Gamal Mubarak’s incredible get-rich-quick scheme
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 countryâs 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, Egyptâs 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 â in which Bullion would hold a 40% partnership share â to establish an offshore company called Egypt Fund that would manage EFG-Hermes Holdingsâ 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 Gamalâs share was $1,750.
Over the next decade, Gamal Mubarakâs initial $1,750 investment grew to about $20 million in âfees and commissionsâ 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 âinvestment advisory agreementâ 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 didnât 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 companyâs 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 âadvisory servicesâ from one of your subsidiaries in a tax haven, which would be recorded as an expense in the holding companyâs accounts and reduce its profits on paper, but the money still appears in the holding companyâs 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 Holdingâs capital gains in excess of cost or 2% of sale value, whichever was higher, would still be paid to Gamalâs company â in addition to an annual allowance of LE250,000 paid to him for his position on the companyâs board.
However, it doesnât 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 Mubarakâs 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 Mubarakâs direct gains as EHPEâs 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 Mubarakâs associates, made a $250,000 investment in Horus I, one of Egyptâs first private equity funds. This was the same year that Mubarakâs 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 EHPEâs bank account to Bullionâs 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 Gamalâs annual profit averaged $880,000 a year. âIn 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,â reads the 2012 EFG-Hermes statement issued to clarify the Mubarakâs 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 Mubarakâs 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 prosecutorâs office that Gamalâs 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 committeeâs 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-Hermesâs 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 companyâs tax bill. âThe 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,â 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 âtax planningâ purposes, a euphemism for tax evasion and lax regulation.
âIt 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,â says Nick Mathiason, the director of Finance Uncovered, a global investigative initiative on illegal capital inflows. âSome 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.â
Comprised of 35 of the worldâs richest countries, the Organization for Economic Cooperation and Development is the worldâs most important tax policy agency. It is currently trying to tackle Base Erosion and Profit Shifting (BEPS), which it defines as âtax 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.â
The OECD says that, although some of the schemes used by big businesses are illegal, most are not, adding that âthis 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.â
A âtax havenâ is a term used to describe a microstate â typically an island or a group of islands in the Caribbean Sea â 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.
âFor years, weâve talked about shutting down overseas tax havens that let companies set up operations to avoid paying taxes in America,â Obama said in a 2009 speech on international tax reform. âI 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 Iâve said before, either this is the largest building in the world or the largest tax scam in the world.â
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. âThe 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,â says Mathiason. âEven 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.â
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This article first appeared on Mada Masr on 20 October 2016. Republished here with the author's permission.