Special Report: An image makeover for Myanmar Inc

(Reuters) – He’s the flashiest tycoon in

one of Asia’s poorest cities, with a canary-yellow Lamborghini parked outside his neoclassical

mansion.

Tay Za is also one of the most vilified associates of Myanmar’s former junta. The U.S. Treasury has

branded him a “notorious henchman and arms dealer,” slapping him with sanctions that froze his assets and blocked his

jet-setting family from cities across the globe.

Now, as his country starts to open up after decades of military

misrule, Tay Za is leading a wave of crony capitalists who are repositioning themselves as the fresh new faces of Myanmar

Inc. According to his son, the 44-year-old multimillionaire has become a semi-retired philanthropist.

“Everything is

all different for him now,” said Pye Phyo Tayza, 25, over a two-hour dinner at the Kandawgyi Palace Hotel, a teak complex

bought by his father two years ago. “He is doing a lot of foundation work. He is doing more contributions for society. Less

greed.”

Reuters interviews with Myanmar’s most powerful business families reveal a broad push to cultivate a new

image – and retain their position atop the economy of this resource-rich nation of 60 million.

Some are promoting

charitable work, forging ties with the dissident Burmese Nobel Peace Prize laureate Aung San Suu Kyi, and huddling daily with

executives from multinational companies descending upon one of world’s last frontier economies.

Many are retooling

sprawling business empires that relied on favors from the state, anticipating an end to sanctions and new competition from

foreign brands. Some are hiving off loss-making assets inherited under a system that reserved lucrative contracts — often in

jade mining, timber and tourism — to favored businessmen, or awkwardly trying to shed an aura of privilege in Asia’s

second-poorest country after Afghanistan.

Quietly, they are bringing sons and daughters into

play, spawning a second-generation elite that is consolidating through business and marriage, even as Washington and Brussels

debate how to lift sanctions without enriching Than Shwe’s business allies.

The maneuvering poses a tricky dilemma

for the West. The United States and Europe must embrace Myanmar’s political and industrial leaders in order for reforms to

take hold and to counter China’s influence in this country at the crossroads of Asia. But that endorsement, and the

impending lifting of trade sanctions, could backfire if the regime takes a repressive turn or the elite keep a lock on the

nation’s resources.

Myanmar’s opening began last year, when Senior General Than Shwe handed power to a nominally

civilian government, and advanced this month when democracy champion Aung San Suu Kyi won election to parliament. That

prompted Washington last week to say it was ready to relax some sanctions, including a ban on U.S. investments in Myanmar,

also known as Burma.

But in announcing those steps, Secretary of State Hillary Clinton said sanctions and prohibitions

will remain “on individuals and institutions that remain on the wrong side” of reforms.

Myanmar’s crony capitalists –

a clique of fewer than 20 families – grew rich with help from the dictator who ruled Myanmar from 1992 until his retirement

just last year. Than Shwe led a military junta whose abuses include killings, torture, rape and forced labor, the

International Human Rights Clinic at Harvard Law School said in a 2009 report.

During her visit to Myanmar in December

2011, the first by a U.S. secretary of state in over 50 years, Clinton called for economic as well as political reforms so

that the benefits of lifting sanctions would “flow to a broad-based group of people and not just to a very

few.”

That’s easier said than done. Even for Clinton: She stayed at the Thingaha, a crony-owned hotel in Myanmar’s

crony-built capital city of Naypyitaw.

The go-to businessmen of the former military junta are now the must-see

contacts of Western executives wishing to invest in this former British colony, nestled between booming India and China with strategic ports and untapped

reserves of oil and gas.

“TOP CRONY”

Tay Za is perhaps Myanmar’s best-known tycoon. Diplomats say he curried

favor with Than Shwe and other generals, giving their children roles in his businesses in exchange for coveted contracts and

import licenses in profitable sectors: trading, logistics, property, agro-industries, tourism, oil and retail.

He has

boasted sanctions made him richer and the generals stronger. Washington calls him “the regime’s top crony.” But his eldest

son tells Reuters his family has suffered under sanctions.

When the military violently cracked down on Buddhist monks

and pro-democracy activists in September 2007, the U.S. blacklisted Tay Za and his family under tighter sanctions, citing his

links to the junta’s inner circle.

Around that time, an e-mail purportedly by Tay Za’s other son, Htet, circulated

on the Internet. It ridiculed sanctions, poked fun at the unrest, and turned an envious and angry public against the

family.

