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Misconduct in agroholdings: unprecedented grain fraud by Agroinvestgroup

12 July 2019

Just as the fuss over the default of a well-known Ukrainian agroholding Mriya faded away, the Ukrainian agribusiness was shaken by another fraud scandal. Having affected 60% of grain market players, both national and international, the issue is believed to be the biggest grain fraud in the history of Ukrainian agriculture. The present article describes the case of misconduct at Agroinvestgroup, the largest agroholding in Southern Ukraine.

Agroinvestgroup’s rise to prominence

Agroinvestgroup is a Ukraine-based agroholding, operating 32,000 hectares of farmland and over 20 grain elevators in the Odesa region of Ukraine. The company produces grains and oilseeds with their further wholesale on Ukrainian market and abroad and provides grain storage services. For over ten years among Agroinvestgroup’s counterparties were the banks Reiffeisen Bank Aval and Tascombank, world-famous international grain traders and agri-food producers BUNGE, Delta Wilmar, Soufflet Group, CHS, Agrarian Fund of Ukraine, Ukrainian agroholdings, e.g. Kernel, as well as small farmers. The number of employees at the company before the incident was 300.

Getting into trouble

In late January 2019, Agroinvestgroup stopped performing its payment obligations within the contracts, giving rise to spreading rumors and anxiety among its partners and creditors. At the same time, the company’s owners Mykola and Vitaliy Kucherenko disappeared, allegedly to Latvia, and the employees left the head office. The Agroinvestgroup’s security service prevented access to the elevators for the grain owners and creditors, who could not neither verify the availability, nor take back their commodities. The total debt of Agroinvestgroup to banks and international financial institutions was estimated at $ 70 million, while the total amount of the fraud was valued at $ 100 – $ 120 million.

Further developments

On the basis of numerous complaints the national police of Ukraine initiated criminal proceedings for embezzlement of property against Agroinvestgroup and took control over its elevators, while the affected parties started filing lawsuits against Agroinvestgroup. However, these actions did not help the companies to get back their grain, as it soon turned out that the actual amount of grain at the elevators was much less than the total amount indicated in the clients’ and creditors’ warehouse receipts. The official inspection at the Agroinvestgroup’s elevators disclosed 30,000 tonnes of grain in total, while the total proven losses of 18 counterparties amounted to 276,000 tonnes of grain.

It became obvious that the same volumes of grain were sold several times, the warehouse receipts were falsified, and all the parties competed for the commodities which did not even exist. To demonstrate the availability of grain at the elevators to its clients, Agroinvestgroup equipped them with false bottoms. Allegedly, 90% of the commodities had been taken from the facilities shortly before the scandal.

Based on the results of inspections and pursuant to a court order, the total volume of grain at the elevators was arrested. To preserve the economic value of grain, the Ukrainian Asset Recovery and Management Agency (ARMA) was authorized to sell it through electronic auction with further distribution of proceeds among the affected parties. At this point the things went out of control. ARMA sold the commodities, reportedly, at a price 5-6 times lower than the market price to shell companies. Some farmers, suspecting the authorities in colluding, in an attempt to save their grain tried to get access to the elevators and to prevent the new owners to take grain away. However, the police considered such actions as illegal and unauthorized. Apparently, the series of measures designed to help deal with the issue have not worked properly. As the struggle between affected parties and public authorities continues, the further developments as well as the outcome of the story remain uncertain.

Lessons learnt

The case of Agroinvestgroup has undermined both the trust and relations among the parties on the Ukrainian grain market. However, the severity of consequences for each particular company differs depending on numerous factors (company’s size, deal volume, availability of supportive documentation, e.g., a warehouse receipt). For instance, a big multi-national trader, having insured the financial risks, will get its losses compensated. However, for a small farmer such experience might become an unbearable burden. Within the last six months, for the Ukrainian grain market as a whole this issue has already resulted in a decrease of amount of forward contracts, avoiding cooperation with Ukraine-based mediators on behalf of international traders and agri-food producers, tightening compliance procedures and reducing the limits of grain supplies.

As the situation around Agroinvestgroup is evolving and no clear outcome is foreseen at the moment, the tension among the affected companies continues to grow. Hopefully, there will be the way out of trouble for all parties of this misconduct.