Ukraine’s murky Black Sea tenders cast shadow over Norway

Graham Stack in Oslo
April 19, 2012

Interviews with Norwegian executives shed new light on murky Ukrainian deals in 2011, where rigs sold by Norwegian companies to unknown parties were resold to a Ukrainian state oil company in apparently fixed tenders for enormous mark-ups.

Ukraine’s state-owned Black Sea oil and gas driller Chornomornaftogaz (CMNG), a minor and moribund company prior to 2010, became – entirely unexpectedly – one of Ukraine’s largest investors in 2011, with a spending spree of about $950m on buying new rigs and support vessels, a large part of which was spent in Norway. The spree was financed by CMNG’s parent company, Ukraine’s national gas operator Naftogaz Ukraine, which is itself dependent on state cash infusions to stay afloat. Suspicion is strong that CMNG’s spending spree was motivated not by the riches of the Black Sea shelf, but by the opportunity to siphon off hundreds of millions of dollars from the state.

Esa Ikäheimonen, CFO of the world’s second largest offshore driller, Norway’s Seadrill, confirmed to bne in an interview that Seadrill in April 2011 sold its West Juno rig to a UK shell company Highway Investment Processing for $248.5m. In parallel to the acquisition from Seadrill, Highway Investment Processing participated in a tender in Ukraine to sell a rig of the same specifications to CMNG – and won the tender, apparently selling for just over $400m the rig purchased for $248.5m from Seadrill.

The news broke almost exactly one year ago, and was then followed by a second identical case in October 2011. The scandal has sent shockwaves through Ukraine, forcing government officials and state company executives to take to the airwaves to deny the allegations, but largely failing to alleviate suspicions. In Norway, however, the press completely missed the story – despite the involvement of local heroes of the scale of Seadrill, a company with a market capitalisation of around $17bn, which is owned by Norway’s richest man, tanker king John Fredriksen, who is chairman of the board.

“That’s news to me,” said Ikäheimonen of the sale of the former Seadrill rig to CMNG for $400m. “You’re telling me the Ukrainian government, who became the ultimate owners of the rig, paid $400m for our rig and had a tender out for similar rigs?” He called the price tag of $400m “ridiculous,” but insisted that the company had been unaware of any scandal in Ukraine until now.

Read more at http://www.bne.eu/story3483

The Czech Connection

In John le Carré’s later novels like “The Night Manager”, there’s a character who keeps popping up – the financial fixer/lawyer to the international moneyed elite, who sits at the back of the private jet but in front of his wealthy and often shady clients as a buffer. Money flows seamlessly between front companies registered in offshore havens from Cyprus to the Caribbean, all overseen by a ubiquitous company director, who also happens to be this lawyer.

Author Chris Morgan Jones based his 2011 debut novel, “An Agent of Deceit”, around such a character, whom he describes as an unglamorous middleman who sets up the network of companies and monitors the flow of cash through that network. Ultimately, Morgan Jones tells bne, “the client and middleman become locked in a mutually binding relationship from which neither can escape.”

One of the more interesting connections thrown up by recent revelations in the Czech Republic concerning the money-laundering case of coal miner Mostecka uhelna spolecnost (MUS) is the link with Russia, Ukraine and the lawyer Markus Buechel. Buechel, currently Russia’s honorary consul to Liechtenstein, seems to have carved out quite a niche for himself in Central and Eastern Europe as a director of various offshore companies since his brief stint as prime minister of Liechtenstein in the early 1990s.

Over the last six months, the Czech daily Mlada fronta Dnes (MfD) has published a series of revelations about the controversial privatisation of the Czech coal miner MUS in 1998, which saw the murky Appian Group, whose true ownership remains elusive, wrestle ownership control of the company from the state.In October, the Swiss authorities announced they had launched criminal proceedings against “seven people suspected of money laundering and economic crime in connection with controlling one of the most important energy companies in the Czech Republic”.

According to various news outlets that have seen the indictment, the energy company in question is MUS, now known as Czech Coal, and the people charged are former directors of the company, together with third-parties, who are also suspected of being at the same time the owners of Appian. Around €500m in local bank accounts have been frozen in connection with the case, which is suspected of having been syphoned off from MUS.

