BUSINESS

'Shell' game

In 2016, a Russian hotel developer told the IRS he used a Bahamas shell company to buy $71 million worth of fruits and vegetables. The IRS didn't believe him.

Eileen Zaffiro-Kean
eileen.zaffiro-kean@news-jrnl.com

DAYTONA BEACH —  Alexey Petrovich Lysich is the Russian-born man building a $192 million hotel on the oceanfront — the most expensive hotel-condo development ever constructed along the beach.

Documents in a federal lawsuit show another one of Lysich's high-dollar ventures caught the attention of the Internal Revenue Service. Lysich was nabbed in a 2016 IRS investigation that found one of his businesses committed tax fraud by wiring $710,000 to a shell company in the Bahamas and then falsely claiming it as a business expense.

He gave the IRS a document claiming that the shell company bought and sold "produce" for him — $71 million worth of fruit and vegetables, to be precise.

The IRS report included in the lawsuit states the shell company Lysich's business sent the money to in 2014 — Solinger Trading Limited — "is used by international parties to move money around the world in a manner to illegally reduce their tax burden." The IRS ultimately ordered Lysich to pay taxes on the $710,000.

That shell company and another offshore corporation connected to an Alexey Petrovich Lysich are included in the Panama Papers, 11.5 million documents leaked in 2015. The once-private records detail financial and attorney-client information for more than 214,488 offshore entities. Some of the companies have been used for fraud, tax evasion and dodging international sanctions, according to the International Consortium of Investigative Journalists, which made the records public by posting all of them on its website and has done news stories on what's been found in the documents.

In a recent phone interview, Lysich told The News-Journal he didn't know anything about the $710,000 or the IRS probe. During the conversation, he repeatedly called the allegations contained in the lawsuit "bulls---."

But the 35-year-old's connection to the Bahamian shell company and the 2016 IRS audit are detailed in documents included in the lawsuit one of Lysich's former business partners brought against him, his father, his cousin and three of his companies. One of those companies is Protogroup, the corporation Lysich is using to build his pricey high-rise hotel.

That ousted business partner, Semyon Kremer, alleges in the suit that Lysich and his father abruptly severed him from all business dealings, funds and investments after Kremer refused to help create a false paper trail that would make the $710,000 look like a payment to Solinger Trading Limited for purchasing and selling fruits and vegetables. A copy of a backdated contract Kremer claims Lysich asked him to sign is contained in the lawsuit, along with a list of the wire transfers to Solinger all identified as "payment for the goods."

Kremer is seeking more than $3 million in damages, claiming wrongful termination, retaliation and shareholder oppression. The lawsuit was filed in March in U.S. District Court in New Jersey, where Kremer lives. Lysich and his business partners — including his father, Petr Lysich, and his cousin, Igor Fedorenko — have filed a motion to have the lawsuit dismissed.

Back in 2012, Kremer was still an ally of Lysich and was hunting for financing for the Daytona Beach Convention Hotel & Condominiums that is currently under construction. He told banks that their company was making $100 million every year and had $250 million in readily available cash and assets.

That was the same year Lysich bought a posh Palm Coast home on the Matanzas River with a boat dock, pool, spa, sauna, fireplace and wet bar that could fetch $1.6 million if it were sold now, according to one online real estate database company. Five years earlier, in 2007, Lysich's father and his brother, Dmitry Lysich, bought a luxurious Flagler County oceanfront home in the Cinnamon Beach gated community that another online real estate service estimates could sell for $1.7 million.

At the beginning of October, construction halted on the hotel project under a "stop work" order from the city that was spurred by Lysich releasing the general contractor, W.G. Yates & Sons Construction. Shortly after the contractor ended work on the project, a spokesman for Yates said his company hadn't been paid since June. Lysich denied that, and has since hired a new general contractor and several sub-contractors who have restarted work on the hotel and condominium towers. 

The massive hotel project, lavish homes, big bank accounts and recent burst of legal challenges — which include more than the federal lawsuit filed earlier this year — are a world away from Lysich's more humble and simple childhood in St. Petersburg, Russia.

How the Lysiches wound up moving to America, living the life of millionaires and building the tallest hotel-condo towers in the Daytona Beach area remains somewhat cloaked in mystery. But the tale begins with the upheaval and reconstruction of political and economic systems in the Soviet Union that began in the late 1980s.

A business tycoon is born

Alexey Lysich was born in Russia in 1983, a time when the country was under stifling communist control and the Iron Curtain separated it from the rest of the world.

