Over the course of two weeks this summer, lawmaker Ihor Kotvitsky transferred $40 million out of Ukraine using a widely-used legal loophole that has triggered a criminal investigation into suspected money laundering that damaged state interests.
The National Bank of Ukraine, the nation’s central bank, as of Sept. 22 is being probed by the Interior Ministry, which is run by Kotvitsky’s former business partner Arsen Avakov. President Petro Poroshenko Bloc lawmaker Serhiy Leshchenko has called this a conflict of interest.
Meanwhile, state-owned Oschadbank, which handled the $40 million transaction, is facing a fine related to the operation.
News of the complicated transaction, conducted when the lawmaker’s income declaration said he had less than $3 million, comes as the West is increasingly pressuring Kyiv to clamp down on corruption in the government’s highest ranks. The European Union and U.S. urged Ukraine to create independent graft-fighting agencies as vested business and political interests obstruct change.
Moving $40 million
Kotvitsky used state-owned Oschadbank to wire four separate tranches of $10 million from July 29 to Aug. 11 to a Panamanian company’s account in a Swiss private bank, which in turn belongs to an Abu Dhabi sovereign wealth fund that invests in energy. JPMorgan Chase in New York was the intermediary bank during one of the transactions.
Kotvitsky, a member of Prime Minister Arseniy Yatsenyuk’s People’s Front party, initiated the transactions at a time when Ukraine’s central bank had about $11.5 billion in foreign currency reserves – barely enough to cover two months’ worth of imports.
He was paying off a loan to a foreign lender, an obligation that he took on behalf of Krym Petroleum Company on June 8 through a series of debt transfer agreements on both the lending and borrowing sides. The Kyiv Post couldn’t find a history of business relationships between Kotvitsky and Krym Petroleum.
“This was a standard way of moving money, and not illegal if everything is in order with all the registrations and documents,” said Dmytro Savchuk, a senior associate at Lavrynovych & Partners law firm.
But one red flag that Oschadbank didn’t notice or act on was that the parliamentarian had less than Hr 63 million – or $2.8 million – in savings or bank accounts, according to his 2014 income declaration.
Oschadbank “categorically” denied “colluding with anyone” when conducting banking operations, adding that all the rules were followed when handling Kotvistsky’s transactions, according to an emailed comment from bank spokeswoman Iryna Kolosovska.
Kotvitsky published an amended declaration on parliament’s website eight days after he completed the last of four $10 million transactions, showing nearly Hr 1 billion – roughly $40 million – in income, officially making him parliament’s richest legislator.
The undeclared money actually had “legally” belonged to the lawmaker and had originally been earned in 1997, Interior Minister Arsen Avakov told Ukrainska Pravda in a report published on Nov. 10.
According to member of parliament Leshchenko, the money had been on deposit at Russia’s Sberbank for 2014 before being moved to Oschadbank.
“This means that at the time Kotvitsky was transferring the $40 million, there were reasonable grounds to believe that the funds were of illegal origin, because they weren’t reflected in his declaration,” said Olena Shcherban, a lawyer who works for the Anticorruption Action Center watchdog.
Kotvitsky blamed his bookkeeper for the error.
“People make mistakes, and they corrected the error. This money had for many years been on the accounts of banks and didn’t appear out of nowhere,” Kotvitsky told Radio Liberty. “This was a mechanical error.”
He declined to speak to the Kyiv Post concerning this report and, in particular, the $40 million transaction.
Setting up wire transfer
Several currency restrictions were in place when Kotvitsky transferred the money. The NBU had banned the early settlement of foreign loans by domestic borrowers. Ukrainians also couldn’t transfer money to their foreign bank accounts, which are difficult to open and require a permit from the central bank.
Kotvitsky on June 8 took on a debt obligation that Krym Petroleum had to its Dutch-registered holding company Tiway FSU B.V. The loan, issued on Feb. 10, 2009, was for more than $41 million, in addition to over $23 million in unpaid and accrued interest.
“Generally speaking, it is uncommon for a legal entity to transfer its debt to a private individual,” said Roman Stepanenko, a partner at Egorov Puginsky Afanasiev & Partners law firm.
No payments had been made on the principal or interest of the loan since it was issued, according to a bank notice dated July 13 issued by Raifeissen Bank, which was servicing Krym Petroleum.
The Kyiv Post likewise couldn’t verify whether Kotvitsky had any prior business dealings or relations with Tiway. Investor, the Kyiv-based company of which he was vice president before entering parliament was engaged in tax consulting, real estate, and accounting and auditing. Avakov until 2013 headed the firm’s supervisory board.
Banking and financing lawyers told the Kyiv Post that for tax purposes, non-resident parent companies prefer to issue loans to their subsidiaries in Ukraine, which can then be written off as a liability. Likewise, the existence of loans within corporate groups between a Ukrainian and a foreign entity are viewed as assets for people looking for opportunities to move money abroad.
