Editor’s Note: The following investigative report is based on millions of leaked records involving offshore secrecy, obtained by the International Consortium of Investigative Journalists.
ICIJ is an independent network of reporters in more than 60 countries who collaborate on cross-border investigations. It is a project of the Washington-based Center for Public Integrity.
A British Virgin Islands court order in 2007 to disclose the assets of gas and chemicals tycoon Dmytro Firtash struck terror into the offshore world, leaked documents indicate, and offered a rare glimpse into the workings of register agents, lawyers, and other facilitators who cater to the post-communist super-rich.
It all began with a messy divorce. Maria Firtash, nee Kalinovska, the ex-wife of Firtash, felt cheated from a one-sided separation and decided to go after what she claimed she was due.
According to documents obtained by the Washington-based International Consortium of Investigative Journalists, she hired fraud buster Martin Kenny who secured a Norwich Pharmacal Order in June 2007 and forced Commonwealth Trust Limited (CTL), a register agent in the British Virgin Islands, to disclose all information so Kenny could search for Firtash traces.
Neither Firtash nor Kalinovska responded to requests for comment for this article.
Issued on June 8, 2007, the order stated that Ukrainian billionaire Firtash “fraudulently concealed” substantial assets from his ex-wife and set up at least two businesses through CTL, a British Virgin Islands company that regulators found had violated the islands’ money-laundering laws and who banned it from taking on new clients, according to a cache of internal company documents leaked to ICIJ.
A High Court judge in the British Virgin Islands was convinced that Firtash had “secretly and fraudulently obtained” a divorce decree against her in Ukraine. The judge also said Kalinovska was seeking to “preserve her presumptive 50 percent interest in the very substantial assets of the subject marriage that have been fraudulently concealed from her by Mr. Firtash through various entities controlled by Mr. Firtash in numerous jurisdictions…”
The decision to allow Kalinovska’s lawyers to go hunting for Firtash’s assets was unprecedented for offshore jurisdictions, shocking local company registration officials who eventually managed to quash the order.
Big picture, global impact
The vast flow of offshore money — legal and illegal, personal and corporate — can roil economies and pit nations against each other. Europe’s continuing financial crisis has been fueled by a Greek fiscal disaster exacerbated by offshore tax cheating and by a banking meltdown in the tiny tax haven of Cyprus, where local banks’ assets have been inflated by waves of cash from Russia.
Anti-corruption campaigners argue that offshore secrecy undermines law and order and forces average citizens to pay higher taxes to make up for revenues that vanish offshore. Studies have estimated that cross-border flows of global proceeds of financial crimes total between $1 trillion and $1.6 trillion a year.
The U.S.-based think tank Tax Justice Network estimates that $21-$32 trillion – of which $9.4 trillion belongs to less than 100,000 individuals – has escaped the mainstream financial system, depriving nations of badly needed tax revenues.
ICIJ’s 15-month investigation found that, alongside perfectly legal transactions, the secrecy and lax oversight offered by the offshore world allows fraud, tax dodging and political corruption to thrive.
Ukraine is a major victim of capital flight and is a relatively huge recipient of money from offshore jurisdictions. According to a 2012 report by Tax Justice Network, Ukraine ranked 15th worldwide on a list of capital flight source countries.
The report added that Ukraine has contributed some $166.8 billion to the global offshore industry. As the top foreign investor into Ukraine, offshore Cyprus has put $17.6 billion, or almost one third of all FDI inflows into the country. Furthermore, such offshore jurisdictions as British Virgin Islands and Belize invest heavily into Ukraine – with $2.2 and $1 billion, respectively. Much of this is suspected of being repatriated money.
In comparison, U.S. investment since independence in 1991 has been $880 million.
The use of offshore havens by Ukrainian businessmen has massively distorted the nation’s economy. According to the World Bank, Ukraine’s income inequality, as measured by the Gini coefficient, where 1 symbolizes a country owned by one person, and 0 where everyone’s income is equal, was 0.256 in 2010. This would make Ukraine one of the most egalitarian societies on earth, on par with Norway and Denmark, and ahead of France, Poland, Austria and even Sweden, according to estimates for the late 2000’s by the Organization for Economic Cooperation and Development.
A High Court order to disclose financial information related to oligarch Dmytro Firtash raised fears it could be “the beginning of the end for British Virgin Islands (as an offshore haven)” Reaction to Firtash asset disclosure
When he learned of the 2007 order, Scott Wilson, the co-owner of CTL, was terrified: “I’m not even sure what that means (and if it means all records, I’m not even sure how we could comply), so if it means what it seems to mean, this is unprecedented. This would be a fishing expedition of the most extreme definition. Not only would compliance with such an order be the end of us, it would be the beginning of the end for BVI (as an offshore haven).”
