The Board of Ferrexpo: hear nothing, see nothing...

Let us remind that on April 26 the shares of Ferrexpo with its main assets located in Ukraine (the Poltava, Yeristovo and Belanovo ore mining and processing enterprises (GOKs) plunged 28%. This followed the announcement of the resignation of Deloitte LLP as the Group's auditor because of the investigation  into a charity called Blooming Land, which had received US$25 million from Ferrexpo annualy “to implement Corporate Social Responsibility (CSR) programs”.

Besides the auditor, two independent directors, Mary Reilly and Bert Nacken, resigned from the board on April 26. They informed of their intention not to stand for re-election to the board of directors at the Group’s annual general meeting on June7, 2019.

Before that, Simon Lockett, senior independent director of British-based Ferrexpo resigned from the board in late January.

Just a week after Lockett’s resignation, it became known that Ferrexpo was conducting a comprehensive check on the use of finances for charity as part of its CSR program (coordinated by Blooming Land). After this news, the company's shares in the London Stock Exchange dropped 7%.
As a result, only one independent director Vitalii Lisovenko remains at Ferrexpo today.

The scandal with the drop of shares on April 26 was exacerbated by the fact that Chris Mawe, Ferrexpo’s Chief Financial Officer, sold 150,000 shares on April 25 at £2.6803 per share whereas the next day Ferrexpo’s share price fell to £1.926.

Thus, Ferrexpo before its meeting on June 7 looks rather unpresentable. The auditor has gone. Three of the 4 independent directors have left the board of Ferrexpo and the CFO is suspected in insider dealings.

However, the key question on the agenda of the Ferrexpo’s General Meeting of shareholders on Friday is whether donations transfers to the Ukrainian charity fund Blooming Land can be treated as a theft by Kostyantin Zhevago, CEO of Ferrexpo and the People's Deputy of Ukraine, or not?

This is where the root of the conflict between the top management of the British-based  Ferrexpo and its former auditor is. Both sides agree that Blooming Land might be involved in frauds with donations transferred by Ferrexpo for its Corporate Social Responsibility program.

The difference is that Ferrexpo asserts that Kostyantin Zhevago has nothing to do with this, while Deloitte LLP is not sure about this.

In fact, the company's statement of April 23 that “the board has formed a unanimous view, based on a lack of clear evidence to the contrary and unambiguous representations given to the board by the CEO over many years, that the CEO does not have significant influence or control over Blooming Land” is not true at least in terms of the “ unanimous view” of the board. Three days later, two independent directors — the already mentioned Mary Reilly and Bert Nacken — laid their letters of resignation on the desk.

Even more interesting, both directors were members of the Independent Review Committee for investigation of transfers of donations to Blooming Land and might know about potential frauds.  After resignation of Reilly and Nacken, the investigation work of the Committee was actually paralyzed, since only Ferrexpo’s chairman Steve Lucas and the already mentioned Vitalii Lisovenko remained there.

It is apt to ask why Deloitte LLP believes that Kostyantin Zhevago might be related to the theft of finances from Ferrexpo through Blooming Land. As our investigation has shown, there are several indirect and direct evidences.

Let's start with the indirect. The most important is the legal nihilism of Kostyantin Zhevago. Since 1998, he is the permanent People's Deputy of Ukraine. At the same time, he is the permanent leader in the number of absenteeism in the Rada of each convocation. It is obvious that the only meaning of the status of a People's Deputy for Kostyantin Zhevago lies in parliamentary immunity. Despite the difficult conditions of doing business in Ukraine, not every Ukrainian oligarch is ready to signal to the society that “I am guilty and fear punishment”.

At the same time, Kostyantin Zhevago ignores a direct constitutional ban on part-time work for the People's Deputy of Ukraine, occupying the position of Ferrexpo’s CEO. Even the fact that he sends his official salary to charity does not save the situation, because according to the Ferrexpo report, the company pays his personal expenses for travel, accommodation and even services of tax consultants. Besides, if it turns out that Kostyantin Zhevago was involved in the theft of charitable US$25 million a year, his official salary in the amount of US$240 thousand transferred to similar purposes in Ferrexpo is not commensurate.

The situation with transfers of donations to Blooming Land is not the first case of a voluntaristic attitude of the Ferrexpo’s CEO to the corporate money and though he owns a stake of over 50% in the company, he is not the only owner. We may recall that as a result of the bankruptcy of the Kostyantin Zhevago’s Finance and Credit bank in 2015, Ferrexpo lost more than US$160 million on deposits with this bank.

All this is the result of the lack of an effective corporate management in Ferrexpo relatively autonomous from the majority shareholder. In order to illustrate this fact, let us return to Vitalii Lisovenko — the only remaining independent director of the British-based company. The problem is not that he comes from the Soviet party elite — his father Victor was a member of the Politburo of the Central Committee of the Communist Party of Ukraine.

Having an impressive record of work in the civil service without a break for any private business, he worked only a couple of years for an international financial organization (Vice President of the Black Sea Trade and Development Bank) and his income declaration 2016 (just at the very end of this year he started working at Ferrexpo) includes several land plots near Kyiv, bank deposits, unfinished houses and UAH5.5 million in cash.