“Using debt transfers was one of the legal instruments of buying a ‘foreign currency quota’ and was used hundreds of times,” said Leonid Antonenko, the former head of the NBU’s registration and licensing department until September. “The NBU banned this particular instrument (on Aug. 22), but many other similar instruments remained intact as demand for quotas has remained very strong.”
On the lending side, Tiway also on June 8 sold its rights to collect on the $41 million loan for $1 – to Kingston Group S.A in Panama, the company that received Kotvitsky’s money. Kingston, as of July 3 – some two weeks before Kotvitsky wired the first $10 million – became the owner of Krym Petroleum, according to the state registry of companies.
The Kyiv Post couldn’t verify who the end owner of Kingston is and whether the lawmaker is behind the company. Panama is an offshore tax haven with extremely rigid privacy laws.
Once the two debt transfers were subsequently registered at the NBU, Kotvitsky had grounds to wire the money to Switzerland, according to a letter written by the Finance Ministry to Leshchenko, citing an internal audit Oschadbank conducted in relation to Kotvitsky’s four wire transfers.
Financial monitoring, red flags
Banks that notice suspicious financial transactions can halt them for two days as they wait for a response from the State Financial Monitoring Service. The service can also prolong the suspension of the operation and conduct a check into possible money laundering, according to AntiCorruption Center lawyer Scherban. Alternatively, the state financial intelligence agency could halt the transaction “once it receives information from the bank, which should come within three days,” she said.
Oschadbank’s Kolosovska told the Kyiv Post that the bank handled Kotvitsky’s transactions in full compliance with the law and that it checked with the central bank and sent all the requisite information to the state’s financial intelligence unit during the “crediting of funds and when writing them off.”
Internal correspondence at Oschadbank that Leshchenko made public shows that Kotvitsky was identified as a publicly exposed person.
Communication between the heads of the currency and financial monitoring departments at the bank noted that because of this, transactions involving Kotvitsky, such as the opening of bank accounts or conclusion of contracts, required the approval of the bank’s chairman Andriy Pyshnyy, who should be notified of such transactions on the day they are initiated.
Pyshnyy led the executive committee of the Front of Changes party led by Yatsenyuk, and helped him run for president ahead of the 2010 election.
Pyshnny didn’t respond to a Kyiv Post message on Facebook and calls placed with the People’s Front Party press hotline were not answered.
In another letter, Oschadbank first deputy chairman Grygorii Borodin tells the bank’s NBU-appointed overseer that since Kotvitsky was being treated as a “high-risk” individual, his financial transactions were registered with the State Financial Monitoring Service and that the agency had been notified.
The state financial intelligence unit in turn told Leshchenko in writing that it had done everything “in accordance with the law” with regard to reviewing Kotvitsky’s transactions, adding that he had grounds to make the transfer while it “receives information about financial transactions after a certain period of time, and de facto after they take place.”
And the Oschadbank internal audit, as cited by the Finance Ministry, concluded that the financial institution didn’t find any wrongdoing while reviewing Kotvitsky’s transactions.
The State Financial Monitoring Department didn’t respond to a Kyiv Post request for comment. Some Hr 52 billion ($2.2 billion) of money laundering cases were documented by the agency in January-September, according to a report posted on its website, which were forwarded to law enforcement bodies.
Still, the General Prosecutor’s Office on Sept. 22 started criminal proceedings. The law enforcement agency’s written response to Leshchenko states that the Interior Ministry was tasked with investigating the central bank for allegedly “legalizing income that was obtained illegally,” and for “causing grave consequences to state interests.”
The family of Interior Minister Avakov recently had a business relationship with Kotvitsky. When getting elected to parliament in October 2014, he was vice president of Investor. Avakov headed the company’s supervisory board and was president until 2013. His wife, Inna Avakova, subsequently took over that position.
Neither the Interior Ministry nor prosecutor’s office would say whether Kotvitsky is being investigated for any crimes.
In a response to a Kyiv Post inquiry, the NBU would only say that banks are the primary “subjects” of “monitoring and controlling” of transactions carried out by people like Kotvitsky.
“Unfortunately, other issues relate to banking secrecy,” the NBU said in an emailed statement.
Krym Petroleum and Tiway
Krym Petroleum was part of the Tiway corporate structure that ends with Tiway Oil AS in Norway. It had a 50 percent interest under a joint-activity agreement to explore and extract gas condensate in northern Crimea. Burisma Holdings had a 25-percent stake through Krymtopenergoservice.
Burisma is run by former Ecology and Natural Resources Minister Mykola Zlochevsky. Burisma chief financial officer Alexander Gorbunenko told the Kyiv Post by phone that Burisma “shut down” the Crimean project more than a year ago, “before the Crimea crisis.”
Houston-based private equity firm Lime Rock Partners had a controlling stake of Tiway and formally exited the company in April 2015.
Kyiv Post editor Mark Rachkevych can be reached at [email protected].
