The $2 trillion of suspicious transactions detailed in the leaked bank records of the new FinCEN Files news investigation demonstrate that, despite repeated fines imposed by U.S. authorities, some of the world’s biggest banks, including Barclays and JPMorgan Chase, have undermined efforts to build an effective international anti-money laundering regime. The leaked documents, which had been filed with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), were obtained by BuzzFeed News and shared with the International Consortium of Investigative Journalists, publisher of other groundbreaking investigations such as the well-known Panama Papers and Paradise Papers.
The FinCEN Files revelations included suspicious transactions by President Donald Trump’s former campaign chairman and now-convicted felon, Paul Manafort, and the Ukrainian oligarch he consulted for previously, Rinat Akhmetov. The documents provide the latest illustration of the continued need for major reforms to the financial industry in places like the United States. Without tighter oversight, embryonic anti-corruption efforts in countries like Ukraine don’t stand a chance against oligarch- and kleptocrat-driven backsliding.
And the corrosive impact of their corruption inevitably reverberates across national boundaries, including back to U.S. and other Western shores. The long pattern of corruption in Ukraine and the way Trump and his supporters, including former New York Mayor Rudy Giuliani, tried (unsuccessfully) to reflect the reputational stain back onto Trump’s key challenger for re-election, former Vice President Joe Biden and his son, Hunter, even became the subject of the U.S. House impeachment of the president.
Ukraine continues to struggle against the caustic effects of corruption today. In early September, for example, Ukraine’s Constitutional Court ruled that the formation of the country’s reform-minded National Anti-Corruption Bureau of Ukraine (NABU) was unconstitutional and asked the country’s legislators to amend, within three months, the 2014 law that created the bureau. But Ukraine’s Parliament is heavily influenced by the country’s oligarchs, raising concerns that the amendment process itself will be corrupted to curtail the watchdog’s independence instead.
Volodymyr Zelenskyy, the Ukrainian president whom Trump tried to arm-twist into investigating the Bidens, was elected president in early 2019 in part on promises to rein in the rampant corruption. His reform efforts have foundered on the systemic complicity of law enforcement and the judiciary in the kleptocracy that significantly controls the country’s intertwined political and business spheres.
And the rapacious graft of Ukraine’s oligarchs and kleptocratic state officials is not a purely domestic problem. The rules-based international financial system affords democracies, and the U.S. chief among them, extensive leverage that they can use to encourage states like Ukraine to reform. That same system, however, also affords oligarchs the means to secure their illicit gains overseas, and thereby empowers their influence over politicians and bureaucrats at home and abroad.
A Case in Point
NABU was set up under pressure from Ukraine’s western donors in support of a vigorous campaign for such an entity by Ukrainian civil society. The International Monetary Fund (IMF) has made the bureau’s independence a condition of the $5 billion pandemic bailout that Ukraine secured from the fund in May. The first disbursement of the bailout was made in June, but further installments are now in question because of Ukraine’s foundering anti-corruption agenda.
Since its creation, NABU has repeatedly faced obstruction from Ukraine’s prosecutors and its courts when it tries to bring cases against parliamentarians and public servants. Earlier this month, frustrated NABU detectives decided to share their evidence in one case with the Kyiv Post, after what they described as surreptitious moves by the special prosecutor to close the case.
The detectives assert that the DTEK group, which controls 70 percent of Ukraine’s coal industry, colluded with the state regulator to defraud Ukrainian consumers of Hr 39 billion ($1.4 billion). NABU contends that the primary beneficiaries of the scheme were Akhmetov, the country’s richest oligarch and owner of DTEK, and former Ukrainian President Petro Poroshenko. Both men deny any wrongdoing.
The scandal has its roots in the aftermath of Russia’s 2014 invasion of Ukraine, including the annexation of Crimea and the start of the war in the Donbas with Russian-supported separatists. The conflict significantly damaged the Ukrainian economy. By January 2015, the hryvnia had lost 70 percent of its value against the U.S. dollar since the start of 2014.
At the time, DTEK, which is owned by Akhmetov’s primary investment vehicle, System Capital Management (SCM Holdings), had borrowed money in foreign currencies, but its cash flow was in hryvnias, according to the Kyiv Post. As the company’s gross profit was cut in half from 2014 to 2015, Akhmetov’s assets decreased from $12.5 billion in 2014 to $2.3 billion in 2016.
Citing the conflict in the coal-producing Donbas, DTEK moved quickly to lobby for the so-called Rotterdam+ formula to fix the price of coal. Introduced in 2016 and extending to July 2019, the formula set the price of coal in Ukraine to the coal index in Rotterdam plus the cost of delivery to Ukraine from Rotterdam, regardless of the coal’s origin.
And yet, no coal was ever shipped from Rotterdam. Some was imported to Ukraine from South Africa and the United States, but the majority was produced in Ukraine at a far lower cost, NABU detectives told the Kyiv Post. DTEK rapidly reaped the benefits of the inflated price.
