Walnut exports are a completely corrupt market. Ukraine exports billions of hryvnias worth of walnuts annually through shell companies. BusinessCensor has uncovered how this scheme works.
The walnut market is almost entirely export-oriented. In just six years, Ukraine has risen to fifth place in the world and first in Europe in walnut production. The walnut yield per hectare is several times higher than the yield from wheat, barley, corn, and sunflower, according to the Ukrainian Nut Association's website.
According to rough estimates, Ukraine produces 60-70 tons of walnuts annually. The international purchase price for a ton of shelled walnuts is approximately $5.
Former President Viktor Yanukovych's inner circle was well aware of the appeal of the nut market. They forced all exporters to send their vehicles to a single customs office—Kherson. When a truck carrying nuts arrived at its destination, tax officials wouldn't proceed with customs clearance without a bribe of $12-$16.
"They forced everyone to pay back then," one exporter recalled in a conversation with a BusinessCensor correspondent.
After the change of power in 2014, walnuts were exported for several months without bribes, kickbacks, or shell companies. However, as market participants told BusinessCensor, customs officials then began finding far-fetched reasons to suspend clearance of vehicles carrying walnuts. Tax authorities, the Security Service of Ukraine (SBU), and the Ministry of Internal Affairs also became involved. Companies purchase the lion's share of walnuts from individuals who grow them in their own gardens. This is precisely why tax authorities are visiting exporters and demanding payment of personal income tax. As a tax agent, the exporter must pay the state 18% of the amount spent on the purchase.
According to the Tax Code, taxes are not payable if nuts are purchased from individuals who grew and harvested the fruit on their own plots, says Elena Ivchenko, a representative of the Ukrainian Nut Association.
To prove that the nuts were actually grown by the seller on his own plot, he must obtain a 3 DF certificate from the village council and give it to the buyer. It's clear that in reality, no buyer will demand this certificate from the nut seller. This situation gives tax authorities an excuse to "shake down" exporters and force them to engage in fraudulent practices.
"If you calculate how much you officially have to pay as required by the tax authorities, it turns out to be higher than the bribe paid by the 'shadow' businesses," says Ivchenko.
Not all businessmen have the desire and resources to fight government officials and begin working with shell companies that are under the supervision of government officials.
"When a decent company enters the walnut export market and clears its cargo through customs, the SBU, tax police, and the anti-smuggling department immediately show up. And then the full-scale pressure begins," says Volodymyr Chuba, founder of the exporting company Ukr-Volant. "If the director knows the law better than anyone else, there's a chance of getting through customs. But then there are inspections and criminal cases. If the director isn't afraid and goes to war with them, they survive and continue working. There are five or six such cases in Ukraine today. They're no longer touched; they know it's futile. The rest don't want problems; they're afraid, so they resort to scams. That's the job of law enforcement—to force everyone into scams."
"Legal companies pay taxes, including on wages, and report to the tax authorities. They receive 100% of their foreign currency earnings. They experience the full brunt of the attention of regulatory and law enforcement agencies. Their production complies with European food safety standards," Chuba adds.
The schemes involve the creation of special front companies that, for a fee and under their own names, export walnuts. Market participants estimate the cost of such companies' services at $9-$10 per truckload (20 tons of shelled nuts).
Almost all such firms operate under tripartite contracts: the exporting firm sends nuts at a price several times lower than the market price to an offshore company, which sells them to the actual buyer at the market price.
The currency from these contracts is not officially returned to Ukraine. It enters the country through other channels and is paid to the actual producer through banks.
"Producers who operate through these schemes don't pay taxes, don't file reports, they simply don't exist. But they still operate and ship cargo for export. They receive money through banks, in cash, or in foreign currency. The cost of this 'customs clearance' for shelled walnuts is $9500 per truck, and for shelled walnuts, $6000," said one exporter, speaking on condition of anonymity.
Market participants' claims about the multitude of fictitious companies are confirmed by data from the customs database on nut exports in 20115, which is available to BusinessCensor.
According to the data obtained, in 2015, three companies with similar and unusual names became leaders in the export of shelled walnuts.
We are talking about the LLC "Labor and Rehabilitation Center for ATO Fighters", LLC "-Labor and Rehabilitation Center for ATO Fighters-1" and LLC "Labor and Rehabilitation Center for ATO Fighters".
Besides their name, these companies share a common place of registration. All three LLCs were initially registered in the same house in the village of Zarvantsy near Vinnytsia. All three were registered in November-October 2015.
