LONDON – A crucial stage has ended in state-owned PrivatBank’s attempts to retrieve billions of dollars it alleges were stolen by the bank’s previous owners, billionaire oligarchs Ihor Kolomoisky and Gennadiy Boholyubov.
The hearings ending on July 31 in London’s High Court of Justice concerned an order that froze the assets of Kolomoisky and Boholyubov worldwide. The court granted the order last December, at the request of PrivatBank’s state owners, who were put in charge after the bank’s nationalization in late 2016. The Ukrainian government had to inject $5.5 billion to cover missing funds.
The December ruling froze about $1.9 billion of the two men’s assets worldwide, plus interest that runs to $500,000 a day, according to PrivatBank’s lawyers. PrivatBank wants the two men to face trial in London over alleged fraudulent schemes and to recover as much as possible of the missing cash.
Freezing order
PrivatBank said the freeze orders were necessary to prevent possible attempts by the two men to move money out of reach if a judge found them responsible for the missing billions and ordered to pay compensation.
In the hearings, lawyers for the defendants and six companies said the judge who granted the asset freeze had only done so because he had not been given all the information and that English courts should have no jurisdiction over the case anyway.
Kolomoisky and Boholyubov, who did not appear in court, deny any wrongdoing and say they are victims of politically-motivated allegations.
The freeze orders also involve six companies that PrivatBank alleges were controlled by the two businessmen: Treamtrend Limited, Trade Point Agro Limited, Collyer Limited, Rossyn Investing Corp., Milbert Ventures Inc., and ZAO Ukrtransitservice. The first three are registered in England.
Kolomoisky and Boholyubov and the other companies were represented by Mark Howard and Ali Malek, respectively. Sonia Tolaney represented the companies. All three coordinated their presentations to save time and repetition. The allegations against the two Ukrainian businessmen were almost identical.
Stephen Smith was the lead lawyer for PrivatBank.
Kolomoisky-Boholyubov defense
The lawyers for the Ukrainian businessmen and six companies presented their cases over three days the previous week, starting on July 25. They asked for the injunctions against their clients to be lifted or lowered to $246 million, claiming the $2.5 billion sum was incorrectly “massively inflated.”
The lawyers claimed that the judge who granted the order had been misinformed. They said PrivatBank’s lawyers alleged to the judge that, while the bank was controlled by the two businessmen, large amounts of money were loaned to insiders — borrowers controlled by Kolomoisky and Boholyubov. The allegations are that they used the funds to pay companies, including the six named, in sham deals. PrivatBank’s new owners said that the schemes, masterminded by Kolomoisky and Boholyubov, bore all the hallmarks of money laundering and led to the loss of huge amounts.
However, the lawyers for Kolomoisky and Boholyubov, say that PrivatBank misled the judge by failing to disclose that although the money travelled in complex “loops” and often through different countries, including Cyprus and the British Virgin Islands, it eventually “bounced back” to PrivatBank, which did not suffer any losses as a result, they claimed.
Mark Howard, Kolomoisky’s lead counsel, called that omission of information “an egregious non-disclosure” and contended the judge would not have granted the order had he been aware.
Suspicious behavior
However, Howard did not explain what legitimate commercial purpose the convoluted money movements served.
The lawyers also argued that as Kolomoisky and Boholyubov had switched from being resident in England to Switzerland before last December’s freeze order was made, England had no jurisdiction over the case.
They claimed that the three English-registered companies, thought to be controlled by the two Ukrainians, were only included in the legal proceedings “to anchor” the case in England so it could be heard in English courts. Their inclusion was “artificial” because, they said, these companies did not differ from approximately 200 others allegedly involved in the corrupt schemes to siphon off PrivatBank’s money. They argued they were selected for the sole reason to connect the two men to the U.K. and thus enable proceedings against them to be held there.
