Maximilian Johnson, the young half-brother of the British Prime Minister, encountered problems in Mongolia. He works for a Hong Kong-based fund GRF2 which invested $19 million along with several other big investors in the Zasag Chandmani multi-metal mine, but now the owner appears to have run away with most of the money.

Mongolian police – the Economic Crimes and Fraud Squad – investigated the case and found evidence of fraud, embezzlement and money laundering by mine owner Buyantogtokh Dashdeleg and two others senior mine executives, CEO, Erdenebatkhaan and CFO, Tsend-Ayush of the project company Zasag Chandmani Mines.

Arrest warrants were issued and their passports were confiscated. However, in 2019 Dashdeleg appealed to a regional court which overturned the arrest warrant and he immediately left town and is now believed to be in the United States.

After a year of inactivity, Johnson and his partners filed a complaint with authorities, who referred the case to the attorney general, who ordered a trial. That was four months ago and investors are now waiting for the deal to be called. With a new government in place following general elections, the case has become a litmus test for the government, which has vowed to improve Mongolia’s battered investment image in a bid to attract more investment. money in the country.

Long road

Johnson has had a colorful career and the road that brought him to Ulaanbaatar has been a long one. Born in Brussels where the brothers’ father worked for the European Commission, he studied Russian at Oxford. He ended up as a metals trader in Hong Kong for five years and also had a stint at Goldman Sachs, where he met Simon Murray, a celebrity investor and former head of investment firm Hutchison Whampoa and trader in raw materials Glencore, as well as being the founder of the mobile phone company Orange, among others.

Murray was interested in Mongolia and his private investment vehicle GEMS created GRF2 to invest in the Zasag Chandmani mine. As Murray and Johnson knew each other and Murray knew that Johnson spoke Russian, he invited the young man to join the company and oversee the Mongolian project in 2018.

“Murray knew I spoke Russian and asked me to help him with the mining project,” Johnson explains. “It should have been a good project. It is a polymetallic deposit with gold, copper and iron ore. We loaned $19 million in the form of a convertible credit note to finance the start-up of the mine, along with other investors.

The GRF2 convertible debt could eventually be transformed into a 30% share of the company. GRF2 followed commodities trader Noble Resources in the deal which also committed $15m. The money was supposed to be used for equipment and starting production, but things quickly started to go wrong.

Both investors did their due diligence, but over time production from the mine did not start.

“We had seats on the board, but the company didn’t call a lot of board meetings. They were sending us reports and management accounts – but, well, those were produced by management,” says Johnson, who is currently based in Indonesia due to the coronavirus (COVID-19) situation. “At one point, GRF2 asked for audited accounts, but management said they had no money and if investors wanted audited accounts, we had to pay for them ourselves. It was around then that the alarm bells started ringing.

Simon Murray (left), Mongolian Ambassador to the UK (centre), Maximilian Johnson (right)

Investigations and charges

As relations deteriorated, investors began to demand their money. Johnson reports that Dashdeleg offered to repay the credit at 20 cents on the dollar, which all parties refused. However, Nobel eventually agreed to some sort of deal and backed out of the deal.

GRF2 decided to stick to their guns and at least try to get the main thing back; According to Mongolian law, if you go to court to collect a debt, you can only claim the principal amount and interest incurred as bad debt on your books, unlike in the west.

Johnson took the matter to the local Economic Crimes and Fraud Squad, which launched an investigation.

“The police were fantastic and investigated the matter thoroughly. They uncovered a considerable amount of evidence showing the details of embezzlement and money laundering,” Johnson said.

Police then issued travel bans against the company’s CEO and CFO and confiscated their passports in early 2020 following the theft of mastermind Buyantogtokh. Among other scams, police discovered that the mine was signing purchase orders with service companies at greatly inflated prices that turned out to be shell companies controlled by the owner and his staff, or their close friends and relatives.

“It wasn’t even clear if those goods and services were ever delivered,” Johnson said. Some of the credits were spent on equipment, but police evidence suggests around $10-15 million was drained from the business using shell companies and related party transactions.

However, a district court judge later overturned the travel ban on December 31, as people prepared for the New Year celebrations, and within three hours of the decision, Buyantogtokh left the country for Korea. Since then, Interpol has issued a red notice warrant against Dashdeleg, who is now on the international wanted list. After continuing to lobby, the case has been reactivated and Johnson and GRF2 are now waiting for a case to be taken to court where the project company, Zasag Chandmani Mines, its CEO and CFO will face trial for fraud, embezzlement of funds, money laundering and counterfeiting.

