Cyprus umbrella: how a Russian oligarch from the sanctions blacklist transfers money

MeritServus is a corporate service provider in Cyprus. This is the company that allows the person to be sanctioned. Russian

oligarch Konstantin Malofeev has transferred tens of millions of dollars’ worth of debts even after he was blacklisted.

Key facts of the investigation

• In 2005 MeritServus registered for Malofeev in Cyprus the company Tinello Investments Limited, owns it on the basis of a consent for trusted management until 2017.

• In 2014, the US and the EU imposed sanctions on Malofeev, but until 2017. MeritServus prepared documents, helping the Cypriot firm of the oligarch and other companies to transfer loans to each other.

• Malofeev owns the TV channel Tsargrad TV, which disseminates Kremlin propaganda about the conflict in Ukraine. The oligarch has come under sanctions for funding Russian-backed separatists in eastern Ukraine.

• According to experts, the credit deals probably mean that both MeritServus and Malofeev’s Cypriot company violated the conditions of the sanctions.

The leaked documents show that Russian investor and propagandist Konstantin Malofeev carried out tens of millions of dollars worth of deals between his companies, despite EU and US sanctions precisely through the corporate service provider.

Malofeev supported separatists in eastern Ukraine and was blacklisted in 2014. However, the Cypriot firm MeritServus, which was once part of the international consulting accounting giant Deloitte, secretly continued for almost three years to serve Malofeev’s Cyprus-registered fictitious company and did not give up on its client.

MeritServus’ leaked internal files also reveal MeritServus’ relationship with Malofeev and other Russian oligarchs linked to Vladimir Putin who have fallen under sanctions. The documents were published by the Distributed Denial of Secrets group, which works for transparency of socially significant data. On April 12, Britain imposed sanctions against MeritServus and its boss, as the company also served the interests of Roman Abramovich. The firm’s relationship with Abramovich was reported by OCCRP in January.

Malofeev has been called an “Orthodox oligarch” because he is an enthusiastic supporter of Putin’s foreign policy on Ukraine, as well as the Russian Orthodox Church, which is closely aligned with the Kremlin. In the early 2000s, against the backdrop of the economic boom in Russia, he founded the investment group Marshall Capital and made a fortune.

Later, Malofeev gained notoriety all over the world – he was blacklisted because in 2014 he financed the participants in the armed conflict in the Donbass. In addition, Malofeev founded the Tsarigrad TV channel, which disseminates pro-Kremlin propaganda about the war in Ukraine.

In response to a question from The Guardian, MeritServus said that until 2017 they were not aware of the sanctions against Malofeev. However, the EU imposed the first restrictions on the oligarch back in 2014.

“
As soon as our client becomes aware of this error, he informs his regulator… and report all transactions,” the firm’s lawyers said, adding that MeritServus had stopped working with Malofeev in March 2017.

“All the while, our client was fully transparent and the position was resolved with both ICPAC (Institute of Chartered Accountants in Cyprus), and with MOKAS (Cyprus Anti-Money Laundering Unit)“, the lawyers stressed.

Speaking to the OCCRP, ICPAC CEO Kyriakos Iordanou said the regulator had “summoned MeritServus to its office” in May 2017 when it learned that the company had worked with Malofeev. MOKAS declined to comment on the situation.

Tom Keating, director of the Centre for Financial Crime and Security Studies at the UK-based Royal United Services Institute, said the three-year gap between the international sanctions imposed on Malofeev and MeritServus was “at best a systematic non-compliance… at worst, there was some form of contributory negligence.”

“This type of violation


(


whether systemic, negligent or complicity


)


must certainly result in some form of sanction or fine.”

Malofeev did not want to respond to invitations for comments.

The Secret Beneficiary

MeritServus is a family-owned company that provides corporate services. In the 1980s, it was founded within the global consulting network Deloitte and until recently its website said that it was a “preferred service provider”. (

However, Deloitte denies this and claims that MeritServus is “not part and unrelated” to Deloitte since 2005.

)

The company’s office is located in the Mediterranean city of Limassol, often referred to as “Limassolgrad” because many Russians export their assets there.

MeritServus creates and administers corporate structures for its clients, advertising itself as the “perfect gateway to the European Union” to customers in countries such as Iran and China. But, nevertheless, its business exists thanks to Russian customers.

“Relations between Russia and Cyprus are not only a matter of taxes and trade. The relationship between the two countries is cultural and social in nature,” the site said in a statement.