According to customs reports for 2015, these three companies exported 2,257 tons of shelled nuts worth UAH 305 million. They also shipped 309 tons of unshelled nuts worth UAH 12,5 million. All shipments were made within two months—November-December 2015.
According to customs declarations, Ukrainian companies exported 24,2 tons of nuts worth UAH 2,16 billion in 2015. Thus, three unknown companies exported almost 10% of Ukraine's total annual nut exports in just two months.
How did little-known companies founded two months before the end of the year become the largest exporters in 2015?
ATO Voinov Shopping Center LLC is owned by Ihor Agafonov, a resident of Vasylkiv, Kyiv Oblast. He has no previous business experience and has never managed any other companies. The company's authorized capital is 500 UAH.
"-TRC Boitsov ATO-1-" LLC, with the same authorized capital, is owned by Kyiv resident Mykhailo Volotovsky. He also has no previous business experience and has never managed any other commercial organizations.
The ATO Fighters' Trade Center LLC, with a registered capital of 100 hryvnias, is owned by Serhiy Okhrimenko, a resident of Dzerzhinsk, Donetsk Oblast. He also owns another company, Agriment LLC, which exports nuts. In 2015, it exported 66 tons of shelled and 23 tons of unshelled nuts. This company was registered in February 2015. At that time, its founder was Igor Mozharovsky.
In addition to the "nut companies," Okhrimenko owns the little-known Dnipropetrovsk-based Grandsel LLC. The company's main activities include trading in timber, building materials, and plumbing fixtures.
Okhrimenko also sells computer equipment through the Kyiv-based companies DTS-T and A La Carte. Together with another Agafonov, Andrey, he owns the company Kresco Loyal Trading. According to the State Register, it is engaged in the wholesale trade of grain.
No information could be found on the business activities of Okhrimenko's enterprises.
The successes of newcomers to the nut market caught the attention of tax authorities. In February 2016, a State Fiscal Service investigator in Donetsk Oblast asked the Zhovtnevy City Court of Mariupol to grant access to the bank accounts of three LLCs opened at PrivatBank in Vinnytsia.
According to tax authorities, unidentified individuals who control the "ATO Fighters' Shopping Center," "ATO Fighters' Shopping Center-1," "ATO Fighters' Shopping Center," "Agroservis OPT," "Rozumnye Igri," and "Oreshek OPT" evaded taxes.
Like the previous three, Agroservis OPT was registered in Vinnytsia at the end of 2015. Its founder is listed as Donetsk resident Denis Lobov.
"Rozumnye Igry" was founded in December 2015 in Kyiv. The company was founded by Kyiv resident Andrey Pronin and headed by Denis Lobov. On the same day, the company "Oreshek OPT" was registered in Kyiv. Igor Agafonov was listed as the founder and director.
According to tax authorities, in 2015, these companies purchased walnuts from individuals for cash, exported the products, and evaded personal income taxes totaling 27,1 million hryvnias.
Furthermore, the suspects orchestrated a scheme to "deliberately introduce dangerous products into circulation. In 2015, they released walnuts onto the Ukrainian market that did not meet regulatory safety requirements in large quantities, totaling UAH 12,8 million."
The tax authorities' definition of "dangerous products" was not specified in the court proceedings. This information can be found in the Vinnytsia City Court's decision of December 7, 2015. In it, a State Fiscal Service investigator in Vinnytsia Oblast requested the court to seize the property of the "ATO Fighters' Shopping Center" and the "ATO Fighters' Shopping Center."
According to tax authorities, these companies, starting in October 2015, exported walnuts using forged documents of origin and deliberately evaded paying personal income tax totaling 4 million hryvnias.
In addition, tax authorities received a letter from the Security Service of Ukraine (SBU) in the Vinnytsia region stating that "coliform bacteria" were found in walnut samples exported by the ATO Warriors Shopping Center.
The existence of criminal proceedings and a letter from the Security Service of Ukraine (SBU) about the discovery of dangerous bacteria in walnuts allowed customs officials to block the shipment of walnuts abroad by other companies in December 2015. Following a public scandal involving the media, nut exports resumed.
In addition to the companies mentioned above, about two dozen firms were involved in nut exports in 2015. All were registered between late 2014 and 2015. All had the same owner and director. Furthermore, by the end of the year, all of them had become major exporters of shelled nuts.
Over the course of the year, these companies exported 13,6 tons of walnuts from Ukraine—more than half of the total volume. The invoice value of the nuts exported by these companies amounted to UAH 1,4 billion. This figure is at least half as low as the companies intentionally understate contract prices in their invoices. These are not all the companies of the same year that exported walnuts. BusinessCensor selected only those with large export volumes.
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