Wilson concluded his e-mail message: “Frankly, I wouldn’t expect something like this to fly even in New York and I am astonished that the judge is not tossing these guys out of his BVI courtroom.”
Thomas Ward, his partner thought that “this is an amazing order. One wonders what the judge was thinking. I agree that this would be the end of us and the BVI – was this order issued by a BVI court? Boggles the mind!!”
Ward quickly grasped the gravity of consequences if the order was to be followed: “As Scott says, this would seem to mean the end of effective confidentiality on the BVI if a fishing expedition of such unbelievably broad scope is permitted…I agree that we must defend this aggressively and to the full extent possible.”
Pushback was swift in coming. One scare tactic used by CTL against Kalinovska and her lawyers was to claim a huge legal bill of more than $200,000. At the very beginning of the court trial, a CTL lawyer asked the judge to order Firtash’s ex-wife to immediately pay $58,675 to cover the offshore register’s legal costs so far and put up security for another $175,000 to cover its legal and paperwork costs going forward.
Email communications show the real legal costs were about $5,000, and Firtash’s personal lawyer Colin Mason even filed a complaint in the local court against the inflated costs asked by CTL.
The order was eventually quashed on July 18, 2007, but not before Mason got involved, flying to the British Virgin Islands to take part in the court hearings.
The domain part of Mason’s e-mail address – Scythian.co.uk – is the company, Scythian, that was paying tens of thousands of dollars in donations to Tory Pauline Neville-Jones through Robert Shetler-Jones of Firtash’s Group DF, according to the Guardian.
A High Court in the British Virgin Islands ordered the disclosure of financial information of 16 companies and individiuals. Background
Kalinovska and Firtash were married between 2002 and 2005. In media interviews, and according to a 2007 investigation conducted by respected Ukrainska Pravda, she got Firtash started in business. They worked together in the early 1990’s in Ukraine and Russia and also in Germany.
She initially got a divorce settlement of $36 million, but felt cheated after learning her ex-husband was worth much more. In 2006, reputable Ukrainian newsmagazine Korrespondent estimated Firtash’s assets at $1.4 billion.
That same year Firtash set up Group DF Limited, months after he publicly admitted to owning a big stake in RosUkrEnergo, a monopoly gas supplier to Ukraine partnered with Russian gas giant Gazprom. Group DF Limited became the holding company for Firtash’s vast interests in energy, chemicals and real estate.
Firtash has expanded his chemicals empire in Ukraine since President Viktor Yanukovych took office in February 2010. He unsuccessfully sued the Kyiv Post in London over an article from July 2, 2010 that reported “accusations of corruption and conflict of interest in the highly lucrative yet frequently non-transparent Ukrainian gas trade.”
In recent years he ventured into philanthropic projects, notably funding the Cambridge Ukrainian Studies department in England and revamping the campus of the Ukrainian Catholic University in Lviv.
Today Firtash, 48, is worth an estimated $3.2 billion, according to Korrespondent’s latest assessment conducted together with Kyiv-based investment bank Dragon Capital.
A maze of offshores
Over the last decade Firtash has extensively used common law offshore jurisdictions to register his wide network of companies.
His maze of offshore holdings was so complex it seems the billionaire himself was at times confused. In early 2009, his Hungarian firm EMFESZ, a serious gas player, was sold for $1 to an unknown company from Switzerland, RosGas.
The deal was done by Istvan Goczi, a director at the CTL-registered Group DF, who sold EMFESZ’s Cyprus-based parent company Mabofi. Firtash terminated Goczi, but had to go to court to regain control over EMFESZ in February 2013.
Documents leaked to ICIJ also show that CTL was sitting on a treasure trove of information related to Firtash and entities related to Kyiv-born crime lord Semion Mogilevich, who earlier topped the U.S. Federal Bureau of Investigation’s most wanted list. Some of the entities controlled luxury property, like the Three Musketeers Castle in France.
The data revealed that CTL had earlier handled company registrations for Group DF and DF Investments, both belonging to Firtash, through Cyprus law firm Demetriades Shakos Pifanis.The person handling all incorporations was a senior partner at the law firm, Andreas Pifanis.
Pifanis didn’t respond to a request to provide comment for this article.
Altogether ICIJ found that Pifanis had registered some 140 companies with CTL starting in 2005 and ending in 2009, in most of the cases using Annex Holdings as a director. Some of these companies were or are officially part of Firtash’s group, some are unknown to the public.
Annex Holdings made headlines in 2005 when it paid a Washington, D.C. lobby contract for then-Ukrainian Energy Minister Yuriy Boyko, a close associate of Firtash. According to U.S. diplomatic cables, Boyko had helped set up Swiss-registered RosUkrEnergo and sat on one of its boards. He also wielded power-of-attorney control over Firtash’s assets in the past.