When Russian government economic controls started loosening in the late 1980s, Lysich told The News-Journal his father jumped into the fledgling new marketplace and opened a small grocery store in St. Petersburg. Then he turned that one little shop into a chain of six stores called SEASON, Lysich said.

In 2005 the family patriarch branched out and opened a four-star, 194-room hotel in St. Petersburg's historic center, Lysich said. Then the elder Lysich opened three more hotels from 2006 to 2010, including a 557-room Holiday Inn in St. Petersburg.

The Lysiches also have a boutique hotel near the beach in Montenegro, a country in southeastern Europe on the Adriatic Sea that some say has become a mafia state. In 2015, an international investigative journalists' consortium called the Organized Crime and Corruption Reporting Project named Milo Djukanovic, Montenegro's longtime president and prime minister, "Person of the Year for his work in promoting crime, corruption and uncivil society."

Montenegro has unsupervised gambling and a hotel industry controlled by Russia, said Jack Blum, a Washington, D.C., lawyer and expert in international tax evasion who served for more than a decade as a consultant to the IRS.

"It's a big money laundering center with big unregulated casinos," said Blum, who has been a consultant to the United Nations Center on Transnational Corporations as well as the United Nations Office of Drug Control and Crime Prevention.

The IRS report that detailed the tax fraud with Solinger Trading Limited noted that Petr Lysich, referred to in that report as a Russian national, also had an ownership interest in night clubs and other business and investment operations in Russia and throughout the world. While some might suspect that Petr Lysich is a Russian oligarch — a very rich business leader with a great deal of political influence — Alexey Lysich told The News-Journal his family has no connection with the Russian government or contact with Russian President Vladimir Putin.

Petr Lysich was able to expand into the United States with the help of Kremer, the old friend now suing him. Kremer left Russia in 1989, emigrated to the United States and settled in New Jersey. In 2005, according to the lawsuit, Petr Lysich flew to New Jersey to visit his longtime friend and offer a business opportunity.

By that time, Kremer was a U.S. citizen and in a position to be an officer and director of new American entities. Kremer paints himself as a key force in the Lysiches' companies for more than 10 years, saying in the lawsuit that he executed corporate documents, negotiated with lenders, bought land and buildings, and in some cases served as the sole officer and director because the other partners were still Russian nationals.

Kremer was given a monthly salary, and in his lawsuit he also states he had a 20 percent interest in three of the companies. He said he was told he'd get the equivalent of a 20 percent interest in a fourth company — Protogroup — but wouldn't be an official shareholder in that entity. The lawsuit said Kremer was "concerned" about not being on Protogroup's official shareholder registry.

In 2007, Petr Lysich came to the United States again and he lived with Kremer in his East Brunswick, New Jersey home, according to the lawsuit. In July 2007, the two incorporated a company in Palm Coast called Smile Land Inc.

Later that year, Kremer used Smile Land to buy four acres of property near Interstate 95 in Palm Coast for $3.4 million. A few years later, the site became the home of a 119-room, four-story Days Inn by Wyndham hotel. The hotel's address at 120 Garden Street North is the same one used for an Internet marketing service, Smile Land, and Protogroup — the seven-year-old company the Lysiches are using to build the Daytona Beach hotel.

After the Days Inn opened in 2011, the family started preparing to launch their landmark Daytona Beach project — the pair of hotel-condo towers now under construction. Alexey Lysich also secured a green card that year and became a permanent resident of the United States. He told The News-Journal he became a U.S. citizen a year ago.

In an April 30 affidavit connected to Kremer's lawsuit, Alexey Lysich said he was making the sworn statement on behalf of both himself and his father because he said his father "is a native Russian" who is "unable to speak, read or write in English." He also noted that Petr Lysich "is a Russian citizen and permanent resident of the state of Florida."

Lysich was just 28 years old when he boldly set out to construct the huge hotel with luxury condominiums. To build support, he met with then-Mayor Glenn Ritchey and City Manager Jim Chisholm and used a translator to explain his idea.

The following year, he found the land for his 120-condo, 500-room hotel overlooking the waves: 4.5 acres on the beach a short distance south of Seabreeze Boulevard. In March 2012, he bought the land — which already had driving banned along its beach — for $6.3 million in a foreclosure sale. County records indicate that there's no mortgage on the land and Protogroup paid cash.

Charles Lichtigman, founder and chairman of Charles Wayne Properties in Daytona Beach, brokered the land sales for Protogroup's hotel and parking garage across the street.

"They always did precisely what they said they would do," Lichtigman said. "They were very good to work with."

