Wednesday, 26 February 2014

Ukraine corruption exposed

Paper trail leads to massive corruption at heart of Ukrainian banking

Graham Stack in Kyiv
February 26, 2014

With former president Viktor Yanukoych and most of his cronies on the run, the full extent to which they have looted Ukraine is now coming to light as activists and journalists sift through documents abandoned in the haste of flight. Document scraps recovered by bne point to a billion-dollar fraud masterminded by one of Yanukvych's closest allies, which is giving rise to concerns that the financial position of Ukraine could be even worse than pessimists predict.

Eight scraps of paper fit together to point to one of the largest frauds in recent history, with potentially billions of dollars stolen from the Ukrainian state. According to the document fragments retrieved by a bne reporter, in December or later Ukraine's 18th largest bank, Brokbiznesbank, opened a UAH650m (roughly $77m at the time) credit line for a sham firm involved in money laundering. The document fragments show that the bank's supervisory board voted to open a credit line of UAH650m to a firm called TOV Virtus XXI – a sham firm with straw men as director and owners, and no employees, offices or public profile, according to bne enquiries.

Such firms are generally used in Ukraine to channel funds through the banking system, ie. money laundering. Tax police even filed criminal charges against Virtus XXI for large-scale embezzlement of state funds in 2012, in connection with a $11m tender that the company won in 2011 to supply electrical equipment to state-owned energy company Naftogaz.

Earlier journalist investigations by Forbes Ukraine named Virtus XXI as part of a network of sham firms operated by the Brokbiznesbank owner, 28-year-old oligarch Serhiy Kurchenko, to launder the proceeds of politically-protected business schemes and fraud. Kurchenko was the subject of an in-depth investigation by bne only in November.

Thus the $76m loan to Virtus XXI appears to have been simply Kurchenko looting his own bank. And given this and another fraud detailed below were only the 30th and 31st items on the agenda being voted on by the Brokbiznesbank supervisory board at that meeting, it suggests these schemes were only the tip of the iceberg, with the total figure looted from the bank possibly running as high as $1.5bn.

Thin edge of the wedge

The document fragments show the bank's supervisory board at the same meeting also voted to make payments to another sham firm, TOV Bat Treyd Liga, under a contract dated December 12, 2013. Bat Treyd is mentioned in anonymous leaks on various websites as being a sham firm providing money-laundering services, analogous to Virtus XXI.

With Virtus XXI and Bat Treyd being the 30th and 31st items on the agenda, it is likely that previous items on the supervisory board agenda detailed loans to be made to sham firms operated by Kurchenko, and thus siphoned off from the bank.

According to National Bank of Ukraine statistics, Brokbiznesbank made just under $1.5bn in new loans in the fourth quarter of 2013 – the period to which the document dates – more than doubling its credit portfolio from UAH11.3bn (October 1, 2013) to UAH23.6bn (January 1, 2014), despite the economy being in free fall. The document recovered indicates that these $1.5bn funds were looted from the bank.

In early February, Brokbiznesbank ran into what it said were technical problems with its payment system that prevented it dispensing cash to customers. The bank's representatives announced February 13 it had received UAH1bn ($120m) in a refinancing loan from the central bank, and expected to soon receive a further UAH1bn tranche – funds that may also have now disappeared from the bank.

The bank strongly denies any allegations of wrongdoing. In a press release dated February 21, first deputy head of the bank, Petro Pekur, a long-standing Kurchenko associate, claimed the bank's business was booming. "Despite the information attacks, since the start of February 2014, more than 2600 new depositors have entrusted their savings to Brokbiznesbank, confirming depositors' trust in the bank," Pekur said.

The bank's holding company, Vetek, for its part issued a press release on February 24 claiming that, "despite the difficult political and economic situation in Ukraine, the group's companies continue to work as normal." At the same time, Vetek employees shredded documents and had cleared their desks. Security personnel at the offices told bne that this was their first day of work there.

