Gamal Mubarak’s get-rich-quick scheme

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By Osama Diab

How can you make a return that is 12,000 times greater than the initial “investment” in under a decade? Ask Gamal Mubarak.


Friday 4 November 2016

Gamal Mubarak, the younger son of deposed President Hosni Mubarak, who was being groomed to become the country’s president before the 2011 revolution put an end to those plans, made an investment in which each dollar became 12,000 in fewer than 10 years.

In 2002, the businessman-turned-politician signed a contract with EFG-Hermes Holding, Egypt’s largest investment bank. Through the contract, which an anonymous source provided to Mada Masr, he managed to take in a net non-taxable profit of about $21 million from an initial investment of just $1,750 in less than a decade. Here is how he did it.

In 1997, the Cyprus-based company Bullion, which Gamal Mubarak co-owns, struck an agreement with EFG-Hermes Holding – in which Bullion would hold a 40% partnership share – to establish an offshore company called Egypt Fund that would manage EFG-Hermes Holdings’ private equity business.

In July 2002, about five years later, Egypt Fund was renamed EFG-Hermes Private Equity (EPHE) and its headquarters were opened on the British Virgin Islands. Bullion now owned a 35% stake and Gamal Mubarak was its director. The paid-up capital of the new company was a mere $10,000, of which Gamal’s share was $1,750.

Over the next decade, Gamal Mubarak’s initial $1,750 investment grew to about $20 million in “fees and commissions” through his ownership stake in Bullion. The vast sum was received with Gamal Mubarak barely making any significant investments, taking any risk or providing any real service that added value.

This is how this complex journey went:

Under the terms of the contract, which was signed on October 2002 as an “investment advisory agreement” between EFG-Hermes and EHPE, EFG-Hermes (the real holding company) appointed EHPE (the shell company) as an investment advisor for its private equity portfolio.

In other words, the subsidiary that only existed on paper and was without resident experts was intended to give investment advice to the holding company, which housed hundreds of experts.

The services described are listed in detail in the contract and include: carrying out regular reviews of the private equity portfolio, recommending and giving general investment advice to the customer in matters concerning the portfolio, coordinating with industry specialists and analysts, as well as risk management advisors, preparing a quarterly valuation of the portfolio and proposing minimum sale prices.

All of these services would have required manpower, but, in a shell company, there is none to provide these services. The people who provided these services were in actuality employees of the Cairo-based company.

While money was paid annually to a company whose existence didn’t extend much beyond a PO box and a mailing address at 3443, Road Town, Tortola, BVI, the holding company was buzzing with 876 employees, according to the company’s website.

This kind of agreement has been known to move profits from a tax jurisdiction like Egypt, where the government currently charges corporations a 22.5% tax on corporate profits, to a tax jurisdiction like the British Virgin Islands, where the corporate tax rate is 0%. The point is to record lower profit by inflating expenses in Egypt and greater profits in the British Virgin Island shell company.

One way of inflating expenses is to buy expensive “advisory services” from one of your subsidiaries in a tax haven, which would be recorded as an expense in the holding company’s accounts and reduce its profits on paper, but the money still appears in the holding company’s accounts, because it is still received by a subsidiary.

Profits in this case are usually transferred to a fully owned subsidiary. Because shell companies normally have a very small amount of capital invested in them and do not serve any material function, the rate of return on capital investment is usually very high, as the profits are not generated from real activities that require capital expenses. EHPE, with a mere capital of US$10,000 (LE61,500), garnered a net profit of about LE497 million between July 2003 and December 2009.

How Gamal Mubarak benefited from the deal

According to the 2002 contract, 10% of EFG-Hermes Holding’s capital gains in excess of cost or 2% of sale value, whichever was higher, would still be paid to Gamal’s company – in addition to an annual allowance of LE250,000 paid to him for his position on the company’s board.

However, it doesn’t make clear economic sense to allow an external party like Gamal Mubarak access to the large artificial rate of return that offshore entities garner, without him having anything to do with the parent company from which the funds were originally transferred. This discrepancy poses questions about the nature of Gamal Mubarak’s relationship with the holding company.

EFG-Hermes has repeatedly declined to answer our inquiries about the contract signed by Gamal Mubarak and refused to comment beyond their short 2012 statement on the involvement of the Mubarak family with EFG-Hermes. In the statement, the company said that no member of the Mubarak family held any shares in the EFG-Hermes Holding or its subsidiaries, with the exception of Gamal, who acquired 18% of EHPE in 1997, before he entered into political life.

