Minor court case sheds light on major Ukrainian corruption scandal

By bne IntelliNews May 4, 2012

Graham Stack in Kyiv -

In 2011, the UK shell company Highway Investment Processing became a household name for corruption in Ukraine when it sold an offshore drilling rig to a state oil company for nearly double the original purchase price, apparently pocketing over $100m in the process. But after scouring Ukrainian court and foreign-trade documents, bne can reveal this was not the first suspicious deal Highway was involved in: four months before the $400m oil rig tender, Highway contracted to sell a second-hand printing press to a provincial Ukrainian eggbox producer for $270,000 - but failed to deliver.

The minor transaction points to Highway operating as a money carousel, run by Latvian banks to rotate clients' money in and out of Ukraine. It puts another question mark over the massive procurement deals carried out by Ukrainian state-owned Black Sea oil and gas driller Chornomornaftogaz in 2011, which totalled $950m for two rigs and support ships. Far from being legitimate special purpose vehicles for asset sales, the UK shell companies like Highway winning these tenders seem from the start to have been vehicles for offshore money processing.

So while speculation swirls around who were the beneficiaries of Highway, the answer may be simple: no one. The pattern of transactions points to it operating as part of a money-transiting "carousel" - used to rotate payments through a chain of companies out of Ukraine and then back in again, with the operators taking commissions from the funds thus processed.

This contrasts strongly with the Ukrainian government's version of events. According to the Borat-style blurb on Highway's website, hastily uploaded in the run-up to the Chornomornaftogaz tender in March 2011, the company "is a large, international and one of the best balanced turnkey contractors in the oil & gas industry." Under this guise, the company was accepted as bona fide contender to supply a drilling rig to Chornomornaftogaz - and did so for $400m, with the rig currently en route from Singapore to Ukraine's Black Sea shelf.

But Ukrainian Economy Ministry orders and court records scoured by bne detail another Highway deal only three months previous to that tender: the UK company contracted to sell a used Man Roland printing press to the Zhitomir printing company Skertso in November 2010, for a down-payment of €270,000. Skertso is a subsidiary of eggbox producers Zhitomir Cardboard Factory.

However, while Highway can buy rigs and move them from one ocean to the next, the company signally failed to supply the Zhitomir printers with its second-hand press - and got taken to court by Skertso over the matter in May 2011.

Courtroom drama

Journalist investigations into the tenders by Chornomornaftogaz had the Ukrainian government on the defensive by May 2011, forcing officials on TV to give unlikely and contradictory versions of why they had purchased a rig with a market price apparently of around $220m for $400m. The obvious question on everyone's lips - who was behind Highway?

Yet at the same time, in May 2011, in a tiny stuffy Zhitomir courtroom a Highway legal representative appeared in open session and acknowledged the plaintiff's claim against his company. The Zhitomir court then ordered Highway on August 1, 2011 to return the payment to Skertso.

An Economy Ministry order relating to the Skertso transaction (no. 662, 11.8.2011) names as director of Highway a certain Pavlo Dvulichanskii, although no such name features in the British company documents. bne found out there is a Lugansk businessman of that name, who confirmed to bne that he is a business associate of Igor Liski, co-owner of Zhitomir Cardboard Factory, of which Skertso printers is a subsidiary.

Dvulichanksii, however, denied any knowledge of the British company. Skertso director Sergei Stanevich told bne that all documents relating to the case were in possession of Zhitomir Cardboard Factory CEO Oleg Karpaka. Neither Karpaka nor Igor Liski responded to attempts to contact them.

Magic money roundabout

The answer to the riddle is likely that Highway - far from being specially created as a vehicle for the rig tenders - was in 2009-10 already part of a "money carousel", operating through Latvian banks to rotate money in and out of Ukraine for clients. The Zhitomir transaction may have been the only one of hundreds rotated through the UK company to hit a snag, and thus leave behind a public paper trail.

According to the training manual of Ukraine's financial monitoring watchdog Derzfinmonitoring, as seen by bne, advance payments made on import contracts that never come to fruition are a standard trick in any such money carousel. The Derzhfinmonitoring manual also specifies that such carousels are mostly run through Latvian banks. According to the Economy Ministry order, Highway banks with Latvia's Trasta Kommercbanka.

Organised Crime and Corruption Reporting Project recently detailed a carousel operating in Ukraine run through a different bank. The scheme involved hundreds of payments made on foreign trade contracts by Ukrainian and Moldovan companies to UK or New Zealand companies with Latvian bank accounts. As a rule, each individual transaction involved down-payments of hundreds of thousands of dollars, after which the foreign trade contract was subsequently voided, and the down-payment returned to the Ukrainian or Moldovan originator - but by a different offshore company in the carousel, thus completing the rotation.

Highway's "sister company" Verylux Company, seems also to have been part of a carousel. Verylux Company is registered at the same UK address as Highway with the same nominee directors and shareholders. In March 2011, Verylux Company supplied $150m worth of support ships to Chornmornaftogaz to accompany the rig sold by Highway.

But analogous to Highway, Verylux is also listed in a Ukraine Economy Ministry order (no. 1091, 1.9.2010) in connection with a foreign-currency transaction in 2010. The order specifies that Verylux Company provided letters of guarantee backing foreign-currency payments owed by a non-resident company to a Lvov-based bus producer LAZ. Like the Zhitomir printers Skertso, the Lvov bus producer was sanctioned by the Economy Ministry for failing to repatriate foreign currency. Thus it seems that the two companies winning the notorious Chornomornaftogaz tenders of March 2011 were both already operating in Ukraine as part of money carousels for Latvian banks.


As a result of the lawsuit with the Zhitomir company, Ukraine's Economy Ministry automatically banned Highway from operations in Ukraine starting August 23, 2011 - thus ruling the UK shell company out of the bidding for a second Chornomornaftogaz drilling rig tender that was officially announced August 30, with deadline for bids acceptance September 21.

Highway was duly disqualified from the second tender, which was won by a Latvian ship repair yard. Apparently covering up for the cock-up, the Chornomornaftogaz tender commission provided a quite different reason for the company's disqualification than the Economy Ministry sanctions: that Highway, winner of the first rig tender March 2011, had for the second tender inexplicably offered a rig built in 2007, instead of 2011-12 as demanded by the tender conditions, and one that in addition had been damaged by fire.

A similar, if rather smaller cover-up on account of the Skertso transaction took place in UK: Highway Investment Processing filed its accounts for 2010 in February 2012- showing total income of £60,128 - despite the Ukrainian documents for the Skertso transaction detailing payments to the company of at least €270,000 in 2010.

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