Graham Stack in Zhitomir, Ukraine -
Latvia has officially confirmed that it opened a criminal investigation into Highway Investment Processing, a UK shell company that controversially sold a $400m drilling rig to Ukraine's energy giant Naftogaz Ukrainy in 2011 after purchasing it for only $248.5m from Norway's Seadrill.
The criminal case could cause a major headache for Naftogaz and officials linked to the deal, just as the national gas company enters into a potentially crucial year with mounting pressure from Russia and a tightening domestic budget situation. And bne enquiries point to things being even worse than they first appear.
In 2011, Highway Investment sold an offshore drilling platform to Ukraine's largest company, state-owned energy giant Naftogaz, for $400m, having purchased it for $248.5m from Norway's offshore driller Seadrill. The huge mark-up prompted widespread allegations of corruption domestically and internationally, but Latvia is the only country until now to have launched a criminal investigation, prompted by Highway Investment having a bank account at Latvia's Trasta Komercbanka.
bne in June quoted sources in Latvia's economic crime department that an investigation into Highway Investment had been opened. Now there is official confirmation: according to Latvia's police spokesman on December 12, "in connection with the purchase by Ukrainian company (Naftogaz subsidiary) Chornomornaftogaz of a jack-up drilling platform on March 1, 2011, on May 16 2012 the economic crime section of the main directory of criminal police of Latvia's state police initiated criminal investigation N11816009312 into the legalisation of funds obtained by criminal means."
Back in March 2011, the Highway Investment deal kicked off a Naftogaz spending splurge ostensibly aimed at increasing Ukraine's energy security by tapping reserves on the Black Sea shelf - but which may have achieved exactly the opposite: by saddling the strategically crucial, but financially challenged company with huge debts and mounting due-diligence questions.
The conclusions of the Latvian investigation as to the rights and wrongs of the initial March 2011 tender will thus bear on appraisal of all the company's subsequent procurement for the Black Sea drilling campaign - now at over $2bn and rising. Ironically, for a project that aims to secure energy independence from Russian gas supplies, the only international funding to date has come from Russia: in November, Russian state-owned bank Sberbank announced it had opened a $58m revolving credit line for Chornomornaftogaz.
While expecting the worst, Latvian investigators may still be surprised by what they find on the Highway Investment books. According to bne enquiries, Highway Investment was not just a special purpose vehicle for the Naftogaz and Seadrill deals, but was already operating as a full-blown money-laundering platform at the time of the March 2011 tender.
Further, bne can reveal that the Latvian investigation is not the only criminal investigation with a bearing on Highway Investment. Ukraine has launched a crackdown on the activity of "conversion centres" - money-laundering operations that "convert" booked company funds into "black cash" via fictive contracts with fictive companies - and in doing so it has unwittingly spilt the beans on some of the forces behind Highway Investment.
Highway Investment was set up in December 2008, with a certain Pavel Dvulichanskii as its director (holding power of attorney) and a bank account at Latvia's Trasta Kommercbanka, a bank that has been linked to Ukraine's former energy minister Yury Boiko.
Despite the company looking like a special purpose vehicle set up for the Naftogaz tender, bne was able to track down one payment made to Highway Investment completely outside of the Naftogaz-Seadrill deal: a small Zhitomir printing company Skerzo paid Highway Investment €270,000 for a second-hand offset press in November 2010. Skerzo subsequently took Highway Investment to court in 2011 when Highway failed to deliver the printer despite the money having moved abroad - violating Ukraine's foreign currency regulation laws.
Skerzo is owned by Oleg Karpeka, CEO of Zhitomir Cardboard Plant (ZKK). Karpeka co-owns ZKK with Lugansk mining magnate Igor Lisky. A bne reporter, posing under cover as a British businessman, spoke to Dmitry Karpeka, brother of Oleg, about the payments made to Highway Investment.
To suspicious minds, the failed ZKK transaction looks like a typical fictive contract designed to move money abroad. But according to Dmitry Karpeka, the company really did order a printing press from a German company. Highway Investment, he explains, was used as a payment vehicle for the printer "to avoid the excessive Ukrainian paperwork and taxes". When the Germany company failed to deliver the goods, the money was returned to Highway Investment minus 20%, which the German company retained for having processed the order. According to Karpeka, the subsequent court case with Highway Investment in Zhitomir was a mere formality required by Ukraine's foreign currency regulations - accounting for the fact that Highway Investment was represented at the Zhitomir court by ZKK's own chief engineer, Oleksandr Ergidzei, as shown in the document below.
