You're reading: Lawless development, corruption, fraud cast big shadows on Kyiv real estate

Despite a rebounding real estate sector, lawless land development, corrupt schemes and property scams continue to stifle growth and create victims as Ukrainian authorities face accusations of manipulating laws to ensure that, one way or another, new developments are illegal, creating rich opportunities for blackmail and corruption.

Leveraging land

In Kyiv’s land development market, a vicious circle exists in which developers defraud the Ukrainian public by shadily leasing municipal land at rock-bottom prices, while the authorities capitalize on those illegalities to engage in corruption and blackmail.

Oleksii Boiko, a lawyer and legal expert on real estate with the Kyiv-based Anti-Corruption Action Center, or ANTAC, had just come from court proceedings when he met the Kyiv Post for a recent interview. The litigator is frequently in court these days, advocating for alleged victims of real estate scams or land-related corruption.

Boiko says that the face of criminality and corruption has morphed — now it’s all about the land and how it’s developed.

“Everything has changed now,” he said. “Until 2013, the state registry of (real estate) assets was the biggest source of corruption and fraud… It was easy to duplicate documents and fraudulently sell real estate assets twice.”

For years, the courts were overflowing with cases like this, with few cases resolved well for the victim. In 2013, state registration of real estate was opened up, with private notaries, lawyers, journalists and civil society activists able to access data and documents more easily. This boost in transparency effectively destroyed many fraudulent schemes.

But new ones quickly popped up instead.

“Now the number one issue is corruption schemes with the land itself,” Boiko said. “In 30 years of independence, we still don’t have regional, local and city authorities that can manage their borders… we need clear demarcation of land boundaries… a proper land register,” he added.

“Everything became worse after the EuroMaidan Revolution,” said Georgiy Mogylnyy, an academic and senior researcher at the Ukrainian National Academy of Science, referring to the popular uprising that drove Kremlin-backed President Viktor Yanukovych from power in 2014. Mogylnyy, who studies corruption related to land and real estate, argues that the situation is worse now than it was under Yanukovych.

Mogylnyy has something of a professional obsession with real estate corruption. He studies the area religiously and often consults with media outlets like Radio Liberty and Nashi Groshi on their investigations.

“Even people who were insiders of the (Yanukovych-led) Party of Regions couldn’t violate zoning with complete impunity like people do now,” he said.

Lucrative zoning violations

According to Mogylnyy and Boiko, the last half decade or so has seen the emergence of a new kind of “smart corruption” in land development that relies on the leveraging and manipulation of laws and guidelines.

“The authorities can now so easily deny building permission — but no laws specifically point out what they should be looking for,” said Mogylnyy.

“They check for violations, and then calculate the size of the bribe. If the development is still illegal after they gave the permission, the same officials can then return to the site and demand more bribes. If a developer comes in and wants to do everything in accordance with the law, he’s not going to be competitive.”

There are, according to an independent study by Domik.ua, at least 67 apartment developments in Kyiv alone that the authorities regard as illegal, having violated zoning laws and guidelines. They lack the correct permissions, are built on the wrong land, are too big or too high, the authorities say. The Security Service of Ukraine, or SBU, has 30 developments in Kyiv that it is “interested in” for supposed violations.

According to most lawyers, 99 percent of new developments in Ukraine are violating a law or guideline, creating a lucrative opportunity for blackmail.

“You will never find a development that is 100 percent legal and proper, or land that is properly registered,” said Vasya Cherednichenko, managing partner of the ExpatPro law firm in Kyiv. “There can easily be a criminal case associated with each building in Ukraine. I believe it’s possible right now to buy an apartment in each of these illegal developments… and this means that the law enforcement in this area is weak.”

Added Mogylnyy: “It’s easy for them to build whatever they want, as long as they pay all the bribes that are needed.”

Activists try to break the fence surrounding an allegedly illegal construction site on the territory of a market at Revutskoho Street in Kyiv on March 1, 2017. (Kostyantyn Chernichkin)

Fraudulent schemes

The Ukrainian public that loses out to corruption. In one type of fraudulent scheme, buyers are encouraged to invest into empty plots of land or half-built apartments.

“Ukrainian legislation doesn’t allow someone to buy something that doesn’t exist, so you can’t buy an apartment that isn’t completed yet,” said Cherednichenko. “But there are several schemes where you can be a shareholder in a so-called cooperative, where you buy shares, and according to the agreement the developer is to exchange those securities into real estate, like an apartment.”

