by Lauren Caryer, PhD
The Largest Case of Money Laundering in History
On January 12, 2016, an all too familiar story appeared in Youngstown’s Business Journal: Warren Steel Holdings LLC would be shuttering a steel plant located just north of Warren, OH, a town in the heart of the so-called Steel Valley, situated midway between Cleveland and Pittsburgh. The company reportedly cited the usual factors contributing to the plant’s closure and the loss of 150 jobs, “weak demand in the steel industry” and a “lack of financing” for the plant’s operations. At first glance this news registers as just another example of the economic decay afflicting the Rust Belt. However, a steady drip of civil suits has shown that Warren Steel may also be sign of another dismaying trend, that of misappropriated international funds increasingly permeating unlikely segments of the U.S. economy through anonymous Delaware LLCs.
These cases, including two pivotal civil suits, filed in May and August of this year in the Delaware Court of Chancery, tell the tale of what has been described in a June 4, 2019 article by the Atlantic Council as potentially “the biggest case of money laundering in history,” involving individuals and entities located in Ukraine, Cyprus, the British Virgin Islands, Miami, Delaware, Dallas, and various locations across the industrial Midwest. The May 21, 2019 suit, filed by the Ukrainian bank, PrivatBank, alleged that from 2006-2016, the bank’s previous owners, Igor Kolomoisky and Gennadiy Bogolyubov, laundered $470 billion dollars through the bank’s Cypriot branch (a figure roughly double the entire GDP of Cyprus for that time frame), and misappropriated the funds into various commercial assets in the United States owned by Delaware LLCs, ultimately controlled by Kolomoisky and Bogolyubov. As the Atlantic Council article notes, the 104-page complaint functions as “probably the most detailed study of large-scale money laundering into the United States.” The complaint, which arose after the bank’s 2016 nationalization, in the wake of its fraud-induced near collapse, offers a unique window into the 4-step process by which a financial institution’s funds can be stolen by its principals, obscured through a labyrinthine laundering process, funneled into offshore commercial assets, and the whole process hidden through a system of loan recycling.
As outlined in the filing, PrivatBank, which came to be one of the largest banks in Ukraine, was founded in 1992 by oligarchs Igor Kolomoisky and Gennadiy Bogolyubov and former Vice Prime Minister of Ukraine, Serhiy Tihipko; the bank was majority-owned by Kolomoisky and Bogolyubov until its nationalization in 2016. During the period spanning from 2006 until 2016, the oligarchs presided over what the complaint described as a “Shadow Bank,” operating alongside the institution’s licit activities.
Four Steps to Shady Financing
First, the oligarchs’ loyalists within the so-called Shadow Bank would issue business loans to entities controlled by Kolomoisky and Bogolyubov. These loans were typically issued for purported “general corporate financing” and these entities would subsequently deposit the loan money into corporate accounts overseen by PrivatBank’s Cypriot branch.
Then, in step two, with the aid of several Cypriot law firms, the Shadow Bank created dozens of anonymized corporate entities, the “Laundering Entities” (ultimately controlled by Kolomoisky and Bogolyubov) each with numerous PrivatBank Cyprus accounts, through which the various loans could be comingled and moved across the various entities and accounts in a complex shell game, meant to obscure the origin of the funds. As stated in the complaint, although these entities “had billions of dollars moving in and out of their accounts, in reality, the entities had no business, assets, operations, or employees and were shell entities deployed for money laundering purposes.”
In step three the laundered money originally acquired through “general corporate financing” loans, was channeled to a group of related Delaware LLCs and used to purchase commercial assets in the United States (more on this later), contravening the stated purpose of the loans.
Finally, in step four, the bank’s accounting was squared by repeating the first two steps and using the laundered funds from the second round of loans to pay off the first round of loans, in a Ponzi-like process known as “loan recycling.” As a July 17, 2019 article from the Financial Times put it, this scheme continued within PrivatBank until “regulators found a $5.5bn black hole in its balance sheet,” at which time Kolomoisky departed first for Switzerland, and later for Israel (where he also possesses citizenship), in the hope of avoiding possible extradition to the United States.
The Optima Group
While Kolomoisky and Bogolyubov oversaw PrivatBank and its shadow functions from Ukraine, three of the oligarchs’ lieutenants, Uriel Laber, Mordechai Korf, and Korf’s son-in-law Chaim Schochet (also named as Codefendants in the May suit), allegedly oversaw the Delaware LLCs, known as the Optima group of companies, from Optima’s headquarters in Miami. The Optima Group’s primary function was to acquire various commercial and industrial real estate holdings on behalf of Kolomoisky and Bogolyubov. The holdings acquired through the misappropriated funds varied both in geography and use, from Stemmons Tower and the former CompuCon headquarters in Dallas, to the former Motorola manufacturing facility in Harvard, IL, to PNC Plaza in Louisville, to steel manufacturing facilities in Detroit, West Virginia, and Ashland, KY.
