When the Ukrainian banking sector or the country’s financial institutions take center stage in a foreign jurisdiction, it is usually for regrettable reasons.
That’s certainly the case in Delaware, a small American state with a reputation as a tax haven.
There, Ukraine’s largest bank finds itself at the center of a case that could expose the biggest money-laundering scheme in world history.
PrivatBank, currently state-owned, is suing its former owners, oligarchs Igor Kolomoisky and Gennadiy Boholyubov, as well as multiple business associates, in the Delaware Court of Chancery. Simultaneously, the Federal Bureau of Investigation, or FBI, has opened a criminal investigation into Kolomoisky and his alleged co-conspirators.
PrivatBank is seeking to prove that, in the course of a decade, its former owners engaged in large-scale money laundering into the United States, parking hundreds of millions of dollars in various commercial real estate projects.
This is a civil suit, but many of its multiple accusations are fundamentally criminal in nature. If the civil case is successful, it could eventually lead to criminal indictments and extradition orders for the two oligarchs.
In 2016, the Ukrainian government nationalized PrivatBank after investigators discovered it had a $5.5-billion hole in its ledger and faced collapse. Although financiers, international experts and Ukrainian civil society support the nationalization, Kolomoisky and Boholyubov are challenging it in the Ukrainian courts.
Both oligarchs have repeatedly denied all past and present allegations of wrongdoing.
Capital flight
While PrivatBank and its ongoing cases in London, Geneva and now the U.S. tax haven of Delaware have become headline-grabbing examples of alleged fraud and money laundering, they are representative of a much larger challenge for Ukraine. Experts say that countless, smaller cases of laundering and illicit capital flight are still crippling the economy.
In one recent example, the Kyiv Post found that the founder of Ukrainian medical company Eurolab, broadcaster and businessperson Andriy Palchevsky, sits at the head of a Caribbean scheme that appears designed to launder money or avoid tax.
Palchevsky has 10 shell companies registered to a residential address close to London where a local accountant admitted to the Kyiv Post that he was managing the books. Records show that those companies are registered to the well-known tax haven of Charlestown, Nevis in the Caribbean.
Experts from the Organization for Economic Cooperation and Development have branded Nevis “non-cooperative” in its efforts to combat money laundering and it has become a haven for dirty money. Some of that money definitely came from Ukraine.
“This remains a problem for our country. In fact, the Ukrainian model currently seems to be capital exporting rather than capital importing,” said Constantin Solyar, a taxation lawyer and partner at the Asters law firm in Kyiv.
While Ukraine has made some efforts to adopt international standards, clean up its banking sector and recover capital and assets that have been plundered or otherwise moved abroad, much of it could be lost forever.
“Banks which were used specifically for money laundering operations were removed from the market with the cleaning up of the banking system by the National Bank of Ukraine (NBU),” said Oleksii Filipov, an expert with the KPMG accountancy and auditing firm.
“As a result, classic banks now face the risk that they could be used for such operations unwittingly,” Filipov added.
Prosecution for financial crimes remain rare and the courts have failed to back lawmakers who attempted to clamp down. Judges and decisions are still up for sale and judicial reform remains stalled.
Viktoriya Fomenko, a tax expert at the Integrites law firm in Kyiv, said that laundering continues to take place, despite the NBU’s efforts to clamp down: “Only during 2019, the regulator (the NBU) has imposed twelve sanctions on banks for violations of its money laundering rules.”
“The effective implementation of anti-money laundering measures is not possible in Ukraine without anti-corruption regulations,” Fomenko said, adding that the courts have been unhelpful on the issue. “By declaring unconstitutional the Criminal Code article on illegal enrichment (in February), the Constitutional Court gave a green light to such illegal funds and, consequently, their laundering.”
The stakes are high for Ukraine and damage to the collective national wealth due to income and assets being shadily hidden in foreign jurisdictions is considerable. State coffers lose out on essential taxation revenue: some $40–50 billion each year, according to multiple independent legal experts who have spoken to the Kyiv Post.
Experts attribute that loss to Ukraine’s collective wealth — equivalent to nearly a third of the country’s current total gross domestic product — to a combination of tax evasion, tax avoidance, aggressive tax planning practices and profit shifting.
The amount lost due to criminal money laundering out of Ukraine is much more difficult to estimate.
Tackling laundering
While developed Western countries pressure Ukraine to reform its judiciary and tackle corruption, their own bankers, accountants and lawyers often play a part in money laundering.
The United States and the United Kingdom play a particular role in illicit capital flight, as do the low-tax jurisdictions where much of the laundered cash ends up, such as Delaware in the United States or Caribbean islands like Nevis, the Virgin Islands, and the Caymans.