Read more at http://www.bne.eu/story3387/The_Czech_connection

Green not always clean in Ukraine

Graham Stack in Kyiv for Business New Europe (www.bne.eu)

Controversial gas oligarch Dymtro Firtash’s star is rising in Ukraine. Already chairman of Ukraine’s main employers’ association, Firtash bagged his first state post on February 17 as head of the National Tripartite Social and Economic Council, and is now looking to boost his reputation further in the eyes of the population.

The wheeze he’s alighted on is to invest $100m in a greenhouse pilot project designed to revolutionise Ukrainian agriculture – and that in the impoverished West Ukrainian village he grew up in. But bne enquiries have raised questions about the nature of the investment and potential use of state subsidies.

Read more at http://www.bne.eu/story3343

 

Behind the Latvian proxies

Latvian citizens Erik Vanagels and Stan Gorin should be billionaires if you look at the hundreds and maybe thousands of companies they own or control. But they are not.  They are proxies.

Proxies are persons who stand in for the real owners sometimes for a fee or sometimes because their identity has been stolen.  Proxies are used to hide the real owners sometimes for legitimate business reasons but more often because the companies are being used for corrupt or fraudulent purposes, to evade taxes or to launder money.  Proxy led companies are being used in Eastern Europe in epidemic proportions.

Vanagels and Gorin are not unique.  They show up along with a group of other Latvian proxies associated with hundreds of companies many involved in criminal behavior.

Finding out who is behind the Latvian proxies is difficult but unraveling the proxy network can help trace who is laundering the money.   In the case of the Latvian proxies, that leads to the former owners of a Latvian Bank, and their associates.

That bank is Parex Bank of Riga, recently rebranded as Reverta.

Parex Bank is a name well known in the Baltic. It was once considered a glowing success in the post-Soviet Latvian banking sector, and funded events officially associated with the NATO summit in Riga 2006.  But by October 2008, it was about to become an embarrassment and a massive drain on the Latvian people who paid for its corruption.

Parex board chairman Valerijs Kargins and CEO Viktors Krasovickis had built the bank from humble beginnings as the Soviet Union’s first ever exchange booth in 1991 into the largest bank by capital in the Baltics. In the process they became Latvia’s richest men and influential oligarchs.

Read more at  http://www.reportingproject.net/proxy/en/behind-the-proxies

The Latvian Proxies

Inga Springe and Graham Stack

for Organised Crime and Corruption Reporting Network

Latvia, a country on the coast of the Baltic Sea and a former part of the Soviet Union, has been at the heart of a number of informal networks of companies fronted by proxies that laundered money for criminal groups.  Last year, the Organized Crime and Corruption Reporting Project looked at some of these companies in its series called the Proxy Platform. The tiny country supplied both the proxies and the banks through which hundreds of millions of dollars travelled through.

And at the heart of many of these deals were two Latvian proxies: Erik Vanagels and Stan Gorin. Some of the hundreds of companies they represent, stretching from Panama to Eastern Europe, were involved in a series questionable or fraudulent businesses ranging from weapon shipments to Africa to Ponzi schemes. Their names are the calling cards of a deeper network.

Read more at http://www.reportingproject.net/proxy/en/the-latvian-proxies

Putin returns for possible 12 yrs amid controversy

Graham Stack in Moscow for Business New Europe (www.bne.eu)

Vladimir Putin returned as president of Russia on March 4, 12 years after becoming president of Russia for the first time, with a potential further 12-year long presidency ahead of him. Opponents accused him of falsifying the elections and are planning a protest near the Kremlin at 7:00 pm local time.

With nearly 100% of the votes counted, Putin had almost 64% of the vote, meaning there would be bo need of a second round. His nearest rival, Communist Party leader Gennady Zyuganov, received about 17%, while nationalist Vladimir Zhirinovsky, former parliamentary speaker Sergei Mironov and billionaire Mikhail Prokhorov all got below 10%. “I promised you we would win. We have won. Glory to Russia,” a tearful (from the wind, apparently) Putin told tens of thousands of flag-waving supporters by the Kremlin’s red walls.

