The 55 Public Square building in downtown Cleveland is, for all intents and purposes, a Cleveland landmark. Twenty-two stories tall, just a couple of blocks from the home of the Cleveland Indians, designers completed the modernist office building in 1958, a sign of Cleveland’s post-war boom.
It was also, according to a lawsuit filed earlier this year, one of the jewels in another crown: that of Ukrainian tycoon Ihor Kolomoisky, who allegedly stood as Cleveland’s commercial real estate kingpin for years, before the bottom fell out of his Ohio empire.
The lawsuit, filed in Delaware in May, alleges that Kolomoisky and his colleagues at Ukraine’s PrivatBank utilized a series of American shell companies — many based in Delaware, a haven for foreign money — to launder hundreds of million of dollars through Ohio-based real estate. All told, Kolomoisky’s alleged schemes allowed him and Gennadiy Bogolyubov, who had joined Kolomoisky as a co-owner at Ukraine’s PrivatBank, to become “the largest commercial real estate holders in Cleveland, Ohio.”
An spokesperson for Optima, the company used to acquire the properties for Kolomoisky and Bogolyubov, told ThinkProgress in a statement that “through our ownership and stewardship of the buildings, we have brought goods jobs and livable wages, while helping to spearhead a massive revitalization of the once moribund district over the last decade.” The spokesperson also pointed out that a restaurant in one of the properties “is a runaway hit.”
The lawsuit, as the Atlantic Council’s Anders Aslund wrote, is “probably the most detailed study of large-scale money laundering into the United States.” Optima says it fully expects to be cleared of all allegations.
Kolomoisky and his colleagues have denied allegations of money laundering, but haven’t issued any denials pertaining to the real estate purchases themselves. But the alleged scheme, even if it doesn’t hold up in court, points to the massive holes remaining in the United States’ burgeoning anti-kleptocracy policies. Pilot programs unveiling the identities of those behind shell companies snapping up American real estate have been wildly successful in the handful of American cities in which they’ve been implemented– but still haven’t been extended to major American metropolises like Cleveland, let alone larger cities like Houston or Portland.
And America remains arguably the greatest font of anonymous shell companies in the world: shell companies that, according to the lawsuit, allowed a staggering amount of Cleveland’s downtown commercial real estate to become embroiled in a post-Soviet financial empire.
“It’s bad enough that the dirty money from abroad has been flooding into Miami and New York, but it intuitively makes sense that criminals and the corrupt would want a Manhattan penthouse,” said Clark Gascoigne, deputy director of the Financial Accountability and Corporate Transparency Coalition, a group advocating for the end of anonymous shell companies in the United States. “But when it infiltrates cities in the heartland of America like Cleveland, it should be a wake-up call to all of us that we have a serious problem in this country — and it can happen anywhere.”
In the United States, Kolomoisky doesn’t have anywhere near the notoriety other Ukrainian tycoons do. Unlike others toppled in Ukraine’s 2014 EuroMaidan revolution, Kolomoisky navigated the transition successfully, expanding his power base where other competitors faltered. Indeed, Kolomoisky has helped combat pro-Russian separatists populating swaths of eastern Ukraine, with the Ukrainian businessman funding and directing a private militia in the aftermath of the 2014 revolution. He even maintained business ties with Ukraine’s new president, Volodymyr Zelensky, who has continued a post-2014 trajectory toward closer relations with both the United States and European Union.
But Kolomoisky has become controversial, especially in the past few years. After he and Bogolyubov established PrivatBank, an institution that eventually accounted for some 20% of Ukraine’s banking assets, Kolomoisky proceeded to scour international markets for further investment opportunities, centering primarily on steel and ferroalloy companies.
But by 2016, PrivatBank faced a growing $5.5 billion hole in its accounts, and Ukraine’s central bank moved to nationalize PrivatBank outright, claiming that the bank had transformed into a lending operation dedicated only to helping Kolomoisky’s associates. As the Financial Times wrote in 2016, Ukraine’s central bank governor said 97 percent of the bank’s corporate loan book went “to individuals or entities linked to the bank or [Kolomoisky or Bogolyubov], both among Ukraine’s top five richest men.” (Kolomoisky is reportedly worth just over $1 billion, per Forbes.)
