How for­tunes are made and lost at stroke of pen


Many com­plain that Ukraine’s economy is closed to new en­trants and that the en­tre­pre­neur­ial spirit has no place to grow in this coun­try of 42 mil­lion peo­ple.

But in Ukraine, you can make mil­lions of dol­lars with the flick of a pen.

The coun­try’s byzan­tine ac­count­ing code and sel­dom-en­forced au­dit pro­ce­dures al­low fraud to flour­ish, per­mit­ting bankers to mark up or mark down mil­lions of dol­lars on their bal­ance sheets, while fraud­sters hide be­hind fake com­pa­nies to seize prop­erty.

And all this oc­curs within a law en­force­ment en­vi­ron­ment where bil­lions of dol­lars have dis­ap­peared from the coun­try’s banks over the past three years and not a sin­gle per­son has been con­victed.

In­sid­ers say that the schemes are con­tin­u­ing un­abated.


The coun­try’s big­gest banks make use of one par­tic­u­lar ac­count­ing scheme that al­lows them to value as­sets on their bal­ance sheet vir­tu­ally any way they like.

The scheme goes like this: A bank might have an as­set, like a loan, worth Hr 1 mil­lion.

Un­der Ukrainian law, the bank has the right to val­u­ate that as­set on its bal­ance sheet, Olek­sandr Savchenko, a for­mer deputy chief of the Na­tional Bank of Ukraine and rec­tor of Kyiv’s In­ter­na­tional In­sti­tute of Busi­ness, told the Kyiv Post.

From there, the bank could mark down the Hr 1 mil­lion loan as only hav­ing a 50 per­cent like­li­hood of be­ing re­paid, halv­ing its value.

The bank’s over­all cap­i­tal would then go down by half a mil­lion hryv­nia.

“I could then say that I don’t have enough cap­i­tal, and the state would give me more,” Savchenko said.

These schemes usu­ally need to be ap­proved by an ex­ter­nal auditor. But re­cent events give rea­son to doubt the qual­ity of their over­sight work. For in­stance, the gov­ern­ment na­tion­al­ized Pri­vatBank in De­cem­ber, cost­ing it $6 bil­lion, af­ter auditor PwC in­cor­rectly val­ued loan col­lat­eral at the bank. The NBU sus­pended PwC’s bank au­dit­ing li­cense in July.

Agro­hold­ing Mriya cost in­vestors $1.1 bil­lion when it col­lapsed, lead­ing to lit­i­ga­tion against auditor EY, al­leg­ing fraud.

As Savchenko pointed out, “99 per­cent of peo­ple won’t turn down an of­fer of $10 mil­lion.”

Ro­man Marchenko, an at­tor­ney at Ilya­shev & Part­ners law firm, said that the scheme is fairly wide­spread in Ukraine.

“Ukraine en­coun­tered the prob­lem when banks re­ceived re­fi­nanc­ing from the NBU, in or­der to get credit, but pre­sented doc­u­ments that were not com­pletely cor­rect and truth­ful,” he said.

‘Fun­da­men­tal’ prob­lem

The op­por­tu­nity to use such schemes arises from flaws in Ukraine’s ac­count­ing stan­dards, which Savchenko said had a “fun­da­men­tal” prob­lem.

Twenty years ago, the Rada moved to shift Ukraine’s fi­nan­cial sys­tem to­wards in­ter­na­tional fi­nan­cial re­port­ing stan­dards.

But par­lia­ment did not go all the way, and left lo­cal, Ukrainian re­quire­ments in place, re­sult­ing in Ukrainian banks and busi­nesses hav­ing to file both Ukrainian and in­ter­na­tional au­dits.

“Ev­ery­thing was done with the ex­cep­tion of one stan­dard,” said Savchenko, an econ­o­mist who helped in­tro­duce the hryv­nia in the early 1990s. “That was the com­pu­ta­tion and method for valu­ing a bad loan. Here, we did not take the method­ol­ogy, the prin­ci­ples, and prac­tice of in­ter­na­tional ac­count­ing stan­dards.”