'Wish I could do more'

The project's 28-story south tower is slated to open late next summer, and the 31-story north tower is expected to be complete sometime in 2020. Lysich originally said he planned to open his 330-foot and 380-foot buildings in 2015, but as it turned out construction didn't even start until early 2017.

Trouble securing financing slowed down everything. Documents in Kremer's lawsuit against Lysich include emails Kremer had been sending in 2012 and 2013 to financiers and banks, including two in Jacksonville. And the emails show how he was turned down again and again.

Some hotel industry experts say it can be difficult to attract a lender without a large American hotelier attached to a project. Jacksonville Fifth Third Bank Vice President Eric Clemons told Kremer in a May 2013 email that if the hotel didn't carry a flagship name, he would be taking a pass.

Kremer was also swimming against the tide in an economy that was still regaining its footing after the Great Recession.

"Wish I could do more," Clemons wrote.

Michael Rakita, an originator with Stonewater Capital Group in Pennsylvania, told Kremer he had an interested investor and also asked about the hotel flag situation.

In a May 2013 email to Rakita, Kremer wrote that the company he was representing was international, had 20 years experience in the service industry and pulled in revenue of about $100 million per year. Kremer went on to write that the company owned six hotels in various countries that collectively had 1,200 rooms.

He said the company was represented in the U.S. by two subsidiaries, Smile Land and Protogroup. He noted that the cost of the project at that point was projected to be about $120 million, and 50 percent of the financing was going to be provided by the owner.

Five years later, Rakita doesn't recall details, but he does remember that "the deal died."

"I don't remember the exact cause," Rakita said.

If Kremer and the Lysiches wanted to look to Russia for financing, they would have found that country struggling with a financial crisis from 2014 to 2017 largely caused by falling oil prices and international economic sanctions.

In an interview about a month ago, Lysich didn't answer a question from The News-Journal about whether he ever secured outside financing for the hotel construction. His only comment was "I'm paying for it with U.S. dollars."

If Protogroup is using cash for the $192 million project, it would fit a new trend, said Mark Soskin, a recently retired University of Central Florida economics professor who taught for 40 years.

"One of the phenomenons we've seen for over 10 years with certain high-end hotels and real estate is people in other nations secure their wealth offshore" so it's not seized by the government in their home country, Soskin said.

A new hotel is a safe place to park money, and it's a place for the developer's foreign business associates to stay when they visit, said Soskin, who still maintains an office at UCF where he's currently doing research on economic development. He said it's resulted in a lot of empty oceanfront hotels around the world, but investing on valuable land is still considered less risky than investing in the stock market.

Another simple reason some developers self-fund is because they have to, with financing still difficult to secure, Soskin said.

Lysich did confirm to The News-Journal that the application he submitted in 2015 to use foreign investors through the EB-5 visa program was approved a year ago by U.S. Citizenship and Immigration Services. The program provides a path to residency for wealthy foreign nationals who invest between $500,000 and $1 million in a project that creates at least 10 U.S. jobs. The EB-5 program applicants' spouses and unmarried children under 21 are also eligible to apply for permanent residence.

Being named an EB-5 "center" allows $1 million investments by up to 40 foreign nationals in exchange for equity in the project and possible visas that allow them into the United States. The News-Journal tried to determine how much money Protogroup attracted with the program and where the investors are from, but a spokesperson with the U.S. Citizenship and Immigration Services said her agency "does not release information on EB-5 applications, investors or related projects due to privacy act restrictions."

Critics of the EB-5 program have said it's murky, loosely regulated and prone to abuse. There have been several cases of fraud, including a South Florida woman accused of diverting nearly $1 million from Chinese investors to buy a 48-foot boat, BMW and Mercedes.

U.S. Citizenship and Immigration Services spokesman Michael Bars said his agency is working to finalize regulatory changes to the program, and added, "we urge Congress to enact needed reforms to the program to protect U.S. as well as foreign investors." The EB-5 program has been around since the early 1990s, and there are now 889 approved EB-5 regional centers nationwide. More than 80 of those are in Florida.

Blum, an expert in white collar crime, is not a fan of the EB-5 program.

"We're allowing crooks from all over the world to buy their way in while refugees are sitting on the borders and can't get in," said Blum, who spent 14 years as a staff attorney with the Senate Antitrust Subcommittee and the Senate Foreign Relations Committee.

Protogroup will also raise money when it sells some or all of its 120 luxury condominiums.

$71 million for vegetables?

