EY Swiss audits missed Zeromax's jewellery and offshore flows before a SFr5.6B fall

Zeromax, a Zug-based conglomerate whose empire in Uzbekistan — from textile processing to natural gas extraction — made it the country's largest employer and up to 10% of its GDP, collapsed in 2010 amid a political power struggle in Tashkent, leaving debts of more than SFr5.6 billion: Switzerland's second-largest bankruptcy after Swissair. At least SFr2.5 billion of its assets are still missing. The company was long associated with Gulnara Karimova, daughter of former president Islam Karimov, who denies any connection.

EY's Swiss partnership gave Zeromax a clean bill of financial health for 2005, 2006 and 2007, and remained its auditor for three more years without publishing further audit opinions. The accounts it passed included more than $13 million on luxury jewellery in 2006-07 — including $2 million in one Geneva Christian Dior store — and $25 million more over the following two years, plus $288 million transferred to opaque offshore companies between 2004 and 2007.

$180 million went to BVI-registered Galat Enterprises, which paid at least $5 million to Takilant, the Gibraltar conduit found in US and Swedish judgments to sit at the centre of a bribery scheme that paid Karimova for telecom contracts. Merkony and Belphil Capital, other offshore recipients, sent Takilant $33 million more, according to Swedish court files.

The oddities kept coming: a $29 million Hong Kong penthouse booked as office space and sold four months later for $14 million to Karimova's then boyfriend; $27 million spent on football in 2008-09, hiring big names for Uzbek club FK Bunyodkor — a $15 million contract with Luiz Felipe Scolari and $12 million for Rivaldo; and a CEO's wife's $250,000 bill at an exclusive sanatorium, excused with a promise to reimburse. An EY executive did question one undocumented $5.5 million transfer's lack of a "business reason"; management replied the reason was "self explanatory".

Investors took comfort from the Swiss domicile and a Big Four auditor; both signals were ornamental — disclosure was opaque and the opinions stopped after 2007.

Extraordinary outflows — jewellery, footballers, penthouses — were booked as business expenses and never triggered wider inquiry into management's trustworthiness.

Offshore loops justified by generic "consulting" contracts led to the conduit at the centre of a proven bribery scheme.

When EY did challenge a $5.5 million undocumented transfer, management called the business reason "self explanatory" and the matter rested.

An auditor who passes jewellery, football contracts and offshore loops as ordinary trade sells out the one thing an audit exists to sell: the right to trust the accounts.

US hedge fund Lion Point Capital, which bought Zeromax debt from the bankruptcy estate, is suing EY Switzerland in Zug for $1 billion in damages; EY says Uzbek court decisions caused a de facto expropriation and it will vigorously defend against "vexatious claims". In 2016 Swiss federal police found Zeromax-paid jewellery, including a $2.5 million Boucheron ring, in Karimova's Geneva deposit boxes; she has been imprisoned in Tashkent since 2015. Hundreds of European creditors, many small businesses in Germany and central Europe, are still owed billions in aggregate.