“It’s a big loop­hole for cor­rup­tion, and is why Ukrainian banks need to do two au­dits,” Savchenko said.

One source in the cen­tral bank, who spoke on the con­di­tion of anonymity due to a lack of au­tho­riza­tion to speak to the press, con­firmed that the prac­tice is rel­a­tively wide­spread.

“It’s been a com­mon scheme at the state banks,” the of­fi­cial said.

Marchenko added that the le­gal con­se­quences for fraud are harsh on paper but, in re­al­ity, al­most no­body is brought to jus­tice.

“Un­for­tu­nately, there has not been one real crim­i­nal case con­cluded from all this,” he said, while adding that fal­si­fy­ing as­set val­u­a­tion when a bank is re­ceiv­ing state loans would be pun­ish­able by up to eight years in prison, if the law were to be en­forced. In other cases, fraud can hap­pen on a smaller scale — your busi­ness part­ner turns out to be a thief.

This can hap­pen through var­i­ous high-tech means.

Fraud­sters will some­times mon­i­tor ne­go­ti­a­tions be­tween two com­pa­nies as they in­tend to con­clude a deal.

In one ex­am­ple, pro­vided by at­tor­neys from Kyiv-based law firm Arzinger at a sem­i­nar called “Fraud — Ukrainian style,” an agri­cul­tural firm was in the process of mak­ing a deal with a trader for the sale of its prod­uct.

All seemed to be go­ing ac­cord­ing to plan — the trader was set to trans­fer cash to the agri­cul­tural com­pany in ex­change for its prod­ucts.

But af­ter re­ceiv­ing the com­pany’s bank de­tails, noth­ing hap­pened. The trader re­ceived no prod­ucts, while the agro firm said it would not send any goods over un­til it got the money.

So what hap­pened?

Ac­cord­ing to the Arzinger at­tor­neys, fraud­sters had ma­nip­u­lated the sit­u­a­tion by mon­i­tor­ing the com­mu­ni­ca­tions re­motely, tak­ing both com­pa­nies’ in­for­ma­tion. At the crit­i­cal mo­ment, it im­per­son­ated one side of the deal, si­phon­ing the cash into its ac­count.

Arzinger part­ner Kateryna Gu­palo said that few peo­ple check to make sure that emails sent un­der fa­mil­iar-sound­ing names are ac­tu­ally com­ing from the per­son in ques­tion.

“Peo­ple aren’t pre­pared to be fooled,” she said, adding that much of it comes down to the se­cu­rity of con­trac­tual agree­ments.

Another ex­am­ple dis­cussed by the at­tor­neys show­cased a for­eign in­vestor that had put $15 mil­lion into a Ukrainian sub­sidiary, which owned a food prod­uct fac­tory.

The com­pany’s sub­sidiary hired a mar­ket­ing firm to ad­ver­tise their prod­ucts, but then wound up the vic­tim — the mar­ket­ing firm coun­ter­sued the sub­sidiary, win­ning a de­ci­sion in a Ukrainian com­mer­cial court to drive the sub­sidiary bank­rupt and then seize the firm’s prop­erty through a bank­ruptcy auc­tion.

In that case, the di­rec­tor of the sub­sidiary had se­cretly agreed with the mar­ket­ing firm to spend the cash from the for­eign in­vestor on fic­ti­tious ad­ver­tis­ing ser­vices. The mar­ket­ing firm then claimed a debt from the in­vestor’s sub­sidiary, su­ing it into bank­ruptcy and us­ing the auc­tion to seize the com­pany.

“You need to know who you’re do­ing busi­ness with,” Gu­palo added.

A prison guard looks into an empty cell in Lukanivsky prison on Aug. 1. Ukraine has failed to pros­e­cute a sin­gle banker af­ter bil­lions of hryv­nia have dis­ap­peared and dozens of banks have been liq­ui­dated in the coun­try’s mas­sive bank­ing col­lapse. (Kostyan­tyn Ch­er­nichkin)

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