Out of the Cauldron, Into the Fire? 3 EXECUTIVE SUMMARY
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FOR HUMANFOR RIGHTS FORUM & UZBEK KRISTIAN LASSLETT PROFESSOR OF THE OUT CAULDRON, CENTRAL ASIA CENTRAL POWER BRIEFS | | BRIEFS POWER o2 FRisk and Ithe PrivatisationRE? of Uzbekistan’s Cotton Sector JUNE 2020 JUNE POWER BRIEFS | CENTRAL ASIA ABOUT THE SERIES SERIES EDITORS 2020 ABOUT THE REPORT AUTHOR Drawing on the systematic Professor Kristian Lasslett Kristian Lasslett is Professor of methodologies behind investigative Umida Niyazova Criminology and Head of School journalism, open source intelligence Dr Dawid Stanczak (Applied Social and Policy Sciences) gathering, big-data, criminology, and at Ulster University. He has pioneered political science, this series maps the investigative methods and data- transnational corporate, legal and modelling techniques for documenting governmental structures employed by the social networks, processes organisations and figures in Central and transactions essential to the Asia to accumulate wealth, influence organisation of grand corruption and and political power. The findings will kleptocracy. These techniques have be analysed from a good governance, also been employed to detect red flags human rights, and democratic in high risk governance environments. perspective, to draw out the big Professor Lasslett’s findings have picture lessons. featured in a wide range of leading international scientific journals, Each instalment will feature a digestible two monographs, feature length analytical snapshot centring on a documentaries and print-media exposés. particular thematic, individual, or organisation, delivered in a format that Uzbek Forum for Human Rights is designed to be accessible to the public, (formerly Uzbek-German Forum for useful to policy makers, and valuable to Human Rights / UGF) is a Berlin-based civil society. NGO dedicated to protecting human rights and strengthening civil society in Uzbekistan. Uzbek Forum works with a network of independent human rights defenders inside Uzbekistan who conduct monitoring of human rights abuses including forced labour in the cotton and silk sectors. Uzbek Forum’s evidence-based reports are used to conduct advocacy and shape policy with the Government of Uzbekistan, the EU and the UN as well as raise awareness in the regional and international media. Uzbek Forum has been twice nominated for the Human Rights and Business Award for ‘important work deserving international recognition'. 022 Out Breaking of the with Cauldron, the Past into the Fire? EXECUTIVE SUMMARY 4 INVESTIGATING THE COTTON CLUSTER SYSTEM 8 PART I I.I Background 8 I.II Methodology 12 ORIGINS OF THE COTTON CLUSTER SYSTEM 15 PART II II.I A Pilot Cluster with Significant Red Flags 15 II.II Expansion of the Cotton Cluster System 20 CONTENTS IRREGULAR OFFSHORE DEALINGS: 22 PART III A LOOK INSIDE THE UZTEX GROUP III.I An Overview of Uztex-InFinBank’s Offshore Structure 26 III.II The Swiss Capital International Group AG 31 III.III Wayrex LLP 35 III.IV Rieter Group 38 III.V A ‘Boomerang’ Sales Contract between Uztex and Rieter 41 RUSSIA’S STARBANK SCANDAL AND UZBEKISTAN’S 45 PART IV CLUSTER SYSTEM PART V FURTHER CLUSTERS AND RED FLAGS 56 V.I Surkhandarya Region, Sherobod District and 57 Surkhandarya Region, Kumkurgan District V.II Andijan Region, Balikchi District 61 V.III Bukhara Region, Romitan District and Tashkent Region, 68 Kuychirchik District V.IV Jizzakh Region, Pakhtakor District 68 PART VI CONCLUSION AND RECOMMENDATIONS 70 Out of the Cauldron, into the Fire? 3 EXECUTIVE SUMMARY Cotton is historically one of Uzbekistan’s most important exports. It is also the country’s most contentious commodity. To pick the vast quantities of cotton, millions of people have been forced by the state to labour in unsanitary and unsafe conditions. This has prompted an expansive However, the rapid privatisation and Following the first iteration of this domestic and international human rights corporatisation of the cotton sector research, a corporate integrity campaign, and an international pledge comes with serious risks. Weaknesses scorecard was developed to identify by major apparel brands not to source in corporate governance and market risk in the cluster system. Green flags cotton tainted by forced labour. In integrity has permitted white-collar are awarded where a corporate actor response, the Mirziyoyev government crime to thrive in the upper stratums of exhibits traits associated with good has committed to eradicating forced Uzbekistan’s private sector, a process practice, amber flags are awarded labour from cotton production in that frequently occurs under the where there is an absence of key data, Uzbekistan. protection, or with the connivance of, while red flags are attributed when state agencies. evidence is identified of bad practice. The centre-piece of its strategy is a rapid privatisation of the cotton This has deterred foreign investment A systematic application of the sector through a system of vertically and damaged Uzbekistan’s scorecard to a sample of 20 clusters integrated clusters. Operated by private international standing. revealed a high proportion of red companies, cotton clusters aim to turn (41%) and amber flags (49%). This raw cotton into value added textiles for The International Labour Organization indicates the cotton cluster system is domestic markets and export. During predicts that the cluster system’s at significant risk of abusive practices. 