Ukrainian billionaire oligarch Ihor Kolomoisky walked away from PrivatBank, but not before sticking taxpayers with a $5.6 billion tab, largely because of insider lending and fraudulent transactions, according to central bank officials. The state took over the bank in December 2016. (Oleg Petrasiuk)
Lawyers of Kolomoisky, Boholyubov and the six companies said that as legal proceedings were ongoing in Ukraine about many of the issues involved, hearing a case in England created the danger that contradictory verdicts (or “irreconcilable judgements”) could emerge, thus preventing clear outcomes.
Kolomoisky’s and Boholyubov’s lawyers said that PrivatBank’s new owners were attempting to hear the case in England because London law firm Hogan Lovells, which began the proceedings against the two men, had convinced PrivatBank that the chances of success were greater in a court in England than in Switzerland, where they now live.
Rejecting suggestions that Ukraine’s judiciary could be corruptly influenced and thus PrivatBank could not expect a fair resolution in Ukraine, the defendants’ lawyers argued that the “natural forum” for all the legal proceedings was in Ukraine, and that if held in the U.K., could obstruct Ukrainian justice.
Smith’s side
Smith, for PrivatBank, said that shortly before these proceedings “all the defendants had dramatic changes of heart about their applications. Each has abandoned approximately half of the arguments it was scheduled to make, including all challenges to PrivatBank having established a good arguable case of fraud.”
The companies lent money made supply agreements to deliver goods to be purchased with the funds. Smith said the defendants had not contested those supply agreements at the heart of the claims by PrivatBank’s new owner, were “shams.” He said “there was never any intention that the huge (and in many instances practically impossible) volumes of commodities which were purportedly purchased would ever be supplied, were not contested even before the defendants’ recent volte face on their challenges to the merits of PrivatBank’s claims.
“The supply agreements were therefore a deception: the enormous amount of money which was moved under them was moved for some other purpose than to purchase the commodities specified in the agreements. But no party, least of all the supply companies themselves (the six named companies), has even tried to explain what was really going on.”
‘Brains behind the scheme’
He said Kolomoisky and Boholyubov, at the time controllers of PrivatBbank and owners of more than 90 percent of its shares were the “brains behind the scheme.”
Smith said: “If the supply agreements were shams, then the loans made by PrivatBank… to the companies which borrowed the monies on the pretext of making payments to the supply companies cannot have been made for legitimate purposes, and the promised security for repayment was always an illusion. All those involved in the grant of the loans who knew that the supply agreements were shams – and anybody who bothered to enquire must have appreciated that they were – were necessarily involved in a fraud on the bank.”
Smith referred to detailed spreadsheets which Kolomoisky’s and Boholyubov’s lawyers had used to contend that money loaned to borrowers who then transferred funds to other entities, including the six named companies ended up back at the bank despite the peculiar transfers, often so complex they may have been generated by algorithms.
He pointed out inconsistencies in them to show that the money wasn’t just being bounced around between borrowers, and suppliers in various banks and then returning to PrivatBank, but that some of the money had gone amiss.
“They arranged for most of the bank’s corporate lending, running to billions of U.S. dollars, to be made on very favorable terms to companies which they secretly owned or controlled,” Smith said. “But when the local banking industry was subjected to enhanced levels of regulation, including substantial increases in the levels of reserves (in this case partly at the behest of the International Monetary Fund), the true nature of the lending was discovered, the loans were left unpaid without any worthwhile security being in place, and the oligarchs fled abroad complaining of victimization and persecution.”
Smith rejected arguments that the defamation and other court procedures in Ukraine should prevent cases against the two men being held in England. He described the “artificiality” of the cases started by Kolomoisky and Boholyubov in Ukraine and saying their sole purpose was to confine legal proceedings to Ukraine and “so oust the jurisdiction of this (English) court.”
Contradictions in Kolomoisky’s views about Ukrainian justice were pointed out in that, while seemingly arguing any cases should be held in Ukraine, the businessman and his PrivatBank partner, Boholyubov, had also alleged they could not receive fair treatment in Ukraine because they were being persecuted by the authorities and the country’s president, Petro Poroshenko.
