Baltic banks at the "Hearts" of Ukraine graft

By bne IntelliNews January 23, 2013

Graham Stack in Kyiv -

There may be fewer bigger followers of Heart of Midlothian FC in Ukraine than Zhitomir local Anatoly Rupeta, but his enthusiasm for the Scottish football club is waning. Rupeta is facing a lengthy jail sentence after being stitched up, as he claims, by a gang of Ukrainian money-launderers operating via Lithuanian bank Ukio Bankas, owned by Vladimir Romanov, who also since 2005 has owned the venerable Edinburgh team.

"Hearts were always my favourite Scottish club because they have the same colours as Zhitomir. I don't know how directly Romanov himself is implicated in my problems, perhaps he is too involved at Hearts to follow what is going on at his bank, but I call on him to prevent a terrible miscarriage of justice," Rupeta tells bne in a cafe in his native Zhitomir, a regional centre of 250,000 people about two hours drive from Kyiv.

Rupeta is facing a 10-14 year jail sentence if found guilty on what he says are trumped-up charges. But despite four years of legal proceedings now drawing to a close, the spruce 54-year-old looks younger than his age, and is calm and collected when talking about his case - and curious to see what a Brit makes of it. As befits a former bank manager, he has put together an impressive array of documents and testimony supporting his arguments.

Rupeta's account raises questions about the real business activities of the East European businessmen who have invested in British football. It also dovetails with a body of evidence that home-grown Baltic banking is linked to dirty money from the former Soviet countries. These questions became more pressing after the arrest of Romanov's colleague both in British football and in Baltic banking, Vladimir Antonov, on asset-stripping charges in 2012. Lithuanian authorities nationalised Antonov's bank Snoras due to major regulatory violations in 2011, shortly after Antonov had purchased the English football club Portsmouth. Lithuania also in January became the latest country - following Switzerland, Latvia and Cyprus - to open an investigation into how its banks might have been involved in the "Magnitsky case". Named after the lawyer who uncovered it but died in prison under suspicious circumstances, this case is a $230m Russian tax fraud that has become a major source of international embarrassment for the Kremlin because of mounting evidence that prominent officials within the Interior Ministry, tax offices and the judiciary were involved.


Rupeta says he fell foul of the Ukrainian money-launderers in 2007. But he has only now dared to speak up after the alleged ringleader of the group in Ukraine, banker Ruslan Demchak, was arrested on money-laundering charges in September 2012. In January , the National Bank of Ukraine withdrew the license of Demchak's small lender RD Bank, which is now undergoing liquidation.

Demchak has said his arrest was politically motivated due to his decision to run as an independent candidate in the October parliamentary elections. His press secretary refuted all allegations of money-laundering and any involvement in bringing charges against Rupeta.

Rupeta says his troubles started when he stumbled across the money-laundering operation in late 2007. He says the gang, unknown to him, were using a bank account opened for the small firm where Rupeta held the post of director - with tens of millions of dollars pouring into the account, wired in instalments by a UK shell company from an account at Romanov's Ukio Bankas.

But when a member of the gang died in a car crash in December 2007, the scheme also skidded off the road, because the widow inherited large amounts of money "belonging" to the money-launderers. Demchak came to Rupeta personally, relates Rupeta, and told him he would use his connections in law enforcement to fabricate a criminal case aimed at freezing the widow's assets, and this would include bringing criminal charges against Rupeta as well, as director of a company involved in the scheme.

Sure enough, the Ukio Bankas client - Corpmark Impex LLP - filed a complaint to the police against Rupeta, and the police immediately brought charges. The complaint alleged Corpmark Impex, despite having signed no contract, had wired $6m to Rupeta's firm as 100% advance payment on a shipment of granite he had promised to deliver, but then failed to.

Rupeta says he admires British justice as much as he does British football, but that Corpmark Impex LLP, registered in the sleepy Hertfordshire village of Elstree, snuggled between parish church and vicarage, may as well have been a resident of the murkiest Caribbean tax haven, such was its disregard of the law.

