Charity’s Shell Corporation Draws Russian Scrutiny
A shell company set up by one of America’s largest Jewish charities, the American Jewish Joint Distribution Committee, is on a list compiled by the Russian State Tax Authority as part of its efforts to root out tax fraud.
The American Jewish Joint Distribution Committee Real Estate Company, or AREC, a Cyprus-based commercial holding company that controls much of the JDC’s real estate in Russia and in other former Soviet countries, appeared on a list recently posted on the Web site of the St. Petersburg division of the Russian State Tax Authority. A Russian embassy official said that the list is composed of companies operating in Russia that have not earned a profit in the past two-and-a-half years and are thus being scrutinized in case they are hiding profits or involved in illicit financial transactions.
JDC officials say that the listing is simply a routine technicality and that AREC is perfectly legal.
“They’re just serving notice to us that we will be audited in September. It’s not a big thing,” said Asher Ostrin, the JDC’s director of programs in the former Soviet Union.
Yevgeniy Khorishko, an official at the Russian embassy, supported the JDC’s stand, saying that the listing is a routine matter and that it implies no wrongdoing or legal peril.
While the JDC may work out the problems with AREC, the difficulties compound troubles that the JDC has had recently in Eastern Europe. The JDC and local Jewish organizations have been embroiled in a number of disputes that have spilled into the press and even into court. For some local community leaders, AREC appears to be part of a broader approach by the JDC in which the interests of the local community are determined by the JDC’s foreign offices.
“The AREC company, as far as I understand, is a part of the strategy of the JDC, which, to my opinion, is the wrong strategy from the very beginning,” said Mikhail Chlenov, secretary general of the Euro-Asian Jewish Congress. “Instead of actually fulfilling the mission which American Jewry trusted JDC to do — lending support and help from the American Jewish community to overseas communities and restoring the local community in the USSR — instead of that, the Joint under Mr. Ostrin started to build its own empire.”
According to Ostrin, AREC grew out of efforts to make sure that Russian Jewish communities can support themselves in the long run. The JDC’s strategy has been to establish Jewish community centers and use the income from rentals and fees to cover the expenses of running and maintaining the buildings.
The concept is a common one among Jewish community centers in America. The difficulty, JDC officials say, is that Russian laws prohibit nor-for-profits from any activity that generates income. In response, Ostrin says, JDC officials established a commercial holding company in 2006 on the island of Cyprus to run and maintain its properties. Ownership of the JDC’s properties has been transferred to the holding company. Tenants — both Jewish and non-Jewish — have paid their rent to the holding company.
Four former JDC senior staffers, who declined to be named for fear of reprisals, say that AREC sparked a heated internal debate. According to these sources and to internal documents and e-mails shared with the Forward, a number of JDC employees, as well as Russian community leaders, objected to establishing the offshore company. These sources say that they and other critics of AREC protested that an offshore shell company would look suspicious to Russian authorities and that it could damage efforts to build partnerships with local communities. The appearance of AREC on the Russian tax list has revived that suspicion in some quarters.
“It was strange,” said Leonid Kolton, head of a JDC-sponsored welfare agency that rents space in the JDC’s St. Petersburg building. “I’m not in business, so I don’t know if it happens all the time or it’s something strange. Maybe [AREC] needs some time to develop its commercial activities. But it doesn’t look nice.”
Ostrin said that internal opposition to AREC was minimal and that any questions were answered.
“Everyone else understood that the buildings could never be self-sufficient if there was no way to get income,” Ostrin said.