While Lysich was trying to launch his oceanfront hotel, the IRS was digging into his dealings with Solinger Trading Limited. In October 2016, the IRS audit found four wire transfers from the Lysiches' Smile Land company to Solinger that were made in September 2014.

In a document attached to Kremer's lawsuit, IRS agents say Lysich told them the six-figure payments were made to buy produce, and that Solinger was acting as an agent to buy and sell produce for Smile Land in exchange for a fee equal to 1 percent of delivered products. Since the payments from Smile Land tallied $710,000, that would have required delivered products to total $71 million, according to the IRS. The IRS documented only $1.3 million of Smile Land produce sales for that tax year.

The IRS was also suspicious because the wire transfers were all rounded off to the nearest $10,000 on a form listing withdrawals that refers to "payment for the goods, fruits." The feds also discovered that Solinger does not buy or sell produce, and that the company has been used by others to avoid paying taxes. IRS agents were also not impressed with the backdated and unsigned copy of an agreement Lysich said laid out the terms between Smile Land and Solinger, but that lacked detail. 

The IRS ultimately ordered that the $710,000 be counted as a dividend, not an expense.

Kremer told IRS investigators he "was not aware of who Solinger Trading Company was or why payments were made to them," the IRS report states. When Lysich was interviewed by the IRS, he also told agents that Solinger Trading's suspicious background was irrelevant.

"Alexey Lysich, President and Director of Smile Land Inc., provided verbal testimony that these amounts were paid for the purchase of produce and the fact that they are round amounts being made to an international shell company that has proven to be used to avoid international taxes should bear no influence on the deductibility of the amounts," the IRS report states.

In his lawsuit, Kremer claims that in or around October 2016, just a few months before construction got under way on the Daytona Beach hotel, he was cut out of all business dealings with the Lysiches. According to the lawsuit, the break came after Lysich "demanded" that Kremer "sign and backdate" the contract Lysich showed the IRS to prove he was purchasing fruits and vegetables from Solinger Trading. Kremer refused to sign it, and "the relationship between the parties came to an abrupt end," the lawsuit states.

Kremer did not respond to an email and phone call seeking comment, and his Pennsylvania attorney only made brief, general comments. The Orlando attorneys representing the Lysiches did not return calls seeking comment.

The Panama Papers also list an Alexey Petrovich Lysich from St. Petersburg, Russia, as a shareholder of Walkany Limited, which was incorporated in November 2011, registered in the Seychelles and linked to the United Arab Emirates. Alexey Lysich told The News-Journal last year he thinks it's a different man and that it could be anyone because it's based on leaked documents. He didn't reply to a phone call and email a few weeks ago inquiring again about his possible connection to Walkany Limited.

The IRS snared Lysich quickly on the Solinger Trading deal, but many who shift money into shell companies carry on their illegal activities in the shadows for years and their money can become very difficult to trace, Blum said. The IRS is having a difficult time keeping up with all the illegal activity since Congress keeps cutting its budget, he said.

There are at least a million shell companies scattered across the globe, and the majority are used to break the rules, Blum said.

"Nobody knows the exact number," said Blum, who's been involved with offshore company investigations for 40 years.

The Lysiches' problems expand beyond the IRS probe and the lawsuit Kremer filed in March. Kremer also has another lawsuit he filed in May pending against Lysich, his father, Fedorenko and three of their companies in an attempt to recover what Kremer maintains are his assets.

Protogroup is also being sued by the owners of a small motel that sits in the middle of the Daytona Beach hotel construction site who have refused to sell their property or shut down. The brother and sister who own that 93-year-old motel maintain an agreement is needed for them to be financially compensated for the boom of a tower crane swinging over their two-story building when the north tower is built.

Another lawsuit could be brought against Protogroup by the original general contractor on the hotel project, Yates & Sons Construction, which maintains it wasn't paid for its work the last three months it was on the job, something Lysich denies. Yates was released from the job six weeks ago — 20 months after breaking ground on the ambitious project. Lysich gave no public explanation as to why the well-regarded Yates was replaced.

"We still have not been paid and are looking at all of our options," said Kenny Bush, a company spokesman for Yates, who is based in Mississippi.

After being pelted with the series of legal challenges and switching contractors halfway through his high-profile Daytona Beach venture, Alexey Lysich is ready to leave the controversy behind and focus on getting the hotel built. Lysich also indicated it won't be his last project. He's not ready to elaborate, but he hinted that he wants to build another hotel in the Volusia County area in the next few years.

"I hope I will have something else in the future," he said.