Massive real estate scam uncovered in Ukraine's capital (02/26/06)

Massive real estate scam uncovered in Ukraine's capital

by Zenon Zawada
Kyiv Press Bureau

KYIV - A massive real estate scam that snared thousands of Kyiv apartment investors has unraveled in recent weeks, causing public outrage and revealing the instability of Ukraine's precarious investment climate.

With the hope of obtaining a brand new apartment, average Ukrainians invested most, if not all, of their savings with Elite-Center, a real estate development company that claimed to have been working on seven simultaneous construction projects in Kyiv.

Instead, Elite-Center's business partners conducted construction at one site while collecting money for others, in some cases selling the same apartment as many as five times over to five different buyers.

Once the victims became aware of the scandal, the swindlers fled Ukraine some time in late January, taking with them a stunning $78 million they had collected.

One of the partners, Oleksander Volkonskyi, was a Russian citizen with an Israeli passport, according to Ukrayina Moloda, a leading daily newspaper in Ukraine that broke the story.

The current whereabouts of Mr. Volkonskyi and his partner, Kyiv resident Oleh Shestak, are unknown. Minister of Internal Affairs Yurii Lutsenko confirmed that the funds had been embezzled months earlier and the suspects were abroad.

The scheme they hatched was typical of any contemporary residential Ukrainian construction project.

Investors interested in a new apartment (known as condominiums in the U.S.) provide cash at the project's start, when they can lock in an inexpensive price.

In the interest of securing a low price, they often put down as much as the entire cost of the apartment. In this manner, building companies also benefit because they're able to raise the necessary start-up capital to launch the first stages of construction.

As construction progresses, more investors buy into the project at more expensive prices per square meter.

In the Elite-Center scam, victims bought into the various advertised projects as early as 2004 and as late as January this year, just before the partners fled.

Investors began to grow suspicious when they couldn't contact the construction company managers at their offices or on their cellular phones, Ukrayina Moloda reported.

Some employees were noticed carrying documents and furniture out of offices, never to return.

Through discussion groups on various Kyiv real estate websites, investors also began discovering that their particular apartments had been sold to other buyers, Ukrayina Moloda reported.

In some instances, a sold three-room apartment had been re-sold again as three separate one-room apartments.

Finally, a group of investors called upon the police to investigate, who discovered that Elite-Center's bank accounts contained a mere $2,940, Ukrayina Moloda reported.

Beyond the shock that such a large-scale fraud could take place, Kyiv residents were equally stunned by the indifferent and even critical reaction of government officials.

Mayor Oleksander Omelchenko, already under heavy criticism for turning Kyiv into a playground for real estate developers, placed the blame on victims themselves for trusting the real estate company.

"The Elite-Center crash was caused by two factors: the company leadership's shocking, fraudulent scheme and citizens who trusted their money with a company that had a dubious reputation and fell for the promise of gaining a residence that was 50 percent cheaper (than market prices)," he said.

In fact, Elite-Center was not a back-alley construction company, but one widely advertised throughout Kyiv on billboards, subway posters, real estate magazines and the radio.

Many of the duped investors acknowledged they were attracted to Elite-Center because of the affordable prices it was asking for apartments in a city where buying real estate is too expensive for most.

However, the prices weren't excessively unrealistic.

The apartments offered by Elite-Center were only 20 percent below market rates, Main Administration Chair Vitalii Yarema of the Ministry of Internal Affairs told Ukrayina Moloda.

Mr. Omelchenko also made the claim that, "We didn't allocate this company a single square centimeter of land."

However, Mr. Volkonskyi invested nearly $10 million in buying seven properties, Mr. Yarema said, even beginning construction at one site.

Scam victims have been gathering on the steps of Kyiv's City Council on the Khreschatyk, Kyiv's main boulevard, every few days to learn more information or carry placards demanding justice and reform.

The victims ranged from newlyweds investing in their first home to pensioners who had sold their apartments in order to purchase new ones.

Many worked with real estate brokers; those who didn't thought they had done their research.

Tetiana Tarasenko said she shopped around many development companies before selecting Elite-Center. She examined the contracts carefully, acknowledging she had slight suspicions about the Elite-Center contract she signed because it had no start date for the construction.

But such lapses are typical in Kyiv real estate. "Based on their documentation, they didn't look any different from any other company," she said.

She bought a 65-square-meter apartment for $600 a square meter, which she insists was near market rates in May 2005.

Given that the scandal erupted during a very competitive mayoral race in Kyiv, Mr. Omelchenko's opponents seized the moment to attack his government as corrupt and inept in defending the interests of Kyiv residents.

"The Omelchenko team of Kyiv officials who built this pyramid bear the main responsibility for this problem," said Anatolii Seminoha, a national deputy with the Yulia Tymoshenko Bloc. "Companies like Elite-Center are beneficial to Kyiv government officials because they can gain enormous bribes that don't go into the city budget but directly into their pockets."

The Yulia Tymoshenko Bloc staged a demonstration on February 17 on the steps of the Kyiv City Council demanding that the Kyiv government pass a law determining how to either return the lost money or complete construction.

The government should perform an immediate inventory and assessment of all construction projects under way in Kyiv, Mr. Seminoha said.

Tymoshenko Bloc leader Mykola Tomenko accused mayoral assistant Valerii Borysov of direct involvement, a charge he firmly denied.

While some preferred to blame corrupt officials and leaders, others faulted Ukraine's woefully inadequate construction and real estate development laws that allow for such scams to occur.

"I thought such scams weren't possible in the capital of Ukraine," Ms. Tarasenko said.

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