The (Court) Battle Of Trafalgar: Ukrainian Oligarchs Face Off Abroad

The British press called this court case one of the most expensive in the history of English law. Two billion dollars. That is the amount that Ukrainian businessman Viktor Pinchuk demanded from two other Ukrainian oligarchs – Ihor Kolomoyskyi, and Henadiy Boholyubov – at the London High Court in 2013.

The case could have been a scandal, but in January 2016, Pinchuk, Kolomoyskyi and Boholyubov concluded an agreement among themselves out of court. In doing so, they ended the lawsuit without revealing the conditions of their agreement.

With the help of documents from the recently revealed Paradise Papers, the Organized Crime and Reporting Project (OCCRP) has uncovered the secret conditions of their agreement.

READ MORE: Paradise Papers Reveal Poroshenko’s Attempt to Avoid Ukrainian Taxes

According to Pinchuk, he gave money to Kolomoyskyi and Boholyubov in the mid-2000s in an attempt to purchase one of the biggest iron ore mining enterprises in Ukraine. But the plaintiff argued he never received the companies or his money back. In 2013, Pinchuk estimated his lost profits since at two billion dollars.

Following the accusations, the media waited in anticipation for details of the litigation. The case had the potential to be no less scandalous than the dispute between Russian oligarchs Boris Berezovsky and Roman Abramovich. When settling their affairs in a London court, the two revealed many spectacular secrets about how state property was divided among oligarchs during privatization in Russia in the 1990s. Had they gone to court, the Ukrainian oligarchs could have revealed similar details about the privatization of Ukraine’s state assets.

The Kryvyi Rih Iron Ore Plant

Amid the steppes of central Ukraine lies the city of Kryvyi Rih, home to the largest deposit of iron ore in the country. An industrial giant that stretches for 120 kilometers, it’s more a cluster of workers’ villages united by a single city strip than an actual city. Each village grew up around its own enterprise: a plant, a mine, or a quarry. The iron ore deposit turns the dust on the roads and the water in puddles red.

Kryvyi Rih – an industrial giant. It is home to the largest amount of Ukraine’s iron ore deposits, which often turn dust on the road and the water in the puddles red. Photo credit: Hromadske

In the 2000s, Ukrainian oligarchs began dividing up the largest enterprises in Kryviy Rih – the wreckage of the Soviet industrial empire. Since then, these oligarchs have been firmly entrenched in the global rankings of the rich. Meanwhile, in the working-class outskirts of Kryviy Rih, people live as poorly as before.

Oleksandr Potapenko, a miner from the Kryviy Rih Iron Ore Plant (KZRK), meets us in the center of the city. After finishing classes for his professional program, he drives us to his home on the edge of the city. On the way, Oleksandr complains about the owners of the company:

“Are we satisfied with our salaries? Of course not. The godfather of my child went to work in a Polish mine. His working conditions are much better than ours. And he gets $1,600 to $2,000 a month. And us? Even with all their salary increases, we get $400-$500 a month at best. And working here is much more dangerous than there.”

Kryvyi Rih – an industrial giant. It is home to the largest amount of Ukraine’s iron ore deposits, which often turn dust on the road and the water in the puddles red. Photo credit: Hromadske

The Kryviy Rih Iron Ore Plant (KZRK) where Oleksandr works is also the subject of the legal dispute in London. It is made up of four mines and almost 600 million tons of iron ore deposits, which are extracted from underground. Working in difficult conditions, the miners at the plant extract five million tons of iron ore each year from a depth of more than 1.5 kilometers. The raw material is then, for the most part, sold for export to Poland, Czechia, Romania, and China.

In 2004, the plant was transferred from state property to private ownership. Leonid Kuchma, then the President of Ukraine, signed a law passed by parliament on the sale of the state holding Ukrrudprom. In doing so, they sold off the most powerful enterprises in the Ukrainian mining and smelting industry for a symbolic sum.

The enterprises fell into the hands of Ukrainian financial-industrial groups. Their leaders, known for their involvement not just in business but also in politics, courts and the media, came to be called oligarchs.

