Graham Stack in Kyiv -
In his first interview since being fired as head of Ukraine's state security service on June 16, Valentyn Nalivaichenko alleged that Ukraine's leading political parties are behind huge flows of secret funds moving to and fro from offshore jurisdictions. He is only the highest ranking among a clutch of disillusioned insiders who claim that black financial flows remain intrinsic to Ukrainian politics.
“Officials on the highest level have not stepped back from business ties, but it not just business, not just accountants, who are using these [offshore] schemes, but also the 'enforcers' [informal parliamentary party whips] who run $500,000 through offshores each week. A simple question – where is this money going to?” Nalivaichenko asked. “The answer: to pay off MPs, government officials, law enforcement.”
“People who for many years have run not the most transparent businesses (..) have taken now power together with their corrupt offshore schemes and set up a cynical system. They take a cut in the sale of [government] posts, and at night send the profits to offshores,” claimed Nalivaichenko, who headed the SBU immediately after the pro-Western February 2014 revolution, after having previously run the service between 2005-2010.
Nalivaichenko also accused financial regulators of turning a blind eye to such schemes. “I have not yet seen a single offshore closed,” he said. It was when the SBU started asking questions about the movement of party-linked slush funds that he was fired, says Nalivaichenko.
Although he named no names, there is little doubt that Nalivaichenko had the pro-presidential Bloc Petro Poroshenko in his sights – the largest parliamentary group, and the party that initiated his sacking.
While Nalivaichenko was speaking of funny money moving to and fro from secret offshore accounts, other disillusioned insiders are talking about the onshore corollary: briefcases of black cash being circulated among political players. According to a number of observers, the entrance tickets to parliament for many of the 450 MPs elected in October 2014 were briefcases of dollars, handed to their respective parties in return for a place on the party electoral list.
Czech investor Tomas Fiala, founder of Kyiv largest brokerage Dragon Capital and head of the European Business Association told media that while the pro-Western parties all have some competent professionals in their ranks to write laws and face the TV cameras, the bulk of backbenchers paid to be there, and did so for business reasons. “They [pro-Western parties] were selling seats on the party lists (...) they filled up the back of the list for $3mn-$10mn contributions [per seat] to finance the campaign,” Fiala told Kyiv Post in a recent interview. “Having these people with very questionable reputations, who were very much tied to the old Ukraine, being re-elected is now haunting them and hurting their political capital,” he added.
The circulation of black cash in parliament and government may also be indispensable to the system's functioning, as Ukraine's former health minister Oleksandr Kvitashvili, one of the so-called Georgian reformers, confirmed after his resignation in July.
According to Kvitashvili, government ministries such as the health ministry pay staff off-the-books dollar cash to boost their tiny official salaries. “I don't know where this money came from,” he told lb.ua in an interview. When he tried to break with the practice, employees fled the ministry, paralysing its work and prompting Bloc Petro Poroshenko, the party that had appointed him, to fire him six months later for “losing control of his ministry”.
Black cash in brief cases is the onshore collorary of secret funds held by offshore companies – and a banking black market specialises in converting one to the other – so that, for example, a briefcase of dollars handed to a party enforcer by a prospective MP gets paid through to a hidden offshore account, and then is later drawn down again as cash - all of this off the radar screen of regulators.
Black cash swamp
This black market payment system is a longstanding fixture at the very heart of Ukraine's politics. Investigators discovered that during the presidency of Viktor Yushchenko between 2005-2010, payments from Yushchenko's presidential secretariat, for instance for lease of a private jet and of a Swiss chalet - were made via such a black market platform, in the form of a New Zealand shell company with a Latvian bank account.
There are no signs that this has changed, despite the hopes of the February 2014 revolution. Thus bne IntelliNews has seen evidence of how in August 2014, freshly appointed first deputy prosecutor general Mykola Gerasymiuk paid his daughter's university tuition fees at UK's Durham University via what appears to be such a black market transaction platform - the fees were paid by UK shell company Smartus Business, via a bank account at Ukraine-owned Latvian bank. Ironically, the tuition fees paid via the platform were for a Masters in 'Islamic Finance'.
Gerasymiuk, who is believed to have left the country since losing his job in February 2015, could not be reached for comment.
A police source familiar with the Smartus accounts identified it as a black market platform: since the firm's incorporation in late 2012, thousands of transactions have passed through the accounts totalling tens of millions of dollars: mostly transfers to and from other offshore shell companies, documented for instance as interest-free loans. “If the nation's top law enforcers are private clients of the black market system, it may not be likely to break soon,” says the source.
Given that such black market schemes are often operated via Baltic banks, it is not surprising for the Rada and government to have a direct proximity to such services. As bne IntelliNews reported, previously a key Latvian agent for Baltic banks had its main Kyiv office in the neighbouring yard to parliament and goverment buildings.
Today Baltic banks are directly represented within the Rada walls. Thus banker Ivan Fursin, owner of a 33% stake in one of Latvia's leading offshore banks, Trasta Komercbanka - through which journalists allege the Russian mob laundered $20bn – is chairman of Ukraine's anti-money laundering and financial monitoring parliamentary committee.
Another banker with strong historic Baltic links, Ruslan Demchak, about whom bne IntelliNews wrote in 2013, is deputy head of the parliamentary bank committee.
Both men emphasise that as MPs they are no longer involved in running any businesses, and have always rejected any links to money laundering.
One way to drain the ruinous black cash swamp at the heart of the Ukrainian state may be state funding of political parties, says journalist-turned-MP Serhiy Leshchenko, who is also one of a cross-party group of MPs developing legislation to this effect. “This would at least eliminate the problem of political parties opening the doors of parliament to the worst people to have there,” he told bne IntelliNews. “At best it could transform our political culture, and separate it from the shadow economy.”
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