Tag Archives: Arbuzov

Achilles Heel of the “Ukrainian Stolypin”

Graham Stack in Kyiv

Party of Regions MP Eduard Prutnik sees the need for a Ukrainian Stolypin – both a Kyiv statue to the last reforming prime minister of the Russian empire, as well as a real-life statesman for Ukraine’s troubled present: “erecting a statue to the great prime minister-reformer will create a striking symbol for the need for a course of reforms that will make the people masters of their destiny.”

Perhaps there is one man Prutnik believes has what it takes: Sergei Arbuzov, 36 year old head of the National Bank of Ukraine, and a protege of Prutnik at the turn of the century, when Prutnik was manager of Viktor Yanukovych’s family assets. Arbuzov and associated officials visited Washington DC in October 2012, and positioned themselves, according to their US interlocutors, as a team of “young reformers with a clear if undisclosed plan”, says Sonya Koshkina of Levy Bereg: “like people who have no doubt they will soon be at the very heights of power and don’t have any hesitation to say this. Soon meaning after the October 28 elections.” “I am actively involved in planning and carrying out economic reforms initiated by the president,” Arbuzov acknowledged for his part, in an English-language interview, despite the NBU’s formal independence from the executive.

Arbuzov’s pedigree certainly speaks for him: his mother, Valentina, is CEO of the All-Ukrainian Development Bank (VBR), a fast-growing bank owned by the Oleksandr Yanukovych, the younger son of President Viktor Yanukovych.

One ambitious Ukrainian politician has already lost to Arbuzov’s meteoric rise from regional obscurity: Oligarch Valery Khoroshkovsy was fired from his post as head of Ukraine’s security service SBU in January 2012, and moved to the finance ministry. After only six weeks he lost that job to an Arbuzov man, Yury Kolobov and was kicked upstairs to the post of first deputy prime minister, which is prestigious but lacks real levers of power. Humilliatingly for Khoroshkovsky, on November 2, Yulia Nosacheva, a close ally of Arbuzov and Kolobov, took Khoroshkovsky’s place on the supervisory boards of the state-owned banks Oschadbank and Ukreksimbank, distancing him further from state financial flows.

One other man is afraid for his job: white-haired prime minister Mykola Azarov, whom it is rumoured could be replaced by Arbuzov in the coming weeks. But he will not go without a fight, and is positioning himself with the rising Arbuzov faction against Khoroshkovksy. In comments made internally, but reported by Germany’s most respected daily, Frankfurter Allgemeine, Azarov savaged Khoroshkovsky October 29 for deliberately ruining Ukraine’s relationships with the West by jailing Yulia Tymoshenko, and thus blocking Ukraine’s access to IMF funds.

Khoroshkovsky’s poison pill

But while Khoroshkovksy may now be bound for a seat on the largely decorative National Security Council, during his last weeks as head of the SBU in November 2011, he left a poison pill for his young rival Arbuzov: an arrest warrant for Arbuzov’s former employer and colleague, Pavlo Borulko, in connection with SBU accusation of large-scale money laundering and even murder.

In November 2011 the SBU issued an arrest warrant for Pavlo Borulko, prompting the latter to flee Ukraine for Belarus. In April 2012, the SBU then went public with extraordinary charges against Borulko together with MP Oleksandr Shepelev, another well-connected 40-something Donetsk banker, whom they called Borulko’s accomplice: charges of massive fraud 2008-2010, and allegations linking the two to contract slayings that covered their tracks.

“The central investigative directorate of the SBU has uncovered the theft by the owner of the banks Evropeiskii, National Standard and Volodomyrskii, Pavlo Borulko and other individuals, of UAH 620m ($76m) from the Guaranteed Deposit Fund,” read the dry press release. “In 2009-2010, offcials at these banks on the day before their licenses were withdrawn, opened 1339 deposit accounts in the names of fictive individuals. Using the accounts of companies they controlled they transferred non-existent money to the accounts of these fictive individuals.” When the bank was liquidated, the Guaranteed Deposit Fund paid out the fictive deposits.