“At this point, all we want to do is get our money back,” says Johnson, who has quietly lobbied to push the process forward. “This case is important not just for us, but for the broader investment climate. Mongolia needs to show that investors are on a level playing field, that the rule of law works.

GRF2 is not the only investment that has gone bad, but the government badly needs to bring in investors to exploit its huge mineral deposits because it doesn’t have the money to do it on its own.

And the government has made progress. In August, five representatives of the Paris-based Financial Action Task Force (FATF) traveled to Ulaanbaatar on an inspection mission of crucial importance to the national economy. Experts from the United Kingdom, United States, Japan, China and Russia questioned whether Mongolia should be removed from the gray list of organizations, which was introduced in 2000. Countries on the gray list of the FATF represent a much higher risk of money laundering and/or terrorist financing. , but unlike those on the blacklist, they have formally committed to working with the FATF to develop action plans that will address their shortcomings.

Mongolia was added to the FATF gray list in 2013, after which the government launched reforms and started fulfilling some of the organization’s conditions.

However, in 2016 the FATF criticized Mongolia for backsliding and urged the government to enforce the laws with a set of recommendations including improving economic transparency, improving financial market supervision and accountability of those who break the law. To comply with the recommendation, the Mongolian government formed the National Anti-Money Laundering and Anti-Terrorism Council in April 2017, which is the law enforcement base that the GFR2 called upon in its case.

The newly elected government has also pledged to improve the investment climate and in August new Prime Minister Oyun-Erdene Luvsannamsrain, Minister of Finance and Speaker of the State Grand Khural (Parliament) all separately made presentations to FATF officials to present their action plan. Mongolia has borrowed heavily in global bond markets over the past decade, and between 2021 and 2024 much of that borrowing will mature. Refinancing costs will be much more affordable if the country can establish a reputation for financial integrity and honesty.

Litmus test for a degraded investment image

The case has become a litmus test for the investment climate in Mongolia. The country has enormous potential, as it is home to hundreds of billions of dollars worth of mineral deposits, but investments in developing these assets have not gone well.

The biggest project in recent years has been the Oyu Tolgoi mine in the Gobi Desert, another gold/copper deposit, which was agreed with international investors Ivanhoe Mines and Rio Tinto in 2011.

Oyu Tolgoi generated a lot of excitement at the time, as the billions of dollars in revenue the mine was supposed to generate was to lead to an explosive boom in the Mongolian economy. Analysts predicted extraordinary annual percentage growth rates in the 1920s and 1930s and rising incomes for the population.

The project did not take off and got bogged down in bitter disputes with the government. Since then, the international partners have changed and Ivanhoe Mines has been replaced by Turquoise Hill Resources, listed in New York.

In July this year, the UK’s Financial Conduct Authority (FCA) launched an investigation into Rio Tinto and the $6.75bn Oyu Tolgoi underground copper mine, which may have breached its rules registration.

In July 2019, Rio announced that the underground expansion of Oyu Tolgoi would require additional capital of $1.2-1.9 billion and would be delayed by 16-30 months. He pointed to difficult field conditions which meant an overhaul of the design and development schedule would be required. However, according to some investors and a former employee, Rio knew the copper mine expansion was in trouble months before the difficulties were disclosed to investors and said nothing. But the mine is now in production and yielded 36,735 tonnes of copper in the second quarter of this year and 113,054 ounces of gold.

The beginning of the last decade was Mongolia’s day in the sun and other investors got excited too. New York-based Firebird Management LLC bought 40% of the free float on the Mongolian stock market in anticipation of the reported economic boom. This investment also did not work out as expected.

Mongolia’s investment image has been tarnished by these missteps and made more difficult by the economic blows dealt to the economy by the recent crises. However, the new government is keen to revamp the country’s image and with soaring commodity prices – particularly copper prices which nearly doubled last year to a record $10,000 a ton – the mining is again a sexy business.

Johnson’s case is now stuck in the prosecutor’s office. GRF2 is waiting for the case to go to trial, where they can stand to get their money back.

“We just hope to get our money back,” Johnson says. “We hope the Mongolian judicial system is fair, as the investment world watches our decision.”