Other than Gamal Mubarak’s direct gains as EHPE’s director, the contract seems to have served another purpose, namely to facilitate the movement of money through a lengthy chain of companies that terminates in secret accounts.

In 1993, Gamal and Alaa Mubarak started a complex network of secret offshore entities by establishing a company called Panworld Investment in the British Virgin Islands. Three years later, the company made its first known investment as a co-manager of a $9 million fund called International Securities Fund. In 1997, Panworld Investments, along with many of Mubarak’s associates, made a $250,000 investment in Horus I, one of Egypt’s first private equity funds. This was the same year that Mubarak’s Bullion entered into partnership with EFG-Hermes Holding to found what would become the British Virgin Islands-based EHPE. Bullion owned 35% of EHPE, with Panworld Investment owning half of this share, 17.5%.

This means that the profits would leave the holding company in Cairo and travel to the secret jurisdiction of the British Virgin Islands, before traveling back to Cyprus and then returning to the British Virgin Islands: a complex journey attempting to obscure the identity of the politically vulnerable beneficiaries.

Although Gamal owns half of Bullion, his name does not appear on official documents because his stake was brokered through Panworld Investment, the other British Virgin Islands-based shell company.

A Central Bank of Egypt report makes reference to US$22.5 million in net profits that were transferred from EHPE’s bank account to Bullion’s Cypriot bank account between 2008 and May 2011.

Further, according to a report by a judicial committee appointed by an Egyptian criminal court to investigate an insider trading case in which Gamal is a defendant, Bullion garnered $24.1 million in profit shares from 2007 to 2009, of which Gamal took in around $12.05 million. 

EFG-Hermes confirmed this information in a previous correspondence, saying that Gamal’s annual profit averaged $880,000 a year. “In the course of his investment in EFG Hermes Private Equity, Mr Gamal Mubarak received total dividends of $880,000 annually, in the context of which EFG Hermes notes that exchange rates were lower at that time than at present,” reads the 2012 EFG-Hermes statement issued to clarify the Mubarak’s involvement with EFG-Hermes.

Additionally, Bullion owned a 40-percent indirect stake in Horus Consultancy, to which EHPE transferred a total sum of LE92.3 million. Gamal Mubarak’s share of this sum was LE18.4 million, or around US$3 million, according to the average exchange rate at the time, as well as $1.25 million in compensatory payments for his role as a board member of EHPE.

Hazem Shawki, the director of EHPE during the 2011 revolution, said in an official interrogation held at the general prosecutor’s office that Gamal’s shareholder equity in EHPE was LE27 million, approximately US$4.5 million adjusted to the exchange rate at the time, in 2011.

This means that, between 2003 and 2011, Gamal made at least $20.8 million, a 1,188,400 percent rate of return on his paid-up capital of $1750. In other words, for every dollar he invested, he took in $11,884 in less than a decade.

Other deals

When looking into the registration location of EHPE, where Gamal Mubarak has an 17.5% indirect stake, we find that it was registered in a building called the KPMG Centre, also known as the Tropic Isle building, in the British Virgin Islands. It is an address that the Offshore Leaks database lists as the home of at least dozens of companies.

Managing partners of private equity funds are often registered in low-tax jurisdictions so that the fees and commissions they receive are exempt from taxes. EHPE was the managing partner of at least eight private equity funds worth collectively close to US$1 billion and received their share of profits made on these investments, of which 18% went straight to the Mubarak sons.

The judicial committee’s report in the insider trading case affirms that at least LE497 million in profits were shifted to the British Virgin Islands between July 2003 and December 2009. The report also notes that there is no indication that EHPE paid any taxes on these profits.

What is more, a similar investment advisory agreement seems to have been signed between EHPE and Bank Audi, in which EFG-Hermes Holding held a 28% ownership stake.

EFG-Hermes’s 2007 annual report states that Bank Audi transferred more than LE16 million in financial advisory services fees to EHPE, an indication that a similar agreement may have been in place between Bank Audi and EHPE.

These agreements have certainly reduced the Cairo-based holding company’s tax bill. “The effective tax rate for 2008 decreased substantially to 10%, from 13.1% in 2007, as revenues from outside of Egypt and non-taxable entities increased,” reads the 2008 financial statement of EFG-Hermes.

