How Ukraine’s Finance Chief Got Rich
Ukraine’s Finance Minister Natalie Jaresko collected at least $1.77
million in bonuses from a U.S.-taxpayer-funded investment project
that she ran even as it was losing money, a sign that her image as a
paragon of public-interest “reform” may not be all that it’s cracked
up to be.By Robert Parry
November 10, 2015 "Information
Clearing House" - "Consortiumnews"
-Before becoming Ukraine’s Finance Minister last December, Natalie
Jaresko collected $1.77 million in bonuses from a
U.S.-taxpayer-financed investment fund where her annual compensation
was supposed to be limited to $150,000, according to
financial documents filed with the U.S. Internal Revenue Service
this year.
The near 12-fold discrepancy between the
compensation ceiling and Jaresko’s bonuses, paid in 2013, was
justified in the IRS filing from the Jaresko-led Western NIS
Enterprise Fund (WNISEF) by drawing a distinction between getting
paid directly from the $150 million U.S. government grant that
created the fund and the money from the fund’s “investment sales
proceeds,” which were treated as fair game for extracting bonuses
far beyond the prescribed compensation level.
Using this supposed loophole, Jaresko and some of
her associates enriched themselves by claiming money generated from
U.S. taxpayers’ dollars while avoiding any personal financial risks.
She and other WNISEF officers collected the bonuses from what they
deemed “profitable” exits from some investments even if the overall
fund was losing money and shrinking, as it apparently was in recent
years.
According to WNISEF’s filing for the 2013 tax
year, submitted to the IRS on Aug. 11, 2015, the value of the
investment fund had shrunk from $150 million at its start to $93.9
million in the fund’s 2012 tax year and to $89.8 million in the 2013
tax year. (WNISEF’s tax years end on Sept. 30.)
So, Jaresko’s arrangement was something like
taking someone else’s money to a roulette table, placing it on
black, and claiming a share of the winnings if the ball stopped on
black. However, if the ball landed on red, then the someone else
absorbed the loss, except in this case the winners were Jaresko and
her associates and the losers were the American taxpayers.
The purpose cited by the U.S. Congress in starting
the non-profit WNISEF with $150 million in the 1990s was to help
jumpstart an investment economy in Ukraine and Moldova for the
benefit of the people of those countries. The project was
administered by the U.S. Agency for International Development (USAID),
which selected Jaresko, a former U.S. diplomat of Ukrainian
heritage, to run the project.
Last December, Ukrainian President Petro
Poroshenko named Jaresko Finance Minister after awarding her instant
Ukrainian citizenship. At that point, she quit WNISEF and has since
become the face of Ukrainian “reform,” representing the U.S.-backed
government at international banking events at Davos, Switzerland,
and elsewhere while appealing for billions of dollars in Western
financial aid which she oversees.
Thus, Jaresko’s standards for handling public
moneys are relevant to judging whether the new regime is just a
reshuffling of who gets to plunder Ukraine or a serious effort at
reform. The overthrow of the previous Ukrainian government of
President Viktor Yanukovych was largely justified in February 2014
because of allegations about corruption. The new regime has
presented itself as committed to reform, even though some outside
observers contend that corruption is as bad or worse than under the
old government.
Self-Interest v. Public Interest
There is also the question of whether Jaresko is
more interested in getting rich than in serving the people of
Ukraine. As WNISEF’s chief executive officer, Jaresko seemed to grow
dissatisfied with her $150,000 salary. For instance, in 2004, she
earned more than double the prescribed amount, paid $383,259 along
with $67,415 in expenses, according to
WNISEF’s IRS filing for that year.
According to audit documents that I obtained from
USAID, an “Expense Analysis” for 2004 showed $1,282,782 being paid
out as “Exit-based incentive expense-equity incentive plan” and
another $478,195 being paid for “Exit-based incentive
expense-financial participation rights.” That suggested that Jaresko
was already claiming bonuses from WNISEF’s investments (bought with
U.S. taxpayers’ money) and sold during 2004.
In 2006, Jaresko’s compensation for her work with
WNISEF was removed from public disclosure altogether after she
co-founded two related entities – Horizon Capital Associates (HCA)
to manage WNISEF’s investments (and collect around $1 million a year
in fees) and Emerging Europe Growth Fund (EEGF), a private entity to
collaborate with WNISEF on investment deals.
