Ukrainian Billionaires Exchanged Luxury London Real Estate in Secret Settlement

Viktor Pinchuk, Igor Kolomoisky, and Gennadiy Bogolyubov are Ukrainian bil­lion­aires who made much of their mon­ey dur­ing the chaot­ic pri­va­ti­za­tion of state prop­er­ty that fol­lowed the col­lapse of the Soviet Union.

All three hail from Dnipro, an indus­tri­al city where their inter­ests have clashed mul­ti­ple times – as they did over the Kryvorizkyi Iron Ore Factory, which was pri­va­tized in 2004 under dis­put­ed circumstances.

In a law­suit filed years lat­er against Kolomoisky and Bogolyubov in London, Pinchuk claimed that he had paid them for the plant, which they had agreed to buy from the gov­ern­ment on his behalf. But in the end, they refused to hand it over. He said he lost $2 bil­lion in the deal.

Filing such suits in London is a stan­dard prac­tice for major Ukrainian busi­ness­men, many of whom trust the British legal sys­tem over their own and hold assets in UK-reg­is­tered firms.

The case was sen­sa­tion­al, involv­ing vast sums of mon­ey and alle­ga­tions of beat­ings and mur­der on both sides.

But on the eve of tri­al in ear­ly 2016, the par­ties declared that a set­tle­ment had been reached.

The specifics of the deal were nev­er released – but some can now be revealed. They were buried in the Paradise Papers, a major leak of doc­u­ments from two off­shore ser­vices firms based in Bermuda and Singapore, as well as from 19 cor­po­rate reg­istries main­tained by gov­ern­ments in secret off­shore jurisdictions.

The doc­u­ments were obtained by the Süddeutsche Zeitung and shared with the International Consortium of Investigative Journalists (ICIJ), which orga­nized a col­lab­o­ra­tive inves­ti­ga­tion with dozens of out­lets across the world, includ­ing the Organized Crime and Corruption Reporting Project (OCCRP) and Slidstvo.Info.

A sudden end to a big dispute

The doc­u­ments reveal that, on Jan. 20, 2016, five days before the tri­al was to begin, Pinchuk’s lawyers from the London-based Hogan Lovells approached Appleby, a glob­al law firm head­quar­tered in Bermuda.

Philip Beswick, a senior legal assis­tant at Hogan Lovells, wrote to Appleby’s Simon Cain on a mat­ter that he said demand­ed urgent attention.

Hogan Lovells’ office in London

We act for Mr Pinchuk who is cur­rent­ly engaged in a dis­pute with Mssrs Bogolyubov & Kolomoisky,” he wrote. “A con­di­tion­al set­tle­ment of that dis­pute is on the table, where­by Mssrs Bogolyubov & Kolom[oisky] will make a series of staged future pay­ments to Mr Punchuk [sic] over the course of sev­er­al years.”

The lawyer said the set­tle­ment would be secured by bank accounts set up in the Isle of Man. These would be backed by a num­ber of Cyprus com­pa­nies and Bogolyubov him­self. The infor­ma­tion that the accounts would in fact be domi­ciled in the Isle of Man “was only shared with us late last night – hence our com­ing to you in a hur­ry,” Beswick wrote.

Appleby sprang into action. Two hours lat­er, the firm’s employ­ees respond­ed that open­ing accounts in the Isle of Man would be pos­si­ble with­out too much paper­work. They asked Pinchuk’s lawyers which bank would be used for the mon­ey trans­fer, and were told it would be Barclay’s, or per­haps some other.

This meant that funds for a Ukrainian enter­prise, divid­ed among Ukrainian busi­ness­men, would bypass Ukraine and its tax inspec­tors. Moreover, they would also bypass England, since all pay­ments would be made through bank accounts in off­shore tax havens.

Two days lat­er, Beswick got anoth­er email from Appleby’s Cain, esti­mat­ing that the work would cost between £3,000 and £4,000.

Cain also told Pinchuk’s British lawyers that, to save time, Appleby should reg­is­ter the off­shore struc­ture under the name of Hogan Lovells to avoid hav­ing to run back­ground checks into Pinchuk, “which I imag­ine will be time con­sum­ing and poten­tial­ly dif­fi­cult [as] we don’t know him.”

