Poroshenko Leads Ukraine Off­shore In Par­adise Pa­pers

Poroshenko lawyers deny charges that pres­i­dent is min­i­miz­ing taxes


The Par­adise Pa­pers, a ma­jor new leak of doc­u­ments about off­shore com­pa­nies pub­lished on Nov. 5, has added to sus­pi­cions that Pres­i­dent Petro Poroshenko was seek­ing tax ben­e­fits when set­ting up Prime As­set Part­ners Lim­ited in the Bri­tish Vir­gin Is­lands in 2014.

Poroshenko and his lawyers ve­he­mently deny any tax-min­i­miza­tion plans and ar­gue that their aim was to pay as much in taxes in Ukraine as pos­si­ble.

The Par­adise Pa­pers, a leak of 13.4 mil­lion off­shore doc­u­ments, mostly came from two off­shore ser­vices firms in the Ber­mu­das and Sin­ga­pore, as well as from 19 cor­po­rate reg­istries in se­cret off­shore ju­ris­dic­tions.

The pre­vi­ous ev­i­dence of Poroshenko’s tax min­i­miza­tion plans was pub­lished as part of a leak known as the Panama Pa­pers in April 2016.

Poroshenko, who promised to sell his as­sets be­fore be­ing elected pres­i­dent in 2014, has failed to de­liver on his prom­ise and has faced mount­ing ac­cu­sa­tions that he is putting his busi­ness in­ter­ests above those of the state.

Mean­while, Poroshenko and his com­pa­nies still haven’t fully ex­plained a 4 mil­lion euro off­shore trans­ac­tion in Cyprus car­ried out in March 2016, made when the Na­tional Bank of Ukraine had banned cash pay­ments abroad. Ac­cord­ing to a form filed with the lo­cal registry, the trans­ac­tion con­sti­tuted a com­bined pay­ment of cash and shares of his com­pany.

The pres­i­dent’s rep­re­sen­ta­tives in­sist that no trans­fers of cash were in­volved. But they have failed to pro­vide the an­nual re­turns of Poroshenko’s Cyprus com­pany, which would doc­u­ment the de­tails of the trans­ac­tion.

In April 2016 Poroshenko trans­ferred his as­sets to a blind trust run by Roth­schild. But the na­ture of the trust re­mains a mys­tery, since he has so far re­fused to ex­plain the trust’s terms, cit­ing con­fi­den­tial­ity rules.

Min­i­miz­ing taxes?

The Par­adise Pa­pers are leaked doc­u­ments ob­tained by Süd­deutsche Zeitung and the In­ter­na­tional Con­sor­tium of In­ves­tiga­tive Jour­nal­ists. They were shared with a net­work of more than 380 jour­nal­ists in 67 coun­tries, in­clud­ing the Wash­ing­ton, D.C.-based Or­ga­nized Crime and Cor­rup­tion Re­port­ing Project, a Kyiv Post part­ner.

The doc­u­ments show that Vadim Medvedev, a lawyer work­ing for Ukraine’s Avel­lum law firm, on June 17, 2014 emailed Sean Dowl­ing, man­ag­ing part­ner of law firm Ap­pleby on the Isle of Man, on be­half of the pres­i­dent. They dis­cussed creat­ing a cor­po­rate struc­ture for “tax pur­poses,” with the off­shore hold­ing com­pany “hold­ing shares” and “re­ceiv­ing div­i­dends.”

Medvedev said that Avel­lum pre­ferred a Bri­tish Vir­gin Is­lands ju­ris­dic­tion for their planned hold­ing com­pany, but that a com­pany on the Isle of Man would also be suit­able.

The hold­ing com­pany would own a Cyprus com­pany for tax pur­poses, as Cyprus typ­i­cally has one of the low­est cor­po­rate tax rates in Europe. The Cypriot com­pany would in turn own a Lux­em­bourg com­pany that would give the busi­ness ac­cess to in­ter­na­tional mar­kets. The Lux­em­bourg com­pany would own a Dutch com­pany, which it­self would own Poroshenko’s Ukrainian as­sets.