Karpeka said that the Highway Investment director Pavel Dvulichanskii was a businessman from Lugansk, and when shown a photo from the Facebook page of a businessman of that name from Lugansk, he positively identified him. Karpeka said that Dvulichanskii was a connection of Lisky's and that the Highway Investment payment arrangement was Lisky's idea.
Lisky, however, told bne that this was not the case. "The transaction with Highway Investment was made by the printing company Skerzo, which is wholly owned by Oleg Karpeko, and to which I have no relationship at all," he told bne. Lisky said, however, it seemed to him that Highway Investment had indeed been a "platform for black market transactions." Lisky denied knowing anything about Dvulichanksii.
But bne established that the Zhitomir cardboard plant (ZKK) had other relations with Dvulichanskii besides the non-resident company Highway Investment. Dvulichanskii - an unusual name which literally means "Janus-faced" - is not only the director of the UK company Highway Investment, but of another of ZKK's counterparties, this time a Ukrainian one.
According to a case brought against the company by the tax police in 2012, ZKK purported to have purchased paper waste and chemicals in 2010-11 from a Lugansk private company Oriens PP, of which Dvulichanskii has been director since 2010. According to the tax police, these contracts with Oriens were fictive and solely for the purpose of tax evasion through reducing profits.
The tax service alleged in court that Dvulichanskii's company Oriens is "a member of a single financial-industrial group that was created for the provision of tax minimisation services, for the conversion of funds (into cash), and for the creation of VAT credits to reduce VAT payments." According to the tax police, Oriens is a fictive company with no staff, office or storage premises, and is one of tens of Lugansk fictive companies used in the conversion centre. Court records show that ZKK made payments to other companies alleged to be involved in the conversion centre as well. The tax service ordered ZKK to pay over $1m in back taxes. ZKK is contesting the claim in court.
Lisky told bne that the tax charges resulted from his support for the opposition party 'Front Zmin'. However, according to the tax police, the conversion centre's customers comprise scores of industrial companies concentrated in East Ukraine, including for instance mines owned by the Sadovaya Group, listed on the Warsaw Stock Exchange. Court records show alone Dvulichanskii's Oriens to be accused of fictive transactions with over ten other plants besides ZKK.
The fact that tax police name a Ukrainian company headed by Dvulichanskii, and receiving payments from ZKK, as part of a conversion centre points to Highway Investment also being part of the conversion centre - and likely receiving payments from other clients of the conversion centre besides ZKK.
The Interfax Spark database shows that Dvulichanskii has had ownership stakes in two other companies - Ukrmagistral-2008 and Ukroptmagistralnik. Both companies are registered at the same Lugansk address and telephone number as Oriens.
Dvulichanskii himself denied any knowledge of the Ukrainian or UK companies to bne. His day job is as a broker of fencing and weightlifting equipment for Lugansk producer Dynamoblade. However the phone number provided for the Lugansk "fictive" companies in the state register matches the mobile number provided for Dvulichanskii's work at Dynamoblade, indicating he may indeed be an employee of the conversion centre rather than a so-called "strawman" - those who stand in front of shell companies, masking the true owners. Ukraine's tax service is prosecuting the directors of other companies it claims were part of the same conversion centre, but it is unclear whether there are proceedings against Dvulichanskii himself.
Akta Bank and the Baltics
Interestingly, all the three Lugansk companies where Dvulichanskii has figured as director and/or owner, including Oriens, have had bank accounts at the same tiny Dnepropetrovsk-based bank, Akta Bank, according to court cases and bankruptcy announcements. This suggests Akta Bank's links to Dvulichanskii and to the conversion centre uncovered by the tax police - as well as potentially to the UK company Highway Investment.
The Akta Bank connection to Highway dovetails with evidence pointing to Akta Bank's interaction with other non-resident companies with bank accounts at Baltic banks.
Akta Bank was established only in 2008 by Dnepropetrovsk businessman Vadim Ermolaev, owner of Alef Corporation, which has interests in real estate, agriculture and alcohol. Within a year of it being founded, then head of Ukraine's security service SBU Valentin Navailachenko named the bank with five others as being involved in large-scale money-laundering in the form of conversion services. According to the findings of a National Bank of Ukraine (NBU) inspection of the bank in 2009, as leaked to weekly Zerkalo Nedeli in 2010, the bank had been selling around $10m and €5m in cash on a daily basis to the same four "individuals".
