were they held in companies linked to Mossack Fonseca?

"The Prime Minister notes that Turnbull & Partners Ltd's interests were accounted for and disclosed in accordance with the relevant legal requirements," a spokesman for Mr Turnbull said last week in response to detailed questions from the Financial Review. "He has nothing further to add to his earlier responses on this matter."

Just how Australia's Prime Minister came to be in such a situation is a very Russian tale, which began with a trip to Moscow by Sydney businesswoman Ludmila Melnikoff in 1989 – a story she tells in her unpublished manuscript, Smoke, Mirrors, Cognac and Vodka.

Melnikoff, who now lives on Sydney's northern beaches, is an Australian whose parents were white Russians.

When Melnikoff returned to Russia in 1989, her mother's contacts gave her access to Russia's most senior government figures, including support from the then emerging leader Boris Yeltsin.

Melnikoff identified mining opportunities for gold and platinum which she then introduced to Australian mining entrepreneur Ian MacNee.

Melnikoff and MacNee ended up with a 34.88 per cent interest in a Russian joint stock company, Lenzoloto, which held the mining rights to the huge Sukhoi Log deposit.

In early 1992 MacNee and Melnikoff were waiting – and waiting – on Yegor Gaidar, the First Deputy Prime Minister in charge of Finance and Economics, to sign a government ordinance approving the Lenzoloto deal.

In her bombshell manuscript, Melnikoff says that on April 6 MacNee returned from meeting one of Gaidar's aides, who had told MacNee he needed to contribute $US1 million into an account called the Protection of Private Property Fund.

Melnikoff says that MacNee flew to Zurich to arrange the money transfer, though there are no documents to substantiate a payment. MacNee died in 2008.

Gaidar signed the government ordinance that approved the Lenzoloto setup on April 9.

MacNee had persuaded Melnikoff that for tax reasons the 34.88 per cent stake in Lenzoloto should be held in the British Virgin Islands, in Star Technology Systems – and the ownership would be hidden by a maze of other BVI and Bahamas companies that MacNee controlled.

In 1993 MacNee sold Star Technology to his Australian listed company, Central Mining. The price was $US5 million cash, 200 million Central Mining shares and 100 million Central Mining options.

These were called "vendor shares" and they were issued to the nine companies, linked to Mossack Fonseca, which MacNee had set up as the original "owners" of Star Technology.

What the Panama Papers show – and what Central Mining directors including Bill O'Neill didn't know – was that all of these companies were owned by Ian MacNee.

But the shares weren't all for MacNee.

As part of the sale process, MacNee had allocated 6 million of the vendor shares and 3 million vendor options to Turnbull & Partners. The shares were issued at 30 cents apiece, which valued the parcel at $1.8 million (by the time the deal closed they were trading way above this, at 44 cents).

It's not unusual for advisory firms to receive a commission in a deal – in this case the six million shares and three million options represented 3 per cent of the purchase price. But it's unconventional for someone advising the buyer in a deal to be paid by the seller.

In Turnbull's defence it should be noted that Central Mining had already decided three months before on the sale price to buy Star Technology. Turnbull's firm was advising on a cash placement that would pay out the cash component of the Star sale as well as funding work on Sukhoi Log.

But why didn't Central Mining just issue shares directly to Turnbull & Partners, and why was it not publicly disclosed at the time?

It also raises questions whether Turnbull had a potential conflict of interest, and whether the arrangement made him an associate of Ian MacNee.

Bill O'Neill, who was on the Central Mining board as an independent director until the day after the Star sale was completed, says he knew nothing of the shares for Turnbull's firm.

"I opposed the whole deal because I couldn't see why the Lenzoloto stake hadn't been put in Central Mining from the start – how does a director get to sell an interest that should have been there already," O'Neill told the Financial Review this month.

Turnbull and Wran are said to have disclosed the commission to the board after O'Neill resigned from the board.

However Turnbull & Partners came to own the shares, they were locked up with the rest of the 200 million vendor shares under ASX escrow, held in the original Mossack Fonseca-linked companies.

And they would be worth nothing if the continuing political infighting in Russia overturned Star's claim on Sukhoi Log.

With the purchase of Star Technology completed, Wran and Turnbull joined the board of Central Mining, now renamed Star Mining Corporation, and immediately deployed their Labor connections.

In December 1993 Prime Minister Paul Keating wrote an open letter to Wran confirming Star's bona fides: "I am taking the opportunity to write to you to assure you I agree with the Australian ambassador that this particular venture is important, not just in itself, but because a successful project of this kind will encourage further investment in Russia from Australia."

Keating wrote directly to Russian PM Viktor Chernomyrdin in July 1994 to urge support for Star, and again later that year – three letters in 12 months.

Melnikoff discovered that Turnbull was a huge success at negotiating with Russians. Melnikoff told officials that Turnbull was on track to be Australia's prime minister, if not president. Russians loved him.

One of Star's toughest critics was the head of the Committee for Natural Resources (Geolkom), Boris Yatskevich, who controlled the granting of mining licences. He told Melnikoff the Sukhoi Log deposit was the pearl of Russia, which should not go to a mining nobody like Star.