Who are the oligarchs?

In due dili­gence par­lance, Pinchuk was a “polit­i­cal­ly exposed per­son,” or PEP, which means that work­ing with him required extra scruti­ny. He is the son-in-law of for­mer Ukrainian President Leonid Kuchma, whose decade-long rule of the coun­try was not­ed for extreme cor­rup­tion and for the for­ma­tion of an oli­garch class that ben­e­fit­ed from poor state man­age­ment and insid­er deals.

Viktor Pinchuk

Pinchuk became very wealthy dur­ing this time, amass­ing a net worth esti­mat­ed at between $1 and $2 bil­lion. Though he start­ed his career in the ear­ly 90s, his busi­ness­es real­ly took off after 1998, when he began a rela­tion­ship with Olena Franchuk, the president’s daugh­ter (the two mar­ried in 2002). His empire was built on the pri­va­ti­za­tion of large state-owned fac­to­ries in the 90s and 2000s.

In addi­tion, between 1998 and 2006, Pinchuk was a mem­ber of par­lia­ment. He then left pol­i­tics to focus on his char­i­ty foun­da­tion, which brings famous inter­na­tion­al fig­ures, includ­ing Tony Blair, to Ukraine to speak at an annu­al con­fer­ence. He counts pop start Elton John as a friend and also owns three large Ukrainian TV channels.

The oth­er two busi­ness­men in the dis­pute, Kolomoisky and Bogolyubov, are con­tro­ver­sial fig­ures them­selves. The two were recent­ly involved in the col­lapse of PrivatBank, Ukraine’s largest pri­vate bank, which they owned. The col­lapse left the state with huge loss­es as it bailed out busi­ness­es and indi­vid­u­als who had held accounts there. An inves­ti­ga­tion by OCCRP revealed that PrivatBank gave out over $1 bil­lion in loans to opaque off­shore com­pa­nies, some of which were linked to the pair or their friends, and were nev­er repaid.

Ihor Kolomoisky

Kolomoisky is also one of Ukraine’s wealth­i­est men – accord­ing to Forbes, he is worth $1.3 bil­lion. His hold­ings include large oil and gas com­pa­nies, Ukrainian International Airlines, the well-known foot­ball club Dnipro, and sev­er­al indus­tri­al plants in the Dnipropetrovsk region. He is also an own­er of pop­u­lar nation­al TV chan­nel 1+1.

For a brief peri­od after the Euromaidan rev­o­lu­tion, Kolomoisky was named gov­er­nor of the Dnipropetrovsk region, which bor­ders on the war zone in east­ern Ukraine. His sup­port was thought cru­cial to halt­ing the advance of pro-Russian sep­a­ratists in the region. But after just one year in the posi­tion, he resigned after a scan­dal involv­ing Ukrnafta, the state oil company.

The Battle of Trafalgar

On Feb. 2, 2016, 10 days after the secret set­tle­ment had been con­clud­ed among Pinchuk, Kolomoisky and Bogolyubov, Appleby heard from Hogan Lovells again:

It looks like we will short­ly have an addi­tion­al piece of cor­po­rate work on this mat­ter which we would real­ly appre­ci­ate your assis­tance with. As part of the set­tle­ment which your cur­rent engage­ment relates to, the oth­er par­ties agreed to trans­fer two high-val­ue prime-London com­mer­cial prop­er­ties to Mr Pinchuk.”

The lawyers explained that the prop­er­ties had already been reg­is­tered under two off­shore firms in the Isle of Man and they would need to be re-reg­is­tered in Pinchuk’s name. For this, a trust need­ed to be cre­at­ed on the island of Jersey which would own the Isle of Man firms.

Naomi Hirst is a senior cam­paign­er with Global Witness, an inter­na­tion­al non-gov­ern­men­tal orga­ni­za­tion that tar­gets cor­rup­tion. She explains that secre­cy would be the pri­ma­ry rea­son for the cre­ation of such a com­pli­cat­ed off­shore scheme.