If Putin serves the two further six-year presidential terms he is allowed to by law, he will be 71 years old by the time he bows out in 2024, and will have effectively ruled Russia for 24 years, counting his four-year interim as prime minister. But heightened attention in Russia to electoral fraud and a strengthening civil society will undermine the legitimacy of this election victory and ask demanding questions of Putin’s top-down governance system going forward.

Putin’s first round victory with an overwhelming majority almost exactly matched the latest opinion poll results published by the respected independent polling organization Levada Center. The most recent poll published February 25 found that 66% of voters who had decided to vote would do so for Putin.

But there were numerous reports throughout the day of apparent electoral fraud involving in particular “carousel” voting whereby groups of hired hands equipped with absentee ballots are bussed from polling station to polling station.

Second-place candidate Zyuganov, contesting and losing his fourth election, said he would not recognize the elections as legitimate. He called the elections “illegitimate, dishonest and untransparent.”

Read more at http://www.bne.eu/story3309/RUSSIA_VOTES_Putin_returns_for_possible_12_yrs_amid_controversy

Mega problems at Ukraine’s largest file-sharing site

Graham Stack in Kyiv for Business New Europe (www.bne.eu)
February 6, 2012

Following January’s high-profile arrest in New Zealand of Kim Dotcom, owner of filesharing site Megaupload, Ukrainian authorities moved against the country’s leading file-exchange server ex.ua – and a hackers’ backlash duly laid low numerous government sites. But days later ex.ua is up and running again, raising questions about its owners, which bne can reveal are linked to a notorious Latvian company service provider that supplies shell companies with fake directors to the money-laundering clients of Latvian boutique banks, eager to hide their identity and often from Ukraine.

On January 20, New Zealand law enforcement, acting on a US request, stormed the mansion of multi-millionaire Kim Dotcom, larger-than-life owner of the Megaupload file-exchange server used by millions of users worldwide to download pirated movies and software for free. He’s accused of $500m worth of copyright piracy and facing 50 years in jail. The move marked the first major bust of an alleged global copyright pirate, and raised the question: who’s next?

Ukraine’s Ministry of Interior supplied the answer on January 31, moving in on the country’s ex.ua file exchanger, confiscating servers and blocking the site.

Ukraine’s decision to act followed a December call by the International Intellectual Property Alliance (IIPA) to the US government to take action on Ukraine’s infringement of copyright. The IIPA report called the ex.ua file-exchange service a “particularly severe case of blatant and open piracy” and said that in 2010 ex.ua already accounted for 50% of illegal content in Ukraine – “and its popularity is growing.”

The site’s enormous popularity is undisputed. According to market research, it accounts for a staggering 15-25% of Ukraine’s internet daily traffic. When the site was shut down on January 31, Ukraine’s internet traffic immediately dipped by around 10%. The reason: the site was free and offered for download or to watch live online a massive range of movies, software and music. In a poor country like Ukraine, that made it a source of great joy to millions and the government decision to take it down prompted howls of outrage, and the inevitable question of “why now?” after three years of operating freely since being set up in 2009.

The obvious answer would seem to be a token gesture in the run-up to high-level meetings between the new finance minister, former secret service head Valery Khoroshkovsky and the International Monetary Fund in Washington DC, as well as a February 5 meeting between President Viktor Yanukovych and US Secretary of State Hilary Clinton at the Munich security conference. Ukraine’s relations with the West are currently very strained over the prosecution and jailing of the country’s main opposition leaders including former prime minister Yulia Tymoshenko, and top officials may have believed they need a bone to throw.

Volte face

Whatever the reason, there was an immediate and vicious backlash against the decision. Hackers launched denial of service attacks on the government servers, swamping them with access requests and causing the websites of the president and government ministries to become unavailable February 1, with the Ministry of Interior website currently still unavailable as of February 5.