Akta Bank both now and in the past has denied any connection to the activities of conversion centres and money-laundering, and says all such reports are the result of paid smear campaigns launched by competitors.
In 2010, there were further revelations about Akta Bank. When in September 2010 the hryvnia suddenly slipped against the dollar, the NBU publicly said this was due to a spike in purchases of hard currency "by the population". But NBU officials leaked documents to weekly Zerkalo Nedeli in late September 2010, apparently showing that Akta Bank - which had at the time only ten branches - had apparently sold a staggering $1.2bn of hard currency to the population for hryvnia in the first nine months of the year - which would make it astonishingly the second largest seller of hard currency to the population, after the country's largest bank, Privatbank, despite being only 60th largest in terms of assets.
If the Zerkalo Nedeli figures were true, where could Akta Bank have sourced the hard currency funds? Ukrainian court records suggest Akta Bank is linked to massive money flows from Baltic banks. From August to December 2010, according to court records, a New Zealand company Anglo Stand Ltd transferred €100m and $30m to a Ukrainian brassplate company in Kharkiv region, as "non-refundable financial assistance". The New Zealand company transferred the funds from its account at Lithuania's Ukio Bank, to the Ukrainian company, Global Distribution AG's account at Akta Bank. According to the court records, the Akta Bank branch in Kyiv then paid out the entire €100m and $30m in cash to the director of Global Distribution over a period of four months, ostensibly to purchase agricultural produce. The tax police investigators identified this as a money-laundering operation.
Given that the NBU documents obtained by Zerkalo Nedeli show Akta Bank selling $1.2bn in hard currency for cash January-September 2010, the Anglo Stand Ltd. transfer may have been only one of over ten such transfers in the course of 2010.
Akta Bank's press officer said it was too early to comment on the ongoing Global Distribution court case and too late to comment on the 2010 Zerkalo Nedeli report.
The Baltic connection is used by major operators of conversion centres to hide from law-enforcement the link between the clients' wired funds to the conversion centre and the off-the-books cash that clients receive in return, minus commissions.
Friends in high places
Akta Bank's owner, Vadim Ermolaev, is the business partner of a powerful Ukrainian political clan with links to the Naftogaz deals, which may account for Highway Investment being used as the vehicle for the controversial Naftogaz tender.
The clan was headed by Vassily Dzharti, a confidante of President Viktor Yanukovych and long-serving Party of Regions natural resources minister and governor of the Crimea - home of Chornomoreneftagaz - from 2010. Dzharti died suddenly in August 2011. Dzharti's protege Eduard Stavitskii at the time held the post of natural resources minister - until being made energy minister with oversight of Naftogaz in December 2012.
In late 2010, early 2011, at the same time as the Naftogaz-Highway-Seadrill deal was in the making, Ermolaev was in talks in Kyiv with the Dzharti group over the privatisation of the assets of Nikopol Pipe Plant, a key supplier of non-rusting pipes for the nuclear power and aerospace sector, which had defaulted on a loan agreement with Akta Bank. In February 2011 - the same month as the Naftogaz tender - the Kyiv commercial court where Dzharti's daugher Viktoria is deputy chairman acknowledged Ermolaev's claim to the pipe plant assets and ordered their transfer to Ermolaev's structure Oskar, with Viktoria Dzharti's husband, Valery Omelchenko, taking a 25% stake in the company via his Austrian vehicle Wellmind Investment, as detailed by a Forbes Ukraine investigation.
According to Esa Ikaheimonen, the former CFO of Norwegian offshore driller Seadrill, the company which sold the drilling platform to Highway Investment in April 2011, the deal could proceed very quickly - with talks starting in December 2010 and the deal announced April 2011 - where the purchasing company could show it had the necessary funds at the ready. This , together with the fact that the initial funds on the Highway Investment accounts may have been effectively untraceable since they originate from a multitude of transactions similar to the ZKK transaction, may account for using the company as a vehicle for the deal.
The investigation points to Highway Investment being a sibling of other notorious platform companies run by Baltic banks and Ukrainian counterparties, such as Tormex Limited, which a US court named as a laundering-money outfit for Mexico's Sinaloa cartel. This makes Highway an unusual choice of business partner not only for Naftogaz, but especially for a $19bn US-listed company like Seadrill.
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