Ukraine Takes Court Battle Against Kolomoisky to the US

08 June 2019 16:51

Oligarch Ihor Kolomoisky in Kyiv, Ukraine on March 6, 2015.Vladislav Musienko / UNIAN

Hromadske takes a look at what Kolomoisky’s former property PrivatBank accused him of and what the U.S has to do with it.

UPDATE: Local Cleveland newspaper CleveScene reported on June 11 that Ukrainian oligarch Ihor Kolomoisky sold out the property he had in Cleveland.

The article has also noted that while the real estate was in Kolomoisky’s possession, it fell into disrepair. The number of people who worked in the skyscrapers fell drastically. In some offices, almost half the staff were made redundant. This was the reason the oligarch was forced to sell his property at a reduced price.

On May 23, 2019, it became known that PrivatBank filed a lawsuit in the American state of Delaware. In the lawsuit against its former owners, oligarchs Ihor Kolomoisky and Hennadiy Boholyubov, the state bank demands pay for damages amounting to “hundreds of millions of dollars,” which, according to PrivatBank lawyers, the former owners may have appropriated before nationalization. On June 5, the text of the claim became available to the public.

Hromadske takes a look at what Kolomoisky’s former bank accused him of and what the U.S has to do with it.

“Ihor Kolomoisky returned to Ukraine for the first time in the past 4 years. This decision is perpetrated by the election of Volodymyr Zelenskyy as Ukrainian President... The media reports that in exchange for media support prior to the elections, Zelenskyy promised Kolomoisky a return of PrivatBank." With these words, the lawsuit that the state PrivatBank filed against its former owners in the United States, began.

104 pages describe, in detail, the schemes that the former owners allegedly used to misappropriate the funds of the bank and launder them through the purchase of real estate, factories in the United States and other countries of the world.

How Did These Schemes Work?

As written in the statement of the claim, schemes for laundering existed long before PrivatBank was declared bankrupt and nationalized in 2016. About half of the entire claim is covered with examples of shady deals that helped launder billions of dollars from a bank to a subsidiary bank in Cyprus and to other offshore Cypriot companies.

The lawsuit states that Kolomoisky and Boholyubov used PrivatBank as their own “pocket bank,” consistently laundering billions of dollars.

The former owners carried out top illiberal management (even a forceful one) in the company and correspondingly demanded their employees fully implement their decisions. Within PrivatBank, they created a separate “shadow bank,” through which funds were laundered.

The laundering scheme supposedly worked like this: PrivatBank collected deposits from its customers. Further, these funds were transferred to a “daughter” bank in Cyprus, from where they were paid to the accounts of two law firms. Further, large sums were transferred to three residents of Miami. And they opened companies in the U.S. through which they bought real estate and factories for Kolomoisky and Boholyubov.

Atlantic Council analyst Anders Aslund notes that the scheme of Kolomoisky and Boholyubov was surprisingly simple.

“It is unusual that the owners of the bank were not prudent and did not create several layers of fictitious companies in Cyprus, the British Virgin Islands and the Cayman Islands (all of the world's most famous offshore zones - ed.), as Russian oligarchs often do for money laundering. Instead, they collaborated with several individuals from Miami who helped them create many anonymous companies in the United States, primarily in Delaware, Florida, New Jersey and Oregon,” noted the analyst.

Businessmen and former PrivatBank owners Hennadiy Boholyubov (C) and Ihor Kolomoisky (R) attend a synagogue in the Ukrainian city of Dnipro on November 25, 2010. Photo: Serhiy Isayev / UNIAN

Laundering Schemes

Unusual in the case of laundering PrivatBank finances was also the fact how Kolomoisky and Boholyubov spent that money. In contrast with the common practice among Russian and Ukrainian oligarchs to invest in real estate in New York or Miami, the ex-owners of PrivatBank invested in real estate in Cleveland, Ohio, where it only took them a couple of years to become the biggest property owners.

According to the authors of the statement of claim, as of 2011, the following American property belonged to the former owners of PrivatBank: One Cleveland Center (31st floor), 55 Public Square (22nd floor), Penton Media Building and The Huntington Bank Building in Cleveland (Ohio), the former headquarters of CompuCom Systems and the Stemmons Tower in Dallas (Texas); the former Motorola Campus, built in 1997 for $100 million, in Harvard (Illinois).

At the same time, Ihor Kolomoisky's son, Gregory, studies at the University of Cleveland, where he plays on the university’s basketball team.

