Russian House of Fraud

16.08.2010 — Analysis

Today in Russia, there is not a single large city left that would have no rallies and pickets set up by defrauded interest-holders. However, in most cases, the citizens' heart-cry receives no response - neither government authorities nor law-enforcement agencies are able or are willing to help. In spring 2010, the World Wide Web featured the "odnodolshiki.ru" web-site. The underlying principle is similar to the popular "odnoklassniki.ru"social network; the difference is that it is designed for communication of interest-holders who united in their confrontation to the lawlessness in housing, rather than for get-togethers of former school students. At the moment, the site has almost 1,400 people registered. The portal founders estimate that the number of the affected families can reach 500 thousand country-wise. The official data evidence 20 thousand defrauded co-investors so far. The exact number of such citizens cannot be estimated, as most of the Russian people do not turn to public organizations or officials for protection, seeing no sense in this. 

Dmitry Niskovskikh, Chairman of the Sverdlovsk Regional Department of the "Union of Borrowers and Investors of Russia", informed "RusBusinessNews" that the Middle Urals has more than 2,000 people who invested their money in residential construction; however, they have received no apartments so far. Moreover, 700 of them have actually no chances to return at least part of their money. 

"We Build, Live, Help", or How to Skin the Interest-Holder 

The swindling systems operating today in Ekaterinburg and its neighboring towns are diverse. Some developers simply collect citizens' money, fence a pro-forma construction site, and some time later, declare bankruptcy and disappear. Some companies attempt to sell one apartment to a few families at once. However, there are companies that can demonstrate staggering resourcefulness.

For example, Vyacheslav Borisov, head of the Ural Ivestment and Construction Corporation (UICC), designed a financial pyramid. He promoted enthusiastically the social and economic program named "We Build, Live, Help"; however, the name had nothing to do with its essence.

The "project" involved a number of organizations, both phony and real. They joined their efforts under the UICC umbrella, enthusiastically calling on citizens to invest money in housing construction. The purchasing of apartments was offered on credit, for the period of up to 30 years, at small interest (from 2 to 12% per annum). Under the agreement, the customer was to pay upfront 30% of the property value as well as to pay subscription and membership fees. After that, he/she was given a fictitious deposit passbook, which stated that the customer was given a loan. However, as a matter of fact, no money was transferred to the borrower, either in cash or via bank transfer. In 2003-2005, the dishonest developer cheated more than 1,000 people in several regions of Russia, including the Sverdlovsk and Kurgan Regions, whereas the total damage exceeded а 50 billion rubles. 

After the fraud had been detected, V. Borisov was sentenced to 7 years of imprisonment, but it brought no comfort to the robbed interest-holders - they are still not able to return their money. As D.Niskovskikh stated, part of the citizens participated in the housing program that was co-financed from the regional budged, and acquired new residential properties at a reduced price. On the other hand, most of the aggrieved invested their last money in UICC - they could not afford an apartment even at the below-market price.  

At the moment, Ekaterinburg is witnessing another large-scale construction shady deal. In 2003, SPEK LLC commenced construction of a high-rise in Khokhryakov Street. The company retained all the rights for the land and the building development, whereas Novy Grad CJSC was authorized to raise money from interest-holders. The companies entered into the relevant agreement. In 2007, the parties signed an amendment agreement, under which Novy Grad agreed to find additional financing in the amount of 85 million rubles for construction of the building. However, the company failed to fulfill the obligation, and the agreement was terminated. 

That was when all the interest-holders' troubles started. On March 12 in 2010, the Arbitration Court of the Sverdlovsk Region made an unprecedented decision - the agreement between SPEK and Novy Grad was invalidated. The purchase and sale transactions performed by Novy Grad in relation to apartments and office premises in this building were declared invalid. The court decision came as a bombshell - SPEK LLC started evicting dwellers and business tenants from the apartments and office premises. The developer decided to re-sell their property. Those who do not want to evict voluntarily are punished: electricity in their apartments has been disconnected. Many people lost the parking spaces that they purchased together with the apartment.

Yuri Repeta, head of Novy Grad, cannot be hold accountable: he is serving the sentence for the deliberate attempt to cause bankruptcy of his other organization - Hydrospetsstroy LLC - aimed at non-repayment of money to the lenders. The entrepreneur was sentenced to two-and-a-half years' imprisonment. Furthermore, the Novy Grad Company is going through bankruptcy proceedings at the moment.

Experts believe that the wildcat venture was premeditated, and all these bankruptcies were planned at the very beginning of the construction. Not coincidentally, the founders of SPEK LLC included Novy Grad and Hydrospetsstroy. Moreover, one of the executive officers of the company is Yevgeni Repeta - Yuri Repeta's son. 

Fraud in Law

The number of defrauded interest-holders is growing due to the specifics of the Russian legislation. Today's federal law requires that land for development should be allotted through tenders; however, many construction companies had received building permits from city governments before the law was adopted. 

"As a result, the developer collected money from citizens, spent it on design documentation, broke the ground, and then it turned out that he did not have any right to perform operations at this site, as he did not participate in the tender. Who is a crook here? The developer was not able to anticipate such an outcome - the city administration tends to be trustworthy. On the other hand, it is difficult to bring officials to account. In principle, the citizens must be compensated for their losses both by builders and authorities; however, Russia has not seen any case when injustice was rectified in this way so far ", D.Niskovskikh commented. 
 
