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By John Helmer, Moscow

LUKoil, Russia’s second oil producer and exporter, has been running an illegal cash smuggling scheme out of front companies in the US, and diverting millions of dollars into a slush fund through an Israeli front company, according to court papers filed in the US yesterday. The mastermind, the US documents allege, is Sergei Kukura, LUKoil’s chief financial officer (image).

Kukura is named in a 68-page filing by lawyers for Archangel Diamond Corporation (ADC) in the Denver District Court. This is in reply to a motion by LUKoil to dismiss the long-running litigation, in which ADC accuses LUKoil of stealing its rights to the Grib diamond pipe, in Arkhangelsk region. Lukoil pleads its innocence on the substance of the claims. It also argues that the US court has no right in law to try the claims, because LUKoil has never done significance business in Colorado, and is not subject to the jurisdiction of the state court.

Kukura, 51, is listed on LUKoil’s website as the first vice president of LUKoil for economics and finance; this is the equivalent of chief financial officer in western corporate parlance. In the court papers, new evidence has been reported from investigations in Israel, Cyprus, the US and Moscow, allegedly showing that Kukura has been in charge of companies which have been engaged in secretly running cash from Colorado into LUKoil’s operations at oilfields in Russia, and running cash out of Russia into slush funds offshore.

The significance of the discoveries, ADC claims in its submission to the Colorado court, is that LUKoil has been doing business in Colorado for the entire time period in which ADC, headquartered in Denver from 1997, has been trying to recover its diamond mining rights from a LUKoil affiliated company, Arkhangeskgeoldobycha (AGD), and from LUKoil’s chief executive, Vagit Alekperov and his partner, Alisher Usmanov.

In addition, this week’s court submission charges, LUKoil has been lying to the court in claiming it had no business in the state; and knew nothing of its executives’ involvement in a subsidiary, LUKoil Israel Ltd.

If the court accepts the new evidence and allegations, and upholds ADC’s argument that LUKoil is subject to the jurisdiction of the Colorado court, Alekperov and Kukura (along with Usmanov and other Russian executives) face possible Russian investigations of violations of Russia’s money-laundering and tax laws; and possible US investigations of parallel violations. If the court finds in ADC’s favour this time, it will order a trial in the US on ADC’s charges of contract violations, fraud, and unjust enrichment. ADC’s claim is for more than $500 million in costs, loss of its mining rights, and triple damages for racketeering.

According to the ADC papers available from the court website, “ADC recently obtained evidence that Sergey Kukura, Lukoil’s CFO, and Dean Sillerud of DS Engineering, Inc. (“DSE”) have been directors of Lukoil Israel, Ltd. (registered in Cyprus) from 1994 and 2000 onwards, respectively. Lukoil Israel is the offshore company through which Lukoil effectively controlled DSE, its de facto Colorado office, by financing it for years, including reimbursement of the $6 million “Cash Smuggling Scheme”. Sillerud denied knowing Lukoil Israel’s directors at his 2009 deposition and Lukoil never disclosed them, now for obvious reason. This confirms Lukoil involvement at the highest level with sham DSE.”

ADC argues that the US court “has general jurisdiction [to proceed to trial] because Lukoil maintained a de facto office in Colorado through DSE, a sham “pass through” company which did Lukoil’s bidding in Colorado from 1999 onward, including recruiting Colorado engineers to work for Lukoil companies while engaging in the “Cash Smuggling Scheme” which illegally transported over $6 million from Colorado to Russia for Lukoil’s benefit. Lukoil agents, including Colorado resident DSE CEO Sillerud; Lukoil officer A[natoly].A[lexandrovich]Usmanov; offshore manager Barry Goldwasser; and Lukoil CFO Kukura, controlled DSE through Lukoil controlled entities. These included offshore companies Oldberry Ltd. (“Oldberry”), Gilwood Ltd. (“Gilwood”), and Lukoil Israel, Ltd. (“Lukoil Israel”), which 100% financed sham DSE during the relevant time period.”

