How this Russian oligarch sanctioned by Canada stands to benefit from the Scarborough subway expansion

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This article was published 14/03/2022 (920 days ago), so information in it may no longer be current.

The company awarded a $750-million contract to tunnel the Scarborough subway is partially owned by a Russian oligarch sanctioned by Ottawa following the invasion of Ukraine, the Star has learned.

Oleg Deripaska, a metals magnate who is reportedly close to Russian President Vladimir Putin, holds a minority stake in Strabag, the lead company on a team the Ontario government selected in May 2021 to design and dig the tunnels for the Scarborough subway.

In 2020, the company was also part of a team that made the shortlist for a multibillion-dollar contract to build the Ontario Line that has not yet been awarded.

Once declared the richest person in Russia by Forbes Magazine, Deripaska has been on the U.S. sanctions list since 2018 due to alleged links to financial and organized crime. The 54-year old was sanctioned by Canada on March 6, and added to the U.K.’s sanctions list several days later. The sanctions freeze the oligarch’s assets and ban business dealings with him.

Austria-based Strabag has publicly disclosed Deripaska’s ownership for more than a decade, and the U.S. sanctions, imposed after Russia’s occupation of Crimea, had been in place for three years when the province awarded the Scarborough subway contract last year.

Metrolinx and Infrastructure Ontario, the two public agencies overseeing the subway, wouldn’t say Tuesday what they knew about Deripaska’s role at Strabag at the time of the award. They couldn’t provide details on how, if at all, the sanctions would affect work on the $5.5-billion extension, which is being partially funded by the federal government and is part of a major GTA transit expansion that Premier Doug Ford has staked his re-election on.

“Infrastructure Ontario and Metrolinx require all companies working with us … to abide by sanctions imposed by the Government of Canada,” Infrastructure Ontario spokesperson Ian McConachie said in an email. “We are currently performing due diligence based on recent federal announcements on sanctions to determine whether it impacts any of our work, its current contractors or any teams bidding on future projects.”

The subway tunnel deal is the first major Ontario public infrastructure project known to be potentially impacted by the sanctions, and experts say it reveals a challenge Canada faces in enforcing the measures targeting Russia’s elite. It also presents an opportunity to fix serious weaknesses in the country’s financial regulations, they say.

After the Star inquired into the impacts of the sanctions on the Scarborough subway project, Strabag released a statement detailing how the other major shareholders had attempted but failed to buy out Deripaska, whose holding company owns 27.8 per cent of the company. Strabag then suspended dividends to Deripaska’s holding company and terminated a “syndicate agreement” that gave Deripaska power to appoint people to the company’s board of directors.

“We are prepared to take all legally possible measures to avert any harm to the company,” read the statement, adding that Strabag is also winding up its projects in Russia.

UNIQA, another part-owner of Strabag, said in a separate statement that the dissolution of the syndicate agreement will not occur until the end of the year.

Infrastructure Ontario’s McConachie said Strabag’s statement indicates “it is severing relations with Oleg Deripaska, and will be altering its dividend payout to ensure any Ontario taxpayer funds do not go to this restricted individual.”

Attempts to reach Deripaska through his spokesperson and charitable foundation went unanswered before publication.

Deripaska has denied the allegations the U.S. Treasury Department made against him when it hit him with sanctions. In messages posted to Instagram in 2019 he said the government’s case was “full of lies” and the Treasury had “arbitrarily” targeted him “for political reasons.”

A statement posted to Deripaska’s personal website in May 2019 said he has never been charged or investigated in connection with a crime, and allegations he was linked to organized crime were “utterly false.” In 2018 he sued the Treasury to have the sanctions lifted, but a U.S judge dismissed the case.

Earlier this month, Strabag put out a statement denouncing the Russian invasion of Ukraine and acknowledging Deripaska’s ownership role.

“As a European construction company, we are just as shocked and appalled by the recent events in Eastern Europe as you and many others. This war of aggression is not only in stark contradiction to everything we believe in under international law and morally, it also hurts us personally that the peace project in Europe is being set back by decades,” the statement read.

The U.K. sanctions list describes Deripaska as “a prominent Russian businessman and pro-Kremlin oligarch” who is “closely associated with the Government of Russia and Vladimir Putin.” The British government says those connections mean Deripaska is closely linked to “persons who are involved in destabilising and threatening the territorial integrity, sovereignty and independence of Ukraine.”

In 2018, the U.S. Treasury Department alleged Deripaska had acted as a representative of the Russian government abroad. The department said he had been investigated for money laundering and faced accusations of bribing a government official, ordering the murder of a businessman, and having links to organized crime.

Since Russian tanks crossed the Ukrainian border on Feb. 24, Canada has sanctioned almost 500 individuals and companies from Russia, Ukraine and Belarus.