“When it infiltrates cities in the heartland of America like Cleveland, it should be a wake-up call to all of us that we have a serious problem in this country.”
Kolomoisky’s fortunes seemed to turn recently with the election of Zelensky, who worked previously as an actor on a television channel Kolomoisky owned. Shortly after Zelensky won the election against former president Petro Poroshenko earlier this year, Kolomoisky returned to Ukraine from self-imposed exile.
It wasn’t all warm welcomes and new beginnings upon Kolomoisky’s return. In April, The Daily Beast reported that Kolomoisky was under FBI investigation for potential money laundering. And just two weeks after ending his exile, the new owners of PrivatBank filed a bombshell suit in the United States, alleging that Kolomoisky’s schemes while running PrivatBank weren’t simply loans to friends, but schemes to use anonymous U.S. shell companies to reach into America’s heartland to enhance Kolomoisky’s own bottom line.
Kolomoisky is by no means the first member of Ukraine’s upper crust accused of using American shell companies to bolster their kleptocratic networks. Former Ukrainian Prime Minister Pavlo Lazarenko created a network of anonymous shell companies based out of a small house in residential Cheyenne, Wyoming. According to Transparency International, Lazarenko allegedly used the network to embezzle up to $200 million — enough to have him listed among the most notorious kleptocrats of past few decades, alongside dictators like Suharto, Ferdinand Marcos, and Slobodan Milosevic.
Some 20 years after Lazarenko’s operations ended, the lawsuit recently filed against Kolomoisky alleged a strikingly similar scheme. According to the lawsuit, Kolomoisky and his associates created a network of shell companies and filtered the proceeds through downtown Cleveland and a number of Ohio-based steel plants along the way.
The alleged scheme was simple enough. The lawsuit claims Kolomoisky and Bogolyubov skimmed money from public bonds and some 20 million Ukrainian citizens who banked with PrivatBank to create a “loan recycling scheme similar to a Ponzi scheme.” It was, as the deputy head of the National Bank of Ukraine told the Ukrainian outlet Hromadske, “a financial pyramid.”
“It’s 100 pages of the exact same thing over and over and over again.”
The loans, issued to shell companies linked to Kolomoisky and Bogolyubov, eventually filtered through a bank in Cyprus and to a trio of associates in Miami. From there, the Miami-based collaborators helped set up a number of anonymous companies across the United States, from Delaware to Oregon, to then begin a shopping spree in Ohio, all detailed in the 104-page document filed in May.
“The simplicity of it — when I read the affidavit, [that’s] what caught me,” said John Tobon, an official with Homeland Security Investigations who has closely tracked foreign money laundering operations in the United States. “It’s 100 pages of the exact same thing over and over and over again.”
And what a shopping spree it was: The buildings purchased included One Cleveland Center, the fifth-tallest building in the city, which a company linked to Kolomoisky purchased for nearly $90 million in 2008, as well as the AECOM/Penton Media Building, which went for nearly $50 million. There was also the Huntington Building, which sold for nearly $20 million. In total, as the Cleveland Scene wrote, the real estate empire “controlled 2.8 million square feet of downtown Cleveland commercial real estate.”
“Just to put it in context, some of the buildings they reportedly owned are some marquee buildings in downtown Cleveland,” said Gascoigne, who is originally from northeast Ohio. “This is some real, prime, flagship real estate in downtown Cleveland.”
They didn’t just stop at buying buildings: A holding company linked to Kolomoisky snapped up a steel plant in Warren, Ohio, just east of Cleveland. As The Kyiv Post wrote, the plant was one of Kolomoisky’s “keystones [in] an attempt to corner the global ferroalloy market.” The lawsuit alleges that Kolomoisky’s network extended to other similar companies, ranging from West Virginia to Michigan to Kentucky.
At the time, many in and around Cleveland viewed the purchases as something of a godsend. Given the hollowing-out of the city over the past three decades, any revitalization attempts were met with open arms — and few questions. (Along the way, Kolomoisky’s son also began playing basketball for Cleveland State University.)