One of the key suspects in the NABU investigation is Dmytro Vovk, the former head of the National Energy and Utilities Regulatory Commission (NEURC). According to his notes, shared with the Kyiv Post by NABU detectives, Vovk initially determined that the Rotterdam+ formula “significantly exceeds the cost in Ukraine” and “does not take into account demand on the internal market.” But the regulator then chose to push for the formula anyway. Mobile phone records show that his subordinate worked with DTEK employees to finalize the formula and plan how to present it to the public.
The detectives also told the Kyiv Post they have secondary evidence that Vovk was leaking information on the formula to Investment Capital Ukraine (ICU), a firm linked to Poroshenko. The firm advised the former president on the sale of the confectionary company, Roshen, that made him a billionaire, while several ICU employees moved into top positions in Poroshenko’s government. ICU acted on the information Vovk provided by investing in DTEK Eurobonds and earning significant dividends. Vovk worked for ICU and then Roshen before the former president appointed him to lead the NEURC.
Before sharing their evidence with the Kyiv Post, the NABU detectives say, they first sought help from cabinet ministers, with no success. Prime Minister Denys Shmyhal, who worked for DTEK from 2017 to 2018, also redirected their appeals to the prosecutors. Although the previous leadership of the Ministry of Energy agreed that Rotterdam+ was excessive, NABU detectives told the Kyiv Post that the current acting minister, Olha Buslavets, rejected their allegations.
Suspicious Transactions and Parking Proceeds in the United States
Akhmetov built his mining empire during the rapid privatization of state-owned industries in the 1990s and later supported pro-Russian Viktor Yanukovych, who ultimately was toppled in the Euromaidan movement of 2014. Yanukovych fled to Russia, facing allegations that he had used shell companies to siphon hundreds of millions of dollars out of the country.
Amid the fallout of Yanukovych’s ouster, the FinCEN Files show, Barclays first filed a suspicious activity report to FinCEN in October 2014, detailing transactions Akhmetov’s companies made over the previous five years. In July 2015, Barclays reported to FinCEN that it had placed some of the oligarch’s companies under what it calls its “Payment Rejection Filter.” However, in total, the FinCEN Files reveal that Barclays moved almost $2 billion for his companies between 2009 and 2016.
Among its concerns, Barclays cited a leaked 2006 U.S. diplomatic cable that described the Party of Regions, the political party that Akhmetov once led and continues to finance, as ‘a haven for mobsters and oligarchs’ and said the party was undergoing an “extreme makeover.” That makeover was orchestrated by Manafort. Akhmetov first hired Manafort in 2005 to rehabilitate the Party of Regions, and the American consultant went on to help drive a political campaign that brought the party’s presidential candidate, Yanukovych, to power in 2010.
The FinCEN Files reveal that banks first flagged suspicious transactions connected to Manafort in 2012, but JPMorgan continued to process over $50 million in payments for the political strategist while he consulted for Akhmetov and Yanukovych.
The willingness of major banks to facilitate Akhmetov’s global enterprises, despite their reports of concern to FinCEN, has helped the oligarch’s companies exploit further legal gray areas in countries like the United States where they invest. Since SCM Holding’s steel and mining arm, Metinvest, acquired Tennessee-based United Coal Company in 2009, inspectors have found more than 14,000 health and safety violations across its four U.S. mining operations, according to an investigation by the Project on Government Oversight (POGO). One of the mines allegedly benefited from the Trump administration’s leniency in a settlement agreement related to its pattern of violations.
POGO also found that United Coal’s operations across Appalachia received a total of $21 million in Paycheck Protection Program (PPP) loans during this year’s coronavirus pandemic, despite earning an estimated $1.5 billion in sales last year. The loans, which can be forgiven by the government under certain conditions, were meant to support small American businesses struggling to cope with the coronavirus pandemic. But unlike past Small Business Administration programs, it does not matter if PPP loan recipients are owned by wealthy foreign entities.
The lack of oversight evident in the PPP loans is just one of many loopholes that kleptocrats and oligarchs take advantage of in major, rules-based financial jurisdictions. Despite recent legislative efforts, the United States continues to lack a beneficial ownership registry, for example, diminishing the ability of law enforcement to identify and mitigate illicit finance.
Legal transparency tends to be even more lax surrounding the purchase of luxury real estate worldwide. Among his vast holdings, Akhmetov last year purchased what had been the most expensive mansion on the French Riviera to go with his $221 million penthouse in London.
The source of Akhmetov’s wealth lies in the corrupt intertwining of Ukrainian politics and economics, but the grand scale and longevity of his success is undergirded by the international financial system. The FinCEN Files help illuminate the key role that major banks based in places like New York play in facilitating and sustaining the power of oligarchs like Akhmetov.
Conditions imposed by the IMF and other foreign donors that support the development of independent anti-corruption bodies in countries like Ukraine are a piece of the anti-corruption puzzle. But they must be accompanied with reforms in the United States and other democratic countries central to the international financial system to prevent offshoring in the first place. By cutting off their means to secure their wealth beyond the jurisdictions they loot, oligarchs and kleptocrats might finally be subject to greater domestic accountability spearheaded by bodies like Ukraine’s NABU.