The Paradise Papers, a major new leak of documents about offshore companies published on Nov. 5, has added to suspicions that President Petro Poroshenko was seeking tax benefits when setting up Prime Asset Partners Limited in the British Virgin Islands in 2014.
Poroshenko and his lawyers vehemently deny any tax-minimization plans and argue that their aim was to pay as much in taxes in Ukraine as possible.
The Paradise Papers, a leak of 13.4 million offshore documents, mostly came from two offshore services firms in the Bermudas and Singapore, as well as from 19 corporate registries in secret offshore jurisdictions.
The previous evidence of Poroshenko’s tax minimization plans was published as part of a leak known as the Panama Papers in April 2016.
Poroshenko, who promised to sell his assets before being elected president in 2014, has failed to deliver on his promise and has faced mounting accusations that he is putting his business interests above those of the state.
Meanwhile, Poroshenko and his companies still haven’t fully explained a 4 million euro offshore transaction in Cyprus carried out in March 2016, made when the National Bank of Ukraine had banned cash payments abroad. According to a form filed with the local registry, the transaction constituted a combined payment of cash and shares of his company.
The president’s representatives insist that no transfers of cash were involved. But they have failed to provide the annual returns of Poroshenko’s Cyprus company, which would document the details of the transaction.
In April 2016 Poroshenko transferred his assets to a blind trust run by Rothschild. But the nature of the trust remains a mystery, since he has so far refused to explain the trust’s terms, citing confidentiality rules.
Minimizing taxes?
The Paradise Papers are leaked documents obtained by Süddeutsche Zeitung and the International Consortium of Investigative Journalists. They were shared with a network of more than 380 journalists in 67 countries, including the Washington, D.C.-based Organized Crime and Corruption Reporting Project, a Kyiv Post partner.
The documents show that Vadim Medvedev, a lawyer working for Ukraine’s Avellum law firm, on June 17, 2014 emailed Sean Dowling, managing partner of law firm Appleby on the Isle of Man, on behalf of the president. They discussed creating a corporate structure for “tax purposes,” with the offshore holding company “holding shares” and “receiving dividends.”
Medvedev said that Avellum preferred a British Virgin Islands jurisdiction for their planned holding company, but that a company on the Isle of Man would also be suitable.
The holding company would own a Cyprus company for tax purposes, as Cyprus typically has one of the lowest corporate tax rates in Europe. The Cypriot company would in turn own a
Luxembourg company that would give the business access to international markets. The Luxembourg company would own a Dutch company, which itself would own Poroshenko’s Ukrainian assets.
Castle Rushen in the Isle of Man, an offshore jurisdiction that features in the OCCRP investigation of President Petro Poroshenko. (Courtesy)
Prior to Medvedev’s letter, Appleby was apparently cautious about the tax and corporate structure proposed by Avellum, as the Paradise Papers documents contain a letter in which its officers express doubts about the offer.
“I do not think that there is an immediate yes or no answer to the question,” Robert Woods, director of compliance at Appleby, said in an e-mail. “The risk assessors of the business would consider all of the facts (and there are not many yet!), such as where are the companies now, why do they want to move, what is their purpose, what is the rationale behind them being in the BVI, what business are they involved in, who else is behind them, what are the benefits to Appleby, I am sure there is much more for this one… It is quite unlikely that this would be worth the risk involved, but without much more information and investigation there is no definitive answer.”
Appleby’s Rejected Business Log, contains the note on Poroshenko, indicating concern about his plans to retaliate against Russian-backed separatists in eastern Ukraine and likely reputational risk for the firm.
In response to the OCCRP investigation, Avellum argued that their aim was to maximize taxes in Ukraine, not to minimize them. Poroshenko would pay an income tax on dividends received from the offshore firms, Medvedev told the Kyiv Post.
Avellum also said that in 2014 it had been considering either selling the assets or holding an initial public offering, known as an IPO. However, the sale could not have been carried out due to unfavorable market conditions, they argued.
But Kostyantyn Likarchuk, a partner at the Kinstellar law firm, a former partner at Avellum and an ex-deputy head of the State Fiscal Service, was doubtful about Avellum’s explanation.
“I can’t understand how this structure can maximize taxes,” Likarchuk told the Kyiv Post.
In such a corporate structure, no tax on the sale of assets would be paid in Ukraine if any of the offshore firms in the chain were sold, Likarchuk said.
The only way to pay taxes in Ukraine from such a sale would be for each offshore firm to make a decision on paying dividends to the other ones, with these dividends ending up in Ukraine. But this scheme is improbable, he said.
“The BVI (holding company) is not necessary if you’re not going to minimize tax payments,” he added.
In the case of an IPO, Poroshenko would not have to pay a tax on the sale of assets in Ukraine either with this corporate structure, Likarchuk added.
“At first sight, the structure mentioned in the lawyers’ letter envisages minimizing taxes, which is not illegal,” Inna Rudnyk, a senior associate at the Alekeyev, Boyarchukov and Partners law firm, told the Kyiv Post. “…Since the correspondence does not mention what kind of operations members of this structure intended to carry out, it’s difficult to say whether they wanted to minimize tax payments in Ukraine or only in European countries.”
Poroshenko has also claimed that the offshore firms mentioned in the Panama Papers did not have any bank accounts.
But in contradiction to Poroshenko’s claims, Medvedev said in the leaked emails that the proposed offshore would be handling assets and could receive dividends, which would imply having a bank account. Avellum responded that, though the opening of bank accounts had been planned, it had never happened in reality.
