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AP IMPACT: Massive Ukrainian scam intercepted billions in taxes using phantom firms

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KYIV, Ukraine - As Ukraine's tax chief tells it, the billion-dollar theft was planned at a see-through plastic table in a vault of sound-proof steel.

The table and six matching transparent chairs sit in a secret chamber on an upper story of the Tax Ministry in Kyiv. It was the epicenter, he and other tax officials say, of a massive fraud suspected of squeezing 130 billion hryvnias ($11 billion) from Kyiv's coffers over the past three years — an amount equal to more than half a year's tax revenue for the entire country.

Deputy Tax Minister Ihor Bilous, the country's new tax boss, says his predecessor was in on the scam, helping to organize a wide network of phantom firms in return for a cut of the cash. The criminals, he says, operated with impunity.

"They didn't care about the police, the security services. Nobody was checking," Bilous told The Associated Press in a recent interview. "That's why this cancer ... spread over the whole country."

Bilous' predecessor, Oleksandr Klymenko, denies the claims, saying he "always fought tough with any corruption" and cited more than 1,300 investigations into charges of corruption that his office opened last year.

"A lot of false information that discredits my honour and reputation is spread by the media," he said.

But documents reviewed by the AP — including tax records, a list of alleged phantom companies drawn up by a Ukrainian anti-corruption group, and data from the business intelligence website Arachnys — support Bilous' description of a wide-ranging scheme, and outside experts support the claims.

Bilous' assertions are "very hard not to agree with," said Anna Derevyanko, the director of the Kyiv-based European Business Association. "Basically, whatever field you are touching, it was corrupt in the territory of Ukraine."

Exhibit A is the steel vault built into the centre of the Tax Ministry, just across from Bilous' office. He said it was here that Klymenko and his cronies worked out how to divide the spoils of a system that had some 1,700 companies in its clutch. The secret chamber was equipped with a white-noise generator to beat eavesdroppers, and plastic furniture that allegedly helped make sure nobody was recording the goings-on.

Using transparent furniture to beat surveillance "is straight out of the old-school, Eastern Bloc, counterintelligence playbook," said Vince Houghton, curator of the International Spy Museum in Washington. East Germany's intelligence service, for example, kept transparent furniture in a chamber at its embassy in Rome.

Klymenko denied anything untoward happened in the vault.

"This room was necessary only with the purposes of confidentiality when planning operational activities, working off tax evasion and fraud cases of large taxpayers," he wrote in an email Tuesday. "I consider such security measures justified."

Klymenko spoke to the AP from an undisclosed location, having left Ukraine in a hurry following the ouster of President Viktor Yanukovych early this year. Surveillance video taken from a Ukrainian airport shows Klymenko and the country's chief prosecutor scuffling with guards who try to detain them and overturning a metal detector gate as they try to reach their plane.

Exhibit B is a massive hole in the ground on Saperne Pole Street, on the other side of town. The pit, foundation work for an apartment complex to be completed next year, is where the headquarters of a trading firm named Mistral are supposed to be.

On paper, Mistral was a management consulting and research company that did millions of dollars' worth of deals before going bust early this year, after Yanukovych was chased out of office. But when police recently tried to visit its offices at 12 Saperne Pole, there was no trace of Mistral, whose name refers to a type of wind.

The numbers on Saperne Pole jump from 9 to 22.

Officials say Mistral may never have existed in the first place — one of 100-120 phantom firms organized to funnel money from legitimate businesses to corrupt officials.

According to officials and insiders, here's how it worked: A business pretended to buy goods or services from the phantom firm. Instead of delivering on the deal, the fake company secretly returned the money in cash, reducing the real company's tax liability in return for a cut of the money.

Getting in on the scam slashed tax bills dramatically. One home appliance importer used phantom partners to whittle its tax obligations down to $85,000 a month, according to ministry figures. Once it dropped the tactic, its payments jumped tenfold.

Those behind the phantom firms stood to make huge amounts of money. One tax document reviewed by AP showed that a Kyiv company purporting to be a trading firm drew in $190,000 in sales per month — with only a single employee on a monthly salary of $110.

A businessman with nearly two decades' experience in Ukraine told the AP about his own involvement in the scheme. He said $300,000 he owed in tax was instead split between his companies and the various phantom firms he dealt with. He said businesses signed up because of high taxes and erratic enforcement of the law. He spoke on condition of anonymity because he feared prosecution.

Phantom companies have long been a problem in Ukraine, which ranks 144th out of 177 in Transparency International's Corruption Perceptions Index. Exorcising them is a key challenge faced by the newly elected administration of Petro Poroshenko, who was sworn in Saturday as Ukrainian president.

For now, Ukraine's budget is being held together with the help of a $17 billion International Monetary Fund loan package.

Bilous is proposing a series of legal changes to fight corruption, and some 30 investigations are underway. But skeptics say the new government is not doing enough to end fraud.

Outside the tax ministry, drum-banging, bell-clanging protesters from the Anti-Raider League of Entrepreneurs, an anti-corruption group, alleged that crooked officials from the previous administration had merely been shuffled around.

Bilous "has not changed anything," said the league's director, Andrei Semedidko. "How are we going to build a new country when the faces are the old ones?"

The group has drawn up a list of 11 alleged phantom firms, but estimates the true number is about 1,200.

In the past five weeks authorities say they have shut at least 30 phoney firms across the country, often raiding empty offices filled with bogus paperwork, fake corporate letterhead and bundles of cash. But there have been no mass firings at the tax ministry.

Bilous said he is doing what he can in the face of entrenched corruption. Tax evasion, he said, has been a problem "for the last 23 years, and it's not easy to close it down."

But he acknowledges he's dealing with a crisis.

"I call it a national security problem," he said, "because if we continue like this, the budget deficit will basically kill us, in a year or two years' time."

___

Associated Press producer Theodora Tongas, photographer Sergei Chuzavkov, videographer Eldar Emric and Valeriy Kulyk contributed to this report.

___

Online:

Raphael Satter can be reached at: http://raphae.li/twitter

Maria Danilova can be reached at: https://twitter.com/mashadanilova

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