The Deposit Guarantee Fund has filed dozens of complaints with law enforcement agencies seeking to recover 3 billion hryvnias stolen from the City Commercial Bank. The bank's owners and management are under suspicion and could be held accountable, as are the borrowers. Lawyers say this will be difficult to achieve, even if law enforcement fully utilizes the adopted amendments to the Criminal Code.
CityCommerce Bank, a city-owned but non-commercial bank
CityCommerce Bank has proven to be one of the most illiquid institutions that the Deposit Guarantee Fund (DGF) has begun to remove from the market over the past year. By the time temporary administration was appointed on November 21, 2014, the bank's assets exceeded UAH 3,9 billion. A subsequent analysis of its financial statements revealed that the total losses from the actions of the bank's former owners and managers amounted to UAH 3 billion.
"At the time the bank was transferred to the Fund, its assets amounted to UAH 3,9 billion, of which UAH 2,6 billion was the loan portfolio. The estimated asset value was only UAH 90 million, and the loan portfolio was UAH 40 million. I believe their real value is even lower," Andriy Olenchyk, Deputy Managing Director of the Deposit Guarantee Fund, told FinMaidan. According to him, the Fund has filed 29 complaints with law enforcement agencies totaling UAH 3 billion. "Criminal proceedings have already been initiated for 26 complaints totaling UAH 1,8 billion," Olenchyk clarified. Most of the cases are being investigated under the articles "Fraud" and "Abuse of Office."
FinMaidan has obtained copies of statements filed by temporary administrator Andrey Ryazantsev (who held this position from November 21, 2014, to January 27, 2015) to the Ministry of Internal Affairs and the Prosecutor General's Office. The administrator reports instances of funds being withdrawn from the institution, including through loans to insolvent companies, as well as to enterprises that had received warnings from the bank's risk management departments or security service.
Black holes
The documents state that Korn Group LLC, which "had insufficient liquidity and is not financially stable—it is dependent on external sources of financing," received a loan of 18 million hryvnias. A similar conclusion was reached regarding Ukrviknoprom LLC, which attracted 10,3 million hryvnias. Stroybudpostach LLC, registered in March 2013, had already attracted 15,8 million hryvnias by June 2013, despite the bank's security service warning that the borrower's contact phone number was the contact number of Zernopostach 2013 LLC and Germesbutmaterial LLC. One of the contact numbers was also listed in an advertisement for the purchase of an LLC with VAT in Poltava for 8 hryvnias in February 2013. "These facts may indicate the fictitious nature of Stroybudpostach LLC's activities, and opening a credit line is risky," the bank's security service concluded.
A mandatory condition for issuing a loan to Umbrella Development Investment Corporation LLC was the "absence of objections in the conclusions of the legal department, security service, and collateral appraisal service under this loan agreement." However, the Fund's statement claims that "no conclusions were provided," and on January 23, 2014, the loan for UAH 39 million was issued anyway. The collateral was a commodity in circulation—rock waste from a mine in Torez, Donetsk Oblast. The same company guaranteed loans to Kikko Best LLC, Melange-M Private Enterprise, and Excellent Trade LLC. It provided land plots as collateral, the assessed value of which covered less than 50% of the loans. Moreover, Kikko Best LLC was registered on November 15, 2013, and received the loan in January 2014, and since June 4, 2014, the company has been in the process of suspending its operations.
Another company, Myslivski Stezhki Ukrainy LLC, acted as collateral for loans to six legal entities totaling UAH 424 million issued in 2013. Land plots were pledged as collateral for the loans. However, they only covered 25-50% of the loan amount. By the time the administration was introduced, all loans were already in default, and two borrowers decided to liquidate on the same day, June 6, 2014.
The provisional administration discovered that borrowers who had secured loans against deposits were cashing out the deposits immediately after receiving the loans. Naftopraktik Plus LLC received a UAH 65 million credit line secured by a UAH 90 million account. After receiving the first tranches, the collateral agreement was terminated, and the borrower withdrew UAH 66 million from the bank accounts.