Besides, today's legislation has no set requirements concerning the minimum authorized capital of construction companies. Sometimes its amount is not sufficient to compensate 2-3 interest-holders for the incurred damage in the event of bankruptcy. Generally, losses of private co-investors cannot be covered through selling of a company's assets - in most cases the developer has nothing but a couple of computers to dispose of - office premises and equipment are usually taken on lease. 

Experts point out that there are other aspects of the "construction" legislation that need to be amended.

"We still encounter practicing double-sales. The law "On Participatory Construction of Many-Apartment Residential Buildings" adopted in 2004 allowed diverse patterns related to selling of residential property: with participation of housing and savings cooperatives, housing cooperatives, mutual investment funds, housing certificates and vouchers. Then the law requirements became more stringent - now any methods of raising money are forbidden except for participatory construction. I am sure that lawyers are already knowledgeable of the ways to get around this regulation in their attempts to reconcile requirements of law and interests of business ", Artyom Abramov, managing partner of Vinder Law Office states.

However, experts in construction do not think that developers have any intention to make money on citizens. "Large numbers of defrauded interest-holders are not generated by the assumption that there are many crooks among developers. The problem is related to the structure of business and to the structure of consumer demand. Participatory construction sprang out because consumers not always can purchase apartments immediately. However, the construction market participants do not have funds to build a house and then to sell the apartments, which would be the least risky option for everybody. Therefore, developers have to turn to such co-financing patterns in construction ", Alexei Maltsev, General Director of R.management, a managing company, thinks.

He pointed out that today's Russia has no adequate methods of accumulating funds to finance construction. It is not profitable for developers to take loans at 11-15% per annum, in which case the burden is translated into prices and the customer has to pay 20-30%.

"I would not look for any "conspiracy theory" and accuse developers in the situation with defrauded interest-holders - that is the situation on the market. Therefore, the developer, the investor and the buyer have to share risks, and whatever the result may be, it will be. This can be avoided only when developers start building with their own money and sell the completed properties. The requirements for liability can be made more stringent, but participatory construction involves initially distribution of risks among all the parties ", A.Maltsev states.

In the meantime, experts assert that today banks are not ready to give developers lower-interest loans, as the risk of non-repayment is quite high - many companies, for instance, were unable to pass through the crises and went broke. That is why, the only way out is to put the operation of "participatory" developers under control. At present, the financial condition of developers is not monitored. It was expected that they will be under supervision of self-regulating entities, which came into life in 2010 and the membership in which was mandatory for each building company, otherwise it would have no right to operate. However, the practice turned out to be totally different. "The self-regulating organization is not authorized to supervise financial activities of its members. It deals with purely technical issues. For example, if a company performs construction in violation of technological requirements, it can be excluded from the market ", Yuri Chumerin, head of the Union of Construction Enterprises of the Sverdlovsk Region, explained to "RusBusinessNews".

Regional and municipal authorities also have no influence on developers; moreover, they are ready to turn a blind eye to any violations, if a company is owned by relatives of any city administrators. The spectacular example to this - the Ekaterinburg "Atomstroycomplex", a co-founder of which is Stanislav Chernetsky, the son of the city mayor. Firstly, in violation of all the laws, the company was allowed to build apartment houses in the vicinity of a source of increased danger - a filling station. Recently, there have been several explosions at the station, and only by good fortune no one was injured. Secondly, having moved to the houses built by Atomstroycomplex, Ekaterinburg citizens are horrified - one year after a building has been constructed it may often develop cracks; the windows in apartments are of low quality; ventilation leaves much to be desired. 

Miracles Do Not Exist!

Thus, today's Russian environment makes it impossible to establish a transparent construction market and to protect would-be interest-holders from fraud. Experts recommend Ural residents to deal with reputable companies, contact the Russian Register for information whether a target apartment has not been sold to anyone else. "Yet, if a person shared the destiny of other defrauded interest-holders, he/she should try to return the money, turning to law-enforcement agencies, lawyers, and the Union of Borrowers and Investors of Russia - we will do our best to give legal and judicial support to the aggrieved", D.Niskovskikh assures. 

In any case, it will be difficult and often impossible to recoup losses. As Mikhail Zherebtsov, Construction Minister of the Sverdlovsk Region, stated, the process can take years. "The procedure is the following: We lift the seizure imposed on, say, the foundation so that we could register interest-holders. Then we should find an investor who will complete the construction. As a rule, it is next to impossible to find a new developer quickly - miracles do not exist", he comments. 

The situation has reached the point where the defrauded co-investors decided to organize a national referendum. The participants of the "odnodolshiki.ru" web-site are determined to seek financial assistance from the federal budget; furthermore they require organization of a "unified investigation group" at the Investigative Committee of the Russian Prosecutor General's Office in order to ensure efficient investigation of criminal cases and search for money stolen by developers. 

The prerequisite for the referendum is 2 million signatures. The "Odnodolshiki" see the number as realistic. "Each defrauded person has friends, relatives, and associates who are sympathetic and fail to understand how such a thing could happen. That is why, to collect signatures is realistic ", the statement at the portal says. Time will show if Russians will succeed in overcoming the construction lawlessness, at least in a few years.

Maria Truskova