5 top cases in 2017 of pressure on businesses
Ukraine’s government keeps saying it wants to make Ukraine more attractive to foreign investment, but the numbers keep showing that it’s failing to do so. Only $4.4 billion in foreign direct investment came to the country in 2016 — and a quarter of it came from Cyprus, an offshore tax haven favored by Ukrainians.
In a recent poll of foreign investors, oppressive law enforcement ranked sixth among concerns in a poll by investment company Dragon Capital, the European Business Association and the Center for Economic Strategy.
The 77 companies polled cited cases of misconduct by the Security Service of Ukraine, or SBU, the National Police and the Prosecutor General’s Office.
These are five of the more famous cases of law enforcement pressure on business in 2017:
On April 26, the SBU searched the Ukrainian office of international investment firm Dragon Capital. The security service claimed
the company was using Russian-made spyware called Stakhanovets Pro.
However, Dragon Capital CEO Tomas Fiala told the Ukrainska Pravda news website that the searches could have been an effort to put pressure on his firm due to its corporate conflict over Sky Mall, one of Kyiv’s largest malls.
Dragon Capital filed a court case against Oleksandr Hranovsky, a top lawmaker with President Petro Poroshenko’s party, and his business partner Andriy Adamovsky, who both have stakes in Sky Mall.
Soon after, Dragon Capital’s press service said that the SBU tried to seize all of the company’s computers. After the search made headlines, the authorities seized only three computers.
Only after the SBU searched the firm did authorities publicly say that Stakhanovets Pro has since 2016 been considered by the SBU as illegal spyware. Dragon Capital says it purchased the spyware from a local supplier in Dnipro in 2015, before it was declared illegal.
Fiala said that by searching his firm, the SBU could have been trying to prevent the implementation of a ruling by the London Court of International Arbitration in the Sky Mall case in favor of Dragon Capital.
It took more than a month for the SBU to apologize and return the confiscated computers, according to Olga Beloblovskaya, Dragon Capital’s communications director. The court hearings on Sky Mall are still going on in London.
Beloblovskaya said the SBU’S search cost Dragon Capital dearly in time, money and stress.
A similar incident occurred in March, when about 100 SBU officers searched the offices and homes of top managers of Youcontrol, an IT firm that provides company reports based on compiled data from state registries.
The SBU accused Youcontrol of disrupting automated systems and of data collecting while using Russian technology. It arrested the bank accounts of many of its employees, as well as some of their relatives, according to Youcontrol’s website.
Youcontrol lawyer Danylo Globa told the Kyiv Post in March that the charges were “legal nihilism” as the legislation on open data permits the use, copying and distribution of the types of information collected by Youcontrol.
Youcontrol has been used by anti-corruption activists and investigative journalists.
Since the search, the SBU has kept hold of the confiscated money and other property. Globa said the courts have ordered the SBU to return the seized property six times, to no effect. The SBU, in turn, said it hadn’t received any court orders, and therefore was unable to do so.
Globa said Youcontrol will continue to fight for its rights in the courts, and that his company has been preparing new appeals to the SBU and the prosecutor’s office to drop criminal charges.
BIIR Properties, a subsidiary of Danish engineering company BIIR, is another company that has faced government officials imposing pressure on its business. The trouble started when the company bought an office building in Odesa for its headquarters n February.
The company had been operating in Ukraine since 2013 in Luhansk, but due to Russia’s war against Ukraine it relocated its entire operation and staff to Odesa.
The building the company purchased in Odesa was under foreclosure — it had originally belonged to Mega-stroy, the ultimate beneficiary of which was Valentyn Skoblenko, a political ally of the former Central Election Commission Head Sergiy Kivalov, who is highly influential in the Odesa courts.
According to a court case from 2013, Mega-stroy failed to make mortgage payments for more than six years, so the bank foreclosed.
The property was then sold by Financial Trust Group to real estate company Prime Odesa, which sold it on to BIIR Properties.
Shortly after purchasing the building, however, Skoblenko filed a case claiming that he was not aware that the property had been foreclosed.
The initial court ruling was that the building should be returned to its previous owner, the mortgage debt entirely canceled, and there should be no restitution to the Danish investor.
BIIR appealed, and is currently waiting for a ruling, which is expected on Jan. 4.
