Petro Poroshenko
As part of its extensive Panama Papers investigation, the Organized Crime and Corruption Reporting Project (OCCRP) published a report titled "The Ukrainian President's Offshore Tax Maneuver," detailing the machinations of current Ukrainian President Petro Poroshenko regarding his company, Roshen.
NV publishes the full text of the article, in which the Ukrainian president is called a "chocolate magnate who was more concerned with his own well-being than the well-being of the country":
When Petro Poroshenko was running for the top government post in 2014, he promised voters that he would sell his company Roshen, Ukraine's largest confectionery business, in order to focus entirely on governing the country.
"If I'm elected, I will act honestly and sell the Roshen concern. As president of Ukraine, I want and will care exclusively about the well-being of the country," Poroshenko said in an interview with the German newspaper Bild less than two months before the election.
However, the actions of Poroshenko's financial advisers and himself suggest that the chocolate magnate was more concerned with his own well-being than the country's. In pursuit of his own interests, Poroshenko (his fortune is estimated at $858 million), according to some, even broke the law twice, presented false information, and deprived the country of taxes it desperately needed during the war.
This happened when he established an offshore holding company to transfer his business to the British Virgin Islands (BVI), a notorious offshore jurisdiction often used by those seeking to hide property or evade taxes.
His financial advisors say the British Virgin Islands were chosen to make Roshen more attractive to potential foreign buyers. But at the same time, it meant Poroshenko could save millions of dollars in taxes he would otherwise have paid in Ukraine.
The bitter irony of this story lies, in particular, in the fact that the news about the "presidential offshore" appears at a time when the Ukrainian government is actively fighting the use of "tax havens," which, according to one international organization, are costing the country $11,6 billion in lost revenue annually.
Details of the registration deal involving Roshen can be found among the documents that formed the basis of the Panama Papers project. These are materials from the database of Mossack Fonseca, a Panamanian offshore services company. The documents were obtained by the Süddeutsche Zeitung newspaper, and journalists from the German publication subsequently shared them with colleagues from the International Consortium of Investigative Journalists (ICIJ) and the Organized Crime and Corruption Reporting Project (OCCRP).
But the even more tragic irony is that, according to the available documents, Poroshenko was scrambling to protect his financial assets in the BVI tax haven just as the conflict between Ukraine and Russia was reaching its peak.
Is the law not written for everyone?
Poroshenko's actions may be illegal due to two circumstances: he opened a new company while serving as president and did not disclose this asset in his financial declaration.
According to Mossack Fonseca documents, on August 4, 2014, George Ioannou, a senior associate at the law firm Dr. K. Chrysostomides & Co LLC, sent an email to Mossack Fonseca's incorporation department requesting the incorporation of a new company for a "politically connected individual."
“We are talking about a holding company for his business, <…> it will have no relation to his political activities,” he wrote to Ioann and asked to be informed whether the company would take on this assignment.
After 17 days, the incorporation documents for the company “with Ukrainian roots” were submitted to the BVI registration department.
A scan of Petro Poroshenko's passport obtained from the Mossack Fonseca database. Photo: OCCRP
The address chosen for the new company, called Called Prime Asset Partners Ltd. (similar to the name of Poroshenko's Ukrainian holding company), was the Akara Building, home to thousands of offshore companies from around the world. Poroshenko, who listed his Kyiv address, became the sole owner. A copy of his passport attached to the documents confirmed that the beneficial owner was indeed the Ukrainian president.
Mossack Fonseca's data clearly stipulates that Prime Asset Partners is designated as a holding company for the Ukrainian and Cypriot entities of the Roshen confectionery corporation, and that the source of funds is to be "income from commercial activities."
Oleksiy Khmara, executive director of Transparency International Ukraine, told OCCRP that this is a serious issue. He said there is a conflict of interest and a likely violation of both the constitution, which prohibits the president from engaging in business, and anti-corruption legislation, which prohibits private commercial activity for all officials.
"If a new company is created in which a government official (after being elected to office) is listed as a beneficiary, this means they are directly involved in the business," says Khmara. "Then there's a clear violation of the law, regardless of the circumstances (under which the company was registered) or the place of registration."
Furthermore, the president failed to disclose his new offshore company and "auxiliary" companies in his 2014 financial disclosure, which may be another violation of the law. There is no information about this in his 2015 disclosures either. ICU, a Kyiv-based financial management company that advises President Poroshenko, reported that two more entities had been established: CEE Confectionery Investments Ltd. (registered in Cyprus in September 2014) and Roshen Europe BV (registered in the Netherlands in December 2014). The BVI holding company owns the Cypriot company, which in turn owns the Dutch company.
