The London Battle Between Ukraine's Biggest Bank And An Oligarch With His Own Private Army

LONDON, England -- When investigators from corporate consultant Kroll turned up at Privatbank’s headquarters in Dnipro, Ukraine, they were told to come back later when the office would be quieter. They had dinner and waited for the phone to ring, but by 11pm gave up and went back unannounced.


Billionaire Ihor Kolomoisky is at the forefront of a case that is shining a stark light 
on Ukraine's banking industry.

It was the latest twist in a legal battle that involves a billionaire who funded a private army to fight Russian-backed forces; bizarre deals that include the alleged purchase of over 126,000 tons of concentrated apple juice; and ultimately the bail-out of Ukraine’s biggest lender.

When the senior Kroll investigators, who had been commissioned by Ukraine’s central bank to do a forensic audit of Privatbank, returned to the lender’s offices, they remember seeing individuals “physically tearing what appeared to be cardboard folders into pieces and putting these pieces into one of several boxes”, according to court documents seen by The Sunday Telegraph.

After a period of stunned silence, the group finished destroying the papers and then left.

“Kroll asked a cleaning lady to leave the boxes where they were and a security guard to lock them in a separate room. But the boxes and material have not been seen since,” the filing read.

One year on since that episode last July and a billion-pound battle is being played out in a London court between the bank’s two former oligarch owners, six companies allegedly linked to the tycoons and the now state-owned Privatbank, which was nationalised in December 2016 to prevent a wider financial crisis in Ukraine.

A summary of Kroll’s findings published earlier this year alleges that the bank was used for “large-scale and coordinated fraud” for at least a decade before it was nationalised, resulting in a loss of at least $5.5bn (£4.2bn).

The former owners have always denied any wrongdoing.

One of the men at the forefront of the case is Switzerland-based billionaire Ihor Kolomoisky, a former governor of his native Dnipro.

Kolomoisky is a powerful figure in his homeland.

He is best known for bankrolling a private army to fight pro-Russian separatists, which included a bounty of $10,000 for the capture of any Russian “saboteur”.

He also clashed with president and billionaire chocolate baron Petro Poroshenko in a dispute that resulted in armed men storming a state-owned energy company.

The other figure at the centre of this extraordinary case is Kolomoisky’s lesser known business partner Gennadiy Bogolyubov, a Ukrainian oligarch reported to own a sprawling £60m mansion in Belgravia and who was sued by his own rabbi in a high-profile dispute over London property deals in 2013.

Along with Kolomoisky, who once called Vladimir Putin a “schizophrenic of short stature” to which Putin responded that he was a “unique villain”, the two magnates earned a reputation for being “corporate raiders” following a series of hostile takeovers in the region during the mid-2000s.

Neither Kolomoisky nor Bogolyubov appeared in court during the five-day hearing into Privatbank’s collapse last week.

Instead, in the drab surroundings of a London courtroom in Fetter Lane, a cast of well-known City lawyers was assembled.

Kolomoisky’s representative was Mark Howard QC, a star silk who previously acted for Uzbek-born billionaire Michael Cheney in his high-profile case against Russian aluminium tycoon Oleg Deripaska. 

Representing Privatbank was Stephen Smith QC, a barrister who previously starred in an extraordinary battle between the liquidators of failed Russian lender Mezhprombank and its founder Sergei Pugachev, a former senator known as the “cashier to the Kremlin” whose partner is countess Alexandra Tolstoy. 

Smith was also the barrister who acted for Kazakhstan’s BTA Bank when it was battling with its former chairman, oligarch Mukhtar Ablyazov, over allegations of fraud.

Both cases played out in English courts.

“You see these cases every time there’s an economic crash,” says a senior lawyer who specialises in banking disputes.

“When the financial system came close to collapse [most recently], governments came in and realised some banks [had issues]. There’s a saying that you don’t want to see law or sausages being made – I would add banks to that.”

In the Privatbank case, Kolomoisky and Bogolyubov are accused of masterminding an operation designed to hide fraud before the bank went into state hands.

They deny the allegations and are fighting a worldwide freezing order.

“Mr Kolomoisky and the other defendants maintain, as they have done throughout, that all of the bank’s claims are misconceived, and will fail,” Kolomoisky’s London-based lawyer Andrew Lafferty said in an email after the hearing.

“They strenuously deny any fraud, or that the bank has suffered any loss of funds.”

The nationalisation of Privatbank followed a $17bn rescue package for Ukraine by the International Monetary Fund and the installation of a pro-Western government that pledged reforms.