In the UK it is far too easy to own prop­er­ty through anony­mous com­pa­nies, what we call shell com­pa­nies, which are com­pa­nies set up with per­haps the pur­pose of dis­guis­ing the true own­er­ship, the true ben­e­fi­cial own­er. The Isle of Man [and the island of] Jersey, they do not have pub­lic reg­is­ters of ben­e­fi­cial own­er­ship. So who exact­ly are the share­hold­ers or direc­tors of these par­tic­u­lar com­pa­nies based in the Isle of Man or Jersey, we don’t know.”

So, she said, “What we see as a gen­er­al trend is that peo­ple who have sus­pi­cious or crim­i­nal mon­ey are quite keen to dis­guise the fact that it is crim­i­nal. So, they will reg­is­ter an anony­mous com­pa­ny in a secre­cy juris­dic­tion. This might be the British crown depen­den­cies, such as the Isle of Man or Jersey, it might be Delaware, the British Virgin Islands or Belize. They will estab­lish an anony­mous com­pa­ny there, put their mon­ey into it, and it is dis­guised. You can’t trace the mon­ey back to them.”

The first of the two valu­able prop­er­ties that Pinchuk received from the oth­er two Ukrainian mag­nates was an office build­ing at 27–31 Knightsbridge in cen­tral London, in the dis­trict of Belgravia. Its offi­cial own­er is a Britain-based firm, Bbay (Knightsbridge) Ltd., that is ulti­mate­ly con­trolled by the trust on the island of Jersey.

The prop­er­ty Pinchuk received on Knightsbridge in cen­tral London

The build­ing stands across from Hyde Park, down the street from Buckingham Palace. At the end of 2015, it was val­ued at £75,650,000.

As valu­able as the Belgravia build­ing was, Pinchuk’s true tro­phy was the sec­ond prop­er­ty named in the deal. Called the “Grand Buildings” at 1–3 Strand Street in Trafalgar Square, this is an icon­ic struc­ture that once housed London’s Grand Hotel.

In 1988, the build­ing was ren­o­vat­ed and now accom­mo­dates offices, expen­sive restau­rants and stores. It sits on Trafalgar Square fac­ing Nelson’s Column, a mon­u­ment hon­or­ing British Admiral Horatio Nelson, who won a dra­mat­ic vic­to­ry against the French and Spanish navies off Spain’s Cape Trafalgar in 1805. The square is one of the city’s major tourist attractions.

After agree­ing on the off­shore prop­er­ty scheme, Pinchuk’s London lawyers told Appleby that the struc­ture was nec­es­sary for “tax pur­pos­es,” among oth­er reasons.

Following com­ple­tion, the client will be tak­ing over the con­trol of the two above­men­tioned IoM [Isle of Man] com­pa­nies and will need to con­tin­ue to admin­is­ter them in the IoM and also main­tain a major­i­ty of IoM direc­tors for tax pur­pos­es,” David Harrison of Hogan Lovells told Appleby.

Nick Mathiason is one of the co-founders of Finance Uncovered, a group of inves­ti­ga­tors that work to uncov­er mon­ey-laun­der­ing schemes in the UK. In a small office on the top floor of an old build­ing in London, he and his col­leagues are study­ing how such real estate “invest­ments” enter the British economy.

He explains that the wealthy Ukrainians’ arrange­ment of hold­ing London prop­er­ty through off­shore com­pa­nies is not exact­ly unusual.

The Grand Buildings in on Trafalgar Square

There are now 40,000 prop­er­ties held in London that are off­shore … That’s worth bil­lions and bil­lions of pounds that we have seen invest­ed from all over the world. It is the same with offices as well, in the cen­ter of London. It is immense­ly valu­able,” says Mathiason.

The rea­son, again, is secrecy.

Potentially, you can save tax­es and also, cru­cial­ly, you can hide your iden­ti­ty,” Mathiason explains. “You don’t have to show to the world that you own this build­ing. You can hide behind an off­shore com­pa­ny. That also presents dif­fi­cul­ties for enforce­ment agen­cies around the world, if they want to under­stand who owns prop­er­ties. If they are look­ing to inves­ti­gate mon­ey-laun­der­ers, cor­rupt peo­ple, off­shore is real­ly, real­ly a good way to hide from those authorities.”