Moreover, the income declaration for that year makes no corresponding mention of either income received abroad or investments in the authorized capital of foreign companies.
In an email, ICU Managing Director Makar Pasenyuk explains that this is because "shares in BVI-registered Prime Asset Partners Limited have no par value, while only such shares were required to be reported in the 2014 declaration."
Shareholder register of Prime Asset Partners Limited. Photo: OCCRP
However, according to documents obtained by OCCRP, since its registration on August 21, 2014, Prime Asset Partners Ltd. shares have actually been valued at $1000, and Poroshenko is listed as their sole owner. The total value of the shares of its Cypriot subsidiary, CEE Confectionary, is $2000, while its Dutch subsidiary, Roshen Europe BV, has an authorized capital of $85. Experts believe that although these amounts represent relatively small amounts, these figures should be declared. When an OCCRP reporter asked Poroshenko's financial advisers about this discrepancy, they told him his information was incorrect.
However, had the president declared new foreign assets at such a critical moment for Ukraine's fight against separatism in Donbas, he could have faced some very uncomfortable questions.
At OCCRP's request, Evgeny Chernyak, an analyst with Transparency International Ukraine, reviewed documents on companies Poroshenko opened in the British Virgin Islands, Cyprus, and the Netherlands. He noted that the presidential income declaration for 2014 contained "no mention of foreign assets" in the section on shareholdings.
Chernyak stated that the lack of information about Asset Partners Limited shares constitutes a "gross" violation of the Code of Ukraine on Administrative Offenses. This refers to the article "Violation of Financial Control Requirements" regarding the provision of false information in income declarations by public servants, in violation of anti-corruption legislation. Chernyak added that Poroshenko was liable for this violation for one year, which in this case expired on March 30, 2016, and therefore is not subject to financial penalties for the information regarding 2014.
Regarding companies in Cyprus and the Netherlands, Chernyak explains that the old anti-corruption laws in effect last year did not clearly define the concept of "beneficial ownership." Therefore, Poroshenko must disclose this information in his declarations starting this year.
A certificate issued by Mossack Fonseca lawyers on December 8, 2015, confirming Petro Poroshenko's ownership. Photo: OCCRP
However, he failed to do this either. The presidential asset declaration for 2015, released on April 1 of this year, still contains no information about any foreign companies or any income received abroad from the sale of their shares. According to the Panama Papers project, as of December 8, 2015, Poroshenko remained the direct owner of shares in the British Virgin Islands-registered company Prime Asset Partners Ltd., valued at $1000. No changes in the ownership structure were recorded until the end of 2015.
On March 22 of this year, the president's financial adviser, Makar Paseniuk, responded to OCCRP by stating that after the new legislation comes into force, "all companies in which this client is the beneficial owner will be properly declared."
New twists in a long-running story
Poroshenko and his advisers are constantly making new proposals regarding the fate of Roshen shares. A pre-election promise to sell the company was soon abandoned in favor of the idea of creating an independent foundation to manage it.
During a press conference in Kyiv last January, the Ukrainian president announced that in early 2016, all of his Roshen shares had been transferred to a so-called blind trust, or anonymous trust, for "a respectable, top-tier foreign bank," which would "own, control, and manage these assets." However, Poroshenko had made similar statements earlier, in an interview with Deutsche Welle in November 2015, assuring that the trust issue had already been resolved.
Today it seems that the president was a bit hasty with such statements.
After the presidential administration referred OCCRP journalists' questions to his financial advisers, new plot lines emerged in this saga. Makar Pasenyuk's response mentioned difficulties in selling Roshen due to concerns among potential investors related to the "extremely unstable political and economic situation." Consequently, an offshore structure was created for this purpose, also intended to "increase the attractiveness of the Roshen corporation."
In his letter, Pasenyuk also assured OCCRP that the trust management issue remains on the table. "The relevant stake in the Roshen concern will be transferred to the trust after all legal formalities are completed," he said.
According to him, the BVI company has already opened branches in Cyprus and the Netherlands, although these divisions “do not currently own any assets.”
Regarding offshore companies, Pasenyuk expressed the following opinion: “As for the practical side, Ukrainian companies widely use such structures.”