Experts agree. "It does look like the case was stitched up. The complaint itself is nonsense and facts cited have been clearly tortured to force the semblance of a criminal allegation," says lawyer Valery Fedichin of Kyiv law firm OMP, who examined the complaint independently. "The pattern of payments looks instead like a classic money laundering scheme, using the Ukraine company as part of a complex scheme of shell companies," says anti-money-laundering expert Saskia Rietbroek of AML Services International, who examined payment documents connected with the case.

The wheels of justice in Ukraine grind slowly but inexorably. Rupeta is expecting sentencing this year on charges of major fraud, which brings a prison sentence of 10-14 years. Ukraine courts convict in 95% of cases. This despite the fact that the mysterious Ukio Bankas client, Corpmark Impex, that brought the charges against Rupeta has since been dissolved. Demchak and his top managers - the people who Rupeta claims stitched him up - are themselves now in custody facing money-laundering charges. "I don't know who was the mastermind behind the scheme - the Baltic banks or Ukrainians - but I believe Romanov might help if he wanted," says Rupeta.

Romanov's investment company Ūkio banko investicinė grupė (ŪBIG) had not responded to a request for comments at the time of going to press.

In and out...

Rupeta, a former bank manager, has had plenty of time during the years of legal proceedings to analyse what exactly had been going on. According to his enquiries, backed by documents seen by bne, the scheme functioned thus: Three non-resident shell companies - Corpmark Impex from the UK, Geraldic SA from Panama and Bridgemax Ltd from New Zealand - channelled hard currency funds to several small local Zhitomir firms, including Rupeta's. Both the British company and the Panamanian company had accounts at Romanov's Ukio Bankas, while the New Zealand company had an account at Latvia's Trast Komercbanka.

The small local companies stood as guarantors for a $2m credit line at a local bank, held by the bank's own head of foreign currency operations - the man killed in the car crash in December 2007. As the manager drew down the funds in cash apparently for his "personal needs", the guarantor firms topped up the account using the funds they were receiving from abroad. The cash funds drawn down by the bank manager were then in fact distributed by road to the clients of the money-laundering platform.

In Ukraine such an operation is called a "conversion centre". The term refers to the conversion of booked company funds to off-the-books cash. Companies wire payments under fictive contracts to firms run by the "conversion centre", and get the money returned in cash, minus commission, on average 10%. The goal of the operation for its clients is tax evasion, by reducing profit tax through inflating company expenses while creating fraudulent VAT credit, and then using the cash received in return to pay salaries off the books, thus avoiding payroll taxes. As such, "conversion centre' is often shortened to convert, the Ukrainian word for "envelope", the medium for such payments. The total annual volume of the market in such "conversion" is around $7bn, according to an analysis by Ukraine's security service SBU that was leaked to the press in 2010.

According to Vladimir Lysenko, professor at Ukraine's national tax service university, "conversion centres are mostly directly organised by Ukrainian banks." Baltic banks play a key role in such operations by circulating hard currency funds in and out of Ukraine via shell companies. According to Rupeta, a total of $57m in cash was transferred from the Baltic banks and paid out in cash via the scheme over a period of one and a half years. "The operation was completely illegal," points out Rupeta, "since there were no foreign trade contracts to back the hard currency transfers from abroad, as is required by law."

But the money-launderers' contacts in law enforcement ensured a blind eye turned, alleges Rupeta.

Demchak's scheme is not the only one where funds channelled from and to Ukio Bankas feature prominently. According to legal proceedings brought in 2012 in Ukraine, over the space of four months from September to December 2010, another New Zealand shell company, Anglo Stand Ltd, wired a breath-taking €100m and $30m to a small firm in Kharkiv, Ukraine from its bank account at Ukio Bankas. The funds were wired on the bizarre basis of an "agreement on non-refundable financial assistance" - ie. a generous Christmas present from the New Zealand firm to the Ukrainian. The director of the Kharkiv company then cashed the entire sum from its account at small regional bank Akta Bank, ostensibly for purchase of agriculture produce.

