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How Ukraine’s Finance Chief Got Rich


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Before becoming Ukraine’s Finance Minister last December, Natalie Jaresko collected $1.77 million in bonuses from a US-taxpayer-financed investment fund where her annual compensation was supposed to be limited to $150,000, according to financial documents filed with the US 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 US 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 US 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 US 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 US Agency for International Development (USAID), which selected Jaresko, a former US 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 US-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 US 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 US 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 US 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 US taxpayers and then used a Delaware court to prevent disclosure of possible abuses, Jaresko has been hailed by the US mainstream media as a paragon of reform in the US-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 US–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.

Reprinted with permission from ConsortiumNews.com.

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