Cypriot deal
Another major issue that arises out of the OCCRP investigation is whether Poroshenko violated Ukrainian law during a corporate transaction made in March 2016.
Prime Assets Capital, a Ukrainian fund owned by Poroshenko, bought 18,000 shares of his Cyprus-registered company, CEE Confectionary Investments Limited, for 3.9 million euros, according to a Cypriot document published by the OCCRP in 2016. According to several Cypriot lawyers and experts interviewed by the OCCRP, the document explicitly says that this was a combined transaction, in kind (company shares) and cash.
One theory, voiced by financial specialist Andriy Gerus, is that the money allegedly transferred to Cyprus was needed for the activities of Poroshenko’s Cyprus company.
A cash payment would indicate that the Cyprus company had a bank account, which Poroshenko and his lawyers have repeatedly denied. Under Ukrainian rules, Poroshenko would have had to declare any such bank accounts. Yet, Poroshenko’s income declaration for 2016 lists only one foreign bank account — $1.06 million at Swiss Rothschild Bank AG. Avellum and the Presidential Administration could not comment on the origin of the funds.
Cash transfers abroad were banned by the National Bank of Ukraine at that time, unless the bank issued a special license. The National Bank of Ukraine said it had issued no such license in this case.
Avellum claims that the document published by the OCCRP does not prove the presence of cash in the transaction, and denies any wrongdoing.
Avellum showed to the Kyiv Post a share subscription agreement between CEE Confectionary Investment Ltd and Prime Assets Capital in which only shares were mentioned as part of the transaction.
However, Avellum’s critics say only documents from the official Cypriot register on the transaction would provide definitive proof. Such documents include annual financial reports and a resolution by the board of directors, which must show under Cypriot law how much cash and how many shares were transferred as part of the 4 million euro transaction.
The Ukrainian documents could turn out to be fake if the Cypriot firm files documents that contradict them, Likarchuk said.
“The documents that are submitted to Cypriot authorities are better proof (than Ukrainian documents),” he added.
Since 2014, Cyprus’ CEE Confectionary Investment Ltd. has not published a single annual return and missed two deadlines for such reports.
Avellum told the Kyiv Post it could not provide the resolution of the board of directors on the transfer of shares and could not say why the company had not published its annual return, or when it would be published.
The law firm also cited a June 2016 memorandum by Baker & McKenzie’s Kyiv office that concluded that there had been no violations in the Cyprus deal, and that only shares had been involved in the transaction.
One problem is that Baker & McKenzie’s Kyiv office based its conclusion on the Ukrainian documents provided by Poroshenko’s representatives, which was confirmed by Avellum. No evidence has been provided that Baker & McKenzie saw any documents from the Cypriot register.
The June 2016 memorandum was signed by Serhiy Piontkovsky and Olyana Gordiyenko, partners at Baker & McKenzie’s Kyiv office. In September 2016 Poroshenko appointed Gordiyenko as a member of the National Securities and Stock Market Commission. She resigned from the post in March 2017.
In a strange coincidence, an investigation by OCCRP and its Ukrainian partner Slidstvo.info shows that Avellum lawyer Medvedev, who worked on Poroshenko’s case, helped Sergiy Oleksiyenko, an official at Ukrainian state gas firm Ukrtransgaz, to set up an offshore fund on the Isle of Man specifically to bypass the National Bank of Ukraine’s currency regulations and transfer $1 million in cash to Cyprus. The scheme involved the Ukrainian subsidiary of Russia’s Alfa Bank and its affiliated firm in the UK, with an offshore ownership structure.
Medvedev denied doing anything illegal but refused to explain in detail why he believes the scheme was lawful.
Blind trust?
Poroshenko’s blind trust is run by the Swiss branch of Rothschild and is regulated by British law, Avellum said.
Avellum also showed the first and last pages of Poroshenko’s blind trust agreement to the Kyiv Post, albeit for less than a minute. The lawyers also said they cannot show the rest due to confidentiality rules. Under the trust deal, Rothschild cannot disclose any information to Poroshenko except for information on the sale of assets and information necessary for Ukrainian disclosure rules.
But Likarchuk argued that usually a proper blind trust cannot provide information to the client even on the sale of assets.
By definition, the trustee of a blind trust must be an independent professional with no relation or affiliation with the politician, and must have full control over buying and selling the assets in the trust.
Sergii Zaitsev, Poroshenko’s acquaintance and long-time top manager, is still a director of Roshen Europe B. V., which holds Roshen’s Ukrainian companies. This raises the question of whether Poroshenko still influences the management of the assets.
Poroshenko also failed to include the blind trust in his 2016 asset declaration. But Likarchuk said he believes that in such a situation a trust must be declared.
Moreover, Poroshenko’s dealings with his assets prior to the blind trust’s creation could have violated Ukrainian anti-corruption law.
Under this law, a state official must either sell his or her assets or transfer them to a management firm, and his relatives cannot run these assets. However, Poroshenko’s father was the CEO of Ukraine’s Prime Assets Capital, which ran the president’s assets until 2016.
Moreover, anti-corruption law bans the president from conducting business activities, and the setting up of Prime Asset Partners Limited in the British Virgin Islands in 2014 is interpreted by some lawyers as a business activity.
Avellum and the Presidential Administration did not comment on the accusations.
