[Congressional Record (Bound Edition), Volume 152 (2006), Part 11]
[Extensions of Remarks]
[Pages 14428-14429]
[From the U.S. Government Publishing Office, www.gpo.gov]




                           RUSSIA AND THE G-8

                                 ______
                                 

                          HON. DARRELL E. ISSA

                             of california

                    in the house of representatives

                        Thursday, July 13, 2006

  Mr. ISSA. Mr. Speaker, as the G-8 meets in St. Petersburg this 
weekend to discuss important international issues, we should be mindful 
that the host nation Russia hardly deserves to be included in this 
accomplished group. The seven other participating countries are mature 
democracies with proven market economies that use the rule of law as 
the basis for civil society and display mutual respect across borders.

[[Page 14429]]

  Unfortunately, Russia has yet to subscribe to these same principles. 
Russian President Vladimir Putin has placed energy security at the top 
of the G-8 agenda. However, with Russia being the dominant supplier of 
gas to Europe, leaders throughout that continent feel anything but 
secure. And for good reason. Just this week, Rosneft, the Russian oil 
company, is seeking validation through a public offering to raise $11 
billion from mostly Western investors.
  What makes this offering controversial is how Rosneft acquired its 
assets and that it is a state-owned entity. Rosneft's asset once 
belonged to the YUKOS Oil Company, a private company that prospered 
until the Kremlin directed attacks against its chairman, Mikhail 
Khodorkovsky. Using the pretext of past tax claims the Russian 
government put Mr. Khodorkovsky and other company of officers in prison 
and then arranged for the state takeover of the company. The case and 
subsequent actions were highly controversial and widely reported in the 
Western media at the time.
  My Energy and Resources Subcommittee under the House Committee on 
Government Reform, recently conducted hearings on energy security and 
received credible testimony about the extra-legal, if not outright 
illegality, of the Russian government's actions regarding the YUKOS 
Company. We should remain concerned about how the Kremlin, which 
clearly controls almost all oil and gas exports to European and CIS 
countries, might use energy for political and foreign policy purposes.
  My colleague, Mr. Lantos, shares my concerns and this week sent a 
letter to several U.S. financial institutions that may be contemplating 
participation in the Rosneft lPO, questioning whether investing in a 
state entity which has acquired its main assets under other than 
legitimate circumstances may be in violation of U.S. laws and the 
Sarbanes-Oxley Act.
  For the benefit of my colleagues, I would like to ask that Mr. 
Lantos' letter be placed in the Record at this time.