KZRK was one of the businesses sold by Ukrrudprom. At that time, President Kuchma’s son-in-law, Viktor Pinchuk, quickly turned out profitable business assets, which eventually gave him billionaire status. Today, these assets give him the opportunity to clear his reputation through considerable sums spent in the West on art, cultural projects and the support of charitable foundations belonging to prominent politicians, such as Tony Blair and the Clinton family.

Kryvyi Rih Iron Ore Combine – four mines and almost 600 million tonnes of iron ore. Photo credit: Hromadske

But in 2005, when President Kuchma stepped down following Ukraine’s so-called Orange Revolution, Pinchuk’s influence diminished significantly. According to him, the oligarchs had an oral agreement on the privatization conditions — they were supposed to acquire the combine in Pinchuk’s interest. Among several individuals who served as witnesses to the sale in the London court case was Ukrainian oligarch Rinat Akhmetov, who later bought a stake in KZRK.

Kolomoyski and and Boholyubov have both denied Pinchuk’s version of the story. After privatization, KZRK remained in their hands. But the two spend very little time in Ukraine. Kolomoyskyi lives in Geneva, while Boholyubov and Pinchuk live in London.

Investigating Privatization

Three years ago, after the Euromaidan Revolution, a special committee was established in the Ukrainian parliament to verify the results of the scandalous privatization of state-owned enterprises in the 2000s. The Commission came to obvious but sad conclusions: that Ukrainian oligarchs had acquired large state-owned mining companies for almost nothing.

“If you look at the real value of...Ukrrudprom’s assets, it was about $20 billion in 2005. And they bought the entire holding, artificially restricting competition, for only $400 million,” says Pavlo Pizanenko, a Ukrainian parliamentarian and one of the leaders of the special commission that verified privatization. “One of these enterprises, Kryviy Rih Iron Ore Plant, was purchased from the state by the structures of Mr. Kolomoyskyi for $40 million, although its real value was over $1 billion.”

Now, Ukrainian prosecutors are checking whether these enterprises, including KZRK, were privatized legally. But they lack key witnesses.

Mikhailo Chechetov and Valentina Semeyuk could have been key witnesses for the prosecutors. In 2004, Chechetov headed the State Property Fund of Ukraine, a special government structure that sold state-owned enterprises. At this time, Semenyuk was the head of the Parliamentary Commission on Privatization, which verified the results of the State Property Fund’s work. But neither Chechetov nor Semenyuk are able to provide an explanation any longer.

Three years ago, Valentina Semenyuk was found dead in her home. She appeared to have shot herself in the head with a gun, although even the police doubted her suicide. In fact, investigative journalism from Slivdstvo.Info has demonstrated that the circumstances and evidence indicate that it was murder. In 2015, seven months after the death of Valentina Semenyuk, Mykhailo Chechetov also died. According to law enforcement officers, he threw himself out of the window of a multistory building. Law enforcement never provided any direct proof that would link these deaths to the privatization of KZRK or any other enterprise.

Now, only the oligarchs remain to serve as witnesses to this turbulent era of the redistribution of state assets.

The Settlement

Stopping his car on the outskirts of Kryviy Rih, miner Oleskandr Potapenko invites us to a place intended only for friends: the garage. Ukrainian men are used to sitting in garages, talking, drinking, discussing politics, bosses and women. On the walls of the garage are pictures from the war.

Oleksandr Potapenko, a miner at the Kryvyi Rih Iron Ore Combine (KZRK), complains about the owners of the company. Photo credit: Hromadske

Oleksandr recently returned from Donbas, where the Ukrainian army is fighting Russians and local separatists. He fought there in one of the Ukrainian volunteer battalions and participated in terrible battles near Ilovaisk and Debaltseve. Returning to their company from the front, Oleksandr and other miners tried to organize a strike:

“After the war, I just got tired of being afraid. We had wanted to go on strike for a long time, with demands for raising salaries, improving labor protection and providing us with quality materials for work. Initially, the leadership wanted to meet with us and raised salaries by 20%. But after two months, salaries became the same as before. They say – that’s all, there’s no money, the ore isn’t selling. But how is it not selling? We see that the warehouses are empty, all the ore is sold out. So, you decide, does it make sense to work here? Our mining foreman makes eight thousand hryvnia a month. The same salary as in a mobile phone store. So, where’s the best place to work? Where you’re in a white shirt and in the fresh air or, for the same money, underground, in the dirt, and still bearing responsibility for every person.”