According to legal experts, however, such schemes are extremely risky and require deep due diligence, but even that doesn’t guarantee a buyer their apartment in the future. Some investors have found this out the hard way.

“Ten years ago, Ukraine faced a huge fraud case with the Elita Center (a proposed apartment complex), where customers put their money in and the developer just declared bankruptcy and they never got their property,” said Cherednichenko. “In other cases, buyers invest into a development and 15 years later it’s still not finished.”

Behind the Elita Center scandal mentioned as an example by lawyers like Cherednichenko, is the well-connected former lawmaker and prolific real estate developer Vadim Stolar. In 2006, an estimated 1,760 people invested their savings into a scheme allegedly headed by Stolar, under the agreement that they would receive an apartment in a completed complex.

Instead, the Elita Center Group mysteriously filed for bankruptcy, and at least $75 million (by today’s value) invested by Ukrainians went up in smoke. During the subsequent fraud trial, Stolar was only called as a witness and his business partner Alexander Shakhov Volkonsky, a Russian citizen, seemed to take the fall, was prosecuted and sentenced to nine years in prison.

These days, Stolar, who many say has escaped justice in relation to his connection with the Elita Center scandal, still seems to be tightly-connected with developers and influential lawmakers, including Kyiv Mayor Vitali Klitschko.

According to anti-corruption campaigners, Stolar — who is often referred to as the “grey cardinal” or “shadow mayor” of Kyiv — is the real authority when it comes to real estate in the country’s capital, operating in the shadows behind lawmakers like Klitschko.

“It is ridiculous,” said Oksana Zinovieva, Klitschko’s spokesperson, in a brief comment to Kyiv Post regarding allegations that Stolar pulls strings at the City Council. She did not elaborate on the Stolar-Klitschko relationship.

A December 2018 investigation by Schemes, an investigative project of Radio Free Liberty, reported that Stolar had also been photographed while making multiple visits to the office of the Ukrainian Presidential Administration. The car that delivered Stolar was allegedly using fake number plates.

The previous summer, another Schemes investigation revealed that Stolar was joined on a chartered flight from Milan to Kyiv by Klitschko and Maxim Mykytas, a prominent property developer and member of parliament.

As reported in a Feb. 7 Mind.ua news article, Stolar is still an active developer and planning to break ground on another high-rise apartment complex in the capital’s city center, recently approved by city planning authorities.

The Kyiv Post could not reach Stolar by phone. The former lawmaker is known for keeping a low profile and not giving statements. His personal website is no longer online and a private message to his Facebook profile, requesting an interview or comment, went unanswered.

Rampant corruption

While the media and public would like to cast the role of a real estate supervillain, lawyers and anti-corruption experts say that the market is saturated with scams, corruption and fraud, with no individual companies or persons having a monopoly.

“Unfortunately there are lots of examples in recent years of how customers have lost their money or investment because of fraud,” said Cherednichenko.

Added Mogylnyy: “Some people don’t steal as much (as in the Eilta Center scandal), but they do it in a smarter way and on a smaller scale to not catch attention. In this context, Stolar is only a drop in the bucket. In Yanukovych times, you could point to one or two people who stole huge amounts — now the violations are more, they are bigger, and you don’t need to be in the government inner circle to cash in.”

Oleksiy Feliv, a managing partner at the Integrites law firm, is bullish on the commercial real estate sector making a comeback, but he also points to failings in Ukraine’s judicial system that allow fraud and corruption to run rampant.

“Law has been improving over the last four years — there is a transparent registry… that’s open to notaries and lawyers, that was very important,” he said. “Where we see challenges is with the Ministry of Justice.”

According to Feliv, the Justice Ministry’s commission that considers real estate and development arbitration claims is unfairly playing the role of a judge, often making decisions that seem arbitrary. Feliv says that this commission, the courts and prosecutor’s office sometimes act with their own agenda that can be tied to vested interests.

“The court system in Ukraine is a problem in itself,” said Boiko of ANTAC. “The civil courts are overflowing with cases like this … but judges themselves are often under investigation too. Too often, the Ministry of Justice does nothing. They don’t even properly register claims. They can just return them without having even done anything.”

Said Mogylnyy: “Politicians don’t want to solve the problem, although an “extremely important” proposed decentralization law would help. “But that law has so far been blocked by the Ukrainian parliament’s Committee on Construction, Urban Development, Housing and Communal Services,” he said.