The federal government, which has pledged up to $2.26 billion for the Scarborough subway, declined to comment on the case due to “an obligation to protect confidential information.”

“Canadian companies need to evaluate their operations and their unique business circumstances in order to determine if Canadian sanctions laws would apply to a broad range of business activities, and implement further appropriate measures to ensure compliance with those measures,” wrote Global Affairs Canada spokesperson Jason Kung.

“Contravening Canadian sanctions is a criminal offence.”

In the rush to sanction Russia’s ruling elite following the invasion, the federal government has struggled to impose real financial penalties while avoiding blowback on Canadian interests, since the two countries’ economies have become increasingly intertwined.

“I don’t know that we have a good sense of the scope of investment by Russian oligarchs or other people linked to the Putin regime in Canada,” said Matthew Light, a professor with the Centre for European, Russian and Eurasian studies at the University of Toronto. “It has not received the same attention as it has in Europe or the U.S.”

“There are certain shiny objects in the discussion of sanctions, like the famous yachts,” said Light. “But what that misses is the extent to which the global financial system is completely porous to money from tainted sources. Even if Canada is not fun enough for the Russian elite to come here with their yachts, we should not assume that we are exempt from investment by compromised political actors.”

Russian ownership of Canadian steelmaker Evraz and tractor manufacturer Buhler have both drawn scrutiny in the past weeks, but both companies have received assurances from Ottawa that the sanctions wouldn’t affect workers.

As a major public infrastructure project that could be impacted by sanctions, the Scarborough subway will face increased scrutiny, though Light said oligarchs are profiting from government and private sector work alike.

“It does seem as though there is something more shocking about an official contract (with an oligarch) … than if they simply came here to sell widgets, but both are wrong and both should be understood to be part of the same problem,” Light said.

The Scarborough subway extension is one of four projects under the Ontario PC government’s $28.5-billion transit expansion plan for the GTA. The three-stop extension would push the TTC’s Line 2 subway from Kennedy station to Sheppard Ave. and McCowan Rd.

Metrolinx and Infrastructure Ontario have broken up work on the project into stages, and in May of last year they announced a team led by Strabag had won the $757.1-million contract for the first phase, which is to design, construct and finance the subway’s 7.8-kilometre tunnel and related works.

The provincial agencies said at the time that the contract had been awarded through an open and competitive bidding process, and Strabag’s proposal “delivers the best value for Ontario taxpayers.”

Premier Ford has a history of championing the subway extension that stretches back to before he was elected premier. He and his late brother Rob waged a fierce political battle to try to win approval for the project when Doug served as a Toronto city councillor and Rob was mayor.

Ford’s office declined to answer the Star’s questions about Strabag’s work on the project.

In addition to its contract for the Scarborough subway, Strabag is vying for work on another project under the province’s expansion plan. In December 2020, Metrolinx and Infrastructure Ontario announced the company was a member of one of three teams that had been shortlisted for work on the southern portion of the Ontario Line, the $11-billion subway through downtown Toronto that Ford has described as the “crown jewel” of his expansion.

The contract for the Ontario Line work has not been awarded.

It comes as no surprise that a Russian oligarch could receive taxpayer funds via a major public infrastructure project without the government knowing, said financial crime expert Vanessa Iafolla.

“Due diligence is lacking in the Canadian business community,” said Iafolla, a professor of criminology at St. Mary’s University in Halifax. “It’s not enough if it’s only a tick-box exercise.”

Companies and financial institutions generally run the names of sanctioned people through their records to identify if they have any contact with them, she said. This process is automated and should happen quickly. Problems arise, however, when it comes to shell corporations and minority stakeholders.

Unlike most advanced economies, Canada does not have a registry of the real owners of companies. These “beneficial ownership” registries have been set up in recent years to combat money laundering, corruption and tax evasion in the U.K., the EU and the U.S. Prime Minister Justin Trudeau promised one in last year’s budget, but has yet to deliver.

“It’s only when things get to a political boiling point that things change,” said Iafolla. “This moment presents an opportunity for Canada to get rid of its snow washing reputation and protect the integrity of our financial system.”

Canada is not the only jurisdiction where Strabag’s work on government funded transportation projects is coming under scrutiny.

The company is one of the major contractors on the U.K.’s HS2, a new high-speed railway that will cost tens of billions of dollars and is billed as one of the largest infrastructure projects in British history. Last week, a member of the U.K. opposition called on the public body overseeing the railway to “immediately terminate” any contracts it has with Strabag.

Marco Chown Oved is a Toronto-based investigative reporter for the Star. Follow him on Twitter: @marcooved

Ben Spurr is a Toronto-based reporter covering transportation for the Star. Reach him by email at bspurr@thestar.ca or follow him on Twitter: @BenSpurr