“U.S. bans us. We’re still f***ing cool in Singapore. We’re sitting on the whole Burmese GDP. We’ve got

timber, gems and gas to be sold to other countries like Singapore, China, India and Russia,” it read. Pye Phyo Tayza says the e-mail was a fake. The family

tracked the ISP address to the United States, he says. His brother, then 14 years old, was studying in Singapore.

“He

didn’t write it,” says Pye Phyo Tayza.

U.S. diplomats agreed the email was a phony but expressed little sympathy for

Htet. “Tay Za’s son does maintain a Facebook page with pictures of him sitting in his Ferrari with semi-automatic weapons,”

says a U.S. diplomatic cable released by Wikileaks.

Pye Phyo Tayza says he suffered from depression in 2003 when

sanctions foiled his chance at attending elite schools in London and Sydney. “They said I am not even entitled to apply for a

visa,” he says. “Where are my human rights?”

He appealed to a European Union high court, arguing he should not be

punished because of his father. The Court of Justice of the EU agreed on March 13 after four years of costly litigation. A

2008 regulation that froze his funds was annulled. He hopes that will pave the way for a lifting of his travel

ban.

Now, as chairman of his father’s Yangon United Football Club, one of 14 teams in a three-year-old national

league, he acknowledges pressure to join the family business.

His father suffers health problems, he says, including a

damaged kidney and lingering effects of frost-bite after surviving a helicopter crash last year in northern Myanmar. Tay Za

and five others spent three days sheltered by a rock and snowdrifts at 12,000 feet before being rescued.

“Those were

the worst three days of my life,” says his son. “And they changed him.”

“He is doing a lot with his foundation,

investing a lot in that area where he crashed,” he says. “He doesn’t do anything else. He delegates to the managing director

and he stays at home, reads books, focuses his time on this.”

“FRIENDS WITH ANYONE”

Other tycoons are doing

more than finessing their image: They’re retooling entire conglomerates.

Few are more powerful than Zaw Zaw, whose

holdings range from timber, gems and rubber plantations to construction and luxury resorts. He dominates the lucrative and

tightly controlled auto-import industry. Annual revenues of $500 million make his Max Myanmar Group a Burmese

leviathan.

His friendship with former dictator Than Shwe makes him “a regime crony”, according to the U.S. Treasury

Department, which blacklisted him under targeted sanctions three years ago. A 2007 U.S. diplomatic cable described how “Zaw

Zaw actively seeks favor with the senior generals.”

Zaw Zaw is shifting strategy. Banking, hotels and tourism are his

priority, he says. Construction is a “big headache”, suggesting an exit from a crony-dominated industry whose state contracts

made him a fortune.

“You cannot manage everything yourself,” he says in an interview from his Yangon office. “We have

to look at which business is good for the future, which business we can partner with foreign companies.”

Dressed in a

crisp white shirt and a traditional Burmese sarong, the affable 44-year-old expects sanctions to be lifted soon, first by

Europe and then by the United States. As Myanmar overflows with tourists and frontier-minded investors, he wants to “inject

more” into his hotel business.

He is constructing a 400-room hotel in Yangon, the dilapidated commercial capital of

5.6 million people, whose 1,500 hotel rooms are chronically overbooked. He says he is in talks with global five-star hotel

groups to operate it. “If I manage it,” he jokes, “it will be one star.”

But his dream, he says, is to build an

international brand for his nearly two-year-old bank, Ayeyarwady. He meets almost daily with officials from foreign banks and

other multinationals to discuss potential deals and alliances, he says.

Asked whether he and other tycoons are lackeys

of dictators, as often depicted, Zaw Zaw shakes his head. The junta favored him for the quality of his work, he says. “We

have never done any business that is illegal.”

He described his friendship with retired dictator Than Shwe as pure

business: “I can make friends with anyone.” Yet he agrees friends get favors. When he built the Royal Kumudra Hotel in the

new capital city of Naypyitaw, he was paid not with money but with 10 permits valued at $180,000 each to import

automobiles.

He was also rewarded when about 300 state-owned assets – from real estate to gas stations and an airline

– were doled out two years ago in the largest privatization in Myanmar’s history. Junta allies hit the jackpot. Zaw Zaw won

a banking license and a cement factory. “For those two, I really appreciate it. I want to say ‘thank you’ to the previous

government,” he says.