A long way from the high life

The object of the wealthy businessmen’s dis­pute seems a world away from London.

The city of Kryvyi Rih is locat­ed on the steppes, or flat grass­lands, of cen­tral Ukraine. While Kryvyi Rih spreads out for over 120 kilo­me­ters, it is more a col­lec­tion of work­er com­mu­ni­ties than a tra­di­tion­al city.

Each com­mu­ni­ty has grown up around its own com­pa­ny: a fac­to­ry, a mine, or a quar­ry. Ukraine’s largest iron ore deposits are in this region, hence the red-col­ored dust on the roads and pud­dles of red water.

The city of Kryvyi Rih.

In the 2000s, Ukraine’s oli­garchs scooped up state assets, often at knock­down prices, dur­ing that decade’s pri­va­ti­za­tions – end­ing up split­ting the last rem­nants of the Soviet indus­tri­al empire between them. Since then, the busi­ness­men have been among the world’s wealth­i­est, while the work­ers of Kryvyi Rih live in rel­a­tive poverty.

The Kryvorizkyi Iron Ore Factory, the cen­ter of the dis­pute in London, incor­po­rates four mines and near­ly 600 mil­lion tons of iron ore deposits, which must be extract­ed from the ground before most is export­ed to the Czech Republic, Slovakia and Romania.

Oleksandr Potapenko, a min­er at the fac­to­ry, meets jour­nal­ists in the cen­ter of Kryvyi Rih and takes them to his home on the out­skirts. En route, Potapenko com­plains about salaries work­ers there receive.

My friend went to Poland,” he says, “The salary [here] was not enough for him, a salary of 8,000 [hryv­nia, about $300 per month]. And this is a min­er who works at a depth of 1,345 meters and does heavy phys­i­cal work.”

Now, [in Poland],” he says, “he works at a coal mine. He is pleased, he says. He earns $300-$400 for two or three shifts.”

The city of Kryvyi Rih.

Privatizations, revolutions, and uprisings

In 2004, Leonid Kuchma, then the pres­i­dent of Ukraine, signed a law that allowed the 10 most valu­able enter­pris­es in the country’s extrac­tion and met­al­lur­gy indus­try – once part of the state-owned hold­ing Ukrrudprom, – to be sold for far less than their true val­ue. Pinchuk, Kuchma’s son-in-law, was rapid­ly amass­ing the prof­itable busi­ness assets that would make him a billionaire.

But, though the Kryvorizkyi fac­to­ry was one of the pri­va­tized enter­pris­es, Pinchuk didn’t come to own it direct­ly. Instead – he lat­er alleged – he had agreed with two oth­er influ­en­tial bil­lion­aires, Kolomoisky and Bogolyubov, that they would buy it from the gov­ern­ment on his behalf pos­si­bly because it would raise ques­tions if a Kuchma’s fam­i­ly was pur­chas­ing the prop­er­ty well under its true value.

But that same year, as the Orange Revolution explod­ed in Ukraine and Kuchma left office, his son-in-law’s influ­ence shrank significantly.

So, as Pinchuk lat­er alleged in London, when the time came for Kolomoisky and Bogolyubov to hand over the promised fac­to­ry, they tricked him into buy­ing a worth­less off­shore firm for $143 mil­lion. The com­pa­ny, called Across, in real­i­ty held no assets, and the fac­to­ry remained with Kolomoisky and Bogolyubov, nei­ther of whom spend much time in Ukraine. Kolomoisky lives in Geneva, while Bogolyubov lives in London, as does Pinchuk.

This was the ori­gin of the London dis­pute between the pow­er­ful busi­ness­men – now appar­ent­ly set­tled through the exchange of mon­ey and prop­er­ties via off­shore channels.

Back in Ukraine, after the Euromaidan upris­ing three years ago, a spe­cial com­mis­sion was cre­at­ed in the Ukrainian par­lia­ment to inves­ti­gate the pri­va­ti­za­tions of the 2000s. The com­mis­sion con­clud­ed that Ukraine’s insid­ers had bought the extrac­tion and met­al­lur­gi­cal com­pa­nies for almost nothing.