The SBU also accused Borulko of conspiring with MP Oleksandr Shepelev to steal repo funds disbursed from the NBU to the value of UAH 315m ($39m) and a further UAH 223m ($27m) in funds from Rodovid Bank, using fictive collateral to obtain the funds.

That was not all: “In February this year, a witness to the inner circle of Borulko provided the investigation with incriminating testimony against Borulko and an MP, and also mentioned that the the accused had threatened him. In the evening, after questioning, the witness was found dead in his own office. (…) An investigation of premeditated murder has now been opened. On one other witness, who gave investigators important testimony, there was attempted murder using automatic weapons.” In addition, according the SBU, another witness in the investigation fell to his death from a high-rise window.

Arbuzov’s Achilles Heel

The close Borulko connection could still prove be Arbuzov’s Achilles heel in his meteoric rise and his enemies such as Khoroshkovsky will seek to make the most of it: Borulko was the man who gave Arbuzov his big break, after their careers had started together in the late 1990s in the small Donetsk town of Konstantinovka, population 100,000, at the same bank, the local branch of Privatbank. Arbuzov’s mother Valentina, was head of the Donetsk division of Privatbank 1994-2007.

Despite Borulko’s apparently criminal career, It is not clear that Arbuzov ever severed ties with him. Arbuzov refuses to comment on his earlier ties to Borulko.

According to the Spark Interfax database, in 2002-2003, Borulko, his patron Prutnik, and their business partner Dmitro Goncharov, together with wives and associates, acquired the tiny Donetsk bank, Donechinna, later renamed as Ukraine Business Bank (Ukrbiznesbank). Borulko himself moved to head Donetsk bank Donechinna in June 2002, the year the bank installed its first autoteller.

But in November 2002, governor of Donetsk, Viktor Yanukovych, was made prime minister, and took with him to Kyiv his ‘manager’ Prutnik, who became head of the board of the state savings bank Oschadbank. Prutnik in turn took with him to Kyiv his own team, including Borulko who became deputy head of the treasury at the bank, and Yury Kolobov, now finance minister, who became head of the treasury, Borulko’s direct boss. Kolobov and Borulko then took responsibility among other things for disbursal of compensation sums to citizens who had lost their savings in Oschadbank after the collapse of the Soviet Union. Borulko left the bank in 2005, but his continued closeness to the Yanukovych family meant he was made adviser to then prime minister Yanukovych in 2007.

Borulko replaced himself at Bank Donechhinna in 2003 with Sergei Arbuzov, his colleague from Konstaninovka’s Privatbank, who stayed at the bank until 2009. Borulko and Goncharov were listed among the bank’s owners alongside Prutnik until September 2008, when structures formerly run by Prutnik, but already passing under control of Oleskandr Yanukovych, took complete control of the bank.

Thus bankers Borulko and Goncharuk were Arbuzov’s employers for six years, while also running a number of other small regional banks.  What was Borulko up to in these years? Already in April 2007, Anatoly Brezvin, head of the Ukraine’s tax administration, at an Interfax press conference detailed a massive money-laundering and conversion operation centred on the Donetsk division of Avtokrazbank, closely associated with Borulko, and headed by a close Borulko and Arbuzov associate, Konstantin Krivenko, according to the bank’s public disclosures.

Money-laundering and murder

Borulko and Arbuzov’s employment in the Konstantinovka branch of Privatbank overlapped with Oleksandr Medvedko, like Borulko a native of the town, heading the prosecutor’s office. By 2002 Medvedko had become Ukraine’s deputy prosecutor general, and from 2007 to 2010 he was the country’s prosecutor general. Konstantinovka is a small place and Medvedko is widely reported to be married to the aunt of Borulko’s wife. In an interview in 2009, Borulko’s business partner Dmitro Goncharov confirmed the two women “were close friends”.

In 2004 came the Orange Revolution, and the appointment of anti-corruption campaigner Yury Lutsenko to the post of Interior Minister. Lutsenko quickly put together a special unit under police major Roman Erokhin to investigate money-laundering by a network of Donetsk banks. Erokhin was then murdered by hired killers in June 2006. The ensuing investigation linked both Borulko and Shepelev to the killing.