Jaresko formed HCA and EEGF with two other WNISEF
officers, Mark Iwashko and Lenna Koszarny. They also started a third
firm, Horizon Capital Advisors, which “serves as a sub-advisor to
the Investment Manager, HCA,” according to
WNISEF’s IRS filing for 2006.
According to the USAID’s expense analyses for
2004-06, the taxpayer-financed WNISEF spent $1,049,987 to establish
EEGF as a privately owned investment fund for Jaresko and her
colleagues. USAID apparently found nothing suspicious about these
tangled business relationships despite the potential conflicts of
interest involving Jaresko, the other WNISEF officers and their
affiliated companies.
For instance, WNISEF’s 2012 annual report devoted
two pages to “related party transactions,” including the management
fees to Jaresko’s Horizon Capital ($1,037,603 in 2011 and $1,023,689
in 2012) and WNISEF’s co-investments in projects with the EEGF.
Though the IRS forms have a line for earnings from “related
organizations,” WNISEF listed nothing, apparently treating
compensation from Horizon Capital and EEGF as “unrelated” for the
purposes of reporting compensation for Jaresko and other officers.
So, the scale of how much Jaresko was making from
her association with WNISEF was unclear until last week when the IRS
released WNISEF’s 2013 tax filing of Aug. 11, 2015, in response to a
request from Consortiumnews.com. Though the filing still did not
disclose all of Jaresko’s WNISEF-related compensation, it did list
her $1.77 million share of the $4.5 million in bonuses awarded to
her and two other WNISEF officers, Iwashko and Koszarny.
WNISEF filings also said the bonuses were paid
regardless of whether the overall fund was making money, noting that
this “compensation was not contingent on revenues or net earnings,
but rather on a profitable exit of a portfolio company that exceeds
the baseline value set by the board of directors and approved by
USAID” – with Jaresko also serving as a director on the board
responsible for setting those baseline values.
Though compensation for Jaresko and other officers
was shifted outside public view after 2006 – as their pay was moved
to the affiliated entities – the
2006 IRS filing said: “It should be noted that as long as
HCA earns a management fee from WNISEF, HCA and HCAD [the two
Horizon Capital entities] must ensure that a salary cap of $150,000
is adhered to for the proportion of salary attributable to WNISEF
funds managed relative to aggregate funds under management.”
Audit Gaps
KPMG auditors, who reviewed WNISEF finances, also
took a narrow view of how to define income for Jaresko and other
officers, only confirming that no “salary” exceeded $150,000,
apparently not looking at bonuses and other forms of compensation.
Neither USAID officials nor Jaresko responded to specific questions
about WNISEF’s possible conflicts of interest, how much money
Jaresko made from her involvement with WNISEF and its connected
companies, and whether she had fully complied with IRS reporting
requirements.
After Jaresko’s appointment as Finance Minister —
and her resignation from WNISEF — I reviewed WNISEF’s available
public records and detected a pattern of insider dealings and
enrichment benefiting Jaresko and her colleagues. That prompted me
in February to file a Freedom of Information Act request for USAID’s
audits of the investment fund.
Though the relevant records were identified by
June, USAID dragged its feet on releasing the 34 pages to me until
Aug. 28 when the agency claimed nothing was being withheld, saying
“all 34 pages are releasable in their entirety.” However, when I
examined the documents, it became clear that a number of pages were
missing from the financial records, including a total of three years
of “expense analysis” – in three-, six- and nine-month gaps – since
2007.
Part of KPMG’s
“Independent Auditors’ Report” for 2013 and 2014 was also
missing. The report stated that “except as discussed in the third
paragraph below, we conducted our audits in accordance with auditing
standards generally accepted in the United States of America,”
accountant-speak that suggests that “the third paragraph below”
would reveal some factor that did not comply with generally accepted
accounting principles (or GAAP).
But three paragraphs below was only white space
and there was no next page in what USAID released. After I pointed
out the discrepancies to USAID on Aug. 31, I was told on Sept. 15
that “we are in the process of locating documents to address your
concern. We expect a response from the bureau and/or mission by
Monday, September 28, 2015.”