Parliamentarian Pavlo Rizanenko, who served on the com­mis­sion, was blunt. “If we look at the real val­ue of the assets of the hold­ing Ukrrudprom, in 2005, it amount­ed to about $20 bil­lion. And this entire hold­ing was pur­chased for as lit­tle as $400 mil­lion, due to the arti­fi­cial­ly lim­it­ed competition.”

One of these com­pa­nies, the Kryvorizkyi Iron Ore Factory, was bought from the state by Kolomoisky’s com­pa­nies for $40 mil­lion, although its real val­ue was over $1 bil­lion,” he said, adding that as a result of the commission’s work the Prosecutor General’s Office has begun inves­ti­gat­ing whether the pri­va­ti­za­tions had been legal.

Two wit­ness­es who may have been impor­tant to the pros­e­cu­tion were Mykhaylo Chechetov and Valentyna Semeniuk.

In 2004, Chechetov head­ed the State Property Fund of Ukraine, a gov­ern­ment agency that man­aged the sale of state com­pa­nies. At that time, Semeniuk head­ed the par­lia­men­tary com­mis­sion on pri­va­ti­za­tion that was in charge of over­see­ing the fund’s operations.

Neither Chechetov nor Semeniuk are avail­able to give expla­na­tions, however.

Three years ago, Semeniuk was found dead in her house, sup­pos­ed­ly hav­ing shot her­self in the head, although police doubt­ed it was sui­cide. An inves­ti­ga­tion car­ried out by Slidstvo.Info jour­nal­ists found the evi­dence point­ed to murder.

Seven months after Semeniuk’s death, Chechetov jumped out of a high-rise win­dow, accord­ing to law enforce­ment. That leaves the busi­ness­men them­selves as the only key wit­ness­es from the era of ques­tion­able privatizations.

No money for the workers

Potapenko, the min­er, talks about an attempt­ed strike at the fac­to­ry. “For a long time, we had want­ed to go on strike. We demand that the wage be increased, work­ers’ rights pro­tec­tion be increased, qual­i­ty mate­ri­als for work be pro­vid­ed to us.”

At first, the man­age­ment lis­tened to us and raised the wages by 20 per­cent,” he explains. “But in two months, the wages went back to what they were before. They said, ‘that’s it, there is no mon­ey, the iron ore is not sell­ing.’ How come is it not sell­ing? We can see that the store­hous­es are emp­ty, all the iron ore is sold out.”

The Kryvorizkyi Iron Ore Factory.

For Kolomoisky and Bogolyubov, the cur­rent co-own­ers of Kryvorizkyi Iron Ore Factory, the com­pa­ny is a high­ly valu­able asset. It is hard­ly sur­pris­ing that they refused to give it up to Pinchuk.

Last year, the fac­to­ry pro­duced 1.1 bil­lion hryv­nias in income from iron ore sales (more than $40 mil­lion dol­lars). And those are the offi­cial num­bers; the real rev­enue could be high­er, as many trans­ac­tions in Ukrainian com­pa­nies are off the books or manipulated.

In last year’s report for stock­hold­ers, it said that the export-ori­ent­ed fac­to­ry sold iron ore at the 840 hryv­nias ($31) per ton. However, the aver­age world­wide price for iron ore in 2016 was near­ly twice as high, at $58.4 per ton.

A com­mon prac­tice is for fac­to­ry own­ers to sell prod­ucts to them­selves through off­shore com­pa­nies so huge prof­its can be record­ed off­shore where they avoid taxes.

Reporters asked Pinchuk, Kolomoisky and Bogolyubov to com­ment on this data, and why they had cre­at­ed such a sophis­ti­cat­ed off­shore scheme for own­ing the real estate.

Kolomoisky declined to com­ment on any­thing, cit­ing his oblig­a­tion to adhere to the con­fi­den­tial­i­ty con­di­tion attached to the set­tle­ment agree­ment. Pinchuk’s press sec­re­tary gave the same response. Bogolyubov did not respond to requests for comment.

By Dmytro Gnap

Ukrainian Billionaires Exchanged Luxury London Real Estate in Secret Settlement

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