Ukraine: Unpunished Bank Fraud
17 Feb 2020

The widespread bank fraud and financial malpractice that took place in Ukraine up until 2014 cost the country at least $25 billion in direct taxpayer losses and likely much more. Yet six years later, nobody of consequence has been prosecuted, while recovery of lost and stolen money is feeble — hindered by sabotage and costly legal delays.

The largest and most famous case of alleged fraud involves the now state-owned PrivatBank. Ukraine’s largest bank is trying to recover at least $5.5 billion it claims was stolen during a decade-long insider lending scheme by former owners Ihor Kolomoisky and Hennadiy Boholyubov. In London, where the bank is suing the two founders, judges have not passed judgment in the case but noted that “fraud on an epic scale” took place at the bank.

Both Ukrainian oligarchs deny all wrongdoing and are suing for the bank to be returned.

But PrivatBank was not alone. Since 2014, 90 banks were put up for liquidation or needed taxpayer bailouts. Even state banks have been accused of acting as pocket banks for powerful individuals in government. To date, law enforcement and the courts have made minimal headway in prosecuting the alleged culprits.

President Volodymyr Zelensky, who has historic business ties with Kolomoisky, promised that he would cut through the lawlessness and corruption that plagues Ukraine, including in its banking sector. And while the Prosecutor General’s Office and the National Anti-Corruption Bureau of Ukraine showed a surge in activity in the latter half of 2019, the detentions and notices of suspicion concerned relatively small-scale fraud cases.

‘Massive fraud’

Valeria Gontareva, governor of the National Bank of Ukraine between 2014 and 2017, recalls that shady banking practices back then triggered a financial crisis that would cost the nation 15% of its GDP.

“This was the fiscal cost of our banking crisis in 2014–2015,” she said, recalling that dozens of banks needed state bailouts. Some 20% of banks in the country were being used only for money laundering, she said.

PrivatBank, where a third of the country’s deposits were held and half of the country’s business transactions were conducted, was the flagship example. “We saw that 97% of the loan portfolio was related-party lending,” Gontareva recalls.

Deemed too important to fail, PrivatBank was taken under state ownership in December 2016 and survived. Plenty of other banks were not so fortunate.

Some $15 billion in recapitalizations due to non-performing loans, or NPLs, were needed throughout the entire banking sector and 89 banks that were shuttered have been described by Gontareva as “empty shells” used to launder or steal money.

“An additional $10 billion was injected into state banks before 2014,” Gontareva recalled, adding that more money was lost by customers that had deposits in liquidated banks, not all of which were protected by the limited capacity of the state Deposit Guarantee Fund.

While PrivatBank is the case so big that it became a litmus test for banking reform and Ukrainian justice, the picture was equally grim elsewhere in 2014–2015. Shady schemes were so commonplace they became the norm, threatening the whole financial sector with collapse.

“The banking system is a critical driver of economic growth for any country and even more so for an emerging economy like Ukraine, where the level of penetration of banking services is so low and needs to grow much faster than the overall economy,” said Artem Shevalev, deputy chairman of the supervisory board at PrivatBank and former deputy finance minister.

“The bank failures in Ukraine had a dual effect — they destroyed the public and business trust in the banks (and trust is a key element to a healthy banking system), whilst undermining the surviving banks’ capacity to lend,” he added.

Gontareva, who is writing a book about her time as governor at the NBU, recalls the bleak banking landscape back then: “Massive lending to related parties. Opaque ownership structures with the real owners hiding behind a line-up of nominal directors. Window-dressing of financial reports. Fake correspondent accounts at foreign banks. Politically motivated lending by state-owned banks, resulting in large losses and a subsequent massive injection of public funds.

“Money laundering as a bank’s business model. Shareholders and management walking away from failed banks with clients’ money, escaping charges for driving them to bankruptcy… Sounds like a horror movie? Impossible in real life?” she asks. “Wrong. It was a common way of doing financial business in Ukraine before 2014.”

Bank fraud free-for-all

The plundering of banks in Ukraine was often brazen to an absurd degree. One scheme that pumped tens of millions of dollars out of Delta Bank JSC even used a bogus company called Bonnie and Clyde LLC, named after the famous bank robbing duo of Depression-era America.

Delta, which was owned by Ukrainian businessman Mykola Lagun, had over $250 million siphoned off from it, allegedly by its own staff. the DGF estimated total damage to creditors at Hr 24.5 billion (about $1 billion.)

By Jack Laurenson and Igor Kossov, Kyiv Post, 14 February 2020

Read more at Kyiv Post

Photo: Адміністрація Президента України / CC BY 4.0

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