Indeed, PrivatBank says that Kolomoisky has shown he can exert influence over Ukrainian judges.
Smith said that as Kolomoisky’s and Boholyubov’s side had withdrawn some of their challenges to the freezing order “it is agreed that PrivatBank has established a good arguable case against each defendant and that there is a real risk that each defendant will dissipate (put out of reach of the courts) his or its assets.”
He called PrivatBank’s case “very strong” and coupled with the “egregious nature of the fraud perpetrated by the defendants” meant the case “cries out” for the freezing order to continue.
He said the judge would have to decide whether the amount sought to be frozen by PrivatBank should be reduced. PrivatBank agreed to Kolomoisky and Boholyubov’s request for some of the arguments, particularly pertaining to their assets in Ukraine and Russia, to be held in private without access for the public or reporters.
Smith contested the defendants’ arguments that cases against them should be “stayed” (halted) in England because PrivatBank was making cases against the three English companies solely to justify such proceedings being held in England. He said even if that is what PrivatBank had done, it wouldn’t necessarily mean the procedure was deficient and should lead to the freezing order being lifted.
But he said PrivatBank has good arguable claims against them which there defendants accept and they potentially have valuable assets and information. “Indeed,” said Smith, “the evidence before the court demonstrates that they were central to (Kolomoisky and Boholyubov’s) fraudulent scheme.” He denied that PrivatBank deliberately tried to mislead the judge at their freezing order hearing last December.
He explained the companies and their accountants could hold documents that could reveal who their real owners were and what was going on including “Relevant and Loan File Supply Agreements: documents and evidence relating to the rationale, negotiation, drafting, execution and non-performance of these agreements. Are there drafts of these agreements? Were they negotiated with (the three English companies’) counterparties? Were instructions given to prepare them individually and in advance (or were they backdated with instructions being given in batches)? Who gave the instructions? How?”
Smith explained two types of “supply agreements” were involved. The first, the Relevant Supply Agreements, provide for prepayments for commodities/equipment to be made before the goods were provided. These agreements related to funds transferred from the borrowers to the six companies. The second, the Loan File Supply Agreements, provide for payment to be made only after the Borrowers had received the commodities/equipment in question. These agreements were used as purported security in support of the loans.
“It was presumably thought that they would be a more credible source of security than the Relevant Supply Agreements if and when security documents had to be shown to the bank’s auditors and/or regulator…..to stop the regulator asking too many questions,” Smith said. “Although the Loan File Supply Agreements could only have been intended as a papering exercise: they could not disguise the fact that the money had been transferred and nothing delivered.”
A lawyer for Hogan Lovells did an analysis of PrivatBank’s transactions which were supplied to the court and in it explained: “…during a period of almost six years, using loans advanced by PrivatBank, tens to hundreds of millions of U.S. dollars at a time, were moved repeatedly between the accounts of the Borrowers and the Suppliers. In total, just under $13.2 billion was transferred from the accounts of the Borrowers to the accounts of 35 Suppliers during this period, and just over $11.2 billion in total was returned to the same Borrowers’ accounts. In June 2014, the prepayments stopped being returned, however, and a total of around $1.91 billion remained in the accounts of the [six] Defendant Suppliers [of which 95 percent went to the three English companies].”
The documents supplied to the court showed the schemes involved in moving the money were so complicated that when Kolomoisky tried to reconstruct them for court proceedings after he was served with the world freezing order, he needed ten weeks and had to use teams of former PrivatBank employees who were “aware of transaction patterns.”
The court was given examples where a company called “Ribotto” on Feb. 6, 2014 moved $20.5 million between 50 companies via 68 different transfers. On Feb 20, 2014, Ribotto received $12.4 million which that same day moved between 28 companies in 49 different transfers. On February 25, 2014, Ribotto got just under $6 million which moved that day between 22 companies via 34 different transfers. On Feb. 27, 2014, the same company received $5,641,000 and $5,539,700 and further transfers of $1.86 and $15 million.
