The Moldovan Connection

In Article Library by Ian Fraser2 Comments

By Ian Fraser and Richard Smith

Published: Sunday Herald

Date: 21 June 2015

Of the 438 firms registered at 18/2 Royston Mains St, two are named as having facilitated a $1bn Moldovan bank fraud

18/2 Royston Mains St, Edinburgh where two firms reported to have facilitated the $1bn Moldovan bank fraud are based. Photo: Google Street Views

How modest homes in some of Scotland’s poorest areas became prolific ‘company factories’. The inside story by Ian Fraser and Richard Smith. 

It’s a humble ground-floor flat in Royston Mains Street in Pilton – the Edinburgh housing estate which gained notoriety as the setting for Trainspotting, Irvine Welsh’s 1993 novel about drug addiction and crime.

The property is the home of a 36-year-old Lithuanian, Viktorija Zirnelyte. It is also home to hundreds of companies, some of which have recently been accused of involvement in a $1 billion Moldovan bank fraud. Of the 438 firms registered at the modest looking address, some are owned by offshore vehicles based in jurisdictions such as the Seychelles.

Owing to a quirk of company law and Britain’s laissez-faire approach to regulation, Scottish limited partnerships, which date back to the Limited Partnerships Act of 1907, are still not required to disclose their annual accounts or even the names of the people who control them. Ownership and control can be masked and layered through the use of faceless “general partners” and “limited partners”, and these are often based in secrecy jurisdictions such as the Marshall Islands, British Virgin Islands, Belize and the Seychelles.

In addition to being favoured because of their tax efficiency by private equity, venture capital and commercial property investors, Scottish limited partnerships have become a vehicle of choice for money launderers, tax evaders, fraudsters, and other forms of skulduggery. Companies legitimately offering no more than registration services and accommodation addresses can then be used as unwitting instruments in crime.

“Most [limited partnerships], like a drug dealer’s pay-as-you-go mobile phone, almost certainly exist for one deal before they are discarded,” said former Her Majesty’s Revenue and Customs tax inspector Richard Brooks.

In a special report published in Private Eye he added: “Those deals, however, can be extremely valuable to the perpetrators – while devastating their victims and sustaining corrupt regimes.” Zirnelyte’s modest flat is the address of two company formation businesses, Royston Business Consultancy, which Zirnelyte runs, and Arran Business Services, directed by a succession of Latvian expatriates, including Anzelika Young, née Trifonova, who was sentenced to 250 hours community service for mortgage fraud in February 2012 at Kirkcaldy Sherriff Court.

Royston Business Consultancy played a part in the formation of companies that were named by the security firm Kroll as having facilitated a massive Moldovan bank fraud which, last November, triggered the collapse of three Moldovan banks, and last month led to 20,000 people taking to the streets of the Moldovan capital Chisinau to protest against corruption (see below).

In a report commissioned by Moldova’s central bank, and leaked last month, Kroll alleged that Fortuna United LP and Novland Limited, both registered at 18/2 Royston Mains Street, were involved in this fraud. Companies House data shows that, since 2013, no fewer than eight other individuals, apparently Lithuanian, Latvian and Ukrainian nationals, have given Zirnelyte’s flat as their residential address. Zirnelyte was unavailable for comment. Calls to Edinburgh numbers listed as her business number were answered by the Royston Wardieburn Community Centre, where Zirnelyte was unknown.

Zirnelyte picked up her company formation skills at Leith-based company formation specialists Lawsons & Co, which is based in Duke Street, at the foot of Leith Walk, and run by the Cypriot-born businessman Marios Papantoniou. Lawsons provide the registered addresses for at least 561 limited companies and limited partnerships, several of which have been named as being under investigation overseas in connection with allegations of a $20 billion “Russian Laundromat” money laundering conspiracy (the Organized Crime and Corruption Reporting Project won a European Press Prize for its coverage of this scandal). Last November, the UK National Crime Agency confirmed it was probing aspects of the ‘laundromat’.

According to the Kroll report, Lawsons’ premises, shared with Papantonioiu’s accountancy firm Axiano, are also the registered addresses of half a dozen companies and limited partnerships allegedly involved in the $1 billion Moldovan bank fraud.