In 2005, the then 30-year-old entrepreneur Malofeev through MeritServus founded the company Tinello Investments Limited. In addition, he signed an agreement with FinServus, a subsidiary of MeritServus, to run Tinello on his behalf.

This agreement, known as a “trust deed”, means that Tinello’s shares are registered in the name of FinServus, although Malofeev is interested and has rights to them, i.e. that he is in fact their owner and beneficiary.

As the leaked documents show, FinServus was obliged to pay Malofeev dividends and always fulfill his will, and also to transfer the shares to his name as soon as it received instructions to do so.

As a result of this contract, Malofeev held full control over the company, while his name did not appear in the documents.

“
If you create an anonymous company and provide it to trusted management, and its details are unknown to the public and the authorities, then to link assets and company back to you would be very difficult,” said Myra Martini, a corruption financial flow expert at Transparency International.

Later, again in 2005, Malofeev founded the private investment company Marshall Capital, which invests in large Russian enterprises, including Rostelecom.

The fiduciary management agreement with FinServus conceals all ties to Malofeev, but data from the leaked documents show that Tinello soon began conducting financial transactions with other of his companies. In 2006, the company began lending to other Malofeev’s enterprises, including those belonging to Marshall Capital.

Financing of rebels

Following Russia’s invasion of Crimea and eastern Ukraine, the EU and the US imposed sanctions on Malofeev for funding the separatists. The Ukrainian government has also launched criminal prosecutions for Malofeev’s alleged support for the rebels.

Former employees of Malofeev’s companies have taken up senior positions in eastern Ukraine. For example, Alexander Boroday was appointed head of the government of the so-called. Donetsk People’s Republic, and Igor Girkin became commander of the armed forces of the DPR. Later Niderlania Girkin He was

convicted in absentia as one of the culprits in the downing of a Malaysian plane in 2014 that killed 298 people.

Malofeev denies funding separatists in Ukraine, but his TV channel Tsarygrad has been actively supporting the actions of Russia’s armed forces for many years. In 2022, a page “Our Heroes” appeared on the channel’s website, dedicated to the Russian military who died in Ukraine. Photos of young people in military uniform appear under a meaningful text: “They went to hell not for money. We can live in the Russian world. “On a peaceful earth.”

In TV broadcasts, “they honor Putin as if he were the second Christ,” said Irene Kenyon, a former senior U.S. Treasury intelligence officer who now serves as director of risk analysis consultancy FiveBy.

She remembers well how she followed Malofeev’s finances back in 2014.

“We had information that he was sending weapons and money to the separatists in eastern Ukraine. If he has access to the global financial system… To transfer money for the separatists, he is funding a rebel movement,” she said.

Under EU and US sanctions laws, banks are obliged to freeze assets if they are more than 50% owned by a sanctioned person, or if it can be proven that that person has direct or indirect control over the assets. Companies in the EU and the US are largely prohibited from dealing with sanctioned individuals or organisations.

In 2014, the EU imposed sanctions against Malofeev, but for two years or more the oligarch carried out financial operations thanks to the trust management agreement with MeritServus. At the same time, he signed new loan agreements and redistributed existing loans between his dozens of companies and their subsidiaries. Some of them were registered offshore areas such as Panama and Seychelles.

The Carousel with the Loans

In MeritServus, Malofeev signed a chain of credit agreements between his offshore companies in the first half of 2015, when he was subject to EU sanctions for at least nine months. In 2016 MeritServus signs an agreement to convert dollar debt into rubles.

• On March 19, 2015, a representative of MeritServus signed an agreement allowing Panamanian-registered Porthos Management Inc., part of Malofeev’s corporate group, to transfer the rights to an existing 2.5 million euro

  (

  $2.71 million

  )

  loan to Tinello.

• After almost two weeks, Tinello transferred the 17m-euro loan rights. Originally allocated to Isma LLC by the Tsargrad Group, to the Seychelles company Aguilas Trading Limited, which formerly belonged to Malofeev.

• On the same day, Tinello handed over to Aguilas Trading the rights to a loan of EUR 3.6 million. Tureya LLC, another Russian company in the Tsarigrad group, which has so far been run by Malofeev’s brother.

• On 3 June 2015. Tinello enters into a 7.5m-euro loan agreement. Marcap Investments Group Limited, the Cypriot subsidiary of Marshall Capital. Under the terms of the contract, the payments had to go through banks in the United States and Switzerland, although in these jurisdictions the sanctions against Malofeev have already been introduced.