Judgement was pronounced on the killers December 6 2010. http://www.reyestr.court.gov.ua/Review/12906450. According to testimony cited in the verdict, Erokhin’s brother, also a top police officer, had been informed by the security service of Arbuzov’s Ukrbiznesbank that Shepelev ran ‘financial groups’ across a number of banks, and was for this reason in conflict with Erokhin. Other testimony said the network was based on Bank Perspektiva, later Unikombank, a bank the SBU has publicly linked to Shepelev.

According to the verdict, the group of killers was initially briefed at premises owned by Shepelev, apparently to plan the kidnapping of Dmitro Goncharov – close business parter of Borulko and also co-owner of Ukrbiznesbank – whose contact details were found with the group. The killers claimed they backed out off the Goncharov kidnap attempt due to the fear of armed resistance. “A few days later”, they were approached by an “unknown party” with the proposal to take Erokhin, which they then implemented, kidnapping and then shooting him in leg, head and stomach, and burying the corpse.

Considering the prosecution’s case was overseen by Borulko’s associate Medvedko, it may be that prosecutors invented the implausible Goncharov kidnapping story to separate Shepelev, Goncharov and Borulko from implication in ordering Erokhin’s murder, after the original Lutsenko-influenced investigation had obtained such evidence. One of the defendants retracted his testimony about Goncharov’s planned kidnapping, saying there had been no such plan and that it had been suggested to him by investigators in return for promised favours that never materialised.

In June 2012, another notorious contract killing was brought to trial, linked to Shepelev and Borulko: that of Sergei Kirichenko, chairman of Avtokrazbank, disembowelled in a frenzied knife attack January 2003. http://www.reyestr.court.gov.ua/Review/25031391. The defendant, a native of Konstantinovka who was directly involved in organising the killing, was found guilty, but given a light sentence of 9 years backdated to 2009. According to the verdict, the killing was ordered by one of the owners of Donkreditinvestbank, likely to have been Shepelev, who has publicly disclosed his ownership of this bank. Analogous to the Erokhin murder case, the prosecution case included a curious preliminary incident in the run-up to the murder: the defendant testified that the same owner of Donkreditinvestbank who ordered Kirichenko’s slaying (Shepelev) had previously paid him for stealing a car from a second co-owner of Donkredinvestbank, indicating the two owners were in conflict with each other. The identity of the second owner whose car was allegedly stolen is unclear, but may have again been Borulko or Borulko’s associate Goncharov, who earlier headed Donkreditinvestbank’s foreign currency department. So the incident may again have constituted an attempt by prosecutors to separate Borulko and Goncharov from implication in the killing.

Privat doubts

Although Oleksandr Medvedko left the prosecutor general’s office in 2010, the Konstantinovka connection is still strong and even growing in top state posts: Yulia Nosacheva, head of the Kyiv tax inspectorate, started her career with Arbuzov and Borulko at Konstantinovka’s Privatbank, and current interior minister, previously head of the tax service, Vitaly Zakharchenko, headed the town’s police at the time.

A further cluster of current top officials worked at other Privatbank branches in the 1990s in Donetsk region, where Arbuzov’s mother Valentina ruled the roost, and also Kharkiv: finance minister Yury Kolobov, his close associate Aleksandr Dubikhvost, head of the NBU’s hard currency reserves department, Roman Maguta, head of Ukraine’s state audit chamber, Viktoria Kononikhina, deputy CEO of state-owned Ukreksimbank, and Konstantin Krivenko, member of the board of Ukraine’s National Securities and Stock Market Commission, where he heads the Committee on Monitoring, Reporting, Disclosure and Prudential Supervision.

Surprisingly, despite this proliferation of former employees of the Privatbank Donetsk division in top state positions today, Valentina Arbuzova’s then bank enjoyed a far from spotless reputation in the late 1990s when these figures started their career.