In addition to real estate, the former owners of PrivatBank also purchased steel mills in the United States, in particular: Felman Production Inc in West Virginia, Felman Trading Inc. and Georgian Manganese LLC, Warren Steel Holdings in Ohio, Steel Rolling Holdings Inc. in Michigan, CC Metals and Alloys LLC, in Kentucky and Michigan Seamless Tubes in Michigan.

The lawsuit notes that in the US, the amount of laundered PrivatBank funds is about $622.8 million (the total value of the property acquired by the ex-owners of PrivatBank). However, the total amount of financial flows that have passed through PrivatBank Cyprus accounts is almost $470 billion.

“When it comes to the amount of $470 billion, this is the total amount of operations that were carried out by PrivatBank through the Cyprus offshore during 2006-2016. Moreover, this data coincides with the data from PrivatBank’s audit, conducted by Kroll. It is likely that the lawsuit against Kolomoisky in the United States was built on the basis of this investigation,” says Andrei Yanitsky, co-author of the book “Private History” on money laundering in PrivatBank.

In his opinion, such a large amount may be evidence that Kolomoisky tried to obfuscate the statements in order to give the funds a legal status.

“The funds that were laundered from PrivatBank came into the US already “clean,” in the form of investments, and from the start they were marked as credit funds from PrivatBank. But someone had to return these loans so that PrivatBank could report that it had a solvent portfolio. Therefore, they were involved in very technical operations, where at the same minute or second the loan was supposedly returned. On paper, it looked like the loan was returned to the bank, but in reality at the same time it was issued again to another company,” Yanitsky said.

Therefore, the former owners of PrivatBank, laundering funds in the form of loans, had to constantly refinance.

“This was a financial pyramid. PrivatBank issued new loans. These loans were laundered through several accounts and were used to pay off old loans (which were used to buy assets in the United States),” the deputy head of the National Bank of Ukraine (NBU), Tymofiy Milovanov, comments on the claim.

Recall that during the nationalization of PrivatBank, the NBU ordered an audit of the international audit company Kroll. Then, the auditors found a $5.5 billion hole in the bank’s balance sheet, which was compensated for at the public’s expense with the help of an internal government bond. According to the audit, these funds were withdrawn from PrivatBank through loans given out to offshore companies that are affiliated with the former owners.

Court Cases

The lawsuit PrivatBank vs. Kolomoisky is not the first in international lawsuit that PrivatBank has pursued. In 2017, PrivatBank filed a lawsuit against Kolomoisky and Boholyubov in the High Court of London, which froze $2.6 billion in assets.

However, one year later, in December 2018, the court made the first decision against PrivatBank: it did not recognize its jurisdiction, that is, competence, to consider this case.

In particular, the court ruled that PrivatBank fabricated its lawsuit in such a way in order to obtain special privileges in the lawsuit against its former owners, in particular, the possibility of freezing their assets.

“This was very beneficial to the bank, especially compared to the less attractive judicial jurisdictions in Switzerland or Ukraine,” the court said.

To this, PrivatBank lawyers noted that English companies owned by Kolomoisky and Boholyubov "played a key role" in the laundering scheme. At the same time, the High Court of London ruled that the role of British companies was significantly exaggerated.

PrivatBank appealed against the court’s decision, thereby offsetting the lift of Kolomoisky and Bogolyubov’s frozen assets.

At the same time, there are litigations in the Ukrainian courts between PrivatBank, the NBU and the government, on the one hand, and the former owners of PrivatBank, on the other hand. Just before the elections, a Kyiv court ruled that the nationalization of PrivatBank was illegal.

In addition, the District Administrative Court of Kyiv made another decision in favor of Kolomoisky, thereby nulling the decision of the NBU to determine the list of persons related to the bank - a key decision that made it possible to transfer 100% of PrivatBank's shares to the state.

On April 20, the Kyiv Pechersk court canceled Kolomoisky's property guarantee for loans, which the NBU issued to PrivatBank in 2013. The total amount of these loans is 9.2 billion hryvnia ($346.1 million). Subsequently, Kolomoisky filed five lawsuits to be relieved of his responsibility as guarantor on PrivatBank’s debts to the NBU, striving to make the bank as an entity responsible instead.

The new lawsuit by PrivatBank against its former owners has a certain chance of success. At the same time, there is a rather high risk that the victories of Kolomoisky in the courts in Ukraine will make it impossible to sue PrivatBank abroad.