After the Sept. 28 deadline passed, I contacted
USAID again and was told on Oct. 2 that officials were “still
working with the respective mission to obtain the missing
documents.” On Oct. 22, USAID sent me one additional page from
KPMG’s audit report stating that its review of WNISEF’s books lacked
“an external quality control review by an unaffiliated audit
organization” – as required by the U.S. government’s auditing
standards – because no such program is offered in Ukraine. Other
pages are still missing.
An earlier effort by Jaresko’s ex-husband Ihor
Figlus to blow the whistle on what he considered improper business
practices related to WNISEF was met by disinterest inside USAID,
according to Figlus, and then led to Jaresko suing him in a Delaware
court in 2012, using a confidentiality clause to silence Figlus and
getting a court order to redact references to the abuses he was
trying to expose.
Figlus’s complaints related to what he saw as
improper loans that Jaresko had taken from Horizon Capital
Associates to buy and expand her stake in EEGF, the privately held
follow-on fund to WNISEF. After Figlus discussed this issue with a
Ukrainian journalist, Jaresko sent her lawyers to court to silence
him and, according to his lawyer, bankrupt him.
The filings in Delaware’s Chancery Court are
remarkable not only because Jaresko succeeded in getting the Court
to gag her ex-husband through enforcement of a non-disclosure
agreement but the Court agreed to redact nearly all the business
details, even the confidentiality language at the center of the
case. [See Consortiumnews.com’s “Ukraine’s
Finance Minister’s ‘American Values.”]
Shared Values
Earlier this year, I sent detailed questions to
USAID and to Jaresko via several of her associates. Those questions
included how much of the $150 million in U.S. taxpayers’ money
remained in WNISEF, why Jaresko reported no compensation from
“related organizations,” whether she received bonus money, how much
money she made in total from her association with WNISEF, what AID
officials did in response to Figlus’s whistle-blower complaint, and
whether Jaresko’s legal campaign to silence her ex-husband was
appropriate given her current position and Ukraine’s history of
secretive financial dealings.
USAID press officer Annette Y. Aulton got back to
me with a response that was unresponsive to my specific questions.
Rather than answering about the performance of WNISEF and Jaresko’s
compensation, Aulton commented on the relative success of 10
“Enterprise Funds” that USAID has sponsored in Eastern Europe,
adding:
“There is a twenty year history of oversight of
WNISEF operations. Enterprise funds must undergo an annual
independent financial audit, submit annual reports to USAID and the
IRS, and USAID staff conduct field visits and semi-annual reviews.
At the time Horizon Capital assumed management of WNISEF, USAID
received disclosures from Natalie Jaresko regarding the change in
management structure and at the time USAID found no impropriety
during its review.”
One Jaresko associate, Tanya Bega, Horizon
Capital’s investor relations manager, said she forwarded my
questions to Jaresko, but Jaresko did not respond.
Despite concerns that Jaresko may have enriched
herself at the expense of U.S. taxpayers and then used a Delaware
court to prevent disclosure of possible abuses, Jaresko has been
hailed by the U.S. mainstream media as a paragon of reform in the
U.S.-backed Ukrainian regime.
Last January, New York Times columnist Thomas L.
Friedman
cited Jaresko as an exemplar of the new Ukrainian leaders
who “share our values” and deserve unqualified American support.
Friedman uncritically quoted Jaresko’s speech to international
financial leaders at Davos, in which she castigated Russian
President Vladimir Putin:
“Putin fears a Ukraine that demands to live and
wants to live and insists on living on European values — with a
robust civil society and freedom of speech and religion [and] with a
system of values the Ukrainian people have chosen and laid down
their lives for.”
Exactly which Western “values” Jaresko actually
shares remains unclear because of the fog surrounding her actions at
WNISEF and her unwillingness to reveal how much she made from her
association with a U.S.–taxpayer funded project. However, if those
Western “values” include putting citizens’ interests before
self-interest and believing that transparency is critical for a
democracy, Jaresko may need some remedial training.
Investigative reporter Robert Parry broke many of the
Iran-Contra stories for The Associated Press and Newsweek in the
1980s. You can buy his latest book,
America’s Stolen Narrative,
either in print
here or as an
e-book (from
Amazon
and
barnesandnoble.com).
You also can order Robert Parry’s trilogy on the Bush Family and its
connections to various right-wing operatives for only $34. The
trilogy includes
America’s Stolen Narrative.
For details on this offer,
click here.