Since its bail-out, there have not only been lawsuits from the lender but also hundreds of cases against the National Bank of Ukraine, Privatbank and the ministry of finance.

Oleksandr Danylyuk, a former finance minister, who was sacked in June following tensions with prime minister Volodymyr Hroysman, called the cases surrounding the lender a “litmus test” in Ukraine’s battle against corruption.

“The [London] hearing matters greatly. As the old saying goes, ‘the best way to rob a bank is to own one’, and that model certainly has held forth in Ukraine,” says Professor Jeffrey Sommers of the University of Wisconsin-Milwaukee.

“Regardless of the disputed amounts involved in this hearing’s fraud case, it is the principle that matters. Several decisive moves must be made against Ukraine’s offshore banking if [the country] has any hopes of stabilising. A struggle is taking place to preserve or kill illicit offshore banking activities.” 

Last week’s hearing in London was considered a key part of the litmus test.

For the first two days, lawyers for the oligarchs challenged a $2.5bn freezing order on their clients’ assets, as well as the fact the case was being heard in an English court.

Although they denied all allegations of fraud, they said it could be difficult to prove that a $248m chunk of the money in question was returned.

On the other side, Privatbank’s lawyers argued in support of the jurisdiction as well as the freezing order.

They pointed to a series of what they called sham supply deals for “inherently incredible” and in some instances “practically impossible” volumes of commodities such as apple juice and manganese ore.

In the instance involving apple juice, the buyer allegedly agreed to an amount that would represent a third of the entire annual output produced in China – the world’s largest apple concentrate producer. 

“The loans were granted without proper approval or due diligence processes, whilst the supply agreements were produced as a fa├žade to enable $1.9bn to be paid to six companies,” the bank said in a statement once the hearing finished.

“None of the companies had websites, offices, staff, warehouses, a workforce or any other public presence.”

In response, Mr Kolomoisky’s lawyer said that he can show that “all the loans were secured, and that all the money that went to the six companies came back to the bank by way of repayment of loans”.

The business was founded in 1992 and grew quickly to become Ukraine’s largest bank.

By 2016, half of the population used the lender.

It had 30 regional offices and 2,445 high street branches.

Kolomoisky and Bogolyubov were among the founders, and are together believed to have had a shareholding fluctuating between 80pc and 100pc in the decade between 2006 and 2016.

“Privatbank is huge – if there was an equivalent bank in the UK it would be an RBS or a Barclays but without the competition,” says an executive who does business in the country.

“It’s the RBS of Ukraine – if you’re a pensioner, you bank with Privatbank. It’s a flagship institution for normal people.”

The case has captivated London’s legal circle as much as Privatbank’s customers.

As well as being the latest courtroom drama to take place between oligarchs in the UK, a key part of the battle is which jurisdiction a trial should be held in.

In court, Howard argued that the bank had chosen to frame its case “in a very specific way, and we know they’ve done that for jurisdiction purposes”.

But the pair are no strangers to the UK legal system.

In 2013, they won a legal battle against London-listed mining firm JKX Oil and Gas, which they are major shareholders in, after the board claimed they were trying to raid the company and tried to ban them from voting.

Three years later, they were scheduled to be involved in one of the most expensive cases ever heard in a British courtroom following a dispute over a business deal with Victor Pinchuk, the billionaire businessman who befriended former prime minister Tony Blair, but the trio settled out of court just three days before the trial was due to begin.

Even so, Anna Pohrebna, who works for law firm CMS in Kiev and is not involved in the Privatbank case, said it could be “mission impossible” to find a judge in Ukraine who would consider this impartially, given Kolomoisky remains one of the wealthiest men.

Having started his career buying and selling computers, the 55-year-old has holdings in oil and gas companies, a TV channel, an airline, industrial plants and a football club, and is reported to have a shark tank in his private office.

Questions emerged last year after a Facebook post uploaded by a student showed Kolomoisky in Amsterdam with Ukraine’s prosecutor General Yuriy Lutsenko.

The prosecutor issued a statement explaining that he had bumped into the billionaire while in the city for medical treatment.

Court filings seen by The Sunday Telegraph also claim that a judge in Kiev granted an injunction aimed at preventing Privatbank’s lawyers, Hogan Lovells, from making the freezing order application in December.

The firm has also advised the liquidator of Mezhprombank in its case against Pugachev.

“It shines an unflattering light on the suitability of the Ukrainian courts to hear a dispute of this kind,” the lawyers argued in the filing.

A judgment is expected in October.

Source: The Sunday Telegraph UK

Comments

Nicholas said…
As long as the oligarchs run Ukraine, the country will be corrupt.