2017/18, 63 clusters were formally economic promise depends on the Green flags (10%) were almost entirely created through government decree, inclusion of ‘responsible agricultural earned by one cluster operator, 1 covering 501,614 hectares of land. investors’. Indorama Kokand Textile. It is anticipated that clusters will This report is based on a year-long prime productivity gains and tackle investigation into the integrity of the the drivers of forced labour. cluster system and the companies selected to operate it. 1 International Labour Organization (2019) Third party monitoring of child labour and forced labour during the 2018 cotton harvest in Uzbekistan, available online: https://www.ilo. org/wcmsp5/groups/public/---ed_norm/--- ipec/documents/publication/wcms_681372.pdf (accessed 27 December 2019) 4 Out of the Cauldron, into the Fire? FINDINGS In-depth case studies were conducted on two major business groupings responsible for 11 clusters. This research uncovered serious evidence of improper corporate conduct. THE FIRST CASE STUDY FOCUSES ON THE UZTEX GROUP. KEY FINDINGS INCLUDE: Uztex is a family owned conglomerate The General Director of Russia’s Diagram 1: Green, amber and red flags that directly operates five clusters, Pyatigorsk Dairy Plant LLC, a were awarded to 20 clusters using the and claims to be the largest textile company previously part-owned by integrity scorecard firm in Uzbekistan. The same family an Uztex offshore holding company, owns a major stake in Invest Finance alleges that Farkhod Mamatdjanov Bank, a private financial institution is involved in criminal activity, 10% previously associated with Gulnara operating with protection from 41% Karimova, the imprisoned eldest employees within Uzbekistan’s daughter of Uzbekistan’s late Prosecutor General’s office. President, Islam Karimov. Farkhod Mamatdjanov recently had Shares in Uztex group companies an investment frozen by the Russian are held through a complex offshore courts over concerns tied corporate structure that spans Switzerland, property was being employed in the the United Kingdom and Singapore. service of organised crime activity. These offshore legal entities use This court order was prompted nominee companies and individuals – by a criminal investigation into some of whom have been tied to Mamatdjanov launched by Russian international money laundering authorities. scandals – which serves to publicly Leaked Uztex records document conceal Uztex group’s beneficial a set of irregular transactions 49% owners and persons with significant between Uztex group companies, control. Evidence indicates that Rieter, a major Swiss multinational some of these offshore entities that supplies industrial equipment Cluster Risk Assessment have potentially filed misleading for the textile sector, and an English information on the financial scope Limited Liability Partnership, Green Amber Red of the group’s operations. Wayrex LLP. Media reports claim that a key controlling mind behind the Uztex group is Farkhod Mamatdjanov. Evidence collected for this case study, which includes leaked internal documents, support these claims. Out of the Cauldron, into the Fire? 5 THE SECOND IN-DEPTH CASE STUDY INVOLVES A NUMBER OF INTERCONNECTED IN ADDITION TO THE CONDUCT COMPANIES OPERATING SIX COTTON CLUSTERS. KEY FINDINGS INCLUDE: DOCUMENTED IN THE TWO IN-DEPTH CASE STUDIES THIS REPORT FINDS A Russian national, Agadzhan Avanesov, Following Starbank’s bankruptcy, CONCERNING NUMBER OF RED FLAGS and his reported assistant Vakhid the DIA has also successfully ASSOCIATED WITH OTHER CLUSTER Artykov, are tied through the litigated against Uzbekistani OPERATORS. THESE RED FLAGS INCLUDE: Uzbekistani company Beshariq companies, Amudaryotex LLC and Tekstil JSC to resident of Kyrgyzstan, Beshariq Tekstil JSC. Both companies The use of opaque offshore structures Mirakbar Yakubzhanov, and his son guaranteed major loans made by featuring nominees implicated in Murat Yakubzhanov. Beshariq Starbank to tied entities in Russia, fraud and money laundering. Tekstil JSC operates the Beshariq which were defaulted on. Under The involvement of politically exposed cotton cluster in Uzbekistan.