Prior to Medvedev’s let­ter, Ap­pleby was ap­par­ently cau­tious about the tax and cor­po­rate struc­ture pro­posed by Avel­lum, as the Par­adise Pa­pers doc­u­ments con­tain a let­ter in which its of­fi­cers ex­press doubts about the of­fer.

“I do not think that there is an im­me­di­ate yes or no an­swer to the ques­tion,” Robert Woods, di­rec­tor of com­pli­ance at Ap­pleby, said in an e-mail. “The risk as­ses­sors of the busi­ness would con­sider all of the facts (and there are not many yet!), such as where are the com­pa­nies now, why do they want to move, what is their pur­pose, what is the ra­tio­nale be­hind them be­ing in the BVI, what busi­ness are they in­volved in, who else is be­hind them, what are the ben­e­fits to Ap­pleby, I am sure there is much more for this one… It is quite un­likely that this would be worth the risk in­volved, but without much more in­for­ma­tion and in­ves­ti­ga­tion there is no de­fin­i­tive an­swer.”

Ap­pleby’s Re­jected Busi­ness Log, con­tains the note on Poroshenko, in­di­cat­ing con­cern about his plans to re­tal­i­ate against Rus­sian-backed sep­a­ratists in eastern Ukraine and likely rep­u­ta­tional risk for the firm.

In re­sponse to the OCCRP in­ves­ti­ga­tion, Avel­lum ar­gued that their aim was to max­i­mize taxes in Ukraine, not to min­i­mize them. Poroshenko would pay an in­come tax on div­i­dends re­ceived from the off­shore firms, Medvedev told the Kyiv Post.

Avel­lum also said that in 2014 it had been con­sid­er­ing ei­ther sell­ing the as­sets or hold­ing an ini­tial pub­lic of­fer­ing, known as an IPO. How­ever, the sale could not have been car­ried out due to un­fa­vor­able mar­ket con­di­tions, they ar­gued.

But Kostyan­tyn Likarchuk, a part­ner at the Kin­stel­lar law firm, a for­mer part­ner at Avel­lum and an ex-deputy head of the State Fis­cal Ser­vice, was doubt­ful about Avel­lum’s ex­pla­na­tion.

“I can’t un­der­stand how this struc­ture can max­i­mize taxes,” Likarchuk told the Kyiv Post.

In such a cor­po­rate struc­ture, no sales tax would be paid in Ukraine if any of the off­shore firms in the chain were sold, Likarchuk said.

The only way to pay taxes in Ukraine from such a sale would be for each off­shore firm to make a de­ci­sion on pay­ing div­i­dends to the other ones, with th­ese div­i­dends end­ing up in Ukraine. But this scheme is im­prob­a­ble, he said.

“The BVI (hold­ing com­pany) is not nec­es­sary if you’re not go­ing to min­i­mize tax pay­ments,” he added.

In the case of an IPO, Poroshenko would not have to pay a sales tax in Ukraine ei­ther, Likarchuk added.

“At first sight, the struc­ture men­tioned in the lawyers’ let­ter en­vis­ages min­i­miz­ing taxes, which is not il­le­gal,” Inna Rud­nyk, a se­nior as­so­ciate at the Alekeyev, Bo­yarchukov and Part­ners law firm, told the Kyiv Post. “…Since the cor­re­spon­dence does not men­tion what kind of op­er­a­tions mem­bers of this struc­ture in­tended to carry out, it’s dif­fi­cult to say whether they wanted to min­i­mize tax pay­ments in Ukraine or only in Euro­pean coun­tries.”

Poroshenko has also claimed that the off­shore firms men­tioned in the Panama Pa­pers did not have any bank ac­counts.

But in con­tra­dic­tion to Poroshenko’s claims, Medvedev said in the leaked emails that the pro­posed off­shore would be han­dling as­sets and could re­ceive div­i­dends, which would im­ply hav­ing a bank ac­count. Avel­lum re­sponded that, though the open­ing of bank ac­counts had been planned, it had never hap­pened in re­al­ity.