How does tax evasion occur?

Holding companies typically establish subsidiaries, also known as Special Purpose Entities (SPEs), in tax havens using a mere PO box, but without establishing real operations. Companies state that these subsidiaries have been founded for “tax planning” purposes, a euphemism for tax evasion and lax regulation.

“It is interesting to see that EFG-Hermes Private Equity is based in the British Virgin Islands, a notorious tax haven. The structure of the private equity industry makes great use of tax havens,” says Nick Mathiason, the director of Finance Uncovered, a global investigative initiative on illegal capital inflows. “Some of this is for legitimate reasons. When you have investors from all over the world, it is often simpler to base yourself in a tax neutral zone. However, on many occasions, businesses, including private equity firms, take advantage of the benefits of basing themselves in a tax haven, thereby denying governments huge sums in tax.”

Comprised of 35 of the world’s richest countries, the Organization for Economic Cooperation and Development is the world’s most important tax policy agency. It is currently trying to tackle Base Erosion and Profit Shifting (BEPS), which it defines as “tax planning strategies that exploit gaps and mismatches in tax rules, which big businesses often use to artificially shift profits to low or no-tax locations where there is little or no economic activity.”

The OECD says that, although some of the schemes used by big businesses are illegal, most are not, adding that “this undermines the fairness and integrity of tax systems because businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that operate at a domestic level. Moreover, when taxpayers see multinational corporations legally avoiding income tax, it undermines voluntary compliance by all taxpayers.”

A “tax haven” is a term used to describe a microstate – typically an island or a group of islands in the Caribbean Sea – in which corporate tax rates are zero percent and where the ownership of companies can remain unknown. Tax havens have been typically used as destinations to artificially shift profits in order to escape the sovereign tax authority operating in the territory where the corporation actually makes its profits.

These islands are so small and house such small populations that they can run their governmental affairs by charging the many large businesses they host very small administrative fees, rather than real taxes. Among the most famous tax havens are the British Virgin Islands, the Cayman Islands, Panama and the Bahamas.

Due to the fact that most registered companies have no real operations there, small buildings of no more than four stories can house as many as 20,000 companies. Even president Barack Obama took note of this phenomenon.

“For years, we’ve talked about shutting down overseas tax havens that let companies set up operations to avoid paying taxes in America,” Obama said in a 2009 speech on international tax reform. “I used to talk about the outrage of a building in the Cayman Islands that had over 12,000 businesses claiming this one building as their headquarters. And I’ve said before, either this is the largest building in the world or the largest tax scam in the world.”

Mathiason thinks that when there are literally thousands of companies operating out of a single address, it is a sign that there are thousands of shell companies there. “The way businesses have been allowed to organise themselves is that they can have subsidiaries set up as self-contained companies, trading and shifting revenues with each other,” says Mathiason. “Even big multinationals have shell companies in out-of-the-way places, in which not a single real employee actually works. This is a symptom of the systemic failure of our international tax system. It promotes artificial transactions and secretive companies to avoid tax. The very same system tremendously benefits organized crime, drug gangs and terrorists.”


This article first appeared on Mada Masr on 20 October 2016. Republished here with the author’s permission.

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Sun, sand and tax “holidays”

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By Osama Diab

In just a single decade, Egypt has lost more than $20 billion in trade mispricing alone, not to mention other forms of tax evasion.

Courtesy of

Courtesy of

Monday 10 March 2014

Most of us know that the world’s largest buildings by height are located in Dubai, Shanghai, New York and other international metropolises. But what we know far less about is the location of the largest buildings in the world by number of registered companies.

Ugland House is a five-storey building located in the tiny Cayman Islands in the Caribbean. Despite its size, this space is home to nearly 19,000 companies.

But how do thousands of companies fit in such a modest space?

The answer is that they do not fit — not in any physical sense. Most companies registered here exist only in public records and, for the most part, have a parent company located in other jurisdictions.

The Cayman Islands have a zero-percent tax rate on all sorts of income, including capital gains and corporate taxes. The tax haven is an attractive destination for businesses around the world to register or have subsidiaries there to avoid paying taxes in their own countries.

