The Pandora Papers investigation hasn’t triggered a political earthquake in Ukraine. I see two reasons for this.
The secret documents did expose the offshore dealings of the incumbent President Volodymyr Zelensky. He even appeared on the cover of The Guardian, but his name is not mentioned in the current situation, but in the events of 2012, when Zelensky was engaged in private business, creating one of the most powerful media studios in the post-Soviet countries – Kvartal 95.
Authoritarian pro-Kremlin President Viktor Yanukovych was in power in Ukraine at the time, opposition leader Yulia Tymoshenko was in prison, parliamentary elections were marred by mass fraud, and the media was severely censored. That is, the context of Zelensky’s participation in offshore refers to a period when he did not even think about a political career. The Yanukovych regime, it seemed to many, came to stay, and all independent businesses built corporate systems of protection against raiding by Yanukovych’s allies. Another sign of that time was that Paul Manafort regularly received money from Yanukovych’s entourage for political consulting and lobbying via his offshore bank accounts in Cyprus.
The second reason for the lack of great disturbance is that society is oversaturated with information on the offshore topic. Offshores are practically a daily occurrence for many large and even medium-sized businesses in Ukraine. This will not surprise anyone in Ukraine. All major gas stations, shops, and even the media, where you can read criticism of offshore structures, operate offshore. For example, the main site for attacks on the government – Petro Poroshenko’s Pryamy TV channel – also traces back to an offshore company registered in another tax haven – the British Virgin Islands.
Ukraine’s offshore history began in 1992. Less than a year after Ukraine gained independence, on Oct. 2, 1992, Tymoshenko created a company called Somolli Enterprises Limited, which later became a financial hub for Ukrainian corruption. She was in Cyprus with her husband Oleksandr and her business partner and neighbor Oleksandr Hravets. They agreed that the owner’s husband would be a nominee director of Somolli Enterprises Limited. According to the law, for an offshore company to work, a Cypriot citizen had to be the director of the company – and Andreas Petrou became one. During interrogations in the case of Pavlo Lazarenko, a U.S. felon and former prime minister of Ukraine, Petrou admitted that he had only signed documents and had never seen Tymoshenko since that meeting, although he had been the company’s nominee director for many years. This allowed Tymoshenko to deny her involvement in the toxic company all her life, using offshore anonymity rules.
This is how the first offshore monster appeared, which served not only for Tymoshenko’s enrichment but also as a tool to foster her relationship with Lazarenko, who promoted the interests of United Energy Systems of Ukraine, Tymoshenko’s natural gas trading company. During Lazarenko’s term as prime minister, the company became the largest importer of natural gas to Ukraine with an annual turnover reaching $10 billion. The investigators were suspicious of the company’s rapid success and of its founders, Tymoshenko; her husband Oleksandr, and their family friend Hravets. Investigators suspected they were helped by Lazarenko.
Indeed, Tymoshenko paid Lazarenko half of her income as a kickback. According to the FBI investigators, Tymoshenko transferred at least $100 million from Somolli Enterprises to Lazarenko’s transit accounts. And then, after Lazarenko resigned, he and Tymoshenko went into big politics, spending offshore money on the new Hromada (Community) party and a pool of their media, acquiring all the hallmarks of an oligarchic clan in the mid-1990s. With the same offshore money, Lazarenko bought real estate in California – a villa in the town of Novato near San Francisco for $6.7 million. The estate, which boasts 10 bedrooms and nine bathrooms, was later confiscated from Lazarenko by the U.S. government to repay his financial obligations following a court decision.
Offshores became popular at the beginning of Ukraine’s independence also because the new state was very naive in its desire to attract foreign investment and offered tax benefits to companies with foreign capital. As a result, all the first oligarchic groups set up offshore companies, some even in the U.S., and then introduced them as shareholders in their Ukrainian business. As a result, they received a double tax exemption – both in Ukraine and in the offshore zone. This didn’t lead to an investment boom, but further fueled political corruption in Ukraine. And some of these companies, according to the decisions of corrupt courts, renewed their benefits even after 2010. For instance, when Yanukovych became the president, a company called Livela — responsible for a tax-free import of oil products — was involved. The budget losses were measured in a half-billion dollars, and the company was connected to former National Security and Defense Council secretary Andriy Klyuyev.
Another example of offshore corruption involved former lawmaker Mykola Martynenko, a political partner of Arseniy Yatsenyuk and business partner Petro Poroshenko.
Martynenko was ultimately charged with corruption, as he turned out to be a beneficiary of a Panamanian firm that is suspected of receiving kickbacks for government contracts. This firm has been investigated in Ukraine, Switzerland and the Czech Republic on suspicion of receiving a 6.4 million euro kickback from Czech engineering firm Skoda to give it a contract to supply equipment to Ukraine’s state nuclear power monopoly Energoatom.
A Swiss court found Martynenko guilty of laundering 2.8 million euros and sentenced him to 28 months in prison and one year of unconditional imprisonment. In Ukraine, the case on this evidence is protracted. It is still being heard in the anti-corruption court, and Martynenko’s lawyers are disrupting the trial in every possible way. They leave the hearings, making the client de-facto defenseless and forcing the judge to postpone the hearing.
All these stories are examples of the offshores’ dark side. And if Tymoshenko in 1992 used offshore not to pay bribes for exclusive gas contracts lobbied by Lazarenko in Russia’s Gazprom, but engaged in ordinary business, then there would have been almost no questions to her. Because offshores, in my opinion, are a tool that existed in the world long before I was born. It allows you to achieve one or more goals at once. Yes, it helps to hide the ultimate beneficiaries. Yes, one can get tax benefits and pay much lower taxes, conduct agreements under British law and protect a business from raider attacks. Yes, it makes it easier to get loans from the world’s leading banks or issue Eurobonds on companies with zero history, which is easy for lawyers to check.
That is, offshore is a legal, though not very noble tool, which can be used by both honest and corrupt businesses. My own example: Payments for ads on my YouTube channel come from Ireland, not Silicon Valley, California.
And I will go against the wave of indignation and try to distinguish between Zelensky’s offshores and Poroshenko’s offshores, which five years ago plunged the Panama Papers into a scandal. Zelensky’s offshore is connected with 2012, when he, along with tens of thousands of other businesses, operated in the environment that existed in the realities of Yanukovych’s Ukraine. And he lost his shares offshore before his inauguration as president.
And the history of Poroshenko’s offshore is the history of a politician who has not had the right to do business since 1998, who was already president but devoted most of his time to his financial interests. For the last 23 years in politics, he has been doing business and actively using offshores. He sold the Leninska Kuznya plant to Serhiy Tigipko via offshore. He registered his Pryamy TV channel offshore. He bought works of art offshore and then legalized them in Ukraine, importing them under the guise of an exhibition at the Consulate of Seychelles, led by his friend Oleh Gladkovsky. He arranged his private flights through an offshore company.
And violations are in at least two spheres. First, a politician has no right to do business. Second, it is immoral to optimize taxes in the country that hired you. Ultimately, the positive impact of the Pandora Paper scandal is that the topic of deoffshorization is becoming a new mainstream. This means that the field of such operations will decrease. Also because in 2022 new rules of taxation of offshore transactions will launch that inevitably will decrease their appeal.