Cypriot deal

An­other ma­jor is­sue that arises out of the OCCRP in­ves­ti­ga­tion is whether Poroshenko vi­o­lated Ukrainian law dur­ing a cor­po­rate trans­ac­tion made in March 2016.

Prime As­sets Cap­i­tal, a Ukrainian fund owned by Poroshenko, bought 18,000 shares of his Cyprus-reg­is­tered com­pany, CEE Con­fec­tionary In­vest­ments Lim­ited, for 3.9 mil­lion eu­ros, ac­cord­ing to a Cypriot doc­u­ment pub­lished by the OCCRP in 2016. Ac­cord­ing to sev­eral Cypriot lawyers and ex­perts in­ter­viewed by the OCCRP, the doc­u­ment ex­plic­itly says that this was a com­bined trans­ac­tion, in kind (com­pany shares) and cash.

One the­ory, voiced by fi­nan­cial spe­cial­ist An­driy Gerus, is that the money al­legedly trans­ferred to Cyprus was needed for the ac­tiv­i­ties of Poroshenko’s Cyprus com­pany.

A cash pay­ment would in­di­cate that the Cyprus com­pany had a bank ac­count, which Poroshenko and his lawyers have re­peat­edly de­nied. Un­der Ukrainian rules, Poroshenko would have had to de­clare any such bank ac­counts. Yet, Poroshenko’s in­come dec­la­ra­tion for 2016 lists only one for­eign bank ac­count — $1.06 mil­lion at Swiss Roth­schild Bank AG. Avel­lum and the Pres­i­den­tial Ad­min­is­tra­tion could not com­ment on the ori­gin of the funds.

Cash trans­fers abroad were banned by the Na­tional Bank of Ukraine at that time, un­less the bank is­sued a spe­cial li­cense. The Na­tional Bank of Ukraine said it had is­sued no such li­cense in this case.

Avel­lum claims that the doc­u­ment pub­lished by the OCCRP does not prove the pres­ence of cash in the trans­ac­tion, and de­nies any wrong­do­ing.

Avel­lum showed to the Kyiv Post a share sub­scrip­tion agree­ment be­tween CEE Con­fec­tionary In­vest­ment Ltd and Prime As­sets Cap­i­tal in which only shares were men­tioned as part of the trans­ac­tion.

How­ever, Avel­lum’s crit­ics say only doc­u­ments from the of­fi­cial Cypriot reg­is­ter on the trans­ac­tion

would pro­vide de­fin­i­tive proof. Such doc­u­ments in­clude an­nual fi­nan­cial re­ports and a res­o­lu­tion by the board of di­rec­tors, which must show un­der Cypriot law how much cash and how many shares were trans­ferred as part of the 4 mil­lion euro trans­ac­tion.

The Ukrainian doc­u­ments could turn out to be fake if the Cypriot firm files doc­u­ments that con­tra­dict them, Likarchuk said.

“The doc­u­ments that are sub­mit­ted to Cypriot author­i­ties are bet­ter proof (than Ukrainian doc­u­ments),” he added.

Since 2014, Cyprus’ CEE Con­fec­tionary In­vest­ment Ltd. has not pub­lished a sin­gle an­nual re­turn and missed two dead­lines for such re­ports.

Avel­lum told the Kyiv Post it could not pro­vide the res­o­lu­tion of the board of di­rec­tors on the trans­fer of shares and could not say why the com­pany had not pub­lished its an­nual re­turn, or when it would be pub­lished.

The law firm also cited a June 2016 mem­o­ran­dum by Baker & McKen­zie’s Kyiv of­fice that con­cluded that there had been no vi­o­la­tions in the Cyprus deal, and that only shares had been in­volved in the trans­ac­tion.

