Audit Office Of Ukraine Exposed Violation Of Law And Procedures Of Use Of Public Funds Amounting To $12 Billion USD

KIEV, Ukraine -- The audit of public finance in Ukraine in 2008-2009 and the first quarter of 2010 conducted by a specialized service of control over the legality of budget operations – the Audit Office of Ukraine, which is legally responsible for the results of this audit, exposed the abuse of public finances of unprecedented scale - the amount of questionable transactions reaches 93 billion UAH (about $12 billion).

PM Mykola Azarov claims that the Tymoshenko government allowed systemic violations in the area of public finances.

State auditors found that the amount of damages caused to the state – the taxpayers' money that were blatantly embezzled – exceeds 35 billion UAH ($4.4 billion).

The report of public auditors is the official document, which is the basis for making a decision on the legal classification of exposed facts of abuse. Under the Ukrainian legislation, the investigating authorities must take appropriate measures in response to the facts discovered by the auditors. In accordance with this norm about 1500 criminal cases were opened in 2010, which are currently being investigated.

All audit conclusions are backed by evidence, which show illegal use of the State Budget funds in 2008-2009 and in the first quarter of 2010.

For example, auditors have a record of the videoconference with the participation of heads of regional offices of the State Treasury, in which the head of the Treasury gave direct instructions to distribute billions of hryvnas from state budget funds for purposes that were absolutely not envisaged by the Law "On State Budget of Ukraine".

This resulted in a situation, where instead of the 25 billion of liquid funds, which should have been in the Treasury accounts as of 1 January 2010, the actual amount based on the analytical accounts and records of the Treasury was only 1.7 billion UAH.

While such an enormous amount having disappeared from the accounts, some mandatory budgetary programs were not funded, for example: education and health care workers did not receive their salaries in the total amount of 143.5 million. Food for children and hospital patients was not paid for (the total of 65 million UAH). Medications were not purchased for hospitals (53 million UAH).

Alongside such a critical shortfall in the funding of social programs, Tymoshenko government, in gross violation of existing legislation, placed more than 6.4 billion UAH, 1.2 billion U.S. dollars and 97 million euro on bank deposits, on terms favorable to commercial banks.

All of this occurred despite the fact that the Government incurred short term debts on the domestic market at 29% APR - extremely disadvantageous terms to for Ukrainian taxpayers. Ukraine's state debt in 2009 increased by 96 billion UAH and on 1 January 2010 amounted to 227 billion UAH. That is 33.9 billion more than the public debt threshold, which was established by the Law On State Budget of Ukraine for 2009.

Systemic abuse was encouraged by Prime Minister Tymoshenko, who made the following statement: "Dear friends, if we literally followed the letter of every law, word for word, then we would not have moved an inch." (quoted from the transcript of meeting of the Cabinet of Ministers of Ukraine).

Transcripts of government meetings indicate that Tymoshenko personally imposed scam schemes abusing public funds. Thus, the ambulances purchased under government guarantees and the medical helicopter were registered as medical equipment (medical products) in order to avoid paying VAT, excise and customs duties.

Issuance of free state titles of land ownership was financed from funds allocated for oncology clinics. The Commercial Corporation UkrAvtoDor was granted a short-term loan from the State Budget General Fund so that the corporation could pay off its external debts.

It must be said that such fraud was resisted even by some members of the Cabinet. As recorded in CMU meeting transcripts, the Minister of Health Care Knyazevich tried to raise objections against the obvious fraud in the procurement of EMS vehicles and helicopters. The Minister of Justice Onischuk directly warned that such solutions are problematic from the standpoint of their legality.

The fraud schemes were implemented only under direct pressure from the head of government. The gravity of threats to those, who disagreed with Prime Minister Tymoshenko is shown in a quote from the transcripts of CMU meetings, when Tymoshenko instructs: “I request the Interior Ministry to set up special teams, which will simply exert severe pressure on businesses. File criminal proceedings, lock people up for 3-4 days.”

Among the violations discovered by the audit, a significant part - 15 bln UAH – took place in the area of public procurement.

In 2008-2009, the Cabinet of Ministers adopted over 60 decisions that allowed holding state procurements without tenders, which are used to determin the most efficient supplier of goods and services.

