New Defense Minister Hires Ukraine’s Top Audit Firm for Due Diligence on Army Contractors

Ukraine’s newly appointed defense minister, Yevhen Khmara, moved to crack down on corrupt army contracting practices like sweetheart no-bid deals, kickbacks and price-fixing by hiring the country’s leading digital due diligence firm to out fly-by-night contractors, a ministry statement made public on Monday said. A professional special operations officer with deep experience in behind-the-lines missions, Khmara took on the defense ministry’s top job on July 20, replacing Mykhailo Fedorov, a former civilian IT professional popular in Ukraine for digitizing most state services and jump-starting wartime drone production.JOIN US ON TELEGRAMFollow our coverage of the war on the @Kyivpost_official. Public demonstrations against Fedorov’s ouster have taken place in the capital, Kyiv, almost daily since then, with most protesters saying he was ousted to protect corrupt army contracting and demanding his reinstatement. A Monday memorandum of cooperation was signed by Deputy Minister of Defense Mstyslav Banik and Danylo Hloba, the deputy legal director of the digital corporate audit company YouControl, appeared calculated to defuse those protests and to carry on the Fedorov-era strategy of using IT and artificial intelligence to root out inflated pricing and graft seen in Ukrainian military contracting in the past. Hloba, in a statement, said that a company wishing to bid on a government contract, as a precondition for submitting the bid, will be required to submit evidence that it is capable of delivering the goods or services purchased at the price and terms agreed with the Armed Forces of Ukraine (AFU). Other Topics of Interest Russia May Target Water Supply This Winter, Kyiv Warns Shmyhal warned Russia could target Ukraine’s water supply this winter, saying surviving more than three days without water and sewage would be extremely difficult. Ministry of Defense reviewing officers will screen the bidding company’s bona fides using YouControl’s national corporate information database, rather than having to investigate and confirm every contractor’s claim and background detail on their own, saving “significant time” and substantially improving chances of determining which potential contractor will fulfill the contract and which is unlikely to, Hloba said. Red flags on paper automatically disqualifying a potential contractor to the AFU from bidding on a contract include the company’s inclusion in sanctions lists, conflicts of interest between members of the armed services and corporate officers, links to the Russian Federation, outstanding debts, past or ongoing criminal cases against the potential contractor including corruption-related, and security risks, the Defense Ministry statement said. A key objective of digitized vetting of potential military contractors will be the development of a rating system called a Trust Index, which would give the reviewing officer a numerical tool for quickly comparing the relative reliability of potential contractors, and for identifying information gaps needing further investigation, the statement said. YouControl is a privately owned Ukrainian business intelligence company founded in September 2014 and headquartered in Kyiv. The company aggregates information from public registers and official data sources to provide due diligence, screening and intelligence development of selected Ukrainian companies for its customers. Privately held, the company reportedly is owned and run by Serhy Milman, 46, a Kyiv National Economic University graduate who worked for nearly a decade in business development and operational management before founding YouControl.YouControl’s customer base includes industrial companies, retailers, and multinational corporations operating in the country, including Michelin, PepsiCo, Carlsberg, Ciklum, Nova Poshta, Ukrnafta, Ukrenergo, Meest, ATB Market, Allo, and Inditex’s Zara business. Reportedly, more than 95% of Ukraine’s banks use YouControl services for screening, compliance, and corporate due diligence. The company website states that its platform serves around 100,000 users each day and maintains customer renewal rates exceeding 90%. By most measures, the firm is Ukraine’s largest and most-developed company operating in digitized corporate research and information collection.Most of Ukraine’s biggest defense procurement scandals since Russia’s second invasion in February 2022 have involved private companies receiving army contracts on questionable grounds and failing to deliver per contract terms. Probably Ukraine’s most notorious defense contracting scandal reached the public domain in late 2022, when Ukraine’s Prosecutor’s Office, working with the national intelligence agency, the SBU, announced their investigators had determined a $40 million contract for 100,000 rounds never was carried out and that the company winning the bid, a firm called Lviv Arsenal, had little or no experience in manufacturing munitions of any kind. The announcement of criminal diversion of advance payments came during a time of critical AFU ammunition shortages and a near-overwhelming Russian superiority in artillery and mortars. Some pundits called for both the contracting officers and Lviv Arsenal corporate executives to be shot as traitors.Investigation found money for the ammunition order was embezzled and concealed through intermediary companies. The case is ongoing with criminal charges filed against current and former Defense Ministry officials and executives associated with the contract, and five arrests made. One detainee was taken into custody as he attempted to travel from Ukraine to an EU state. Ukraine’s best-known wartime procurement scandal emerged in January 2023 after investigative journalists revealed that Ministry of Defense contracting officers had agreed with more than ten food supply companies to sell basic produce staples used in AFU mess halls, like eggs, potatoes, cabbage, and fat pork were sold to the government wholesale at prices four and even six times prevailing retail prices. According to reports by Ukraine’s National Anti-Corruption Bureau (NABU), contracting officers and suppliers colluded to manipulate food item pricing to generate excessive profits. Taxpayers lost some $17-18 million buying overpriced food for the military before the scam was exposed. News reports and court proceedings later came to be known in Ukraine as “The Golden Eggs” case because of alleged purchase by the Ukrainian military of hen’s eggs at three to five times market prices. Court proceedings are in progress against one former contracting officer and three corporate executives involved in the scheme. Across the AFU, corruption in contracting is considered a decades-old problem that in modern times has been limited but far from eliminated by modern digital practices and massed volunteer support of the military, along with greater patriotism and unwillingness to skim money by private companies providing goods to the army. On Friday, in a move widely supported by officers and other ranks across the service, Ukraine’s new army commander General Mykhailo Drapaty sacked the AFU former head of supply services Major General Volodymyr Karpenko, in a short statement thanking Karpenko for his service. No criminal allegations have reached the public about Karpenko; however, he was widely criticized across the AFU for using supplies of food, uniforms, ammunition and vehicles as a lever to support commanders that were loyal to Drapaty’s predecessor, and to punish often more efficient and better-commanded units whose members called for more equitable distribution of military supplies. President Volodymyr Zelensky has said corruption in military contracting is real but argued that given the scale of Ukrainian military outlays – around $100-120 billion including both Ukrainian taxpayer financing and international assistance – cases of criminal misdirection of funds are relatively small and uncommon.Zelensky appointed Drapaty commander of Ukraine’s armed forces on July 22. The Ukrainian leader said he wanted to shake up the country’s wartime leadership to make the military more effective and to prepare better for a possible Russian fall offensive.