PrivatBank contends the fraud used so many money transfers considering the transactional data, experts believe they were directed by an algorithm – something Kolomoisky has not denied.
Smith said the two men appointed loyal lieutenants to key positions within PrivatBank and even created departments within the bank that were dedicated to servicing their own companies and there was a “bank within a bank” dubbed “bok” to this end.
Many of the 24 main borrowers, said Smith, were connected to the bank’s owners, had no credit history and received loans for purposes that did not reflect what their companies’ purported business was about. These companies received improbably huge sums of money for businesses of their profiles and supposedly dealt in impossibly large quantities of commodities.
For instance, one deal involved 2.3 million tons of Australian Iron Ore which, according to contracts dated May to August 2014, required delivery of the goods to an Odesa seaport by December 2014.
Another contract called for the delivery of 42,000 tons of apple juice concentrate to Dnipro (then Dnipropetrovsk) by August 2015. Ukraine produced 70,000-90,000 tons of apple juice concentrate in 2014 and imported just 343 tons.
Oleh Beketov, the bank’s Ukrainian law expert, explained in a document presented in court:
“Even if part of the exact same monies that the borrowers received from the bank under the Relevant Loans was circulated back to the bank for the purpose of discharging earlier loans (in whole or in part), the misappropriation of funds from the bank via the Relevant Loans (and associated agreements) would remain unremedied and the defendants’ unlawful actions in relation to those agreements … would remain actionable under (Article 1166) of the (Ukrainian) Civil Code.”
Kolomoisky also argues the procedures in England should be halted because, in addition to the defamation actions in Ukraine, they clash with 440 sets of proceedings brought against PrivatBank by “new borrowers.” The New Borrowers contend that they have repaid the loans of the original borrowers so that PrivatBank is not entitled to seek to recover the loan from the original borrower and the borrower is obliged to pay the “New Borrower.”
PrivatBank believes Kolomoisky is behind these as part of attempts to halt the English proceedings.
Beketov also explained it would not be possible for PrivatBank to bring its fraud claims against Kolomoisky, Boholyubov and the six companies in the existing defamation proceedings in Ukraine. He also said that the English proceedings would not interfere with Ukrainian courts’ ability to deal with cases involving overlapping matters.
Smith explained that it had been difficult for PrivatBank’s new owners to piece together what had happened because “some employees were reluctant to assist and/or remained loyal to Kolomoisky and Boholyubov.”
He said mysterious things had happened to deliberately hamper the new owners’ full understanding of what had happened prior to their takeover and thus being able to present a complete picture at last December’s freezing hearing. That shouldn’t be used to as a reason for removing the freeze order, he said.
Kroll investigation
PrivatBank used American business intelligence and investigation company Kroll to investigate the transactions when PrivatBank was owned by Kolomopisky and Boholyubov. Lawyers for the two men complained that report had not been shared with them and asked for it to be disclosed.
The documents supplied by PrivatBank to the court say that on the evening of July 10, last year, two Kroll staff unexpectedly at 11p.m. walked into the bank’s offices and found five or six people tearing up folders. There was an awkward silence and the people destroying the files left. The Kroll staff saw that the torn up material related to at least one of the borrowers involved in the alleged fraud.
The Kroll people asked a cleaning lady to leave the boxes where they were and asked a security guard to lock them in a separate room. But when they returned the boxes and torn-up material had disappeared.
PrivatBank’s lawyers said that during the time of the alleged fraud Boholyubov was resident in the UK. Smith said that Kolomoisky undoubtedly knew the purpose of the complex transactions but had failed to share that knowledge with PrivatBank. He and his co-owner of the bank, Kolomoisky, apparently chose to use English companies in their schemes because as UK businesses are usually regarded as trustworthy they thought it would limit scrutiny of the fund transfers.
Smith said: “If a fraudster chooses to use English companies in his fraudulent scheme, he cannot profess surprise when he and his English companies are sued in the English courts.”
Both sides completed their arguments after five days of hearings just in time for the courts’ summer recess. The judge said he would deliver a decision in October.
