In Ukraine, the images of Berkut riot police fighting protestors on Kiev’s Maidan have been replaced by ones of the officers on their knees asking for forgiveness. And while Ukraine seeks to compose itself, questions have emerged in the wake of the fall of the government. The unifying objective of ousting Yanukovych has been replaced by confusion surrounding the current situation, whether the East of the country (primarily Crimea) will acquiesce to the new state of affairs (or become the latest suzerainty of Russia), and where Ukraine will find the aid to repair its hemorrhaging economy (currently at an estimated $35 billion over the next two years).
These questions and confusion are magnified due to the speed with which Yanukovych went from ordering the massacre of protestors to disappearing from his palatial estates (security cameras caught him and his bodyguards fleeing to helicopters which spirited him to eastern Ukraine), and to ultimately resurfacing in Russia. In his wake he left not only confusion, anger and the bodies of numerous Ukrainians—protestors and police alike—but also numerous documents, documents which, in his haste, he was unable to get rid of (or amateurishly tried to) and detail the almost incomprehensible level of pillaging of the Ukrainian economy and government. The documents, and the incoming government, detail—an initial—report of at least $37 billion vanishing from state coffers (supposedly through fraudulent loans), and a total of $70 billion being sent out of the country to offshore locations during Yanukovych’s three year rule.
While the amounts are surprising, the pilfering is not, especially with the revelations of Caligula levels of extravagance and frivolity. Ukraine has long suffered from corruption, and not just under the most recent government of Yanukovych—the recently released former prime minister Yulia Tymoshenko has been accused of corruption during virtually her entire political career and undoubtedly contain some merit.
The question remains however, where did all the money go?
Some of it went to the criminally ostentatious lifestyles of the regime. But a majority of it was spirited out of the country using complex and overlapping shell corporations, bank accounts and nominee directors which hide the true ownership and origin of the assets. Austria, Liechtenstein and Switzerland have already announced investigations and the freezing of assets belonging to former members of the regime, along with the EU attempting to coordinate a region wide asset freeze.
The most emblematic illustration of the corruption of the Yanukovych regime to come to light is his palatial home called Mezhyhiriya, which comes complete with a galleon and zoo (The excess of the estate is remarkable. Yanukovych even beamed about the workmanship of the German contractors hired to remodel his villa. He noted, “I can say they were the intelligentsia among workers”). Mezhyhiriya was once the home to a 14th century monastery which was destroyed by the Bolsheviks, and eventually was turned into the dacha of the leader of the Ukrainian Soviet Socialist Republic (it was once home to former Nikita Khrushchev). During Yanukovych’s tenures as Prime Minister he rented the location (it should be kept in mind that Yanukovych’s stated income as PM was $2,000 a month), but was forced from it by Orange Revolution leaders Viktor Yushchenko and Tymoshenko. He eventually concocted a scheme, when he returned to the premiership, to privatize Mezhyhiriya, trading it for a couple of decrepit and run down building in Kiev to a Donetsk based company which turned around and sold it again and quickly declared bankruptcy—making any examination of the transaction even harder. In 2009 Tymoshenko tried to return it to state ownership, but Yanukovych’s cronies in parliament destroyed the documents relating to its sale.
But aside from the destroyed documents, its true ownership is emblematic of the use of shell companies and bank accounts in European countries with secretive banking sectors to obfuscate (launder) the true provenance of many Eurasian elite’s finances. Mezhyhiriya is nominally owned by a Donetsk (Yanukovych’s hometown) company called Tantalit. Tantalit is in turn 99.97% owned by an Austrian firm Euro East Beteilungs GmbH, which is then owned by a British firm Blythe (Europe) Ltd, registered in London. But the trail does not end there, Blyth is further owned by P&A Corporate Services Trust which is registered out of Liechtenstein (a tiny nation located between Switzerland and Austria with bank secrecy laws that make even the Swiss jealous). The rationale of this complicated and disparate network of companies and ownership is not by mistake, it is intended to confuse and hide the true owners. This is done by layering, which is creating companies who own each other and in differing locales. By doing so, a launderer can remain several companies removed, and behind multiple jurisdictions, all with stringent privacy protections. This makes the efforts of investigators and journalists even more complicated as they have to search through and deal with multiple companies and jurisdictions just to identify the true ownership—that often times will remain truly unknowable owing to the complexity and privacy protections afforded to such schemes.
