In October 2006 SEB entered a good deal, or so it seemed. The bank agreed to lend €18.5m (290 million Estonian kroons) so real estate developers could erect a nice business and parking building in Tallinn city centre.
Businessmen pull mega wool over banker eyes
Please note that the article is more than five years old and belongs to our archive. We do not update the content of the archives, so it may be necessary to consult newer sources.
Real estate boom was peaking and city centre developments were in high esteem. The prominent business building was supposed to stand at Veerenni St 53a / Töökoja St 1 corner. Right in the Tallinn Prison neighbourhood, close to the promising traffic juncture of Veerenni Roundabout.
Eight years later, the developers formerly of decent reputation will go behind bars for major fraud – as judged this Wednesday by Supreme Court, rejecting an appeal by the businessmen.
What happened was quite unbelievable, in hindsight. Though SEB gave the developers money, in good faith – totalling 46.4 million kroons or €2.97m – no building ever came to be on the lot. Instead of that, the money ended up in Spain where these very developers bought a lot in Málaga which looked promising regarding real estate.
On the lot in Tallinn, the site was made to look to be under construction – just so the naive bankers would cough up the cash. That’s what the contract was like – SEB paid the bills on basis of expense receipts. The businessmen managed to present these, to the bank, for the value of 68 million kroons.
Any average crook will be able to produce expense receipts. Still, SEB believed them. For a long time the bank believed that the development will be okay. Even when the promised building failed to appear.
Old contacts
Eyes of bankers were opened by the developers’ company bankruptcy trustee Erik Savi who, in September 2010 filed a crime report to the police. Pretty quickly it became obvious the money pumped into the project by SEB was probably gone forever.
As assessed by Northern District Prosecutor’s Office, the bankers fell victim to fraud. The crooks disagree. They think the large scale trouble was caused by unfavourable economic circumstances.
Even after Prosecutor’s Office sent the fraud claim materials to court, the accused kept on scheming. Their defence made up of six sworn lawyers sought termination of the court case due to expiry of crime. Fraud is a crime of second degree and expires in five years.
The court thought otherwise and gave the men five year jail terms. Of these, as shock imprisonment, three months will have to be spent behind bars. A good deal considering the income of several million euros, say the cynics.
The accused do not think so. Therefore, they appealed to Supreme Court for milder punishments. Yesterday, the answer came back: no.
The fraudulent development was pursued by Arco Kapital. No links whatsoever to the Tallinn stock exchange listed Arco Vara. But for the bank, the men behind Arco Kapital – Kaido Kaljusaar (42) and Andres Lauri (41) – were trustworthy. As earlier cooperation partners, they had developed real estate before.
For starters, all felt safe. A commercial building in central Tallinn felt a done deal, as office space is always hot in the centre. The location seemed promising, with excellent access.
So, for the lot, the developers paid 76 million kroons. The money, of course, was loaned by SEB. The bank believed all to be well. The developers had even contracts to show, entered with rentees of office space. As it later surfaced, these were with straw men.
To build the business building, developers entered into contract with construction company Müller Lahendused. Its chief, Urmas Kuusküll (43) was an old acquaintance of the developers. Hiring an acquaintance for main contractor is nothing unusual. But it becomes quite unavoidable if the hirer intents to cheat the bank out of money, with false documents.
The accusers say that’s why the developers needed Mr Kuusküll as partner. The man agreed to present fictitious expense receipts regarding construction work. The developers needed these to get money from the bank to begin with. Again: pursuant to loan agreement, all it took to get money was to present expense receipts.
But the expense receipts were even more important than that. By the loan contract, developers had 20 percent own financing obligation. Not having the money in their pockets, a main contractor to balloon the expense receipts as needed was vitally important.
For instance: Müller Lahendused presented as expense receipt a document stating that the company had performed works on the lot, from April 16th to July 14th 2007, for 7.08 million kroons. The developers took this to the bank, which the very next day transferred five million kroons.
To «buy» glass facades for the building from Spain, a bill of 32 million kroons was written. Why from Spain? That was ten million kroons cheaper, than in Estonia, the men claimed.