For Ihor Kolomoyskyi and Henadiy Boholyubov – the current co-owners of KZRK – this enterprise is a very valuable asset. It’s no surprise that they refused to give it to Viktor Pinchuk. Last year the plant brought its owners a profit of 1.1 billion hryvnias from the sale of iron ore (over $40 million), according to the joint-stock company’s annual report.And this is just the official figures. The real profit could be much larger.

In addition to saving on labor remunerations, it’s possible that the enterprise could be under-reporting on its financial returns. Last year’s shareholders’ report said that the plant, which exported the bulk of its products, sold iron ore at 840 hryvnias ($32) per ton. However, the average world price for tons of ore in 2016 was almost twice as high: $56.80 per ton. Therefore, the enterprise could generate significant additional income in the shadows. The owners of KZRK could be earning much more than the declared $40 million from the plant annually.

To keep such an attractive enterprise for themselves, Kolomoyskyi and Boholyubov must have paid dearly. While it is still unclear as to whether or not Pinchuk received the desired two billion dollars in return for KZRK, it appears he was sufficiently compensated.

To keep such an attractive enterprise for themselves, Ihor Kolomoisky and Gennadiy Bogolyubov had to hand over something  something truly valuable to Viktor Pinchuk. From left to right: former Israeli president Shimon Peres, Gennadiy Bogolyubov and Ihor Kolomoyskyi at the "Golden Rose" synagogue, Dnipropetrovsk, 2010. Photo credit: Sergei Isaev/UNIAN

According to the documents the OCCRP received within the framework of the international project known as the Paradise Papers, at the beginning of 2016 Pinchuk’s lawyers – from the famous London firm Hogan Lovells – appealed to an administrator from the offshore legal service provider, Appleby.

“Dear Simon!” wrote Philip Beswick, senior legal assistant at Hogan Levells, to Appleby employee Simon Cain. “We represent the interests of Viktor Pinchuk, who is currently suing Mr. Kolomoyskyi and Mr. Boholyubov. The terms of the agreement are ready. According to them, Mr. Kolomoyskyi and Mr. Boholyubov will make a series of payments to Mr. Pinchuk over the next few years. These future financial commitments must be made through a series of bank accounts, which, as we understand, will be registered on the Isle of Man. This should be done through a series of Cypriot companies and through Mr. Boholyubov personally. Most importantly, British law provided for the opening of these accounts. We were told about this late last night, we have to hurry!”

Hogan Lovells’ lawyers had good reason for hurrying Appleby’s employees. The letter was dated January 20, 2016 and the London High Court was supposed to start the trial hearings for the case five days later. Obviously, both parties didn’t want hundreds of outsiders (primarily journalists) to become witnesses to the resolution of their dispute. As such, they sought to arrange a peaceful agreement as soon as possible.

A reply came from the Appleby office two hours later, stating that the opening of the accounts on the Isle of Man was possible and wouldn’t require much effort and document processing. Employees from the offshore legal service provider also asked Pinchuk’s lawyers which bank he planned to transfer the money through. They replied that they were talking about Barclay’s, but it could be another bank.

At the start of 2016, Victor Pinchuk’s lawyers from the London law firm Hogan Lovells appealed to the administrator of the offshore company Appleby (photo – Hogan Lovells’ offices) Photo credit: Hromadske

As a result, the money for the Ukrainian company, which the Ukrainian oligarchs shared among themselves, didn’t even have to enter Ukraine. Moreover, it didn’t even have to enter England because all payments were planned through offshore bank accounts registered in tax havens, in particular on the Isle of Man. How much did they plan to spend via these accounts? The further development of the situation shows hundreds of millions of dollars.

Two days later, Philip Beswick received another letter from Appleby, advancing their cooperation.

“Dear Philip, We have to officially resolve this issue, so I asked my secretary Lisa to send you a letter with a statement. I have indicated that your firm will be our client, so our expenses will range from £3,000 to £4,000 plus tax and other payments. Sincerely, Simon Cain.”

