Graham Stack in Kyiv
February 6, 2012
Following January's high-profile arrest in New Zealand of Kim Dotcom, owner of filesharing site Megaupload, Ukrainian authorities moved against the country's leading file-exchange server ex.ua – and a hackers' backlash duly laid low numerous government sites. But days later ex.ua is up and running again, raising questions about its owners, which bne can reveal are linked to a notorious Latvian company service provider that supplies shell companies with fake directors to the money-laundering clients of Latvian boutique banks, eager to hide their identity and often from Ukraine.
On January 20, New Zealand law enforcement, acting on a US request, stormed the mansion of multi-millionaire Kim Dotcom, larger-than-life owner of the Megaupload file-exchange server used by millions of users worldwide to download pirated movies and software for free. He's accused of $500m worth of copyright piracy and facing 50 years in jail. The move marked the first major bust of an alleged global copyright pirate, and raised the question: who's next?
Ukraine's Ministry of Interior supplied the answer on January 31, moving in on the country's ex.ua file exchanger, confiscating servers and blocking the site.
Ukraine's decision to act followed a December call by the International Intellectual Property Alliance (IIPA) to the US government to take action on Ukraine's infringement of copyright. The IIPA report called the ex.ua file-exchange service a "particularly severe case of blatant and open piracy" and said that in 2010 ex.ua already accounted for 50% of illegal content in Ukraine – "and its popularity is growing."
The site's enormous popularity is undisputed. According to market research, it accounts for a staggering 15-25% of Ukraine's internet daily traffic. When the site was shut down on January 31, Ukraine's internet traffic immediately dipped by around 10%. The reason: the site was free and offered for download or to watch live online a massive range of movies, software and music. In a poor country like Ukraine, that made it a source of great joy to millions and the government decision to take it down prompted howls of outrage, and the inevitable question of "why now?" after three years of operating freely since being set up in 2009.
The obvious answer would seem to be a token gesture in the run-up to high-level meetings between the new finance minister, former secret service head Valery Khoroshkovsky and the International Monetary Fund in Washington DC, as well as a February 5 meeting between President Viktor Yanukovych and US Secretary of State Hilary Clinton at the Munich security conference. Ukraine's relations with the West are currently very strained over the prosecution and jailing of the country's main opposition leaders including former prime minister Yulia Tymoshenko, and top officials may have believed they need a bone to throw.
Whatever the reason, there was an immediate and vicious backlash against the decision. Hackers launched denial of service attacks on the government servers, swamping them with access requests and causing the websites of the president and government ministries to become unavailable February 1, with the Ministry of Interior website currently still unavailable as of February 5.
The move to close ex.ua proved deeply unpopular across society as a whole, removing a much-loved source of khalyava ("something-for-nothing") at a time when the government is raising utility prices and tightening taxes on small business, retail credit is dead, and wages are languishing below their 2007 levels. Politicians swiftly used the opportunity to score brownie points with the public by questioning the move to block ex.ua; even President Yanukovych's son filed a parliamentary question to the Prosecutor General regarding the legal grounds for closing the resource.
Hardly had the first wave of outrage peaked, then in an astonishing U-turn February on 1 the Interior Ministry announced it was unblocking the site ex.ua, without providing any coherent explanation for the volte-face. In a cringe-inducing moment at a press conference February 1 on the situation with ex.ua, Interior Ministry spokesman Volodymyr Polischuk freely told journalists that 47% of the ministry's own software was unlicensed – thus implying it was in no position to judge others.
According to the Interior Ministry, there is an ongoing investigation into ex.ua with servers confiscated, but no one has been detained. Currently, ex.ua says it is operating in a reduced form, but its basic functions of downloading or watching movies online seem to be already back to normal.
The volte-face might be partly down to public pressure, but also raises obvious questions about the ownership of ex.ua and its administrative clout. The huge traffic passing through the site brings with it significant revenue streams from advertising, including from leading Ukrainian companies such as mobile phone giant MTS and online shopping site rozetka.ua. But this might only be the tip of the iceberg, since the site also has huge significance for boosting internet traffic and thus boosting revenues of internet providers and hosting services.
Smoke and mirrors
The public face of the company are two likeable young Latvians, Yury Piskovyi and Valery Vavilov. They have portrayed ex.ua as an initially small-scale start-up by bright young IT people that quickly got big. Piskovyi told the Kyiv Post in March 2011 that he is a co-owner of ex.ua, and all owners invested only their own personal money in the project.
bne enquiries, however, reveal that Piskovyi is linked to a notorious Latvian company service provider International Overseas Services (IOS). IOS supplies shell companies with fake directors to the money-laundering clients of Latvian boutique banks, eager to hide their identity and often from Ukraine. IOS, for instance, has been implicated in a number of major recent Ukrainian corruption scandals, with shell companies and money flowing through Latvian banks: such as a $450m government tender for an oilrig in 2011 won by a British shell company that featured two of the Latvian nominee directors employed by IOS, Erik Vanagels and Stan Gorin. Most recently, journalists at weekly paper Zerkalo Nedeli revealed in January that the construction firm building a giant helicopter pad for President Yanukovych in the heart of historic Kyiv is also owned by a Vanagels-Gorin shell company – and that the "helicopter pad" will also host a full-scale entertainment complex.
Apart from corruption money and tax evasion, companies with the Latvian nominee directors have frequently also been implicated in cyber crime schemes where ill-gotten gains have been routed through Latvian banks, according to an investigation conducted by the Baltic Center for Investigative Journalism.
According to bne enquiries, in 2010 Piskovyi organised the opening of, and hired staff for, the IOS Kyiv office, conveniently located next door to the parliament and government. The office was abruptly closed again in 2011 following the breaking of the corruption scandals. Piskovyi told bne in 2011 that he set up the Kyiv office only as "a favour" to his friend from Riga IOS manager Arvis Steinbergs, and said he had no further connection to IOS. But in fact at least one overseas company associated with the domain ex.ua – Denver-based LLC Altercom Ltd – was in turn established by an IOS structure – Panamanian company Cascado AG – which had as directors the Latvian nominees Vanagels and Gorin. Piskovyi could not be reached to comment on the situation.
Piskovyi's connection to IOS will fuel suspicions that he – like Vanagels and Gorin, but more approachable – is merely a front for the real owners of ex.ua: suspicions he went someway to confirming January 31, mentioning an unspecified "Western investor" with plans to "legalise the resource". But many believe the "Western investor" story is yet more smoke and mirrors, and the real owners of ex.ua are to be found among Ukraine's largest internet providers and web hosting services whose businesses have benefited so hugely from the file-exchange service and its cornucopia of content. This in turn may explain why – in strong contrast to Kim Dotcom's fate – after a week when it seemed certain that ex.ua had exited the stage, it is up and running again and has even benefited from the wave of publicity. And almost everyone is happy.