While court records only detail this single transaction, the scale of this operation may have been tenfold greater. According to documents leaked to the press by Ukrainian National Bank officials in 2010, the same small regional bank, Akta Bank, had already converted over $1bn of hard currency funds into cash between January and September 2010, making the total for 2010 close to $1.5bn. It is not clear how much of this total was transferred through Ukio Bankas.

According to Ukio Bankas, "As far as we know Ukrainian laws currently don't include 'tax crimes' as a predicate offence [for money-laundering]. Ūkio bankas is neither claimant nor respondent in these cases."

"We assure that Ūkio bankas strictly follows the law (including anti-money laundering laws) of the Republic of Lithuania and EU Directives in its everyday operations. The bank's operations are regularly supervised by the authoritative state institutions. We also cooperate with state law enforcement authorities as required," Ukio Bankas added.

... and round about

There is also visibility on the reverse side of the operation - moving funds back out of Ukraine to the Baltics, and then on into the international financial system. In 2009, the head of Ukraine's security service SBU accused another small Dnipropetrovsk bank, FS Bank, of hosting conversion centres that had moved over $2.5bn out of the country illegally in preceding years, including to Ukio Bankas.

According to the corresponding court case documents, between January 2007 and August 2008 three UK shell companies - Technoline Service, Winsboro and Dreamlux - wired over $1bn from their accounts in FS Bank to accounts at Ukio Bankas, Trast Komercbanka and Kyrgyzstan's Asia Universal Bank - the latter a bank that Kyrgyz authorities nationalised in 2010 due to money-laundering suspicions and balance sheet holes.

The UK companies declared the funds to be the repatriation of investments. The "repatriation of investment", however, came from the sale at face value of what in fact were worthless local securities - a notorious scam for shifting funds from one company to the next. The securities were sold to a cluster of other UK, US and Ukrainian companies all with accounts at FS Bank, where it is to be assumed the wired payments from clients of the conversion centres had accumulated.

What happens to the dirty Ukrainian funds after reaching the Baltics? Luckily in 2010 the Belgian Financial Intelligence Processing Unit (CTIF), Belgium's anti-money-laundering watchdog, flagged up suspicious money flows that had passed through a "Belgium bank" from a "East European" bank. Two respected Belgian media outlets quoted sources in CTIF that the banks in question were Belgium's ING and Lithuania's Ukio Bankas. Ukio Bankas in turn confirmed at the time that it had been queried about the payments.

According to the CTIF report, the "East European bank" had two accounts at the Belgium bank for correspondent banking. "They were used to transfer money from various offshore companies, customers of this bank, to various counter parties across the world." Around €1.4bn was transferred via the correspondent accounts in 2008-2009 to a variety of tax havens across the world, in an operation involving a total of 475 shell companies.

"There was little or no information available on the articles of association or these companies activities... CTIF's analysis showed that several of these companies were known for serious and organised tax fraud, corruption, embezzlement, fraud and organised crime," reads the report.

The money was transferred in such a way using a series of intermediary companies and alternately regrouping and splitting the funds to make it difficult for the bank in Belgium to determine their origin. "The bank made sure they could conceal the nature of the money," concludes the report.

From grey to black

The phenomenon of conversion centres may account for the bulk of the dirty money between Ukraine and Baltic banks on an annual basis. Tax evasion sounds a victimless crime, considering the high tax rates and bureaucracy in Ukraine. But the enormous grey international financial flows generated create a channel perfect for laundering the proceeds of crime and corruption.

Moreover, on a local level the work of conversion centres involves billions of dollars in cash buzzing around Ukraine's pot-holed roads - and none of it recoverable by legal means. This makes their activity the preserve of serious organised crime. And given the improved technologies at the disposal of Ukraine's tax police, none of this would be possible if law enforcement agencies were not paid off or cut in. Thus conversion centres are a key intersection of the state and mafia.

A number of high-profile contract killings are also linked to the work of conversion centres, such as the savage slaying in 2006 of top cop Roman Erokhin, who was tasked with cracking down on conversion centres by former prime minister Yulia Tymoshenko. But such killings may be only the tip of the iceberg of routine violence and intimidation - as is indicated by Anatoly Rupeta's case.

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