The great Moldovan bank robbery
By Chris Weston, CEE Consulting Group
When a country experiences a bank robbery, it rarely catches the headlines in the national newspapers. But when a country is the subject of a robbery that saw USD 1 bln or close to 15 percent of that country`s GDP disappear, this deserves headlines the world over.
Skip back to late November 2014, aroundÂ USD 1 bln is transferred to a series of UK- and Hong Kong-registered companies – companies whose ultimate owners are unknown, from three of the country`s leading banks, including the one mentioned above, BEM, or Banca de Economii. The other two banks involved were: Banca Sociala and Unibank.
The prolific American bank robber, Willie Sutton, when asked why he robbed banks, laconically replied: â€śBecause that`s where the money is.â€ť He robbed banks of USD 2 mln over a forty-year career, which also earned him substantial prison terms. Rather than wearing masks and wielding sawn off shotguns (the stuff of American and British film lore), today`s â€śblaggersâ€ť wear pinstripe suits and use a combination of modern IT systems, â€śstrawmenâ€ť, company formation agents in various jurisdictions, lawyers and accountants to rob banks. They also tend to get away with the crime.
There is a tendency to view events in Moldova as perhaps unavoidable as political and law enforcement institutions were weak in one of the poorest countries but it was surely not as unforeseeable as has been portrayed.
In July 2014, the international financial institution, the IMF, published its Article IV report on Moldova. All countries, great and small, are subject to this procedure as members of the IMF. In essence, an IMF team visits the country to â€śkick the tyresâ€ť of the macroeconomic, financial and regulatory system in place and identify issues/make recommendations for follow up.
The interesting aspect of the Article IV report was item one concerning Moldova`s financial system. The fact that this was ranked above fiscal items i.e. a government`s tax and spending policy, was highly significant given the IMF`s raison d`etre â€“ IMF is jokingly referred to as â€śIt`s Mostly Fiscalâ€ť given the importance it typically affords this subject.
The report noted on page 1: â€śCorporate governance in the banking sector is a major concern. In line with FSAP recommendations, significant weaknesses in the legal and regulatory frameworks must be urgently addressed to ensure stability and soundness of the financial sector. â€ś
On page 8, the IMF outlines as its first substantive issue its concerns with the country`s financial sector: â€śRisks to systemic financial stability are significant due to governance problems in the banking systemâ€ť (original bold type retained).
It goes on later in that page: â€śThe condition of BEM, the fourth largest bank with an extensive branch network, and two mid-sized banks believed to be affiliated remains fragile (original bold retained). These three banks, which combined comprise 28 percent of banking system assets, equivalent to about 20 percent of GDP, have large interbank exposures among themselves and also large exposures to several Russian banks. Staff recommended that the NBM maintain a high level of scrutiny of BEMâ€™s operations, and monitor developments in liquidity indicators in these banks on a daily basis, including interbank exposures. Staff recommended that the NBM maintain a high level of scrutiny of BEMâ€™s operations […]â€ť
For a staid international institution, this was the diplomatic equivalent of â€śgrabbing someone by the lapelsâ€ť and giving someone what is euphemistically described as â€śthe hairdryer treatmentâ€ť. As is also made clear, the report had been discussed in April with Moldovan government officials, including its Prime Minister and the head of the country`s central bank.
As a result of the collapse in November 2014, the state was forced to step in to bail the banks out – protecting depositors but creating a hole in the public finances equivalent to an eighth of Moldova`s GDP. A corporate governance issue has thus been transformed into a fiscal problem of significant proportions.
Controlling stakes in the three banks had been acquired in 2012 and 2013, â€“ some bought their shares using funds from UK limited partnerships, whose ownership is often opaque, â€“ with the shareholders a collection of individuals who each held less than a 5 percent share. This â€śhad the effect of transferring ownership to a series of apparently unconnected individuals and entities,â€ť but who were, in fact, largely connected to Ilan Shor [â€“ who is the heir to the Dufremol duty-free shop business and one of Moldovaâ€™s richest men], and were able to act in concert without seemingly raising any red flags,â€ť a later investigative report said.
The list included family members of Shor, close business associates, and Ukrainian and Russian individuals with loans financed through offshore entities.
The banks then entered into a series of transactions with various companies linked to Shor, which the report says had “no sound economic rationale”. Money was then moved in various ways back and forth between the three banks as well as banks in Russia, each time artificially inflating the liquidity of the Moldovan banks to the extent that they were able to eventually issue loans worth many billions of lei.
The web of loans emptied the banks of funds until “they were no longer viable as going concerns”.
In a final twist, days before Banca de Economii was placed under special administration, many of the documents related to the money transfers were loaded into a van for transportation; only for the vehicle and all of the documents to be stolen and discovered a few hours later burnt out. The van company, Klassica Force, is controlled by Ilan Shor.
The missing USD 1 bln is currently thought to be sitting in offshore bank accounts.
Moldovan politicians and institutions have been deeply compromised by their inertia, complacency, corruption and political cowardice. Needless to say, international financial institutions have withdrawn support from Moldova until there has been a proper follow up to the affair.
On May 6, 2015 Shor was placed under house arrest for 30 days although he has denied all allegations of impropriety. Despite the house arrest, he was allowed to register for electoral race for the mayor of city of Orhei, a contest in which he was successful at the June 14 local government election.
An IMF mission is now expected in Moldova from September 21 â€” a visit which may well lead to a new bailout program which could unlock withheld budgetary support money from both the EU and the World Bank.
Photo courtesy of Kosson (Wikimedia Commons).