Based on the fraudulent scheme described above State Enterprise Ukrmedpostach received a thousand Opel Combo minivans, which did not meet any international standards for EMS vehicles, and are basically unsuitable for the transportation of patients. Despite this fact, all above mentioned minivans with were personally presented by PM Tymoshenko with PR stickers reading: Tymoshenko Government Program in the course of the Presidential election campaign.

The cars were purchased from one party - an intermediary company, but the supply chain included 8 offshore companies! As a result, their price was more than doubled, and the budget suffered direct losses in the amount of 80 mln UAH. Besides, now, after the repayment of the loan secured by the Government, we will have to pay another 48 million UAH of VAT, plus additional excise and customs duties.

All procurements of medicine and medical equipment by the Ministry of Health Care for combating the epidemic of swine flu were also carried out solely through intermediaries, which lead to the increase of cost of at least two-fold, and losses to the state budget in the amount of over 40 mln UAH.

In 2008-2009 the Ministry of Economy approved public procurement from a single bidder (i.e. without a competitive bidding procedure) in 39 cases, with no grounds to apply the simplified procurement procedure. This is a direct violation of the current legislation in the amount of over 1 billion UAH.

Thus, on September 4, 2009, the Minister of Economy Danylyshyn signed a letter of approval on the application of procedures for procurement from one bidder of the works on reconstruction of the airfield complex "Kharkiv International Airport" in the amount of 696.6 million hryvnia (bidder – Construction and Installation Company # 813). The same company was approved to reconstruct the Borispil airport.

On September 23 Danylyshyn signed a letter of approval on the application of procedures for procurement from one bidder for the procurement of works on construction of administrative buildings, underground parking and a canteen for the Supreme Court of Ukraine in the amount of 95.5 million hryvnia (bidder - "Manufacturing Company ‘Bytremstroymaterialy’”).

On October 1, Danylyshyn signed the approval letter on the procurement of works in the amount of 97.5 million hryvnia for the reconstruction of water supply system of Lviv City from one party - the Energy Resource Corporation.

There are dozens of such examples of absolutely unjustified, non-urgent procurement from one bidder.

1500 tons of meat that was allegedly purchased from Suvorov Meat Factory for penitentiary system, for a total amount of 51 million UAH, which were never received by the prisons. Counter-audit of Suvorov Meat Factory, where the meat was allegedly kept, revealed that that factory did not even have refrigerators or storage facilities to store the meat, so it physically could not have been stored there.

The total amount of violations in the State Penitentiary Department was 470 mln. The State Financial Reserve revealed embezzlement of funds in the amount of 4,2 billion UAH.

On September 9, 2009 the Prime Minister Yulia Tymoshenko signed a secret Order #1049-r "On Replenishment of Single Treasury Account" (declassified in 2011), which states in black and white :

1. “To replenish the Single Treasury Account, urgently convert 200 million euros, which came from the sale of the set amount of greenhouse gas emissions under the Kyoto Protocol, into the national currency through the National Bank at its official rate, and credit the amount to a separate special account of the State Treasury.

2. The State Treasury shall ensure the completion of the transaction referred to in paragraph 1 of this Order.”

Thus, Tymoshenko directly violated the law which prohibited the use of Kyoto Protocol funds for any other purpose except environmental investments.

Besides, the minutes of CMU meetings showed that Tymoshenko was very well aware of this restriction, imposed by law, and repeatedly stated: "We have clearly defined the areas of use of Kyoto Protocol funds. These are heat pumps. Dear friends, we won’t spend the money for any other purposes." No heat pumps were built in Ukraine.

On September 14, 3.6 billion hryvnia appeared at the Single Treasury Account and by September 18 only 893 million remained in the account.

The environmental money received through Kyoto Protocol is a huge amount for Ukraine, and it was obviously spent for non-priority needs. Thus, from January 14, 2009, when the currency was converted and credited to the Single Treasury Account, the money was immediately spent as follows:

· 49 million UAH was spent for the Metalist Football Stadium in Kharkiv;

· 56 million was spent for the reconstruction of Kharkiv airport;

· 70 million UAH was converted into foreign currency for UkrAvtoDor needs;

· 130 million was spent for the procurement of grain to the Agrarian Fund;

· 6 million UAH was spent for the procurement of spare parts for firefighting equipment and so on.