The move to close ex.ua proved deeply unpopular across society as a whole, removing a much-loved source ofkhalyava (“something-for-nothing”) at a time when the government is raising utility prices and tightening taxes on small business, retail credit is dead, and wages are languishing below their 2007 levels. Politicians swiftly used the opportunity to score brownie points with the public by questioning the move to block ex.ua; even President Yanukovych’s son filed a parliamentary question to the Prosecutor General regarding the legal grounds for closing the resource.

Hardly had the first wave of outrage peaked, then in an astonishing U-turn February on 1 the Interior Ministry announced it was unblocking the site ex.ua, without providing any coherent explanation for the volte-face. In a cringe-inducing moment at a press conference February 1 on the situation with ex.ua, Interior Ministry spokesman Volodymyr Polischuk freely told journalists that 47% of the ministry’s own software was unlicensed – thus implying it was in no position to judge others.

According to the Interior Ministry, there is an ongoing investigation into ex.ua with servers confiscated, but no one has been detained. Currently, ex.ua says it is operating in a reduced form, but its basic functions of downloading or watching movies online seem to be already back to normal.

The volte-face might be partly down to public pressure, but also raises obvious questions about the ownership of ex.ua and its administrative clout. The huge traffic passing through the site brings with it significant revenue streams from advertising, including from leading Ukrainian companies such as mobile phone giant MTS and online shopping site rozetka.ua. But this might only be the tip of the iceberg, since the site also has huge significance for boosting internet traffic and thus boosting revenues of internet providers and hosting services.

Smoke and mirrors

The public face of the company are two likeable young Latvians, Yury Piskovyi and Valery Vavilov. They have portrayed ex.ua as an initially small-scale start-up by bright young IT people that quickly got big. Piskovyi told the Kyiv Post in March 2011 that he is a co-owner of ex.ua, and all owners invested only their own personal money in the project.

bne enquiries, however, reveal that Piskovyi is linked to a notorious Latvian company service provider International Overseas Services (IOS). IOS supplies shell companies with fake directors to the money-laundering clients of Latvian boutique banks, eager to hide their identity and often from Ukraine. IOS, for instance, has been implicated in a number of major recent Ukrainian corruption scandals, with shell companies and money flowing through Latvian banks: such as a $450m government tender for an oilrig in 2011 won by a British shell company that featured two of the Latvian nominee directors employed by IOS, Erik Vanagels and Stan Gorin. Most recently, journalists at weekly paper Zerkalo Nedeli revealed in January that the construction firm building a giant helicopter pad for President Yanukovych in the heart of historic Kyiv is also owned by a Vanagels-Gorin shell company – and that the “helicopter pad” will also host a full-scale entertainment complex.

Apart from corruption money and tax evasion, companies with the Latvian nominee directors have frequently also been implicated in cyber crime schemes where ill-gotten gains have been routed through Latvian banks, according to an investigation conducted by the Baltic Center for Investigative Journalism.

According to bne enquiries, in 2010 Piskovyi organised the opening of, and hired staff for, the IOS Kyiv office, conveniently located next door to the parliament and government. The office was abruptly closed again in 2011 following the breaking of the corruption scandals. Piskovyi told bne in 2011 that he set up the Kyiv office only as “a favour” to his friend from Riga IOS manager Arvis Steinbergs, and said he had no further connection to IOS. But in fact at least one overseas company associated with the domain ex.ua – Denver-based LLC Altercom Ltd – was in turn established by an IOS structure – Panamanian company Cascado AG – which had as directors the Latvian nominees Vanagels and Gorin. Piskovyi could not be reached to comment on the situation.

Piskovyi’s connection to IOS will fuel suspicions that he – like Vanagels and Gorin, but more approachable – is merely a front for the real owners of ex.ua: suspicions he went someway to confirming January 31, mentioning an unspecified “Western investor” with plans to “legalise the resource”. But many believe the “Western investor” story is yet more smoke and mirrors, and the real owners of ex.ua are to be found among Ukraine’s largest internet providers and web hosting services whose businesses have benefited so hugely from the file-exchange service and its cornucopia of content. This in turn may explain why – in strong contrast to Kim Dotcom’s fate – after a week when it seemed certain that ex.ua had exited the stage, it is up and running again and has even benefited from the wave of publicity. And almost everyone is happy.