One prob­lem is that Baker & McKen­zie’s Kyiv of­fice based its con­clu­sion on the Ukrainian doc­u­ments pro­vided by Poroshenko’s rep­re­sen­ta­tives, which was con­firmed by Avel­lum. No ev­i­dence has been pro­vided that Baker & McKen­zie saw any doc­u­ments from the Cypriot reg­is­ter.

The June 2016 mem­o­ran­dum was signed by Ser­hiy Pion­tkovsky and Olyana Gordiyenko, part­ners at Baker & McKen­zie’s Kyiv of­fice. In Septem­ber 2016 Poroshenko ap­pointed Gordiyenko as a mem­ber of the Na­tional Se­cu­ri­ties and Stock Mar­ket Com­mis­sion. She re­signed from the post in March 2017.

In a strange co­in­ci­dence, an in­ves­ti­ga­tion by OCCRP and its Ukrainian part­ner Slid­stvo.info shows that Avel­lum lawyer Medvedev, who worked on Poroshenko’s case, helped Sergiy Olek­siyenko, an of­fi­cial at Ukrainian state gas firm Ukr­transgaz, to set up an off­shore fund on the Isle of Man specif­i­cally to by­pass the Na­tional Bank of Ukraine’s cur­rency reg­u­la­tions and trans­fer $1 mil­lion in cash to Cyprus. The scheme in­volved the Ukrainian sub­sidiary of Rus­sia’s Alfa Bank and its af­fil­i­ated firm in the UK, with an off­shore own­er­ship struc­ture.

Medvedev de­nied do­ing any­thing il­le­gal but re­fused to ex­plain in de­tail why he be­lieves the scheme was law­ful.

Blind trust?

Avel­lum also showed the first and last pages of Poroshenko’s blind trust agree­ment to the Kyiv Post, al­beit for less than a minute. The lawyers also said they can­not show the rest due to con­fi­den­tial­ity rules. Un­der the trust deal, Roth­schild can­not dis­close any in­for­ma­tion to Poroshenko ex­cept for in­for­ma­tion on the sale of as­sets and in­for­ma­tion nec­es­sary for Ukrainian dis­clo­sure rules.

But Likarchuk ar­gued that a proper blind trust can­not pro­vide in­for­ma­tion to the client even on the sale of as­sets.

By def­i­ni­tion, the trustee of a blind trust must be an in­de­pen­dent pro­fes­sional with no re­la­tion or af­fil­i­a­tion with the politi­cian, and must have full con­trol over buy­ing and sell­ing the as­sets in the trust.

Sergii Zait­sev, Poroshenko’s ac­quain­tance and long-time top man­ager, is still a di­rec­tor of Roshen Europe B. V., which holds Roshen’s Ukrainian com­pa­nies. This raises the ques­tion of whether Poroshenko still in­flu­ences the man­age­ment of the as­sets.

More­over, Poroshenko’s deal­ings with his as­sets prior to the blind trust’s cre­ation could have vi­o­lated Ukrainian anti-cor­rup­tion law.

Un­der this law, a state of­fi­cial must ei­ther sell his or her as­sets or trans­fer them to a man­age­ment firm, and his rel­a­tives can­not run th­ese as­sets. How­ever, Poroshenko’s fa­ther was the CEO of Ukraine’s Prime As­sets Cap­i­tal, which ran the pres­i­dent’s as­sets un­til 2016.

Avel­lum and the Pres­i­den­tial Ad­min­is­tra­tion did not com­ment on the ac­cu­sa­tions.

Cas­tle Rushen in the Isle of Man, an off­shore ju­ris­dic­tion that fea­tures in the OCCRP in­ves­ti­ga­tion of Pres­i­dent Petro Poroshenko. (Cour­tesy)

(ICIJ / Rocco Faz­zar)

Pres­i­dent Petro Poroshenko leads the list of 11 Ukraini­ans who fea­ture in the Par­adise Pa­pers, a new leak of 13.4 mil­lion off­shore doc­u­ments from the Ber­mu­das and Sin­ga­pore. The rev­e­la­tions add to sus­pi­cions that Poroshenko was try­ing to min­i­mize taxes...

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