Maximilian Johnson, the younger half-brother of Britain's prime minister, has run into trouble in Mongolia. He works for a Hong Kong-based fund GRF2 that invested $19mn along with several other big investors into the Zasag Chandmani multi-metal mine, but now the owner appears to have run off with most of the money.

The Mongolian police - the economic crimes and fraud squad - has investigated the case and found evidence of fraud, embezzling and money laundering by the mine’s owner, Buyantogtokh Dashdeleg, and two other senior managers at the mine, the CEO, Erdenebatkhaan and the CFO, Tsend-Ayush of the project company Zasag Chandmani Mines.

Arrest warrants were issued and their passports were confiscated. However, in 2019 Dashdeleg appealed to a regional court that overturned the arrest warrant and he immediately skipped town and is now believed to be in the US.

After a year of inactivity Johnson and his partners complained to the authorities, who kicked the case up to the General Prosecutor, who ordered a trial. That was four months ago and the investors are now waiting for the case to be called. With a new government in office following general elections the case has become a litmus test for the government, which has promised to improve Mongolia’s battered investment image in an effort to attract more money into the country.

Long road

Johnson has had a colourful career and the road that brought him to Ulaanbaatar was a long one. Born in Brussels where the brothers' father was working for the European Commission, he studied Russian at Oxford. He ended up as a metals trader in Hong Kong for five years and also did a stint at Goldman Sachs, where he got to know Simon Murray, a famous investor and the former head of investment company Hutchison Whampoa and commodity trader Glencore, as well as being the founder of the Orange mobile phone company, amongst other things.

Murray was interested in Mongolia and his private investment vehicle GEMS set up GRF2 to invest into the Zasag Chandmani mine. As Murray and Johnson were acquainted and Murray knew that Johnson spoke Russian he invited the younger man to come into the firm and oversee the Mongolian project in 2018.

“Murray knew I spoke Russian and asked me to help on the mine project,” says Johnson. “It should have been a good project. It's a poly-metallic deposit with gold, copper and iron ore. We lent $19mn in a convertible credit note to finance getting the mine going, along with other investors.”

The GRF2 convertible debt could eventually be turned into a 30% share of the company. GRF2 followed the commodity trader Noble Resources into the deal that had also committed $15mn. The money was supposed to be used on equipment and starting production, but things soon began to go wrong.

Both investors did their due diligence, but as time passed production at the mine failed to start.

“We had seats on the board, but the company didn't call many board meetings. They were sending us reports and management accounts – but, well, those were produced by the management,” says Johnson, who is currently based in Indonesia due to the coronavirus (COVID-19) situation. “At one point GRF2 asked for audited accounts, but the management said they had no money and if the investors wanted audited accounts we would have to pay for it ourselves. It was around then the alarm bells began to ring.”

Simon Murray (left), the Mongolian ambassador to the UK (centre), Maximilian Johnson (right)

Investigations and charges

As relations deteriorated the investors began to demand their money back. Johnson reports that Dashdeleg offered to repay the credit at 20 cents on the dollar, which all parties refused. However, eventually Nobel did accept some sort of deal and exited the deal.

GRF2 decided to stick to its guns and at least try to recover the principal; under Mongolian law if you go to court to recover a debt you can only claim the principal amount and interests incurred are bad debts in your books, unlike in the west.

Johnson took the case to the local economic crimes and fraud squad, which opened an investigation.

“The police were fantastic and investigated the case thoroughly. They uncovered a considerable amount of evidence that showed the details of embezzlement and money laundering,” Johnson said.

The police then issued travel bans on the company’s CEO and CFO and confiscated their passports in the beginning of 2020, following the flight by the mastermind, Buyantogtokh. Amongst other scams, the police discovered that the mine was signing purchase orders with service companies at vastly inflated prices that turned out to be shell companies controlled by the owner and his staff, or their friends and close relatives.

“It wasn't even clear if these goods and services were ever delivered,” says Johnson. Some of the credits were spent on equipment but the police evidence suggests some $10mn-$15mn was drained out of the company using shell companies and related party transactions.

However, a district court judge later overturned the travel ban on 31st December, when people were preparing for the New Year’s Celebration, and within three hours of the ruling, Buyantogtokh left the country for Korea.  Since then Interpol has issued a Red Notice warrant for Dashdeleg, who is now on the international wanted list.  After continuing to push the case was reactivated and Johnson and GRF2 are now waiting for a case to go to court where the project company, Zasag Chandmani Mines, it’s CEO and CFO will be tried on charges of fraud, embezzlement, money-laundering and counterfeiting. 