Papantoniou told the Sunday Herald that Lawsons is not responsible for the behaviour of firms registered at its addresses and that neither the National Crime Agency nor any other UK authority has approached him about the allegations. He said: “Some of the companies we create are sold to an agent in Estonia, but we are not involved in the day-to-day activities of these companies or anything else they do.” In a subsequent email, Papantoniou said the Kroll report was inaccurate and that he is considering suing the New York headquartered firm for defamation.

Other Scottish properties hosting companies allegedly involved in Moldovan fraud include a non-descript semi-detached council house, 45 Rosehaugh Road, in Inverness’s deprived South Kessock district, colloquially known as “The Ferry”. The property is home to a further 585 opaque limited partnerships, five of which, Kroll alleges, were used for the Moldovan heist. The Electoral Register says the residents of 45 Rosehaugh Road are David A MacMillan and Latvian-born Liene Brice, both in their thirties. They could not be contacted.

Another address favoured by companies said to be linked to fraud is 78 Montgomery Street in Edinburgh’s East End, home of John Hein, founder of Scotsgay magazine and a former candidate for the Liberal Party, and his partner James Stuart McMeekin. Both Hein and McMeekin are directors of company formation business Cosun Formations Ltd. Their address is the principal place of business of an astonishing 3,500 limited partnerships. Of these, five are mentioned in the Kroll report as being involoved in Moldovan fraud – Avenilla Commercial LP, Intratex Sales LP, Metalforum LP, Swedtron Alliance LP and Trademarket Networks LP. Hein failed to respond to requests for comment.

Overall the Kroll report identifies 28 Scotland-based companies and 20 based elsewhere in the UK, many with Latvian bank accounts, in connection with its investigation into the Moldovan fraud. The underlying network of opaque corporate entities, sometimes known as “shell” companies, is believed to be vastly larger, numbering at least 11,000 companies in Scotland alone. And the Scotland-based company formation specialists identified by the Sunday Herald are churning out a further new 300 limited partnerships each month.

Other Scottish addresses where entities in this wider network are registered, include 16/5 West Pilton Rise, Edinburgh. It is the base of 424 companies and limited partnerships associated with convicted mortgage fraudster Anzelika Young, a former director of company agents Arran Business Services, who is also still believed to manage 123 Accountants and to now live in the Fife port of Rosyth. None of these companies have been accused of connection to Moldovan fraud. Mrs Young was unavailable for comment.

There is no suggestion that any of these company service providers knew they were creating or serving companies or partnerships that were being used in offshore fraud, or that could be especially useful for such purposes. And Kroll’s allegations are at this stage no more than claims – they have not yet been tested in a court of law. Where it could, the Sunday Herald asked the formation companies to contact on its behalf the entities named by Kroll, but those who responded refused to discuss any matters relating to their clients.

Opposition leaders believe the government needs to take action to clean up the sector and prevent opaque British shell companies including limited partnerships from being used as conduits for the proceeds of crime and money laundering with tougher rules and greater levels of mandatory disclosure. The Labour MSP Hugh Henry said he will be tabling parliamentary questions about abuse of LPs and LLPs in Holyrood, and will write to both the Lord Advocate and the chief constable early this week. Henry, the shadow justice spokesman in the Scottish parliament, also said he would table a motion for a Holyrood debate.

“The Kroll report is shocking and it’s also very worrying, because, on the face of it, it looks like Scotland is becoming the money laundering capital of Europe. That is frankly unacceptable,” said Henry. “The UK government needs to look at whether or not the rules on limited partnerships and limited liability Partnerships are fit for purpose. The Scottish government should establish whether the the regulation of company formation agents is a reserved matter or whether there are aspects of devolved powers that could be used to bring in regulation.

“Why in Scotland do you have this huge proliferation of company formation agents whose output is so disproportionate to that which exists in England? We regulate lawyers, we regulate accountants, we regulate estate agents and we regulate financial advisers, but company formation agents seem able to establish completely fictitious entities, some of which are being used for money-laundering and to rip off impoverished countries. The third thing, which is clearly a Scottish responsibility, is for Police Scotland and the Crown Office to investigate whether there is any criminal activity.”

A Scottish government spokesman said that the law on limited partnerships is a reserved matter and therefore not its responsibility. The UK government did tighten up disclosure requirements relating to UK company ownership in its Small Business, Enterprise and Employment Act 2015, following an agreement on beneficial ownership principles at the G8 Summit in Northern Ireland in June 2013. But the SBEE Act failed to force greater transparency on limited partnerships.