On March 21, the day before Pasenyuk's written response arrived, the National Bank of Ukraine, as well as the country's fiscal and antitrust agencies, announced that they had agreed on a joint action plan to "deoffshorize" Ukrainian business.
According to the Washington-based Global Financial Integrity, which monitors tax havens worldwide, illicit financial flows deprived Ukraine of an average of $11,6 billion annually from 2004 to 2013. In 2013, this figure amounted to almost a quarter of its state budget.
Why the British Virgin Islands?
In conversations with OCCRP, legal and tax experts made no secret of the fact that setting up an offshore holding company, whether for sale or trust management, offers enormous tax advantages.
Daniel Bilak, managing partner at the Kyiv office of the international law firm CMS Cameron McKenna, declined to discuss the details of the Roshen situation but stated that tax savings are one of the main reasons for transferring assets offshore and creating a trust.
"Jurisdictions such as the British Virgin Islands, Panama, and Malta are generally considered offshore havens because they have very flexible legislation in terms of asset management and company registration. At the same time, they provide maximum confidentiality and minimal taxation," says Bilak, adding, "Therefore, it's entirely legal to limit your tax payments."
In turn, Yaroslav Lomakin, managing partner of the consulting firm Honest & Bright, which operates in London, Moscow, and Kyiv, calls the establishment of a holding company in the BVI the simplest and cheapest way to protect assets, although he admits that this is “bad for image and reputation.”
"There's a general belief that trusts are created to better protect assets and reduce the tax burden," says Lomakin. "Income tax for businesses and trusts in the BVI is approaching zero. However, the most interesting, multi-layered [opportunities] arise when it comes to profit distribution."
But even if politicians can sometimes set up offshore trusts, should they really do so?
Andreas Knobel, an expert with the Tax Justice Network, believes that only transparency and publicity can resolve potential problems associated with politicians and offshore companies or trusts. Any politician with a trust must "disclose the existence of this structure, specifying the law under which it was created (to prevent abuse of the law), and… provide information about all assets held in the trust—companies, shares, etc."
Knobel notes that while opening a company in a tax haven can be justified by various goals, such as reducing the tax burden or taking advantage of more liberal laws, many use offshore companies for tax evasion and corrupt activities.
"It would be interesting to know what prompted the creation of these companies," the expert adds. "Taxes? Secrecy? Why couldn't they have kept everything in Ukraine?"
"Boiler"
Poroshenko's company registration took place during one of Ukraine's most tragic moments. In late July and early August 2014, Ukrainians watched with alarm as Poroshenko called up reservists and spoke of a possible Russian invasion. Television reports of the dead and wounded were a daily reminder of the scourge of war.
To instill confidence in the nation, on July 26, Poroshenko invited television journalists to a National Guard base to film him, clambering onto an armored vehicle in uniform and confidently firing a machine gun. His generals were actively preparing a decisive counteroffensive to recapture separatist-held areas of the Donetsk and Luhansk regions.
But during these extremely dramatic days, the president found time to manage his offshore structures on the other side of the world. On August 4, 2014, Poroshenko's financial consultants initiated the process of registering a holding company in the British Virgin Islands.
Also in August, the Ukrainian General Staff set the task of recapturing lost territories in Donbas and ordered four volunteer battalions to occupy Ilovaisk, an important railway junction 40 kilometers from Donetsk.
The plan was to cut off supply lines from Russia to Kyiv's armed opponents in Donetsk. However, the Ukrainian command failed to take into account that, according to various sources, 3500 Russian military personnel had been deployed to the area.
On August 21, 27 Ukrainian soldiers were killed as a result of intense shelling from Russian weapons, and the events of those days would soon be called the "Ilovaisk Cauldron."
It was on this day that Poroshenko's offshore holding company in the British Virgin Islands was officially registered.
Within a week, Ukraine's volunteer battalions were surrounded, and their commanders apparently lost their ability to lead for several critical days.
Transparency International's head in Ukraine, Oleksiy Khmara, says that from a moral standpoint, the president should have put all personal interests aside.
"At the very least, he could have said, 'Guys, we don't need to deal with this now—we have more important things to do,'" Khmara is certain. "So his silent consent, his inaction at that moment, became components of a moral crime."
In just a few weeks of fighting in the Ilovaisk Cauldron, more soldiers died than in any other operation—almost a fifth of the total number killed during the entire armed conflict.
On September 1, 2014, Poroshenko declared that Russia had committed blatant aggression against Ukraine. That same day, he provided Mossack Fonseca with a utility bill as proof of his home address.
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