It is difficult to know which Egyptian companies are registered in this building due to the secrecy most tax haven countries provide investors. However, Cairo-based regional investment bank EFG-Hermes, which owns many subsidiaries in no-tax jurisdictions, has at least one company among the 19,000 registered at Ugland House, according to one of the firm’s documents.

Ugland House eventually came to the attention of US President Barack Obama. “For years, we’ve talked about shutting down overseas tax havens that let companies set up operations to avoid paying taxes in America,” he said in a speech in 2009 on international tax policy reform.

“I used to talk about the outrage of a building in the Cayman Islands that had over 12,000 businesses claiming this one building as their headquarters. And I’ve said before, either this is the largest building in the world or the largest tax scam in the world.”

Despite his firm warnings, Obama seems to have forgotten that his own country is accommodating what is probably the world’s largest building by registered businesses.

The address is 1209 North Street, Delaware, a single-storey building that hosts just under 300,000 registered businesses, including big names like Ford, American Airlines, General Motors, Coca-Cola and Kentucky Fried Chicken.

The building in Delaware, a state know as a low-tax jurisdiction, also has some Egyptian companies registered there.

According to the Delaware business registry, a company called EFG Capital Partners Inc is registered at 1209 North Street. The name of the company is identical to another EFG-Hermes subsidiary registered in the Cayman Islands, which might be a possible sign of a link to the Egyptian investment bank.

EFG Capital Partners Delaware

According to the registry, another two EFG-Hermes companies called The Middle East and North Africa Opportunities Fund, LP and the Egypt Growth Fund are registered in the same building.

A request for comment to the EFG-Hermes headquarters in Cairo went unanswered for several days.

The construction and cement giant, Orascom Construction Industries, also has a registered company for its US subsidiary Orascom E&C USA, Inc, in the Delaware building.

There are numerous companies with “Egypt“, “Egyptian” or “Misr” in their name registered in the Corporation Trust Centre building in Delaware, but it’s not always easy to establish a connection with a person or an entity in Egypt.

But why would any company want to register there and fight with hundreds of thousands of other companies over this small office space?

It is mainly because shell companies, or companies with no significant assets or operations, are often used as a vehicle to shift profits to no- or low-tax jurisdictions using a variety of tactics including transfer mispricing and round tripping.

Some websites provide the service of registering these companies online in a few minutes for a small fee of a few hundred dollars.

Transfer mispricing is when a company sells a product to its subsidiaries on paper only for artificial prices to avoid paying taxes, a tactic used to maximise company profits.

It is done by making the most profits on paper in a country with the lowest tax rates usually through a shell company in a tax haven. The Washington-based organisation Global Financial Integrity (GFI) estimates that between 2001 to 2010, at least $22.32 billion left Egypt illegally as a result of trade mispricing.

Round tripping, on the other hand, is routing your earnings through a set-up company in a tax haven so it is counted as earnings of a foreign company and, therefore, not taxable in the investor’s country of residence.

There are around 85 companies registered in the Cayman Islands investing about $2.5 billion in Egypt, according to the General Authority for Investment. Considering the minuscule size of the island, it is unlikely that these large investments are native to it. It is therefore more likely to be about routing profit through shell companies in tax havens.

“If you set up a company in a tax haven and route your money through it, your earnings are counted as earnings of a foreign company — and you only pay the tax due in the tax haven where the company is registered. That is usually next to nothing,” says Nick Hildyard, a British anti-corruption activist and the founder and director of the London-based anti-corruption organisation The Corner House.

Needless to say, lower tax revenue means less money to build roads, schools, hospitals and provide public services.

While GFI estimates that at least $22.32 billion of taxable profits left the country in an attempt to avoid taxation, this would only be a fraction of the total unpaid taxes.

With a large informal sector and a history of tax evasion, Egypt loses billions of pounds in unpaid taxes annually. Last year, Egypt collected roughly LE93 billion in taxes on goods and services. If roughly 30 percent of economic activity happens in the informal sector, and another 30 percent of businesses pay only half of what they owe, losses for last year alone would total nearly LE77 billion.

The existence of such tax havens also intensifies tax competition between countries to keep investors “onshore”, which leads to what experts call “a race to the bottom”.

This can only lead to the reduction of government spending on public and social services, and relying more on indirect, regressive taxation, or over-taxing low and middle incomes, who are unable to hide their incomes in tax havens.


This article first appeared in Mada Masr on 5 March 2014. Republished here with the author’s consent.


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