In February 1994 Turnbull met with Yatskevich and reported back that the man the Star team had taken to calling "Yat the Rat" was softening his resistance. But it wasn't enough.

"Yat liked Malcolm very much, but more needs to be done," a Russian intermediary told Melnikoff a month later.

"Yat spoke to the Irkutsk branch of Geolkom and they would like a contribution of $30,000 and he would like $70,000."

On March 24 1994 a request was faxed to Turnbull to approve payments of $US70,000 in Moscow and $US30,000 in Irkutsk which was described as covering "private detectives, gifts and for newspaper articles".

Turnbull, who knew nothing of the planned bribery, was bemused, and assumed that the sender must have been drunk, Melnikoff says.

Yatskevich needed the money for renovations to his home and unbeknown to Turnbull, the payment was made.

"I was there in the office when the bags of money were handed across," Melnikoff says.

Star Mining documents from 1996, after Turnbull left the board, refer to "black money" kept in the Star office safe in Moscow, and include notes handwritten by MacNee detailing how $US250,000 was to be paid to a Swiss account operated by the leader of the ultra-nationalistic Liberal Democratic Party, Vladimir Zhirinovsky, and the Moscow account of his niece, Natalia Sokolova, who was also on Star's payroll as a consultant.

In June 1995, Yatskevich flew to Sydney, after Star arranged for then Labor Resources Minister David Beddall to invite him to Australia.

The "Yat" met government officials in Canberra, spoke glowingly of Star's prospects at a press conference at County NatWest, and spent a weekend at Turnbull's farm at Scone, with hotels and hire cars at Star's expense (Yatskevich had paid his own airfare).

The highlight of his trip was a series of long appointments at a Sydney dentist, undergoing major dental work for a "full oral makeover", all at Star's expense.

The daughter of the governor of Irkutsk, Anastasia Nozhikov, was also a beneficiary of Star hospitality.

On August 9 1995, Turnbull wrote to Nozhikov to invite her to come to Sydney to work as an intern at the Star Mining offices for seven weeks, with Star picking up the cost of the airfare.

Despite all of Star's efforts, feuding between Russian power brokers continued to block all attempts to move forward. The big breakthrough came on September 30 1994, when prime minister Chernomyrdin signed a decree confirming the rights to Sukhoi Log license and ordering government departments to issue a new mining licence for Lenzoloto and to release geological data.

Star hailed the decree as a game-changer, finally confirming their rights to the gold tenement.

Melnikoff tells a different tale of how the decree came to be signed.

She says that in mid-September 1994, MacNee met a Russian intermediary in a tunnel behind the Star offices in Moscow who told him that Chernomyrdin needed "$1 million deposited into a Swiss bank account – I have the numbers here".

"I don't need an answer, but I must tell you once this is done, the Decree will be signed," MacNee was told.

There is no documentary verification that MacNee made this payment, though Chernomyrdin was infamous for demanding bribes – so much so that the CIA issued a report on his corrupt dealings, and a Swiss judge investigated payments others made into a Swiss account linked to him.

"I know MacNee paid $10 million of his own money in Russian deals," McNeill says, though he was not aware of a specific payment to Chernomyrdin.

Chernomyrdin's September 30 decree confirmed Star's mining rights just as the shares in the Mossack Fonseca companies came out of escrow. This was money time and it triggered a flood of sales by MacNee.

Star Mining's half-year report, signed by Turnbull on March 15 1995, showed that 82 million vendor shares held by the Mossack Fonseca companies had disappeared, representing sales and transfers worth more than $25 million.

Some of these shares appear to have ended up with Turnbull's firm. His interest in Star Mining shares had jumped to 22.5 million shares, plus 7 million of the vendor options.

Turnbull outlined his holdings in a signed fax to MacNee dated May 7 1995, at a time when NatWest was pressing for a new "lock-up" of the vendor shares.

Turnbull proposed he would:
"1. Sell 10 million of my 21 million shares to a third party.
"2. Transfer 30% of [Turnbull & Partners'] remaining 11 million shares to Neville [Wran] and 70% to me."

Turnbull and Wran would give undertakings not to sell those 11 million shares while they remained directors of Star Mining (they resigned four months later).

"I should note that of that 11 million shares only 6 million are 'vendor shares'."

Turnbull & Partners earned more than $2 million in fees from Star Mining in addition to share sales. By late 1995 it is believed the firm had sold almost all of its Star shares, raising more than $5 million at the current share price.

Turnbull and Wran resigned from the Star Mining board in September 1995. By 1996 the company's fortunes were in decline as the alliances that Turnbull had helped build up fell apart.

Turnbull has made it clear that he was never aware of any bribery payments by Star, and it is not suggested that he was. But critics will suggest he should have been aware.

Any such payments, and the government decisions they influenced, would have helped to boost the Star Mining share price, which in turn would have helped to lift Turnbull & Partners' share profits. Turnbull remained blithely unaware, the happiest and most unwitting of beneficiaries, with the handy knack of a timely exit line.