Experts say that the National Bank of Ukraine, for its part, has been trying to stem the outflow.
“The NBU… has implemented a risk-based approach for supervision to prevent money laundering,” said Filipov of KPMG. “It includes remote monitoring of transactions and onsite inspections. The aim of the approach is to implement leading international practices in this area.”
The Ukrainian government needs to implement rules on extraterritorial incomes and foreign entities that are owned by Ukrainians, legal experts say.
“These rules are… measures to combat tax avoidance when a taxpayer in one country establishes an entity in an offshore jurisdiction and diverts the income… to the foreign entity,” Solyar said.
“Corruption and illegal economic activities put Ukraine among states with significant money laundering risks,” adds Fomenko.
Strong ties with International Financial Institutions like the International Monetary Fund and the European Bank for Reconstruction and Development play an important role, she says.
“These institutions make Ukraine move down the path of reforms… and significantly and positively affect anti-money laundering in Ukraine.”
Valeria Gontareva, the former National Bank of Ukraine governor, fears the loss of central bank independence. (Volodymyr Petrov)
Massive fraud
In Delaware, PrivatBank would like to teach Ukraine and the bank’s former owners a valuable lesson about oversight, transparency, and the rule of law.
American and Ukrainian investigators have alleged that a decade of embezzlement took place at PrivatBank, with the former owners and their associates using it as their own “personal piggy bank” for 90 percent of the bank’s lending.
Now, investigators’ attention is also shifting to what they allege was international money laundering on an unprecedented scale through PrivatBank’s base in Cyprus, and ultimately into Delaware and the wider United States.
PrivatBank has assembled a cohort of lawyers and public relations specialists to fight Kolomoisky and Boholyubov. The bank’s leadership is confidently on the offensive, but tight-lipped about details.
“The bank has developed its legal strategy with consultants and we are quite confident overall,” Anna Samarina, PrivatBank’s deputy chair and CFO, told the Kyiv Post at a banking conference in London.
“In the cases ongoing at the moment in various jurisdictions… there are evidences which have been proven by investigators, evidence of fraud, and the fraudulent schemes done through the bank,” she added.
However, Samarina is not only referring to the alleged $5.5 billion hole found in the bank’s books back in 2016.
The latest case filed in the U.S. by PrivatBank’s lawyers against Kolomoisky and Boholyubov also implicates three American co-defendants and 19 proxy companies in the States. It alleges that, during the decade spanning 2006 to 2016, $470 billion was laundered through PrivatBank Cyprus, while “hundreds of millions of dollars’ worth of PrivatBank’s misappropriated loan proceeds” were pumped into the United States and invested into commercial real estate projects.
If proven in the American courts, it would be the biggest case of money laundering ever.
“PrivatBank investigators have done extraordinary detective work, and this is probably the most detailed study of large-scale money laundering into the United States that runs 104 pages, though it has not been proven in court yet,” writes Anders Aslund, a senior fellow at the Atlantic Council. “This case shows how money laundering from Ukraine to the United States allegedly takes place.”
“The ultimate problem is that the United States allows the formation of hundreds of thousands of anonymous companies that have permeated this country with laundered money.”
Warning signs
With PrivatBank cases ongoing in the background, the broader prognosis for the Ukrainian banking sector is cautiously optimistic. However, the unpredictability of the courts continues to create anxiety in Ukraine and among outside observers.
The banking sector is stable, but fragile to external shocks, especially of a political or judicial nature, according to experts who gathered in London on June 11 for Ukrainian Banking Day.
PrivatBank was the elephant in the room during panel discussions. Meanwhile, Igor Kolomoisky haunted the debate, largely unmentioned by name. Off the agenda completely was any discussion of money laundering, financial crime or tax evasion.
“The financial sector is in the best shape ever,” said Kateryna Rozhkova, deputy governor of the NBU. However, the Ukrainian judicial system is still corrupt, she added, and susceptible to being used “for leverage by the oligarchs.”
Court decisions on PrivatBank — especially ones that could reverse its privatization — are a huge threat to Ukraine’s financial stability, Rozhkova added.
“Court rulings against PrivatBank have been felt by us,” said Samarina. “But we have not been hurt.”
Valeria Gontareva, who was NBU governor until she resigned in May 2017, told the Kyiv Post that PrivatBank is a litmus test for Ukrainian reforms and justice.
She said NBU independence must be “fiercely protected” while civil society and lawmakers should look for warning signs that its impartiality is under attack.
She said it was possible that this was already taking place in the courts and Kyiv’s corridors of power, and that President Zelensky could make changes at the NBU that would be helpful to Igor Kolomoisky or could appoint people who might protect him or promote his interests.
“He is the devil,” she said.