It is obvious that we face a typical Ukrainian corrupt official who has left his state career as deputy finance minister. It was here he met with another deputy minister (at that time) Oksana Markarova and her husband Danylo Volynets. The latter is the official owner of Accordbank, and after the bankruptcy of the Finance and Credit bank, Kostyantin Zhevago redeployed some of his specialists and transferred accounts of his business units to Accordbank. Incidentally, Blooming Land and its sub-funds have their accounts in the same Accordbank.

The income declaration of Vitalii Lisovenko itself casts doubt on his ability to be independent from anyone other than the Ukrainian state. It is not surprising that after the scandal with Blooming Land he turned out to be the only independent director who did not resign.

The most important indirect evidence speaking about Kostyantin Zhevago’s connection with the charitable fund in Kremenchug is common sense. It is obvious that anyone could not have been entrusted to manage US$25 million annually for three national CSR programs (though no one had heard of them). After all, this is 10 times more than finances allocated, for example, to the second activity of Ferrexpo’s charity — to social programs within a radius of 50 kilometers from Poltava GOK- the company's main production asset.

Now, from the indirect indications of ties of Ferrexpo’s CEO and People's Deputy of Ukraine Kostyantin Zhevago with the charity Blooming Land we shift towards direct evidences. In February, we already wrote that a simple search on the Internet shows a mass of publications of 2014-2015 in regional media in which the charity is directly tied to Kostyantin Zhevago. At the same time, there is no information in the Ukrainian media about the large-scale Ferrexpo’s CSR programs carried out through Blooming Land. Although judging from the volume of investments in these programs, the British-based company should be included in the top five philanthropists in Ukraine.

However, let us leave the press alone and look at the person of Igor Temchenko, who, according to state registers, is the founder and director of the charity Blooming Land.  He is also the founder of three sub-funds (matching the number of Ferrexpo’s Corporate Social Responsibility programs) receiving finances for the nationwide fights against diabetes, vision problems, and for provision of a decent living during old age in Ukraine:

CHARITABLE ORGANIZATION “CHARITABLE FUND” UKRAINE — HEALTHY COUNTRY”

CHARITABLE ORGANIZATION “CHARITABLE FUND” UKRAINE — HEALTHY VISION”

CHARITABLE ORGANIZATION “CHARITABLE FUND” UKRAINE — INSTITUTE OF SOCIAL PROGRAMS”  

The fact that Blooming Land is registered by Igor Temchenko in Kremenchug, Poltava Oblast, and three sub-funds — not only in another city, but even in another region (in Vyshgorod, Kyiv Oblast), suggests that we have a potential financial scam scheme. Indeed, with one sole founder, such a scheme is needed for these four units only to make it easier to mislead various supervisory bodies.

Actually, law enforcement authorities are now investigating the fact of money laundering through Blooming Land. To be fair it is worth mentioning that Ferrexpo's management acknowledges the problems with the Ukrainian charity fund. Moreover, according to Steve Lucas, “with the exception of a little bit of correspondence early in the forensic stage they have clammed up”.

However, this does not explain if and how Blooming Land is connected with Kostyantin Zhevago or if there is no connection at all. A simple search on the Internet shows that Igor Temchenko plays a major role and performs the most diverse functions at the enterprises of the Ukrainian oligarch.

For example, on April 22, 2019, Igor Temchenko who had already ceased communicating with Ferrexpo, acted as secretary of the Counting Commission at a shareholders meeting of Private Partners PJSC. In May 2008, through this company, Kostyantin Zhevago acquired 78.34% of the shares of Southern Radio Plant OJSC (Zhovti Vody, Dnipropetrovsk Oblast).

Five years earlier, Igor Temchenko was the head of the general meeting of shareholders at another oligarch's enterprise — Kamenetz-Podolskagregat. Prior to this, since 2008, Igor Temchenko was deputy chairman of the board of the Agromash factory in Kyiv (this factory had been taken away by Kostyantin Zhevago from a competing raider in a bitter struggle a year earlier). Finally, Igor Temchenko together with Viktor Lotus, chairman of the board of the Poltava GOK, headed a list of plaintiffs who tried to challenge and block actions of the Individuals Deposits Guarantee Fund and Interim Administration of the bankrupt bank Finance and Credit one year ago.

This list of “coincidences” is endless, but it is clear that Igor Temchenko is one of the lawyers of Kostyantin Zhevago. And when the Ferrexpo board headed by Steve Lucas plays  its role as “hear nothing see nothing”, it's just a choice of keeping a low profile in London and a “nothing personal” deal.

No doubt that with such a level of management, Kostyantin Zhevago’s finianical frauds in Ferrexpo might not be limited to Blooming Land only. For example, we noticed dozens of enterprises which are not in the official income declaration of the People's Deputy Kostyantin Zhevago, though they are listed in the Ferrexpo report as related to him: starting from Uzhgorod Turbogaz and ending with FC Vorskla Poltava.

According to the 2018 report, Ferrexpo spent US$10.7 million on sponsorship of this football club. While, for example, in 2011, these costs were much more lower — US$6.5 million. It is possible that Vorskla is another Blooming Land, through which Kostyantin Zhevago has been drawing money out from the British-based company for himself for years.

Oleh KALYTA