                                    Congress of the United States,


                                      House of Representatives

                                    Washington, DC, July 10, 2006.
     Mr. James Dimon,
     Chairman and CEO, J.P. Morgan Chase,
     New York, NY.
       Dear Mr. Dimon: I write regarding recent news accounts that 
     J.P. Morgan Chase may serve as an investment advisor or 
     otherwise participate in the initial public offering of 
     Russia's state-owned oil company, OAO Rosneft Oil Company 
     (``Rosneft''). I understand from these news reports that the 
     offering, currently estimated to be $8 billion to $13 
     billion, is to take place in mid-July 2006.
       I am concerned that such transactions may violate federal 
     anti-money laundering laws and the Sarbanes-Oxley Act. 
     According to published reports, the largest portion of 
     Rosneft's assets was acquired in a transaction of 
     questionable legality I question whether financial 
     institutions that have access to the U.S. payments systems 
     should be engaged in transactions involving assets acquired 
     by a state entity under circumstances that are contrary to or 
     in violation of U.S. laws and acceptable market practices.
       Given the source of Rosneft's assets, there are questions 
     about whether the proposed IPO would involve prohibited 
     proceeds as specified under 18 U.S.C. 1956 (``laundering of 
     monetary instruments''). Specifically, any financial 
     institution involved in the IPO could be at potential risk of 
     violating federal anti-money laundering laws aimed at 
     preventing the proceeds of theft, corruption or other forms 
     of unlawful activity from entering the payments system.
       Rosneft's acquisition of assets from a publicly traded 
     company, OAO NK Yukos Oil Company (``Yukos''), in which 
     Americans had invested through American Depository Receipts 
     traded on the New York Stock Exchange, violated basic 
     principles and norms of free markets. Public accounts of the 
     transaction strongly suggest that Rosneft's senior officers 
     and directors, some of whom are senior officials of the 
     Russian government, personally profited from the theft of 
     these assets through their involvement in a sham transaction. 
     In that transaction, a front-company of unknown ownership 
     acquired the assets at billions of dollars below their market 
     value in a forced auction arranged by these very officials, 
     who in turn secured the prompt transfer of these assets from 
     the front-company to Rosneft--a sequence of events that have 
     raised serious questions of corruption.
       Significant financial institutions and analysts have raised 
     ethical and legal concerns about the planned IPO due to the 
     history of the Rosneft assets. As you may know, F&C Asset 
     Management (``F&C''), based in London, on April 27, 2006 
     publicly announced that the Rosneft IPO raised serious 
     questions of governance and legal risk, which made it 
     impossible for F&C to be a participating investor. According 
     to F&C, the Rosneft IPO is burdened by its lack of 
     transparency and no ``credible assurances that it has 
     identified, and made adequate provisions for any liabilities 
     stemming from the acquisition of its Yuganskneftegaz asset 
     [the assets taken from Yukos].''
       Independently, George Soros, an experienced investor in 
     Russia, has also found serious ethical issues pertaining to 
     the Rosneft IPO. As Soros wrote in The Financial Times on 
     April 26, 2006, Rosneft acquired its Yukos assets through 
     non-transparent sale by a front-company that ``won'' a rigged 
     auction of Yukos assets engineered by Russian authorities 
     under circumstances that made it impossible to determine who 
     profited 0 the transaction. As Soros wrote, the assets were 
     ``not acquired directly. The auction was won by unknown 
     Russian company that sold itself within days to Rosneft.'' 
     According to Mr. Soros, ``[t]he unknown owners made an 
     unknown amount of money on the transaction. The question is: 
     `Should an IPO be allowed to go forward without disclosing 
     the pertinent information?'.''
       In amending the Bank Secrecy Act in 20 1 with the USA-
     PATRIOT Act, the Congress emphasized the policy of ensuring 
     that every financial institution determine the beneficial 
     ownership of the assets involved in a transaction in order to 
     ensure that they are not illicit proceeds. We established a 
     risk-based system for due diligence in which we asked federal 
     regulators to ensure that financial institutions exercise 
     greater due diligence in high risk cases, such as when assets 
     are controlled by political figures, or those close to them, 
     sometimes known as ``politically exposed persons,'' in order 
     to guard against the risk that the financial institution 
     could be used to handle the proceeds of corruption.
       I recognize that Bank Secrecy Act and Sarbanes-Oxley 
     compliance has become a continuing focus of all publicly 
     traded U.S. financial institutions and that your institution 
     has policies and procedures in place designed to protect the 
     institution from the risk of handling illicit funds. In 
     recent years, however, federal regulators have repeatedly 
     found cases in which major U.S.-regulated financial 
     institutions failed to undertake risk-based assessments 
     across every area of their business, with the result that 
     some significant risks had not been recognized in a timely 
     fashion.
       There is no information publicly available to enable 
     Congress to assess the kind of due diligence that 
     participating U.S. financial institutions have done regarding 
     the underlying assets involved in the Rosneft IPO. We cannot 
     assess ow such institutions have determined that neither 
     corruption nor theft have been involved in Rosneft's 
     acquisition of this property. I recognize the Rosneft IPO is 
     only weeks away, but I urge you to take into account the 
     concerns outlined above, particularly as they relate to the 
     Bank Secrecy Act and Sarbanes-Oxley concerning any 
     transactions you contemplate in this regard.
           Sincerely,
                                                       Tom Lantos,
     Member of Congress.

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