Beyond the obtuse ownership of his Mezhyhiriya estate, the Yanukovych ruling “family” has been implicated in numerous other ownership schemes utilizing various European countries to mask their true ownership. Yanukovych has been linked to companies and the same nominee directors (absentee owners or directors who sell their name and signature to the true beneficial owner) who were implicated in laundering the proceeds of the $230 million Magnitsky fraud. Former Prime Minister Mykola Azarov’s (one of Yanukovych’s closest supporters until his ousting in response to the protests) son Oleksii is purported to own assets, including a Vienna villa, through a company registered out of Liechtenstein. Andriy Klyuev, former head of the Presidential administration, (and his brother Sergiy) is also purported to hold assets via an Austrian holding company. (You can see further connections relating to shell companies and a purported Austrian money laundering network here). Additionally, Azarov and the Klyuevs were among the former members of the government to have their assets frozen by Switzerland. Making these transactions all the more suspicious is that they are not included in their official income declarations and are structured to hide their designations as Politically Exposed Persons (according to international anti-money laundering statutes this means that anyone in government, or related to government officials, should undergo increased scrutiny to ensure that their assets are not the result of corruption).
But Liechtenstein, the UK, Austria and Switzerland are not the only nations that are the destination for Ukrainian funds. The Baltic States—particularly Latvia—have close banking and financial relations with Ukraine (many of the major domestically owned banks have offices and locations inside of Ukraine) and have been implicated in numerous shady dealings. From facilitating the laundering of proceeds of arms shipments out of the port of Odessa, to the corrupt purchase of offshore oil rigs for $150-180 million more than they were worth (The oil rigs prices were reportedly inflated to allow officials to pocket the difference. Latvian banks played an integral role in the deals and authorities have since launched an investigation into the sales). Baltic banks also play an integral role in what is called a “conversion scheme.” This is where companies transfer company funds and get cash returned off the books. Graham Stack for Business News Europe explains the operation:
“Companies wire payments under fictive contracts to firms run by the ‘conversion centre,’ and get the money returned in cash, minus commission, on average 10%. The goal of the operation for its clients is tax evasion, by reducing profit tax through inflating company expenses while creating fraudulent VAT credit, and then using the cash received in return to pay salaries off the books, thus avoiding payroll taxes. As such, ‘conversion centre’ is often shortened to convert, the Ukrainian word for ‘envelope,’ the medium for such payments. The total annual volume of the market in such “conversion” is around $7bn, according to an analysis by Ukraine’s security service SBU that was leaked to the press in 2010.”
This scheme then enables the transfer of clean (laundered) money into the wider financial system. The reason that Baltic banks are so important is they facilitate the exchange of hard currency between Ukraine and the wider financial system; “Baltic banks play a key role in such operations by circulating hard currency funds in and out of Ukraine via shell companies… A total of $57m in cash was transferred from the Baltic banks and paid out in cash via the scheme over a period of one and a half years.”
Beyond its own efforts to spirit money out of the country, Ukraine is immensely important as an initial laundering point for Russian and Eurasian money seeking to flow into the wider financial world. Initially, in light of the corruption and events of the last weeks, it would seem counter intuitive that money flowing from Ukraine would garner less suspicion than Russia, but Ukraine has not been the focus of such attention and vast capital outflows as Russia. Ukraine has not, until recently, had a comparable Magnitsky event or visible Oligarchs buying sports teams and houses to raise its profile. Due to this, by passing money through Ukraine, then to the Baltic and finally into the wider financial world, Russian launderers can essentially remove the attention and scrutiny of their transactions than if they had directly wired money from Moscow to London. It also makes more sense when one understands that money being wired to London from Riga (after transiting through Kyiv and originating in Moscow), the capitol city of a Eurozone member and home to a stable legal system, would not draw scrutiny from regulators than if it had come from the high risk jurisdiction of Russia. It’s for this reason as well that some Russians are less than enthused about recent events.
Ukraine has lost a lot of money over the last three years, much of it going to finance the Romanesque levels of decadence for many members of the government. The pilfering of the economy is one that will surely be remembered as one of the most criminal fleecing’s of a country in recent memory. And while the world is looking at Russia’s annexation of Crimea, a little more attention should be paid to Western Europe and the Baltics, where most of Ukraine’s treasury is surely hiding.