“At this point all we want to do is get our money back,” says Johnson, who has been quietly lobbying to move the process forward. “This case is important not just for us but for the wider investment climate. Mongolia needs to show there is a level playing field for investors, that the rule of law works.”

GRF2 is not the only investment that has gone awry, but the government badly needs to bring in investors to exploit its huge mineral deposits, as it doesn't have the money to do this on its own.

And the government has been making progress. In August five representatives of the Paris-based Financial Action Task Force (FATF) flew into Ulaanbaatar on an inspection mission of crucial significance to the nation’s economy. Experts from the UK, US, Japan, China and Russia were considering whether Mongolia should be removed from the organisations grey list, which was introduced in 2000. Countries on the FATF grey list represent a much higher risk of money laundering and/or terrorism financing, but unlike those on the black list they have formally committed to working with the FATF to develop action plans that will address their deficiencies.

Mongolia was added to the FATF’s grey list in 2013 after which the government initiated reforms and started to meet some of the organisation’s conditions.

However, in 2016 FATF criticised Mongolia for backsliding and urged the government to enforce the laws with a set of recommendations, including enhancing economic transparency, improving oversight on the financial market, and holding those who break laws accountable. To comply with the recommendation, the Mongolian government formed the National Council to Combat Money Laundering and Terrorism in April 2017, which is the basis of the law enforcement agencies that GFR2 appealed to in its case.

The new government, recently elected, has also committed itself to improving the investment climate and in August new Prime Minister Oyun-Erdene Luvsannamsrain, the finance minister and Chairman of the State Great Khural (parliament) all separately made presentations to FATF officials to put forward their plan of action. Mongolia has borrowed heavily on the world’s bond markets over the last decade, and between 2021 and 2024 much of this will come due. Refinancing costs will be much more affordable if the country can establish a reputation for financial integrity and honesty. 

Litmus test for a battered investment image

The case has turned into a litmus test for Mongolia’s investment climate. The country has enormous potential, as it is home to hundreds of billions of dollars worth of mineral deposits, but investment into developing these assets has not gone well.

The biggest project in recent years has been the Oyu Tolgoi mine in the Gobi Desert, another gold/copper deposit, that was agreed with international investors Ivanhoe Mines and Rio Tinto in 2011.

Oyu Tolgoi caused a lot of excitement at the time as the billions of dollars in revenue the mine was supposed to generate were expected to lead to an explosive boom for Mongolia’s economy. Analysts were predicting extraordinary annual percentage growth rates in the 20s and 30s and a step-up in incomes for the population.

The project didn't take off and got bogged down in bitter wrangling with the government, and since then the international partners have changed and Ivanhoe Mines has been replaced by the New York-listed Turquoise Hill Resources.

In July this year the UK’s Financial Conduct Authority (FCA) started a probe into Rio Tinto and the late-running $6.75bn Oyu Tolgoi underground copper mine which may have breached its listing rules.

In July 2019, Rio announced that the Oyu Tolgoi underground expansion would require an additional $1.2bn-$1.9bn in capital and would be 16 to 30 months late. It pointed to difficult ground conditions that meant that a rethink of the design and development schedule would be necessary. However, according to some investors and a former employee, Rio knew the expansion of the copper mine was in trouble months before the difficulties were disclosed to investors and didn't say anything. But the mine is now in production and reported 36,735 tonnes of copper output in the second quarter of this year and 113,054 oz of gold.

The start of last decade was Mongolia’s day in the sun and other investors got equally excited. New York-based Firebird Management LLC bought 40% of the free float on the Mongolian exchange in anticipation of the mooted economic boom. That investment didn't work out as planned either.

Mongolian’s investment image has been battered by these misfires and made more difficult by the economic blows dealt to the economy by the recent crises. However, the new government is keen to remake the country’s image and with commodity prices flying – especially copper prices that have almost doubled in the last year to hit a record $10,000 per tonne – mining is once again a sexy sector.

Johnson’s case is now stuck at the Prosecutor’s Office. GRF2 is waiting for the case to go to trial, where it can stand to recover it’s money.

“We are simply hoping to get our money back,” says Johnson. “We hope that Mongolia’s justice system is fair, as the investment world looks in on our ruling.”