KPMG WITHDRAWS AUDIT REPORTS FOR THREE YEARS OF STATI FALSIFIED FINANCIAL STATEMENTS
By letter dated 21 August 2019, KPMG Audit LLC (“KPMG”) notified the Republic of Kazakhstan that they have withdrawn eighteen (18) audit reports covering three (3) years of financial statements issued by companies controlled by Anatolie Stati (“Stati”), saying that “reliance should not be placed on the audit reports issued by KPMG Audit LLC.” KPMG took this extraordinary action after reviewing evidence showing that material misstatements existed in the Stati financial statements, that these misstatements were based on knowingly false representations by Stati to KPMG, and that Stati had relied on the KPMG audit reports, the falsified financial statements, and other false and fraudulent information, to obtain the December 2013 ECT Arbitral Award against the Republic in the amount of circa $500 million.
KPMG stated in its letter that it took this decision after it “conducted a thorough and independent assessment, which included but was not limited to, the materials” provided by the Republic. KPMG also stated that, consistent with International Standards of Auditing, it had sought to engage with Stati on this matter but that he had not responded. Finally, KPMG stated that it had notified Stati of its “conclusion and requested that [Stati] take all steps necessary to prevent any further or future reliance on the [KPMG] audit reports.”
The material reviewed by KPMG included evidence showing that Stati inflated the costs of his alleged investments in Kazakhstan by hundreds of millions of dollars, through sham undisclosed related-party transactions. The material also included sworn testimony of Stati’s former CFO, Mr. Artur Lungu, obtained by the Republic in April 2019, in which Mr. Lungu testified that Stati made a series of materially false misrepresentations to KPMG in connection with its audit of the financial statements, and that these financial statements were materially misstated. Mr. Artur Lungu now resides in the US and works for the company Amni Petroleum International Petroleum Development Company.
The Republic of Kazakhstan is now taking steps to inform the relevant authorities of KPMG’s action and conclusions. On 22 August 2019, the Republic filed KPMG’s letter and underlying materials with the Dutch court in which Stati is requesting enforcement of the fraudulently obtained ECT Award. A hearing in those Dutch proceedings is scheduled for 27 August 2019.
As previously disclosed, in June 2017, in enforcement proceedings initiated by Stati, the High Court of England issued a 22-page fully-reasoned opinion in which it found “there is a sufficient prima facie case that the ECT Award was obtained by fraud,” and that the interests of justice required that Kazakhstan’s fraud allegations be “examined at trial and decided on their merits.” In response, Stati abandoned these proceedings on condition that he never re-institute enforcement proceedings in England and also pay substantial legal fees and expenses to the Republic. KPMG’s present action confirms that the High Court of England’s decision was correct, and that the ECT Award was obtained by fraud.
The fraudulent scheme committed by Stati and his co-conspirators is a direct attack on the investor-state dispute settlement (ISDS) system set up to protect foreign direct investment in Kazakhstan. The Republic will continue to take actions to protect foreign investment in Kazakhstan, including bringing to light the actions of parties such as Stati that abuse and manipulate the ISDS system for their own fraudulent ends.