According to media reports from the time, at a meeting in 1997, the Donetsk regional administration’s committee for combating organised crime, in the presence of top regional and national law enforcement officials, including two deputy heads of the SBU, singled out Valentina Arbuzova for her bank’s money laundering activities, in particular the creation of fictive companies, abuse of loro accounts and hard currency transactions. The regional prosecutor said that criminal cases had been opened against Privatbank officials for implementing money transfers, up to $200,000 dollars per day, on fictive contracts.

In 1998, in an article published in the government announcer, Golos Ukrainy, Ukraine’s then prosecutor general Mikhail Potrebenko singled out Valentina Arbuzova’s bank as having laundered funds for a major organised crime group, using eleven fictive companies with accounts at Donetsk’s Privatbank division.

Things do not seem to have improved after the turn of the century. The Mariupol branch of Donetsk Privatbank was wracked by scandals 2002-2003, when its head, Tatiana Kudina, was first accused of stealing depositors’ funds, and then of running a huge fraudulent VAT reimbursement scheme.

Internet scam

The first Internet data communication networks were rolled out through Ukraine in the 1990s by a German joint venture with national telecom fixed line monopolist Ukrtelekom. The joint venture, Infokom, installed the ‘Ukrpak’ network initially for corporate clients, especially banks.

Uniquely in Donetsk region, however, Infokom operated through a local partner ZAO DORIS, founded in 1996, co-owned and run by Olesandr Shepelev, represented on paper by his grandmother Maria Shevchenko, and a local strong man, Party of Regions MP Nurulislam Arkallaev, represented on paper by his wife. Infokom and DORIS rolled out a nationwide data network for corporate clients, primarily banks linking up to global payment systems, large companies and government bureaucracies. DORIS faded in importance after the turn of the century, as Ukrtelekom started expanding its own network, but in the 1990s DORIS had a monopoly on internet communications for corporate clients in Donetsk region. Thus Shepelev and Arkallaev effectively ran Donetsk banks’ payment systems around the turn of the century.

Privatbank was one of DORIS’ clients, and a pioneer in using internet for data transfer. Around 2000, Privatbank in Donetsk introduced the first special payment centres handling households’ payment of utility bills, together with billing the state for the accompanying subsidies, that reached 100% for some classes of consumers, such as impoverished pensioners. Such centres thus controlled data for all local households, including personal data, and handled large financial flows. The first such centre was installed in Konstantinovka, where Arbuzov headed the town’s Privatbank branch.

In 2002, in the last year of Arbuzov’s employment as head of the branch, media reported a fraudulent scheme apparently run through the bank since 2000, involving the utilities billing datacenter: the scam was based on the centre not reporting deaths of consumers as required by contract, and thus continuing to claim state subsidies for utilities bills of pensioners, frequently as much as 100% of the bill,  for years after their death, effectively the classic ‘dead souls’ scam known since Gogol’s times.

The fourth bank

Borulko and associates may have continued as Achilles heel for Arbuzov even after the latter’s move to Kyiv in 2010. One of the figures closest connected to Borulko’s banks 2008-2009, former chairman of the supervisory board of Borulko’s National Standard, and CEO of his Evropeiskii Bank, Konstantin Krivenko, also originally from the Donetsk Privatbank division, was made adviser to Arbuzov in 2010, immediately before he took over at the National Bank. According to unconfirmed sources quoted by Ukrainskaya Pravda, Krivenko and Arbuzov are godfathers to each others’ children. Krivenko is now a member of the National Securities and Stock Market Commission.

While the ‘bank robberies’ that the SBU publicly attribute to Borulko and Shepelev took place 2008-2009, in fact the scheme went into overdrive in 2010, after the Party of Regions came to power and were effectively calling the shots at the National Bank even before the resignation of long-serving head Volodymyr Stelmakh in December 2010.