Branches in Kyiv of Kurchenko's smaller bank, Real Bank, were shuttered February 24. Other Kurchenko projects such as the construction of a giant basketball arena in Kharkiv are frozen, according to webcams at the site. Players are also leaving Kurchenko's football club, the venerable FC Metalist Kharkiv, due to unpaid salaries. Kurchenko himself is believed to have fled to Russia.

Prosecute the prosecutor

The apparent massive fraud at Brokbiznesbank is only part of one of the largest frauds in recent history, perpetrated by the country's highest legal office, the former prosecutor general Viktor Pshonka.

The network of sham firms operated by Kurchenko – including Virtus XXI – laundered revenues from politically corrupt insider business that, using the political power of the prosecutor general's office, cornered first the market in propane/autogas, then cornered the market in motor fuel imports, worth hundreds of millions of dollars.

The same network of companies also leeched on state energy company Naftogaz – the company that handles 80% of Russia's gas supplies to Europe via its pipelines – siphoning off hundreds of millions of dollars from the ailing company via inflated tenders, according to a Forbes Ukraine investigation and bne enquiries.

Not only sham Ukrainian companies were involved: according to bne enquiries, Naftogaz handed over $1bn to UK shell companies linked to Kurchenko's network that had "won" big-ticket tenders to supply offshore drilling rigs and support vessels. Around 50% of that sum may have been the embezzlers' margin.

After the theft, then came the attempt at legalisation: in late 2012, the young Kurchenko, hitherto unknown, burst into the spotlight in Ukraine when he bought FC Metallist. The spending spree continued in 2013, with purchases of one of the country's largest oil refineries and oil transhipment ports, as well as Brokbiznesbank. And as investigative journalists started to penetrate the mysterious business empire – and ask for whom Kurchenko was fronting – Kurchenko simply bought out their publications.

So for whom was Kurchenko fronting?

On the same day that the document fragments emerged in Kyiv, a document was posted on the internet from an archive found at the palatial residence of ex-prosecutor general 60-year-old Viktor Pshonka, a long-standing Yanukovych associate, who has gone into hiding and whose mansion has been taken over by opposition activists.

Pshonka's Kyiv mansion rivals the suburban estate of his boss, Viktor Yanukovych, in terms of its vulgar opulence, and even points to megalomania on the part of its owner, decked out as it is with portraits of Pshonka himself in different historical guises, including as Julius Caesar and legendary Russian general Marshal Kutusov, who defeated Napoleon.

The document found in Pshonka's archive at his abandoned house confirms long-held suspicions that the former prosector general – the man formally responsible for upholding the law in Ukraine – was the mastermind behind the criminal operation that stole billions of dollars from the state, and that Kurchenko was his frontman.

Apparently addressed to Pshonka, the document reveals him as the driving force behind Kurchenko's schemes, and actively involved in the administration. It reads: "In agreement with you, starting 2011 together with Kurchenko S.V. we implemented the 'propane' programme. From October 2012 to April 2013 inclusive, debts arose totalling UAH95m (accounts are attached). Kurchenko S.V. refuses to settle the debt, referring to your instructions. Currently the program has stopped."

Another chilling document posted on the internet from Pshonka's archive shows that he was ready to go to the utmost to defend his and his cronies' ill-gotten gains. The document contains the text of an apparently recent speech, in which Pshonka calls on Yanukovych to introduce a state of emergency, including a full-scale crackdown on the media and internet, and the prohibition of opposition parties. "Not for the first time in the modern history of Ukraine, you and I have become witnesses of actions that pose a real threat to the constitutional order and the rule of law in the country," Pshonka told Yanukovych in the document, without a hint of irony. "I, as prosecutor general and a member of the National Security Council, believe there are all grounds required by law, and a general need, to introduce a state of emergency on the territory of Ukraine for the period of 30 days."

Pshonka, Yanukovych and their cronies will go down in history as yet more proof that "power corrupts, and absolute power corrupts absolutely."