By the way, after the inspection and inventory of the Agrarian Fund, about 300 thousand tons of grain was missing in the storage facilities. The Agrarian Fund had agreements, it paid money for the rent [of storage facilities] to fictitious companies (from the same converted "Kyoto funds"). Until now, the grain has not been found, it was not returned to the Agrarian Fund.

In other words, “the Kyoto funds” were converted, put into the general budget fund, illegally used for other purposes, and were not restored to the treasury accounts by the time Tymoshenko government was dismissed.

The international audit of Tymoshenko government activity exposed evidence of numerous violations at procurement of foreign medicine and medical equipment with budgetary funds.

International auditors Trout & Cacheris and Akin Gamp Strauss Hauer & Feld LLP compared the actual market prices and the procurement prices, which the previous government used to purchase medicine and equipment. Investigators also tracked the chain of offshore intermediaries, through which procurements were carried out.

The difference in prices is the “corruption tax” collected from Ukrainian taxpayers by dishonest officials and intermediaries. They deliberately inflated the value of contracts.

Interpharm company supplied the Ministry of Health Care with TETRAct-HIB vaccine at the price of $8.11 per dose. The producer, Sanofi, sold this medication at about $2 per dose. The intermediary, Olden Group LLC, is responsible for the quadruple increase in the price.

The total amount spent for vaccines was $5 million, of which according to estimation of auditors $3.9 million or 75% of taxpayers' money were overpaid.

The vaccine against rubella was procured by the Ministry of Health Care at the price of 30 UAH [per dose], while the producer’s price was 9,5 UAH.

The total amount of contracts signed by the Ministry of Health Care with Interpharm reaches 118 million UAH.

International auditors exposed the use of foreign intermediaries and the violation of legislation on tender procedures in the supply of goods by United Medical Service in the amount of 76 million UAH, by “TRI - The Central Pharmacy Warehouse" in the amount of 165 million UAH. The latter signed an agreement with an intermediary a month before it signed a contract with the Ministry, as if it was guaranteed to win the tender.

Many tenders were clearly fictitious. For example, officials did not notice that supposedly competing bidders - Imbioimpex and Medat – had the same address and phone numbers.

The total value of contracts that were acknowledged by international audit as unscrupulous and suspicious exceeds 400 million UAH (50 million USD). The investigation determines now, who used such impudent overpricing practices, and who is responsible for the abuses.

In February 2010, 10 days after the announcement of results of the second round of presidential elections, which Tymoshenko lost, but still held the post of Prime Minister, the State Committee for Material Reserves suddenly instructed the state enterprise UkrResursy to purchase sugar to replenish the stocks spent on trade intervention in late summer 2009.

In other words, the decision to replenish the reserves made in September 2009, was delayed, but quickly implemented after Tymoshenko’s defeat, despite the fact that February was the period of peak prices on sugar.

This deal with the Ukrainian company Hermes-Trade LLC was closed on the commodity exchange, where UkrResursy previously had never bought anything. Besides, the price of the transaction actually exceeded the average price in the peak period: 11 thousand UAH per ton vs. 8.5 thousand UAH per ton. Moreover, it was possible to buy cane sugar from Brazil at half of this price.

Incidentally, the same Hermes-Trade LLC bought cane sugar through Heritage Capital Investment (UK) at the price of 4.7 thousand UAH per ton. The contract amount reached 243 million UAH.

In other words, the losses of the state budget caused only by inflated pricing alone range from 55 to 140 million UAH.

As if this was not enough, the 243 million UAH were paid in advance (which was also never done before), out of about 22 thousand tons of sugar that were supposed to be supplied under the contract, only 5,000 tons were actually delivered.

Thus, in addition to other losses, the state did not receive goods in the amount of 188 million UAH.

The investigation now determines, who raked in "the sugar money", who exactly cheated Ukrainian taxpayers in the last days in office.

The abovementioned examples are not a comprehensive summary of the audit of the previous government’s financial activity. Complete audit materials are available on request at the State Financial Inspection.

However, these examples are simple enough to understand: in any country of the world such practices as those exposed by Ukrainian auditors (as well as confirmed and supplemented by international auditors Trout & Cacheris and Akin Gamp Strauss Hauer & Feld LLP), require investigation by law enforcement agencies, require legal evaluation of the actions of officials, who committed violations and abused public finances.

This is justice, not politics.

Source: Ukraine Governmental Portal