Graham Stack in Kyiv -

Ukrainian regulators announced a crackdown on February 25 on illicit outflows of funds, saying these were putting downwards pressure on the currency, fuelling Ukraine's currency meltdown. In particular the regulator targeted one of the oldest tricks in the book – moving hard currency out of the country under the guise of advance payments for import contracts.

With Ukraine's hryvnia down by 50% in 2015 to date, and by 75% since the start of 2014, the NBU's move underscored that one continued channel of pressure on the hryvnia is illicit capital flight: billions of dollars fleeing Ukraine through shadow economy schemes. A swathe of this capital flight takes the guise of advance payments on import contracts on which no delivery is ever made, the NBU said.

“We have to battle against illegal import contracts based on advanced payments," NBU head Valeriya Gontareva said at a press briefing on February 25. The NBU intends to “eliminate the possibility for economic entities to enter into sham contracts and agreements that destabilise the foreign exchange market,” she added. Gontareva said the NBU will now check individually all import contracts requiring advance payment, and any advance payment of over $500,000 will require a letter of credit from a foreign bank which has an international investment rating.

Capital flight

NGO Tax Justice International estimates that Ukraine is the 15th largest source of capital flight source, with $167bn having left the country since it achieved independence in 1992 through to 2013.

Recent journalist investigations into one case of advance payments on import contracts with no subsequent delivery - the classic scheme now targeted by NBU head Gontareva – allegedly led $1.81bn to leave the country during three months in 2014 via the country's leading commercial bank, Privatbank.

The investigations allege that in May-August 2014, $1.81bn was moved out of Ukraine via Privatbank, by firms reportedly linked to the interests of the Privatbank shareholders, Ukraine's leading oligarchs Hennady Boholyubov and Ihor Kolomoisky.

Three separate journalist investigations came to the same conclusions, drawing largely on open sources and thus easily verified.

The Privatbank shareholders own a swathe of major assets throughout Ukraine and internationally, which together with the bank are known as the 'Privat Group’, although no such group formally exists. Privatbank co-owner Kolomoisky is also since March 2014 governor of Dnipropetrovsk region, where Privatbank is headquartered.

On February 19 2015, the NBU gave Privatbank a fresh stabilisation credit of UAH2.28bn, making the bank by far the largest recipient of National Bank support. Privatbank comprises 15% of all the assets in the banking system, with 26% of Ukraine's household deposits making up over 50% of the bank's liabilities, the NBU explained.

Paper trail

Ukrainian law stipulates that where advance payment is made on an import contract without any subsequent delivery, the 'deceived' Ukrainian company has to sue the foreign counterparty in Ukrainian courts for the sum of the advance payment within six months. Given that Ukraine has an online, easily searchable database of litigation, this makes it possible to trace some illicit capital outflows by following the litigation trail.

Scores of apparently pro-forma lawsuits brought against non-resident companies for failure to deliver imports as contracted hit Dnipropetrovsk courts starting in September 2014.

Processing these cases, journalist investigations identified 6 firms from the UK and British Virgin Islands as receiving advance payments in May-August 2014 totaling $1.81bn, with no subsequent delivery of the contracted goods.

42 firms registered in Dnipropetrovsk allegedly made the payments from their accounts at Privatbank, funded by loans from Privatbank collateralised with the goods ordered - mostly oil cargoes.

All the firms are owned via offshore entities, but the journalist investigations linked them via cross-ownership or trading operations to alleged 'Privat group' structures. The six non-resident recipients of the funds also have links to alleged 'Privat group' trading operations, according to the investigations.

The funds allegedly flowed from the accounts of the 42 local firms at Privatbank to accounts at Privatbank's subsidiary in Cyprus owned by the six UK and BVI firms. The court records suggest the advance payments on imports were a fiction used to move the funds out of the country, according to the journalist investigations.

Privatbank denied the allegations of moving funds abroad illicitly. “We have already stated a number of times that the information about moving capital abroad does not correspond to reality and is based on fabricated data,” Privatbank told bne IntelliNews.

The NBU did not reply to bne IntelliNews' questions about the allegations. Asked about the alleged scheme in a previous interview, NBU head Gontareva said that she “did not notice” such a scheme.

The alleged case with Privatbank may be only the tip of the iceberg in terms of illicit capital export. Ukraine's court register contains dozens of similar cases – and there may be many others that have never been brought to court, because the Ukrainian importing structure has simply been wound up after the money has been moved abroad.

Thus, a brief glance at the litigation database for January shows three Dnipropetrovsk firms, with accounts at a small local bank, moving around €30mn to a UK firm with a bank account in Estonia for advance payments on an import contract that never happened. Likewise a West Ukrainian agriculture concern moved around $50mn to a UK company with a Latvian bank account, while a West Ukrainian sugar producer moved $20m to two UK companies.