How a Ukrainian reform backfired, opening a new door to fraud

August 23, 2016 10:42 AM EDT

A view shows Horizon Park business centre in Kiev, Ukraine, August 18, 2016. REUTERS/Valentyn Ogirenko


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By Natalia Zinets

BARYSHIVKA, Ukraine (Reuters) - The goal was to make Ukraine more friendly for investors by reducing red tape. But reforms that loosened the rules for registering ownership of assets have left companies prey to fraudsters who can swipe entire businesses at a pen stroke.

The new laws, which took effect in December, give thousands of private notaries new powers to record changes of ownership of assets at registries around the country.

According to the government, on at least 250 occasions so far, fraudsters have taken advantage of the changes to seize control of shopping malls, building sites or other businesses, sometimes emptying bank accounts before they are discovered.

The fraud outbreak shows how steps taken by Ukraine's pro-Western government to open the country up to investment can instead backfire, providing more opportunities for criminals. The government says it is planning new legislation to tackle the problem, but those changes are months away, and meanwhile the authorities have few tools to stop the thefts.

Something was wrong when an accountant for Ukrainian real estate developer Stolitsa Group tried to log on to the company's online filing system one Monday in July.

The login credentials didn't work. But that turned out to be just the first hint of a much bigger problem. The company, it transpired, was no longer the owner of a $50 million subsidiary running one of its main projects.

A few days earlier, someone had walked into a registrar's office in Baryshivka, a village of about 10,000 people, 74 km (45 miles) outside the capital. The man presented forged documents, and re-registered the title to the subsidiary.

According the register, the new owner was now a 21-year-old living in territory controlled by separatists in eastern Ukraine, who had bought one of the highest-profile real estate projects in Ukraine for $400. Stolitsa says the whole transaction was fake.

"It happened out of the blue and we rushed to Baryshivka to that registry office," Valentyna Radionova, a senior manager at Stolitsa, told Reuters.

Stolitsa, which has built hotels, shopping malls and office buildings across Kiev, was eventually able to recover control of its subsidiary, and the case is now the subject of a criminal investigation. Managers agreed to discuss the fraud on condition that the project that was targeted not be identified, to avoid undermining confidence in it.

The government says it responded as quickly as possible, helping Stolitsa recover its property. Mykhaylo Apostol, an adviser to the interior minister, personally went with Stolitsa representatives to Baryshivka to investigate.

Apostol told Reuters those behind the fraud appeared to have been involved in other cases as well, although he declined to give more details of the ongoing investigation.

"We are aware of the people at the very lowest rung, who had the affidavits on which the firm was transferred," he said. How long it would take to prosecute the case would depend on how long the chain went to find those ultimately responsible.

MOVING UP THE RANKS

Since a revolution ousted Ukraine's pro-Russian government in 2014, the country's new pro-Western leaders say they are trying to make Ukraine a better place to invest. Ukraine has crept up the World Bank's "ease of doing business" rankings from 112th to a relatively respectable 83rd, two spots above China.

One change was to speed up transactions by making it much easier to register changes in ownership of assets.

Previously, only centralized registries could record changes of ownership of property. But now such transactions can be recorded in local registries like the one in Baryshivka. Some 6500 private notaries can register a business, a change in ownership or the movement of collateral for banking loans. Transactions can be recorded day or night, at weekends and from any location.

"It was aimed to improve Ukraine's position in the World Bank's rating for doing business," said Svetlana Mikhaylovska, deputy head of Ukraine's European Business Association.

"But in practice, positive tools are being used by unscrupulous people while bona fide owners are not protected. An agent, motivated by money, can transfer your business to anyone, because the law does not assume any responsibility for notaries," Mikhaylovska told Reuters.

Deputy Justice Minister Pavlo Moroz told Reuters the government still has only limited tools to address the issue. The ministry can bar notaries suspected of wrongdoing from accessing state records, but it cannot withdraw their licenses, nor is there a law that specifically classifies incorrect registrations as a crime.

In September the ministry plans to submit a draft law to parliament which will remove the right of notaries to change the ownership of businesses that are not in their local area.

More documentation will be required to register changes in property ownership, and owners will have the option of obtaining paper certificates that must be presented to transfer titles.

"I am confident as soon as these changes are approved this phenomenon will disappear," Moroz said.

HOSTAGES OF THE SITUATION

Since the reforms, foreign investors as well as Ukrainian firms have been hit by similar scams.

The same day that the Baryshivka village registry recorded the bogus purchase of Stolitsa's subsidiary, it also transferred ownership of Ave Plaza, a business center and shopping mall in the eastern city of Kharkiv, from Austrian firms Uniqa Real Estate and Uniqa Real Estate Holdings.

"In our case it was clear from the first glance that documents had been forged. The names of our co-founders had been written with mistakes -- Unica instead of Uniqa," Yuriy Kushnir, general director of Ave Plaza, told journalists.

Like Stolitsa, Uniqa was able to recover control of its subsidiary. But the fraudsters managed to steal millions of hryvnias from the company's account before it was handed back. That case is also under investigation.

In another case, global agriculture producer Bunge says a private notary in the Vinnytsia region registered a grain elevator belonging to one of its subsidiaries to new owners.

The local subsidiary of Italian bank Unicredit temporarily lost a Kiev office building called Horizont Park that it had held as collateral for a loan. A private notary in a village had changed ownership, the bank says.

"A situation is developing in which notaries ... can, with complete impunity, carry out the illegal manipulation of property," Tamara Savoshchenko, CEO of UniCredit's Ukrainian subsidiary, told a news conference.

With a few multi-storey buildings surrounded by cottages nestled among fruit trees, the village of Baryshivka is almost big enough to be classified as a small town, earning it the official trappings of a district center.

The registrar's office is located in a two-storey building on the main road, once named "October Street" for the Bolshevik revolution, now just called "Central Street".

Olha Honchar, a 57-year-old woman with short hair and a colorful dress, is one of four registrars who work there and accepted the documents in both the Stolitsa and Ave Plaza cases on the same day. She told Reuters she has a vague recollection of a man who appeared to be in his thirties, who came with the paperwork to register ownership of the Stolitsa subsidiary.

She became frightened, she says, when people in expensive cars turned up days later demanding the registration be canceled. She was brought to Kiev for questioning by police, and the experience left her unable to sleep properly, she said.

"I believe that my actions were fully in accordance with the law, I'm sorry that it turned out to be fake," she said.

Reuters was not able to obtain the name of the suspects in the Stolitsa case, including the 21-year-old briefly listed as the owner of Stolitsa's subsidiary; the authorities say the identities are confidential parts of the police investigation.

Honchar's boss, Tetiana Posevkina, said staff were acting in good faith, and had no way to verify whether the documents they were presented were forgeries.

"We have become hostages of this situation, it is very unpleasant. We read different slurs about us every day, but who said that we acted illegally?"

(Writing by Matthias Williams; editing by Peter Graff)



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