• In July 2016. MeritServus signed a contract to convert a loan of 14.1m euros to rubles. Tinello had previously lent to SNM LLC, another subsidiary of the Tsarigrad group, led by Malofeev’s brother.

In March 2017 MeritServus finally remembers to pay attention to the oligarch. The “internal report on suspicions” states that Malofeev refused to provide a new copy of the passport and for 10 years has not once sent a financial statement.

In the “client risk indicator” without a date, MeritServus notes the EU sanctions imposed on Malofeev, as well as a number of other risk factors, including “excessive secrecy on the part of the client”, lack of “financial/commercial justification” for at least one transaction, and the fact that the origin and source of his wealth cannot be identified.

In May 2017, Tinello’s shares were finally transferred to Malofeev’s name and for the first time the entrepreneur’s shares in the Cypriot company were registered in the official register of legal entities.

Experts believe that MeritServus violated EU sanctions by working with Malofeev in the period in question.

“Every entity in the EU involved in this scheme is guilty of assisting in circumventing sanctions,” said Keating of

the Royal United Services Institute

.

According to Kenyon, the dollar credit Tinello received from Malofeev’s Marcap Investments Group Limited, as well as other credit transactions, was a violation of U.S. sanctions.

“The purpose of putting someone on the list (for sanctions) is to cut it off from the US dollar so that if (loans were made) to Malofeev as a sanctioned person using US dollars, then I would rate this as a violation,” she said.

“Those who help individuals and entities under sanctions transfer money open the door to these malicious actors who want to gain access to and corrupt the global financial system,” she said.

In response to questions from The Guardian, MeritServus lawyers said the company learned of the sanctions in March 2017, almost three years after they were introduced. The company then suspended its relationship with Malofeev and informed the regulator ICPAC of all transactions.

ICPAC chief Kyriakos Iordanou said that in 2017 the regulator required MeritServus “to submit a full report on this case.” And the corporate service provider was not punished at the time. As the UK has now imposed sanctions on the company, “ICPAC will assess the situation and decide whether it is necessary to take any measures.”

In response to a question whether Britain’s sanctions against MeritServus speak of omissions by the Cypriot regulator, a representative of the Government of Cyprus defended the mechanisms of enforcement and monitoring of sanctions in the country. He said the competent authorities in Cyprus had been informed of the individuals and companies against whom the UK had imposed sanctions a week ago.

Holes in supervision

Until Russia’s full-scale invasion of Ukraine in 2022, the EU did not standardize penalties for circumventing sanctions across the bloc. Thus, as long as no decision has been adopted on this issue, each EU country can set its own enforcement standards.

In 2016, Cyprus passed a law providing for imprisonment and fines of up to 300,000 euros for violating EU and UN sanctions. But law enforcement in this country is not particularly strict, and scandals about international money laundering and other financial crimes therefore erupt.

“It is known that there is almost no fight against money laundering in Cyprus. And that’s why the Russians there like it so much,” Kenyon told OCCRP.

Suggestions that the country was violating sanctions over weak law enforcement were described by a Cypriot government official as “simply ridiculous”.

In the U.S., Malofeev’s partners ran into trouble for helping the oligarch circumvent sanctions. In June 2015, Malofeev agreed with a U.S. prosecutor to provide retroactive documents that would prove he had transferred shares in a Texas bank to a Greek partner before the sanctions took effect. This is stated in the indictment of the United States Department of Justice.

Former Fox News producer John Hanik, who helped Malofeev create Tsarigrad TV, has been charged with violating sanctions and faces a maximum sentence of 25 years in prison. Malofeev faces an even harsher sentence, but is unlikely to be extradited, although a US judge ordered the seizure of 5.4m euros in February. $100 of its assets.

Chris Tuck, a political risk specialist at global consulting firm J.S. Held, said that in such cases, lawsuits against intermediaries could prevent violations of sanctions in the future.

“Despite reputational risks, some people will still do it with the thought that they might get away with it. But if they see convincing examples of enforcement in the press, some of them may get dissuaded,” Tok told OCCRP.

According to him, before the Russian invasion of Ukraine, many companies in the EU were willing to take risks by serving sanctioned customers – provided they would not be caught.

“
If enforcement is ineffective, if firms are willing to take risks by serving these people, then the whole sanction regime just doesn’t work,” he said.

Tom Stokes




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OCCRP





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Translation:




BIRD.BG

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