A spokesman for the NCA said: “The NCA remains willing to consider any formal request for assistance from the Moldovan authorities in connection with their investigation, however our initial enquiries have revealed that only a tiny proportion of the funds entered the UK financial system and therefore the jurisdiction of the UK authorities.

“We continue to work closely with Companies House on the introduction of a publicly accessible central registry of company beneficial ownership information. Greater transparency of company ownership and control will make it more difficult to conceal involvement and act as a deterrent to crime.”

Scotland and the bank heist of the century

20,000 protestors take to Chisinau's street. Photo Agora.md

20,000 protestors take to Chisinau’s streets. Photo Agora.md

The alleged theft of $1 billion, equivalent to one-eighth of Moldova’s gross domestic product, from three Moldovan banks last November did not just bankrupt the banks concerned. It also nearly bankrupted the former Soviet republic’s economy, and sparked unrest, with 20,000 people taking to the streets of the Moldovan capital, Chisinau, to protest against corruption.

“A big majority of Moldovans are very, very angry with this case,” said Alina Radu, director of the Chisinau-based newspaper Ziarul de Garda. They are angry with the government for failing to prevent such crimes, she said, adding “but they’re also angry [with Ilan Shor, a Moldovan businessman who was allegedly the lynchpin of the fraud] and his family as well.”

The National Bank of Moldova, the republic’s central bank, is answerable to Moldova’s parliament.

In response to Moldovans’ clamour for justice, the parliament’s speaker, Andrian Candu, published an interim report into the fraud commissioned by the NBM from corporate investigators Kroll on his website. Candu said the government had “a responsibility to be transparent with our citizens.”

Kroll singled out 28-year-old Ilan Shor as the key perpetrator of the $1 billion fraud. He was charged with corruption two days later and has since been under house arrest. He denies wrongdoing. In a statement he described the allegations against him as “groundless” and said he will “support the authorities in finding out the truth” about the banks’ losses.

Shor also owns a football club, TV stations, the country’s main international airport, Chisinau International Airport, and has a Russian pop-star wife called Jasmine. He made his fortune selling duty-free goods at the airport. The Kroll report alleges Shor used a labyrinth of offshore firms to extract $1 billion from three Moldovan banks – Banca de Economii (where Shor is the chairman), Unibank, and Banca Sociala.

The offshore firms, including the Scotland-based ones, are alleged to have gained control of the banks using subversive means and then, in a flurry of deals on 25 and 26 November last year, improperly borrowed $767 million without providing any collateral. Total losses are expected to reach $1 billion. It is claimed that records of many transactions were afterwards deleted from the banks’ computers, with documents detailing loans issued by Banca de Economii loaded into a van that was reportedly stolen and destroyed in a fire a few hours later.

According to the Kroll report, Pilton-registered Fortuna United LP became involved in mid November when the loan portfolio of Banca de Economii was abruptly moved, through a series of opaque transactions, to Banca Sociala. Banca Sociala then claimed to have held a shareholders’ meeting in a remote Ukrainian town on 26 November and decided to transfer the collection rights on the loans to Fortuna United.

Dorin Dragutanu, the governor of Moldova’s central bank, said the shareholders’ meeting in Ukraine and the deal with Fortuna were “completely fake,” noting that Fortuna United had supposedly agreed to pay full price for the loan portfolio, but not until 2019. The funds were afterwards filtered through a “complex web of transactions,” said Kroll’s report, with much of the money ending up in Latvian bank accounts held by “apparently unconnected” England and Scotland-based limited partnerships.

Kroll’s report (dubbed the “Project Tenor – Scoping Phase – Final Report” said that a full forensic investigation was needed to identify other potential beneficiaries and recover the funds, and the Moldovan government has promised to embark on a second probe along these lines.

This is an extended version of the business focus published on pages 38 and 39 of the Sunday Herald on 21st June 2015. For a broader analysis of LPs, LLPs, their creators, and their role in the $1 billion Moldovan bank fraud, see A Billion-Dollar Bank Fraud in Moldova, and 20,000 Opaque British Corporations also written by Ian Fraser and Richard Smith and published by Naked Capitalism.