Attached as an addendum to ADC’s court filing is this diagram illustrating what the words meant in the operational practice that has been alleged:


Click to enlarge

The Usmanov named in the latest court document is not Alisher Usmanov, who was named in much of ADC’s litigation record, and who has been Alekperov’s business partner in VA Invest and other companies; these were involved in the long-running diamond mine scheme before Alekperov reportedly bought out Usmanov’s interest. It is not known what relationship, if any, Anatoly Usmanov has to Alisher Usmanov. The latter is not a defendant in the ADC litigation, and he has denied involvement in the alleged theft of the diamond mining rights. He has been named by ADC as one of the witnesses it wants to testify if the case comes to trial.

ADC has been pursuing its half-stake in the Russian Grib diamond pipe since 1998, alleging that Lukoil, its chief executive Vagit Alekperov and his partner Usmanov, have illegally withheld from ADC its mine licence and project rights. The last report of the court proceedings in Colorado was a year ago, when the presiding judge was forced to withdraw for a conflict of interest.

The Grib pipe, at Verkhotina, in northwestern Russia’s Arkhangelsk region, was assayed by De Beers several years ago, and on those data it is the one of the world’s largest undeveloped diamond deposits. First discovered in 1996, a total of 68 boreholes totaling 19,557 meters were completed by ADC, before the alleged asset raid by the Russians halted work. A resource estimate prepared in 2000 by ADC counted 98 million tonnes of kimberlite to a depth of 500 metres, containing an estimated 67 million recoverable carats. The grade has been estimated by De Beers from 69 to 82 carats per 100 tonnes. Depending on valuations which have moved with oscillating prices for rough, the asset value of the diamonds to be mined is between $5 billion and $7 billion.

Last year, after a shareholder revolt against De Beers’s involuntary bankruptcy plan for ADC, it was agreed with the US Bankruptcy Court that ADC’s remaining assets, including this litigation claim, would be transferred to a liquidating trust, which would continue the fight against LUKoil. If successful in or out of court, the trust would then distribute the costs and compensation award among creditors and shareholders.

The scheme, a voluntary bankruptcy procedure, was proposed by ADC’s principal lawyer, Bruce Marks, and two minority investors, Firebird Global Master Fund, a US investor, and Clive Hartz, an Australian who resigned from the ADC board in protest against the De Beers bankruptcy scheme. They acted together after De Beers had threatened ADC with foreclosure on a loan of almost $10 million, and the abandonment of the two legal claims ADC has been waging since 1998 — in the Colorado District Court, and in the Stockholm international arbitration tribunal.

These two proceedings were suspended between April 2008 and January 2009, when De Beers and LUKoil attempted to work together in a joint mining venture for the Grib pipe. That collapsed when the Kremlin’s Foreign Investment Control Committee imposed conditions raising the cost and the unpredictability of the investment. Exactly what the deal-killing conditions were, and who lobbied for them, have never been disclosed.

Although ADC then resumed prosecuting LUKoil, the Stockholm arbitration proceeding was abandoned last year by De Beers; the US court case continues in Colorado.