Cain also told Pinchuk’s British lawyers that it would be easier for Appleby to register an offshore structure under Hogan Lovells. This would save time by avoiding the need to run a check on Pinchuk. “It can take a lot of effort and can be very difficult because we do not know him,” Cain wrote. Representatives of the Ukrainian oligarch were satisfied with the decision.

But on February 2, 2016, ten days after the announcement of the Pinchuk, Kolomoyskyi and Boholyubov settlement, Appleby received another letter from Hogan Lovells’ lawyers:

“Dear Simon, It looks as though we will soon have an additional part of the corporate work regarding this issue and we will be very grateful for your help. As part of the settlement we are cooperating on, the other side agreed to hand over two prestigious high-value commercial buildings in London to Mr. Pinchuk.”

Pinchuk’s lawyers then announced that the buildings were already registered under two offshore companies from the Isle of Man and that they must be re-registered under the new owner. To acquire ownership of the building, they must create a trust on the island of Jersey, which will be owned by companies from the Isle of Man.

“We are well aware of how easy it is to own real estate through anonymous companies in the UK. These are the so-called shadow companies that may hide the name of the real beneficiary,” explains Naomi Hirst, an expert from the anti-corruption organization Global Witness. “And on the Isle of Man and in Jersey, from the state ownership registries, it is not possible to find out who are the shareholders or the beneficiaries located there. So the general tendency is that people who want to hide the origins of their suspicious money register anonymous companies in secret jurisdictions. This can be in countries of the British Commonwealth – Isle of Man or Jersey, Virgin Islands or Belize. They create an anonymous company, invest money into it and bingo! Money is hidden and you cannot track it. At the same time, in Britain, it is legal to buy property through ‘anonymous’ companies. The tempting thing here is that you can invest a large sum of money at once.”Naomi Hirst, expert from an organisation, which uncovers corruption, explains why such a complex offshore was created. Photo credit: Hromadske

According to Hromadske’s data, the first building that Kolomoyskyi and his partner used to pay Pinchuk is an office center on 27 Knightsbridge Street in one of central parts of London— the prestigious district of Belgravia. It’s officially registered under British Bay (Knightsbrige) Ltd. and controlled by a trust from Jersey Island. Hyde Park is across the street and further down the road is Buckingham Palace. The building itself has an area of 64 thousand square feet. Its value at the end of 2015 was estimated at 75,650,000 pounds (more than $99.2 million). According to the documents Hromadske received, the estimated annual income from leasing the property was four million pounds (over $5.2 million). And in the future, the value will increase.

“London real estate is exorbitant, and prices are just going up,” says Nick Mathiason, one of the founders of Finance Uncovered, a research group that uncovers money laundering in Britain.

In a small office on the upper floor of an old building in London, Nick and his colleagues investigate numerous dirty money deals that are disguised as investments into the British economy. “Now in London there are forty thousand properties owned by offshore companies,” Mathiason says. “These houses are worth billions of pounds, because investors come from all over the world. The reason is that with the help of an offshore system you can hide the final beneficiary and not reveal that you are the owner of a property.”

The building which Kolomoyskyi and his partner handed over to Pinchuk, according to our data. 27 Knightsbridge, central London. Photo credit: Hromadske

However, the real trophy for Pinchuk was the second building that Kolomoyskyi and Boholyubov had to give up according to the agreement. This is the Grand Buildings house on Trafalgar Square, located at 1-3 Strand Street in London. The astounding building once hosted the London Grand Hotel. In 1988, it was reconstructed and now has offices, expensive restaurants and shops. On Google Maps, the center of London is located next to this building on Trafalgar Square. It faces the Column of Nelson – a monument to the famous British admiral, who in 1805 defeated the united French-Spanish squadron at Cape Trafalgar. And now this British landmark represents the settlement of an argument between Ukrainian oligarchs.

