Presidential Laundry

How Poroshenko evades taxes

We have in our possession a recorded conversation between a person with a voice similar to that of Vadim Medvedev, an AVELLUM law firm partner, and a European businessman. During the conversation, Medvedev proposed tax avoidance and disclosed a scheme working in Ukraine. Medvedev himself is a confidant of the President of Ukraine, Petro Poroshenko. The banks mentioned by the lawyer in the scheme also directly relate to the head of state. Thus, with revelations allegedly made by Mr. Medvedev, we can trace the entire path of the money laundering by the President, who has not only sold his business, as he had promised before the elections, but also got a tax evasion scheme going that involves local investment funds, national banks, and Cyprus-based offshore companies.

Tax lawyer Vadim Medvedev, a partner of Kyiv-based AVELLUM law firm, is a confidant of the President of Ukraine. We have come into possession of a recorded conversation that took place in London allegedly between Mr. Medvedev and a particular Spanish businessman. During the talk, the lawyer described in detail a scheme used to evade taxes and siphon off money abroad, which is an economic crime.

During the conversation, the lawyer outlined steps to conceal incomes from property and business through foreign vehicles by creating tiers of trust funds and offshore companies.

The scheme is simple: a tax-exempt mutual fund is established locally to own real estate. It pays dividends to a foreign special-purpose vehicle (SPV) located in Cyprus. Neither the fund nor the SPV is taxed. Consequently, Poroshenko can earn big profits without paying a penny to the government.

The intricacy of this process is to be one step ahead of the tax authorities without immediately putting millions into one account and thus attracting unwanted attention. “You can establish a number of funds and diversify them,” the tax advisor recommended.

In this case, an SPV comes into play. It becomes a legal entity for the registration of several funds and can be indicated as their official owner. Handily located in Cyprus, the SPV does not pay taxes.

Speaking about banking matters, the tax advisor recommended a specific list of banks that did not ask too many questions and were familiar with the schemes in Cyprus. In particular, (presumably) Vadim Medvedev decided that International Investment Bank and “Ukrgasbank” would be the best candidates for cooperation. Both banks are directly connected with Petro Poroshenko: “International Investment Bank” is 60% owned by the President, and “Ukrgasbank” is owned by the government. This allows using their services to evade taxes and hide the status of an ultimate beneficial owner.

The most difficult part of such a discretionary scheme is to conceal the ultimate beneficial owner. The man with a voice similar to that of Medvedev noted that for the establishment of mutual funds that “are managed by an asset management company…, it [the company] must have some shareholders.” In this case, the asset management company is a front that manages assets and is the only publicly disclosed entity.

With that, the mutual funds own stock in real estate and transfer their revenues to the SPV company in Cyprus. Then, that SPV transfers the money to bank accounts in the British Virgin Islands as a trust. Thus, President Poroshenko has a perfect tax evasion strategy that is in no way linked with him personally.

Replying to the question about what offshore firms were the most trustworthy and were able to provide the required documents, presumably Mr. Medvedev said: “Should you need any legal services, in Cyprus, for example, you may contact the “Chrysostomides” law office.” According to him, the Cyprus company is a key hub for politically exposed persons as Poroshenko hires personal lawyers, such as George Ioannu, to make sure he has free rein, no questions asked.

Therefore, many of Poroshenko’s political and business partners form a network of dubious equity funds involved in multiple sectors of offshore companies, funds, and law offices willing to undertake the task of laundering the money of politically exposed persons.

Let us cite a few excerpts from our conversation. First, about the structure of a secret equity fund established for the purpose of tax evasion.

Businessman (B): We need to establish the structure in order to buy and to own, and to manage those, those properties.

Presumably Medvedev (PM): Probably what I would say, again, we’d have to look at the detail, most likely what I would suggest is that we would have foreign SPV. Probably Cyprus, but not necessarily. Held in trust.

Discretionary.

B: Where?

РM: That would be for your of your choice.

B: Okay.

РM: Then, if we do have if, if we do have enough time to set up a fund management structure, we could go for unit fund.

B: Where?

РM: In Ukraine.

B: Okay.

РМ: Managed by the management company, asset management company. And there must be some shareholders. But not.

В: Ukrainian?

РМ: It could be foreign, but it should not be actually the UBO.

В: Obviously. What’s the percentage of shares that he will have?

РМ: He will have, he will hold the asset management company.

B: Yes.

РМ: But not the fund.

В: Okay.

РM: The fund will be fully owned by the SPV.

B: Okay.