Never did they buy the facades etc of course. In reality, the Spanish company getting the millions were controlled by Mr Kaljusaar and Mr Lauri, as board members.
That wasn’t to be the last «Spanish transfer». A couple of weeks later, the company in Málaga got €500,000 more. Then, a month later, it got its last cash injection from Estonia – €62,000.
Instead of glass facades, an unimproved (without buildings) plot was purchased by the money transferred to the firm Rock Island Capital, in Málaga. For €2.3m. The buyer was Concord Construcciones Cordobesas.
Meanwhile, winds were howling over the empty lot in Tallinn city centre. To keep the bank calm, the developers thought it sufficient to diligently pay loan contract interests. All in all, they managed to pay 6.6 million kroons worth of these.
Still, the financer wasn’t feeling easy. The developers were invited to the bank, to give an account.
Where are the glass facades ordered from Spain?
The facades will take a little longer, as they had just found a better offer...
The bank asked for producers data. The developers told then of a firm called Costa Works. The persons linked to the firm were acquaintances of the Estonian developers; this, the bankers did not know of course.
Later, investigators interrogated the Spaniard sitting in boards of both Concord Construcciones Cordobesas and Costa Works. The man confirmed nobody actually planned to buy the windows. All the money gotten from Estonia went straight to finance the plot purchase in Málaga.
At the beginning of 2008, the Tallinn development deal begun to look bad for the bank. In the summer, when the developed had for the fifth month failed to pay loan contract interests, SEB terminated the contract. By then, Arco Kapital was deep in trouble. In 2009, they assumed a new name – OÜ Kapitaalsus. The step kept them not from going bankrupt.
Solidary liability
Mr Savi, the trustee in bankruptcy, started by looking for the glass facades ordered from Spain for dozens of millions of kroons. It felt unlikely that Estonian entrepreneurs, having such deep troubles, would just forget a down payment of €2m.
Arco Kapital’s assets were worth 20 million kroons. The liabilities were ten times that – 200 million kroons. Of that, 145 millions were liabilities towards SEB, and 54 million towards Swedbank. Too bad...
And not about to get better. In the spring of 2010, the trustee sold the lot bought for €4.8m at the price of €0.7m. The real estate boon had turned into bust and six to sevenfold losses were the order of the day.
After a year of working, the trustee was finally convinced that the whole Tallinn centre development was one big organised fraud. Yes, the developers had paid seven million kroons for geodesic work and five million kroons to the builder Mr Kuusküll. But a large part of the money had went into their own pockets.
On September 8th 2010, trustee in bankruptcy Mr Savi filed crime report to police. A week later, Northern District Prosecutor’s Office launched criminal proceedings.
The trio accused in fraud spent a night in jailhouse. To cover the damage, they had nothing more to offer. No real assets left. Except for shares in Rock Island Capital, located in Spain.
Mr Kaljusaar, Mr Lauri and Mr Kuusküll were sued as accused in for fraud, money laundering, and falsification of documents. On September 13th last year, Harju County Court ruled the men were guilty. Of the three, Mr Kuusküll was the only one who got his jail term totally conditionally; Mr Kaljusaar and Mr Lauri will have to do time for three months.
On basis of solidarity, the trio was judged to pay damages to SEB, as they have the ability. Will they do that, or opt for private person’s bankruptcy, time will tell.
Comment
Erik Savi, trustee in bankruptcy
During bankruptcy proceedings, nothing could be recovered for the lenders as the sole assets of the bankruptcy estate was that lot in Spain. Me and the court had one view of the events, the management of the bankrupt company had a different view.
It was a very complicated process, as the debtor was not inclined to cooperate. Therefore, for the obtaining of any data, separate and multiple queries had to be made.
When finally I had all these materials collected, it was obvious that while these supported the version presented by the debtor, the story was not realistically believable. Basically, there was nothing left for me to do but to file criminal report, as a civil dispute would have led nowhere. On the basis of the existing documents, it was not possible to file any actions regarding the management of the debtor.