On Sept. 6 armed law enforcers searched the premises of Astarta-kyiv, a major agricultural holding and sugar producer. For several hours, Astarta-kyiv employees were not allowed to enter their offices and the whole enterprise was paralyzed. Its bank accounts were frozen.
The search was initiated by the Prosecutor General’s Office as a part of a criminal investigation into tax evasion.
Astarta’s press service denied all accusations of tax evasion, and called the law enforcers’ actions “unprofessional, pressure on the business.”
On Sept. 19, the prosecutor’s office closed the case against Astarta due to the absence of evidence. After 10 days, Pechersk District Court of Kyiv ordered Astarta’s accounts to be unfrozen.
Astarta’s press office said that this had been the first raid by law enforcers in the almost 25 years of the company’s existence.
The Astarta case was resolved because the company fought back actively, and through making personal appeals to members of the Ukrainian government about the problem, according to Anna Derevyanko, the executive director of the EBA.
Back in June, Sanofi-aventis, the Ukrainian division of French Sanofi Group, a global pharmaceutical company, accused Ukrainian vendor Khosa Plex — which provided marketing services to the company — of stealing nearly $1.9 million using forged documents. Kyiv's Business Court of Appeals upheld the vendor’s claim on Oct. 5.
The press service of Sanofi-aventis said in a press release that in 2014 Khosa Plex had been guilty of tax evasion and making fraudulent deals, which had led to a criminal investigation being opened against the company’s former top management.
After that, Sanofi-aventis broke off its agreement with Khosa Plex, but soon discovered that the firm had continued to order promotional campaigns in pharmacies on behalf of Sanofi, while sending the invoices to Sanofi-aventis.
In 2016 the vendor filed a claim in court against
Sanofi-aventis and presented fake documents to the court, SanofiAventis press service said.
The Business Court of Kyiv refused the request of Sanofi-aventis that the documents be sent for examination to establish their authenticity, and ordered the seizure of more than Hr 46 million from the bank account of Sanofi-aventis.
Sanofi’s lawyer Leonid Chernyavskiy told the Kyiv Post on Dec. 15 that Hr 92 million had been arrested by the law enforcers. The first court ordered Sanofi to pay Hr 46 million to Khosa Plex, but Ukraine’s executive service withdrew the sum twice from Sanofi’s accounts. They tried to return the second confiscated Hr 46 million to Sanofi, but failed, as the entire sum was arrested by the state amid ongoing criminal proceedings.
Sanofi has been continuing to fight for its money, but court hearings are continually postponed due to changes of judges. The last judge was dismissed by the newly created High Council of Justice. The Sanofi case will now be passed from the Business Court of Appeals to the Supreme Court. The date of the next court hearing has not been set.
Consequently, Sanofi says it plans to file an international arbitration claim.
“The company hopes that the country’s leadership will take all necessary steps to stop financial raiders whose actions cause significant damage to the country’s investment image and cause an outflow of foreign direct investment from Ukraine,” Guilhem Granier, director of Sanofi-aventis Ukraine said in a statement.
“Financial raiders’ actions cause significant damage to the country’s investment image.” – Guilhem Granier, director of Sanofi-aventis Ukraine.
Prosecutor General Yuriy Lutsenko (L) speaks with representatives of business associations during a discussion in his office in Kyiv on Oct. 5. Lutsenko signed a letter of understanding with businesses to make law enforcers more accountable in criminal investigations. (gpu.gov.ua)
A visitor stands on the stairs of the Val de Bievre Campus of French multinational pharmaceutical company Sanofi at the company’s headquarters in Gentilli near Paris on Dec.4. (AFP)
A Sept. 16 survey of foreign investors shows that corruption, lack of rule of law and monopolization by oligarchs are the three major obstacles to foreign investment in Ukraine.
A Sept. 16 survey of foreign investors by Dragon Capital, European Business Association and Center for Economic Strategy identifies obstacles to investment in Ukraine and priority areas to improve the investment climate.
Ukrainian lawmakers are accused of putting pressure on businesses rather than serving as public champions for free, fair and competitive markets.
Tomas Fiala, CEO of Dragon Capital, speaks during the 5th Kyiv Post Tiger Conference in Kyiv on Nov. 29, 2016. (Kostyantyn Chernichkin)