He also lauds the work of Suu Kyi. As the head of the Myanmar Football Association, he invited

her to a recent game, where the two were photographed. Some Suu Kyi allies fumed that she had sold out. But the image

underscores the scale of change in Myanmar, as Suu Kyi prepares to enter parliament after her party’s landslide by-election

victory on April 1.

Suu Kyi’s spokesman, Nyan Win, declined to comment on her relationship with Zaw Zaw or other

well-connected tycoons.

GEM-STUDDED RECLUSE

While Zaw Zaw reshapes his empire in the hope of forging

post-sanctions deals with multinationals, other top cronies seem intertwined with the junta that enriched them.

KBZ

Group controls two airlines, the country’s largest private bank, and lucrative jade and gem mining concessions. Its chairman

is Aung Ko Win, a former schoolteacher whose connections with General Maung Aye, 74, formerly the junta’s second-in-command,

first showered him with riches.

They also won him a place on the EU sanctions list, along with his wife, Nan Than

Htwe, and Nang Lang Kham, one of three daughters being groomed to take over the business. The family are “very shy, very

religious, very good-hearted,” says Nyo Myint, a KBZ Group consultant.

Aung Ko Win steers clear of the media, although

in January the chairman – wearing a trilby hat, Ray Bans and a diamond-studded gold watch – was spotted aboard an Air KBZ

flight by Reuters staff on assignment in Myanmar. An attempt to interview him was cut short by the pilot, who emerged from

the cockpit to shoo a reporter away.

But his daughter Nang Lang Kham and consultant Nyo Myint agreed to meet at KBZ

Bank’s headquarters in Yangon.

Aung Ko Win is closely associated with the former junta. Photos of him inspecting

chunks of jade with retired dictator General Than Shwe adorn the bank’s walls.

Aung Ko Win struck it rich at ruby and

sapphire mines in the early 1990s in a region of Shan State where Gen. Maung Aye was a commander. “My dad was an

entrepreneur,” says Nang Lang Kham.

But during a 2008 meeting with U.S. diplomats, Aung Ko Win admitted Maung Aye gave

him jade and gem mining concessions, and that he remained close to the general.

That intimacy appeared to help his KBZ

Bank fend off the rival Co-operative Bank in a 2010 dispute over the ownership of Myanmar International Airways. Ultimately,

KBZ Bank secured 80 percent of the airline. Co-operative endured a run by depositors who feared their bank might not survive

a conflict with a powerful crony.

But influence cuts both ways. The following year, amid rumors of Maung Aye’s

ouster, KBZ itself suffered mass withdrawals by “anxious depositors concerned that the star of Aung Ko Win was also on the

wane,” wrote economist Sean Turnell, a Myanmar banking expert at Macquarie University in Sydney.

KBZ Bank has since

become Myanmar’s largest private bank, although the sector remains tainted by allegations of money-laundering and ties to

drug traffickers. Myanmar is the world’s second-largest producer of opium after Afghanistan and a leading supplier of

methamphetamine.

A Financial Action Task Force of U.S. and Japanese officials concluded after a 2006 visit to Myanmar

that KBZ Bank was “weak in promoting a culture of AML (anti-money laundering) compliance,” says a U.S. diplomatic

cable.

KBZ Bank denies those allegations. In a statement, it said it “participates enthusiastically in anti-money

laundering activities.”

The Task Force also noted that brisk trade in gold, gems and jade “provided ample

opportunities for abuse.”

Gem and jade remain KBZ Group’s primary cash cow. Every few months, Myanmar holds gem

emporiums at which KBZ racks up sales of between $40 million to $50 million, according to a company document seen by Reuters.

This figure excludes one-off sales. In 2011, a Chinese buyer snapped up a $44 million chunk of imperial jade.

U.S.

investment restrictions are unlikely to be lifted soon on gems, timber and some other resource-related industries, even if

Washington relaxes sanctions, said a U.S. official in Washington, as they are “regressive sectors” in ethnic minority areas

known for human-rights abuses.

One part of Aung Ko Win’s empire is struggling. In 2010, he launched a domestic

airline called Air KBZ. One of its three aircraft crashed at Thandwe airport in February. No injuries were reported among the

51 passengers, who included foreigners bound for Ngapali, Myanmar’s best-known beach.

Air KBZ’s chairman is the

tycoon’s daughter, Nang Lang Kham. “I still have a lot to learn from my father,” she says. “We are trying to modernize our

banking business and restructure our organization as well.”

CRONIES REBORN?

Not every tycoon is a crony.