An ICIJ investigation based on leaked documents also found that among the companies registered by CTL, two are linked to Mogilevich: Highrock Properties, established in 2000, but later re-named to Kemnasta Investments Ltd under lawyer Pifanis’ supervision, and Barlow Investing Ltd registered on behalf of Mogilevich’s former wife Galina Telesh.
Highrock Holding, a similarly named vehicle, was used both by Firtash and Mogilevich’s associates or their former wives, according to the Financial Times.
U.S. State Department cables posted on the WikiLeaks website have reported that Firtash acknowledged to a top American diplomat “that he needed, and received, permission from Mogilevich when he established various businesses, but he denied any close relationship to him.”
Internal CTL company documents also showed that it had set up Lacoste de Pratviel Ltd in 2006, a winery that is part of the famous castle Chateau d’Arricau-Bordes worth more than €3 million. The castle was listed as the property of Shetler-Jones in 2010, a supervisory board member at Group DF and its former CEO from 2007 to August 2012.
In a letter to the owner of CTL, Pifanis describes the nature of his business: “As I explained to you during our meeting we are involved in serious money transactions through the use of BVI companies.”
In a later email he explains that Firtash is one of his biggest clients: “this Group is one of the largest Groups we administer, who have already bought from us few dozens of BVI companies that we bought from you.”
Pifanis furthermore appears keen to please Firtash, and becomes agitated when things drag at CTL. One of CTL employee’s, Shonia Matthew, told a colleague in a Dec. 7, 2006 email that she was threatened by Pifanis: “he once threatened he will kill me if he comes to BVI and since then I am handling his requests professionally and without delay… but at the same time no extra ‘sweetness’.”
About the project
Documents used to report this story come from a cache of 2.5 million files that cracked open the secrets of more than 120,000 offshore companies and trusts, exposing hidden dealings of politicians, con men and the mega-rich the world over. The secret records obtained by the International Consortium of Investigative Journalists lay bare the names behind covert companies and private trusts in the British Virgin Islands, the Cook Islands and other offshore hideaways.
These secret files show CTL had served as a middleman for an extensive list of shady operators around the world, including in Russia and the U.S. – setting up offshore companies for securities swindlers, Ponzi fraudsters and individuals linked to political corruption, arms trafficking and organized crime.
There’s no evidence CTL engaged in fraud or other crimes. Records obtained by ICIJ indicate, however, that CTL often failed to check who its real clients were and what they were up to – a process that anti-money-laundering experts say is vital to preventing fraud and other illicit activities in the offshore world.
The documents show authorities in the British Virgin Islands failed for years to take aggressive action against CTL, even after they concluded the firm was violating the islands’ anti-money laundering laws.
CTL co-founder Thomas Ward blames many of the firm’s problems on “the law of large numbers.” Anytime you form thousands of companies for thousands of people, he said, a few of them may be up to no good.
In a written response to questions from ICIJ, Ward said CTL chose its clients carefully and that it had no more problems than other offshore services firms of similar size.
“I regard myself as an ethical person. I don’t think I intentionally did anything wrong,” Ward, who has worked as a consultant for the firm since selling it to new owners in 2009, said in a telephone interview. “I certainly didn’t aid and abet anybody doing anything illegal.”
It was not until February 2008 – nearly five years after regulators first found CTL in violation of anti-money-laundering rules – that they took action that threatened to put the company out of business. They banned CTL from taking on new clients until it complied with anti-money-laundering regulations.
CTL was reinstated by regulators after it was bought out by a Dutch company, Equity Trust, in 2009, thus getting the ban on signing new clients lifted.
What is Norwich Pharmacal Order
What the Norwich Pharmacal Order means, according to CTL legal counsel, from internal documents leaked to ICIJ:
“The Norwich Pharmacal Order is a discretionary relief that in an appropriate case can entitle the Applicant to have the Court override either contractual or other duties of confidentiality in order to assist an Applicant who either knows that a wrong has been done to him but not by whom or knows by whom but cannot ascertain the extent of the injury without assistance from third parties (who may be themselves innocent of any wrongdoing) but who have information (which may have been obtained on a confidential basis) that would assist in discovering the identity of the wrongdoer or the nature and extent of the injury. (…) there can be no greater confidential relationship than banker and customer. However, in Bankers Trust –v Shapira – (“the Banker’s Trust Case”) such an order was in fact made against a bank.”
“Where an ordinary citizen comes knocking on the door then he cannot discover anything from Commonwealth, but where the Applicant is a person who can prove to the Court that there is a grievance, and injury, then the Court will grant the Order and third parties such as Commonwealth have very little ground on which to resist.”