The ADC submission pinpoints the Colorado engineering company DSE as a lynchpin for managing oilfield engineers working on LUKoil’s fields in Russia, and allegedly for running cash in and out of the US and Russia. “DS Engineering had no clients other than Lukoil companies from 1999 through early 2008. Each month, DS Engineering charged for Lukoil Colorado Employees’ daily rates and travel expenses for work in Russia, and the Colorado Office’s monthly operating expenses … DS Engineering even charged for office chairs, Christmas parties, flowers, and holiday cards. DS Engineering was nothing more than a ‘pass through’ entity serving as a de facto Lukoil office in Colorado… From March 1999 … Lukoil Colorado Employees … were effectively full time employees … even though DS Engineering apparently treated them as independent contractors in apparent violation of Colorado and federal law … Lukoil has continuously employed and paid up to 25 Lukoil Colorado Employees per month from March 1999 …The Lukoil Colorado Employees were appointed to positions of authority within the Lukoil companies in Russia; for example, [Dean Sillerud] … served as the “First Deputy General Director” of Lukoil AIK … for many years … numerous other DS Engineering personnel served as “Chief Engineer” of Lukoil AIK and other Lukoil companies…From March 1999 … Lukoil used DS Engineering as the fulcrum of illegal cash smuggling schemes … in which the Lukoil Colorado Employees carried cash from Colorado to Russia, in amounts averaging $40,000 per month, totaling over $6 million….The cash smuggled each month was purposefully broken up into bundles of less than $10,000 and divided among separate Lukoil Colorado Employees travelling to Russia to knowingly avoid U.S. currency reporting laws.”

Kukura’s involvement in this and a purported “money laundering slush fund scheme” is alleged by the ADC court filing to have occurred through his direction of LUKoil Israel, which not only controlled shares of DSE, but also engaged in commercial transactions with DSE.

“DSE billed offshore companies Oldberry, Gilwood, and Lukoil Israel (Israel or Cyprus) which had no commercial reason to be in between DSE and Lukoil AIK (or other Lukoil companies). DSE paid Lukoil Israel over $3.8 million for undescribed services which it then added to its bills to Lukoil Israel for which there was no written contract. Sillerud offered no reasonable explanation for such billings, even though he was a director of Lukoil Israel from 2000 onwards (which he concealed)… There is no commercial reason that Lukoil AIK would purchase “material goods” from a shell BVI company with an mailing address in Israel; the obvious purpose was to transfer monies from Russia to offshore structures which Lukoil controlled through CFO Kukura. In the typical Russian scheme, these “material goods” are sold at inflated prices (i.e. “Buy High”) to divert money offshore…the Lukoil 2003 Report states that Lukoil AIK sold 17.58% of its oil to Lukoil Israel, Ltd. (presumably Cyprus)…There is no commercial reason that Lukoil would sell oil, let alone 17.58% of its output (worth at least $70 million at 2003 prices), through a shell company with no real office or known employees, unless it was controlled by Lukoil (i.e. CFO Kukura) so that it could control the ultimate allocation of its profit. In the typical Russian scheme, the oil is sold at a below market price (i.e. “Sell Low”) to a related entity to accrue profits offshore.”

From the court papers, here is ADC’s illustration of how the court should interpret the scheme as working:


Click to enlarge
 

The court filing also alleges that Kukura was in charge of both the DSE and LUKoil Israel financial schemes. “Since 1993, he has been one of Lukoil’s top four executives serving as First Vice President… In 2006, Kukura was reported as Russia’s 31st richest citizen…Without doubt, a powerful person like Kukura would not be assigned to serve as a director of Lukoil Israel if he did not control it. When Kukura was kidnapped in Moscow in 2002 and mysteriously released a few days later, it was widely reported that he was responsible for managing Lukoil’s “offshore structures” in Cyprus, commonly considered “slush funds”. As obvious, Lukoil entrusted Kukura with overseeing Lukoil Israel to manage a multi-million offshore Lukoil controlled fund, using DSE in the process.”

LUKoil spokesman Dmitry Dolgov and LUKoil corporate bond reports confirm that LUKoil Israel is part of the worldwide LUKoil group of companies, and that Kukura is chairman of the board of directors at LUKoil Israel Ltd., based at 30 Kalisher Street, Tel Aviv; and also chairman of the board at LUKoil Israel (Cyprus) Ltd., whose address is given as 10 Mnasiadon Street, Nicosia. LUKoil’s spokesman said yesterday: “Lukoil Israel Ltd is an associated company. They don’t report to us, so I can’t say if Sergei Kukura holds any post there. But he did work there in the past, when Lukoil Israel Ltd was a Lukoil subsidiary. That was back in late 90s.”

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