Michael Moe Myint was identified in a 2009 U.S. embassy cable as “one of Burma’s most successful businessmen, and perhaps

the most legitimate.”

His 23-year-old Myint & Associates is Myanmar’s biggest contract oil and gas services

provider, with annual revenues this year of about $12 million. He also runs a $40 million oil and gas exploration and

production company.

A former commercial pilot, Moe Myint, 59, studied and worked briefly in the United States before

returning to Myanmar in 1989 to emulate his late father, a geologist who advised Shell.

“You just don’t do it,” he

says of cronyism, “though sometimes it is very hard.”

In the late 1970s, he planned flights for General Ne Win, whose

1962 coup began Myanmar’s dark years of army rule. He worked closely with a Ne Win protégé, Khin Nyunt, who would become the

much-feared chief of military intelligence.

Years later, when Khin Nyunt offered him lucrative state contracts, Moe

Myint says he said no. “That’s not the way I wanted to earn my money.”

Today, he is close to Suu Kyi, hosting a

Japanese-themed dinner for her and 250 guests in January. She also dined with his family on Christmas day, urging his son, a

petroleum engineer with Chevron in Australia, to return home. “She convinced him to leave Chevron and come

back and help the country,” he says.

But he is scornful of the U.S. sanctions against him and his family, which were

imposed in 2008 due to what a U.S. diplomatic cable described as production-sharing contracts with the former military

government. He says the U.S. measures were hypocritical. While U.S. companies cannot invest in Myanmar, his company employed

Americans and had contracts with U.S. companies. “Yet because I am working in oil and gas in Myanmar, I am denied a

visa.”

A year later, U.S. diplomats urged Washington to reverse the decision, saying in a March 2009 cable that “he

does not provide and/or derive significant support to or from the regime.” The sanctions were removed only last

month.

Sanctions often missed their mark, says Serge Pun, chairman of SPA Group, whose interests include real estate

and financial services.

“How could they be effective when you have China on one side and India on one side that

didn’t bother about the sanctions?” In the 2010-11 (April-March) fiscal year, for instance, China pledged $14 billion of

investment, pushing total foreign direct investment promises to $20 billion, official data show.

Among those doing

business with China is Myanmar’s most reclusive crony: Tun Myint Naing, 53, better known as Steven Law. A soft-spoken ethnic

Chinese, Law owns a huge construction and trading company, Asia World, that built Yangon’s busiest port, an extension to its

international airport and one of the best-known hotels, Traders.

It also helped create the capital Naypyitaw, throwing

up hotels, ministries and a retirement mansion for strongman Than Shwe.

Asia World was founded by Law’s father, Lo

Hsing Han, described by the U.S. Treasury in a 2010 document as the “Godfather of Heroin” and “one of the world’s key heroin

traffickers dating back to the early 1970s.” Law, the document adds, “joined his father’s drug empire in the 1990s and has

since become one of the wealthiest individuals in Burma.” Law has denied involvement in drug trafficking.

Asia World

has profited from Law’s “excellent personal relationship with senior generals,” including Than Shwe, and from sealing

business deals between Chinese companies and the military regime, U.S. diplomatic cables say.

Yet when reformist

President Thein Sein visited China in May, Law was in the delegation, suggesting that he will remain “very influential” as a

Chinese-speaking intermediary, predicts Sumana Rajarethnam, an analyst with the Economist Intelligence Unit. Asia World is

involved in some of Myanmar’s biggest and most controversial Chinese-led projects, including the Kyaukphyu deep-sea port

complex overlooking the Bay of Bengal and the trans-Myanmar pipelines that will carry oil and gas into China.

Law

declined to speak to Reuters for this story.

Even if cronyism fades, its likely legacy is a class of entrenched

business dynasties. One is led by Khin Shwe, a property tycoon and member of the upper house of parliament who is listed

under U.S. and European sanctions.

His son, Zay Thiha, is vice chairman of their property group, Zaykabar. Zay

Thiha’s sister, Zay Zin Latt, is married to Toe Naing Mann, founder of telecoms group Redlink Co. Toe is the son of lower

house speaker Shwe Mann, a former general and a possible future president.

This second generation is less tainted by

Myanmar’s military past, and the first generation is relying on them in its quest for legitimacy in the new

Myanmar.

“Actually we want to rest,” says Khin Shwe in an interview, with his son sitting nearby. “But we

cannot.”

(Additional reporting by Aung Hla Tun and Paul Eckert; editing by Michael

Williams and Bill Tarrant)