In 2012, for instance, the Cleveland Plain-Dealer ran a gauzy piece on one of Kolomoisky’s U.S.-based associates, Chaim Schochet, who is also named in the lawsuit. According to the piece, Schochet was “unlike any other 25-year-old in Cleveland,” working as “one of downtown’s largest landlords.”
“His fondness for this city is really apparent,” a senior vice president of real estate for the Greater Cleveland Partnership told the Plain-Dealer. “And I asked him: ‘Why Cleveland? Why now?’ His perspective was that it’s a market where acquisition was possible. But, also, it was really his description of the city. He loves the historic nature of the buildings, the density of the city.”
The lawsuit, though, indicates otherwise. Instead of looking to Cleveland out of “fondness,” the lawsuit alleges that Schochet was a cog in a sprawling money laundering scheme. Nor does the fate of the buildings linked to Kolomoisky’s network indicate any kind of love of the city’s “historic nature” — nor even any kind of market savvy. As the Cleveland Scene wrote in June, the Kolomoisky network “has been selling off its Cleveland properties, most of which have fallen into disrepair and suffer from high vacancy rates.”
The paper added that 55 Public Square is mired in a “situation of disrepair and vacancy,” with the value of the building dropping by nearly half since Kolomoisky’s network took it over. The AECOM/Penton Media Building likewise saw occupancy rates plummet in the eight years it was owned by Kolomoisky’s network, selling for nearly 20% less than the original purchase price. Another purchase, the Huntington Building, is currently a “gaping hole” in downtown Cleveland, according to the Plain-Dealer.
But the Warren steel plant fared potentially worst of all. In 2016, the plant announced it would be closing entirely — forcing some 162 workers to lose their jobs in the process.
Tracking the assets
Even if the details contained in the lawsuit prove untrue, the story it tells — of a post-Soviet tycoon parking his money in American real estate, relying on anonymous shell companies and compliant realtors along the way — highlights a very real phenomenon unfolding in the country. American officials have only recently begun attempting to combat the proliferation of shell-company purchases by kleptocrats.
For decades, any and all American shell companies could lead purchases of American real estate — all entirely anonymously, with no questions asked. Thanks to a “temporary” exemption that permitted realtors to skip steps necessary to check suspect funds, billions of dollars worth of potentially dirty money cascaded into American markets, ballooning costs and desiccating neighborhoods along the way. Everyone from the Iranian government to Equatorial Guinea’s dictatorial ruling family took part, parceling out America’s high-end real estate market, keeping their money safe from prying eyes. All of it was perfectly legally and totally anonymous.
In 2016, the Obama administration finally took action. Spearheading the Geographic Targeting Orders (GTO) program, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) demanded information on individuals behind these anonymous financial vehicles. In the three years since, the program appears to have been wildly successful in countering the flood of anonymous cash; One study, run by researchers at the University of Miami and Federal Reserve Bank of New York, found that the types of real estate purchases targeted by GTOs had fallen some 70%.
There was one catch, though: As these GTOs were a pilot program, they applied only to a handful of locations, like Miami, New York, and San Antonio. That range has since expanded to cover cities like Seattle, Las Vegas, and Boston, but is by no means nationwide. Cleveland, for example, is not covered, and that city’s experience highlights a major loophole: People behind these networks of dirty money are simply moving to other cities to clean their cash.
The GTOs “focus very much on New York, Miami, places where you expect people” to launder their money via high-end real estate, said Aslund, who analyzed the lawsuit for the Atlantic Council. “But here, it’s completely different — this is a [different] part of the U.S.”
But the alleged operations linked to Kolomoisky also accent another reality. Whereas other kleptocrats and oligarchs have often looked to purchase condos in the United States to live up their lavish lifestyle, the purchases in Cleveland were far more commercial. All of which opens up an entirely new world of real estate to potential questions about money laundering, and who’s really behind the investments supposedly made to reinvigorate downtown areas across the country.
“I think what it does is it brings forward a different type of individual, with something else in mind,” Tobon said. “We haven’t looked at companies that are coming in to do infrastructure projects in a city, [saying], ‘Okay, we are going to revitalize an area.’… All of these development projects, all of these sales — significant sales of commercial real estate in important downtown areas — that’s where we need to start to focus on.”
UPDATE (8/27/19): This story has been updated to include comments from a spokesperson from the Optima group of companies.