Perhaps most notably, according to the complaint, one Optima entity, Optima Ventures LLC (owned equally by Kolomoisky, Bogolyubov, and Korf and managed by Schochet), became “the largest holder of commercial real estate in Cleveland” with major holdings dotting the Cleveland skyline including: One Cleveland Center, 55 Public Square, the Huntington Building, the Crowne Plaza Building, and the AECOM/Penton Media Building. A February 5, 2012 profile of Chaim Schochet in Cleveland’s Plain Dealer, labelled Schochet as “The most important guy you’ve never heard of,” and the man “responsible for roughly 2.8 million square feet of office space” owned by the Miami-based Optima and ultimately controlled by the Privat Group, a “Ukrainian business conglomerate.” While the article described the then-25-year-old as “engaging” when discussing his investment goals in the rebounding city, it also characterized Schochet as “circumspect” in describing Optima’s structure and investors.
Schochet’s reticence to discuss the Optima Group appears clearer in hindsight as subsequent accounts have demonstrated how little Optima cared for its “investment” properties in Cleveland. Following the nationalization of PrivatBank, which put an end to Kolomoisky and Bogolyubov’s control of the bank’s Supervisory Board and access to its lending portfolio, Optima began divesting its assets in Cleveland. As a June 11, 2019 piece in Cleveland Scene described, most of these properties “have fallen into disrepair and suffer from high vacancy rates.” The AECOM Building was purchased by Optima in 2010 with 90% occupancy; it was sold in 2018 “in need of significant renovation” with a mere 57% occupancy at an $8.5 million loss. Reportedly, One Cleveland Center has also suffered from poor tenant retention and diminished valuation. While Optima purchased the property in 2008 for $34 million, it was appraised in 2018 at only $20 million. According to the article, Optima continues to shop the building after a prospective buyer pulled out “calling the project unworkable.”
Fifty-five miles east of Cleveland, the Warren Steel plant may have closed, but its owner, Warren Steel Holdings LLC, continues to haunt Kolomoisky, Bogolyubov, and Mordechai Korf. On June 15, 2015, Warren Steel Holdings LLC’s minority beneficial shareholder, Vadim Shulman, filed suit against the trio and related business entities in the Trumbull County Court of Common Pleas. While the suit was dismissed on jurisdictional grounds, a similar suit was reportedly filed on August 23, 2019 in the Delaware Court of Chancery.
Shulman’s Trumbull County complaint, which includes details which dovetail with those found in the bank’s May 2019 suit, contends that Kolomoisky, Bogolyubov, and Korf sought to gain near-total control over Warren Steel through a “long-running, self-dealing, debt-accumulation scheme.” They did so by moving to restructure Warren Steel’s debt through a new lender. While the total value of Warren Steel’s assets was reported to be $27 million, $25 million in additional loans were advanced by the new lender, the identity of which was only revealed to Shulman after the restructuring was greenlit. The mystery lender? Optima Acquisitions LLC (indirectly owned by Kolomoisky). As the Trumbull County complaint summarized, “If the assets of Warren Steel were valued at only $27 million, Optima Acquisitions (and therefore Kolomoisky alone or together with Bogolubov) would have the benefit of security over almost all of the assets of Warren Steel which, if enforced, would leave approximately $2 million for the other lenders and obviously nothing for the Plaintiffs.”
While Kolomoisky and company were allegedly attempting to wrest full control of the plant away from its minority owner through a self-dealing lending scheme, the complaint contends that the Defendants were knowingly siphoning capital and resources away from the plant through a parallel “undervaluation scheme” in which sweetheart deals were made with other ferroalloy companies controlled by the oligarchs. Allegedly, “as a way to transfer funds away from Warren Steel, [the Defendants] sell goods to Related Parties for less than their true value and purchase goods from Related Parties for more than their true value.” These trading partners: Optima Group entities and their holdings. The Warren Steel plant “continued to operate at a loss” and closed six months after Shulman’s initial complaint was filed. If Shulman’s allegations are to be believed, the official reasons for the closure – a faltering industry and lack of financing – look more like pat excuses, trading on the well-worn economic tropes of the region and obscuring more nefarious causes.
The Purchase of a President
Back in Ukraine things are looking bright for Kolomoisky and Bogolyubov. Both of the oligarchs have returned from their extended stay in Israel following the April 2019 election of comedian Volodymyr Zelensky as President of Ukraine. According to the Financial Times, Zelensky “rose to fame playing a fictional president” on a TV channel owned by Kolomoisky. The oligarch is also believed to be Zelensky’s largest financial backer and Andriy Bogdan, an attorney who has represented Kolomoisky in the PrivatBank litigation, is serving as Zelensky’s Chief of Staff. Kolomoisky himself was reported as boasting, “People come to see me in Israel and say, ‘Congrats! Well done!’ I say, ‘For what? My birthday’s in February.’ They say, ‘Who needs a birthday when you’ve got a whole president.’” Mere days before Zelensky’s electoral “landslide,” a Ukrainian court ruled against the PrivatBank nationalization, raising concerns that Zelensky will return to bank to his political patrons. While in Ukraine the fate of PrivatBank hangs in the balance, Kolomoisky may find his own fortunes still tied to Ohio. As The Daily Beast reported on April 7, 2019, the FBI and the U.S. Attorney’s Office in the Northern District of Ohio have initiated a probe into the oligarch’s possible financial crimes.
The Kreller Hot Topics Report is a monthly publication dedicated to insights on international issues and incidents.
About The Kreller Group
For nearly 30 years, Kreller has relied on “extensive boots-on-the-ground” research, conducted by investigators who are well-versed in worldwide military, law enforcement, business and government matters to deliver the concise information our clients need to make decisions.
Want to discuss how our expertise can help? Click here.