РM: The unit fund in Ukraine is actually exempt from income tax. So, you will not have any income tax in Ukraine.

B: Is that so?

РM: Yeah.

B: But where do you pay tax?

РМ: If you do it carefully nowhere.

B: Go on, okay.

РM: So, then you have the units of the fund held by secret entity and you could do. (…) So, what you would usually do, you will do buy-back, buy-backs of units here.

B: Okay.

РМ: So, the fund will purchase the units it should form, and pay the consideration to the SPV. And in Cyprus, shares of Ukrainian investment funds are exempt from the income tax as well.

В: That’s interesting and nice! Okay.

РМ: And then, you could distribute dividends to the trust, and there is no withholding tax and dividends in Cyprus at all.

B: Yeah, okay, yeah.

РМ: So, it all goes up to the trust, there’s no income taxes.

Then they talked about establishing an asset management company and proceeded with the discussion of the banks. The person with a voice similar to that of Medvedev laid cards on the table:

РМ: What about banking side? What if I establish banking relations for investments, for funds? (…) If you are setting down the structure, you’ll definitely need a bank to work with it. To hold cash, whatever.

B: Of course.

РМ: And that is quite a common business in confidential structures, that banks are extremely, extremely cautious about them. And it’s difficult to establish a good banking connection if you are going to make something very discreet.

(…)

B: Local bank that you can recommend?

РМ: That could be ‘International Investment Bank’, or that could be ‘Ukrgasbank’, it is state-owned, so there are a couple of.

B: That you mentioned, you know them? You have good connections and you have a previous experience with them?

РМ: Yeah.

How to conceal the ultimate beneficial owner?

B: What about UBOs, and stuff, how do you manage with the not mentioning, especially my, my high-profile people?

РM: That depends on three aspects. First one, now in Ukraine, we have public registry of UBOs, local entities, and the complicities of, are importance for you…

B: It is.

РМ: Then we should not simply use local entities. So, you should use foreign SPVs, in modest jurisdictions.

B: Yeah, where?

РМ: That could be Cyprus.

A buying-in proposal: creation of fictitious ultimate beneficial owners to conceal the real UBO.

РМ: So, we usually don’t provide shareholders or money services.

В: Okay.

РМ: And then you’ll have to.

B: So, because in Luxemburg this is what lawyers do.

РМ: I know.

B: Not only in everywhere in the world. You have a lawyer that says, ‘You are the UBO’.

РМ: So, that’s not what we do. What we could help with, we could find someone on the market who owns like, this type of business, who could be easily cleared with a financial regulator, as a valid UBO for, foreign bank business.

So it turns out that ‘Avellum’ is working with local offshore companies on establishing an equity organization concealing its ultimate beneficial owner. One of such offshore companies was ‘Chrysostomides’ (a law firm in Cyprus affiliated with Petro Poroshenko).

B: Now, you spoke about some companies, SPVs that you work with abroad. And what the characteristics of this company? It’s big, small, very international, something, niche, some kind of a company?

РM: Very different. Depending on profile of the transaction. So, we’ll suggest something fitting for your particular needs.

B: Yeah, but these are known companies, or this is something that it’s very difficult to, only very few people know about them?

РМ: Both options. We have like, contacts who are international and well-known and we have more discreet offices which are not publicly circulated, so.

B: Can you mention one or two which are known worldwide that you can recommend, so I can see what is the profile of such a company?

РМ: Yeah, if it will be, if you will need any legal services for example in Cyprus you can go to ‘Chrysostomides’ law offices.

Petro Poroshenko’s offshore companies were reported in detail by Panama Papers and Paradise Papers in 2016–17. Back then, it was reported that the President was the owner of the ‘Prime Asset Partners Limited’ offshore company, registered in the British Virgin Islands in August 2014. Later, based on the Paradise Papers reports, the ‘Slidstvo.Info’ Project journalists came to the conclusion that the offshores established by the President’s lawyers in the summer of 2014 were intended for minimization of taxes rather than putting the ‘Roshen’ corporation into a blind trust.

Since then, the guarantor not only has learnt nothing from what happened, calling the investigation of his scams an element of the hybrid warfare used against Ukraine, but significantly increased his assets.

Pursuant to law, public officials of Ukraine must declare their assets in their entirety. Any indication that they may be ultimate beneficial owners of undeclared assets waives their immunity as public officials and leads to legal proceedings.

The audio of conversation can be streamed at the link:

https://www.youtube.com/watch?v=ba6gK37P_uc