The SBU in press communications in 2012 named three banks used in the deposit compensation scheme, but also mentioned a fourth unnamed bank. That bank was Dialogbank, a tiny Dnipropetrovsk bank put under temporary administration by the NBU in 2009. In 2010 extraordinary things happened at the bank. Still under temporary administration of the NBU at the start of 2010, in January 2010, Dialogbank was readmitted to full membership of the GDF, meaning that new deposits would be fully insured. In April 2010 a new investor injected UAH177.5m (22m)  into the bank’s capital, and in July 2010 the NBU withdrew administrators.

By October 2010, the tiny bank’s loan book had grown from UAH 219m ($27m) in April 2010 to 826m ($101m), almost entirely loans made to legal entities. At the same time, deposits expanded from UAH 111m ($14m) in April 2010 to UAH 1092m ($134m) in October 2010, i.e. almost tenfold in 6 months. http://www.bank.gov.ua/control/uk/publish/category?cat_id=84853. While the loans went to legal entities, almost all the new deposits were owned by natural persons, according to NBU data.

In November 2010, the NBU reintroduced temporary administration. In May 2011, the bank’s licence was withdrawn and it was liquidated – and the process of the Guaranteed Deposit Fund paying out to the ‘depositors’ initiated.

Examination of a number of law suits accompanying the liquidation of Dialogbank 2011-2012 shows that investors acquired the bank in April 2010 using a vehicle, Spetstroiproject-2007, whose owner on paper, was the CEO of Voskhod. Voskhod, a development company that builds and runs the Obzhora shopping mall chain in Donetsk, was co-founded in 2000 by none other than the wives of Oleksandr Shepelev and Vyacheslav Sobolev, former deputy mayor of Donetsk, according to Spark Interfax. Party of Regions MP Nurulislam Arkallaev, Shepelev’s partner in data network operator ZAO DORIS, took a stake in the company in 2006, and in fact is regarded by local sources as its guardian angel from the very beginning.

One week prior to recapitalisation of the bank in April 2010, Dialogbank had provided loans to five small companies roughly equivalent to the funds then injected into the bank’s capital. The loans thus apparently used to buy the bank in April 2010 were collateralised by a building owned by Arkallaev, at Universitskaya 36a in Donetsk, and the mortgage agreement was drawn up by public notary Victoria Soboleva, ex-wife of Vyacheslav, according to court records. After withdrawal of the bank’s license May 2011, the outstanding loans were settled against the capital injection, which had been declared invalid by the NBU, freeing the collateral from claims by the bank.

Arbuzov later claimed that the NBU had cracked down on the scheme. “We understand what happened in this bank and introduced a number of restrictions that prevented implementation of the planned scheme by its organizers,” he told Zerkalo Nedeli in February 2011.

In fact, court records shows that it was not the NBU, but Khoroshkovky’s SBU which had intervened November 2010, opening a criminal investigation into theft of funds from the DGF in the cases of Dialogbank, Volodmyrsky, Evropeiskii and Nationalny Standard, according to court records. http://www.reyestr.court.gov.ua/Review/25773909,

Additionally, according to information provided by the DGF, it paid out a total of UAH 93m to 927 depositors / natural persons after the liquidation of Dialogbank in May 2011. But a court ruling of 14 December 2011 details that a suspiciously similar number of individual depositors, 920, had transferred their deposits to a Donetsk company Triumf – Servis, one of the five companies receiving loans in April 2010 prior to acquisition of the bank.

http://www.reyestr.court.gov.ua/Review/20268729

Thus apparently a payout was made after all to the organisers of the scheme, despite intervention by SBU and assurances by NBU.

While Borulko has fled to Belarus, which appears to refuse to extradite him, Shepelev in October 2012 was still in Ukraine, fighting a parliamentary election as an independent. While it was clear that he would lose, and thus lose his immunity from prosecution, he was playing it cool in an interview he gave to RBK Ukraine in October: “Mr Derevyanko (SBU press secretary) made his announcement seven months ago. Since then, there has been enough time for investigative proceedings. If any criminal investigation was in progress, they would at least have invited me for an interview. (…) For three years rumours have circulated about my implication in various investigations, but if they really wanted to remove my deputy’s immunity, believe me they would have done it along time ago.”