According to the British press, Boholyubov purchased this building in 2010. The purchase was accompanied by a scandal when well-known London realtor Amanda Staveley filed a lawsuit against the Ukrainian oligarch. She claimed that she had arranged an agreement for a Ukrainian businessman to purchase the building from a state-owned company in the United Arab Emirates. Boholyubov eventually bought the building, but through other realtors. Staveley demanded three million pounds from Boholyubov in agency fees. At the time, the building cost the Ukrainian businessman 173 million pounds. Over the years, its price has grown substantially. Last year, the cost of the Grand Buildings house, according to the financial documents of offshore owner Barlaya Limited, was estimated at 305 million pounds (over $400 million).

Pinchuk’s really royal trophy was the “Grand Buildings” on Trafalgar Square. Photo credit: Hromadske

In their correspondence with Appleby, Pinchuk’s lawyers from Hogan Lovells approved the creation of system of offshore ownership for “tax purposes.” “The client will have control of the two aforementioned companies from the Isle of Man. He will have to manage them, and for tax purposes, will have to support the majority of directors on the Isle of Man,” wrote David Harrison of Hogan Lovells’ to Appleby.

According to Nick Mathiason of Finance Uncovered, “Potentially, it can be used to avoid taxes. In the past, you could avoid the tax you pay for buying a property. If you have offshore companies, you minimize these obligations. And when you sell real estate, you can avoid capital gains tax on commercial properties. So, there are many advantages to owning real estate through an offshore [structure]. It also eliminates problems with law enforcement agencies around the world. If the government wants to understand who owns this property or to investigate someone for money laundering and corruption scandals, then the offshore system is the way to go.”

Nick Mathiason explains that this kind of scheme can be used to minimize taxes. Photo credit: Hromadske

Hromadske reached out to Pinchuk, Kolomoyskyi and Boholyubov to confirm this data and to comment on whether there were any other agreements apart from the transfer of the luxury real estate in London. They were also asked to comment on why they created such a complex offshore structure for the ownership of this property and whether it was done to minimize taxes.

Kolomoyskyi replied that he would not comment in order to comply with the conditions of confidentiality agreed upon in the settlement. The same answer came from Pinchuk.

Meanwhile, back in Kryviy Rih, the workers at the iron ore plant continue to face problems.

“Do you want to hear about the problems in our company? Let's meet near the plant, an hour before the shift change,” says KRZK trade union leader Olena Maslova over the phone. Later, in a café in the city, she expresses her concerns about her workers.

READ MORE: Blockade Leaves Tens of Thousands Without Salaries in Eastern Ukraine

“Now that the borders have opened, we are experiencing a dramatic outflow of personnel. Earlier there was a waiting list to get into the company, and now people are being let go,” she explains, sighing. “For such work, our salary is insufficient. Therefore, our specialists go to Poland, Czechia, Bangladesh… 350 people were let go already. And they appreciate them abroad because our people work well. There’s no point of risking your health and wellbeing here. The plant’s legal department put together this document.”

Olena pulls out a sheet of paper: “This is a statement. Here it is written: ‘I, so-and-so, aware of the working conditions, wish to work in this enterprise. I know that working in harmful conditions negatively affects my health and could lead to an illness in the future. In this regard, I do not make and will not make in the future, any claim of a monetary or non-monetary nature against the company.' Do you understand what they are forced to sign? And people sign. Where should they go? Because we are only numbers to them. We're just disposable. Means of pro-duc-tion!” she concludes.

Olena Maslova, union leader at KZRK shows us the document which every employee has to sign. It states that they accept the hazardous working conditions that could affect their health. Photo credit: Hromadske

In response to Hromadske’s questions about the low salaries and poor social protection for its workers, KZRK’s management wrote:

“Some hotheads do not understand the laws of the economy and demand preferential treatment. In 2017, a salary increase of 20% took place, and the company’s average salary became one of the highest in the industry. Another increase was planned for the end of 2017, but the economic situation now does not allow us to talk about raising wages and forces us to impose the most severe measures of austerity.”

The company denied Hromadske’s request for an interview. Instead, they suggested we watch a video about the plant that shows happy and smiling workers participating in sports and applauding their leadership.

The film doesn’t mention the expensive British property or the use of offshore systems, nor does it touch upon the money that is withdrawn from Ukraine every year and laundered abroad.

/Written by Dmytro Gnap for Hromadske’s investigative unit, Slidstvo.Info

/Translated and adapted by Eilish Hart & Tanya Bednarchyk