It's worth noting that the founder of Naftopraktik Plus LLC, according to the Unified Register of Legal Entities and Individual Entrepreneurs, is the Cypriot company RMS Converse Group Holding Limited, which is owned by Vladimir Antonov, the former owner of City Commercial Bank. However, as a source at the bank told FinMaidan, Naftopraktik Plus LLC's credit history dates back to the time of Alexey Savchenko, who sold Partner Bank to Vladimir Antonov in 2011. Mr. Antonov then renamed the institution Converse Bank, which, after another change of ownership in 2012, was renamed City Commercial Bank.
The City Commercial Bank's portfolio also includes illiquid collateral currently located in territories not controlled by Ukraine. For example, on April 29, 2014, PJSC Garant-Auto pledged a building in Donetsk to Beverly Rox LLC as collateral for a UAH 45 million loan. It is noteworthy that the deputy chairman of the board of PJSC Garant-Auto was Mikhail Pryanichnikov, who had served as the director of the strategy and control department at Global Financial Management Group LLC, the owner of City Commercial Bank, since 2012. He was also a member of the supervisory board of Profinbank. However, Mikhail Pryanichnikov personally did not sign the collateral agreements.
External output
Funds were also siphoned off from the bank through foreign entities, such as the Austrian Meinl Bank. A letter to the Prosecutor General's Office signed by administrator Andrey Ryazantsev (a copy is available to FinMaidan) states that the day after the administration was instituted, the City Commercial Bank's correspondent account at Meinl Bank held €59,35 million, according to accounting records. On November 26, at the administrator's instruction, €10 from the correspondent account were transferred to Raiffeisen Bank International. A request was then sent to Meinl Bank for an additional €100, but the transaction was rejected due to City Commercial Bank's €10 debt. "Considering that the Meinl Bank account held 59,35 million euros, and that no account transactions were reflected in the bank's operating system, it can be concluded that the City Commercial Bank's management manipulated the correspondent account at Meinl Bank," reads a statement to the Prosecutor General's Office obtained by FinMaidan.
Another interesting fact about the Ukrainian bank's woes is that, while investigating the bankruptcy of Latvia's Latvijas Krājbankas, the audit firm KPMG Baltics discovered in 2011 that Latvijas Krājbankas had deposited €25 million in an account at Meinl Bank and used it as collateral for a loan to Melfa Group LTD Belize. In October 2011, €20 million was written off from the account as loan repayment. KPMG Baltics' notice states that Melfa Group LTD documents mention Vladimir Antonov, the former owner of City Commercial Bank and a member of Latvijas Krājbankas's supervisory board.
However, according to a source within the bank, the temporary administration discovered documents dated 2011 in a safe deposit box, indicating that Conversbank funds were pledged as collateral for the obligations of Melfa Group LTD, a company founded and beneficially owned by Vladimir Antonov. "This fact may indicate that City Commercial Bank funds were used to cover the obligations of Melfa Group LTD Belize and its owner, Vladimir Antonov, to Meinl Bank," the source told FinMaidan.
Systemic difficulties
Lawyers note that the Fund can invalidate loan agreements concluded in violation of the law. "The Law on the Deposit Guarantee System for Individuals obliges the authorized person to review all transactions concluded by the bank during the year prior to the introduction of the temporary administration for their invalidity. For example, transactions under which the bank transferred property or made a payment to a third party on preferential terms will be considered invalid. After establishing the fact of such a transaction, the Fund's authorized person has the right to demand the return of the property or funds transferred by the bank under the invalid agreement," says a lawyer at the Law Firm.Lavrinovich and Partners» Inna Rudnik.
However, the chances of recovering funds from fictitious companies are minimal. "To pay off depositors in troubled banks, the Fund attracted financing from the National Bank and the Ministry of Finance. However, the financial position and actual asset status of most of the banks we manage preclude even theoretical hope that we will be able to recover even a portion of the funds paid to these depositors from the liquidation estate. And for individuals over 200 and legal entities whose claims are satisfied after us, there's simply no hope," laments Andrey Olenchik.
The Fund expects that working with troubled banks will become easier thanks to the new law "On Amendments to Certain Legislative Acts Regarding the Liability of Bank-Related Persons." The law allows for the criminal prosecution of bank owners, beneficiaries, and top management for driving the bank into insolvency.
But laws are not retroactive. "This principle is enshrined in Article 58 of the Constitution of Ukraine and has only one exception: cases where a new law mitigates or eliminates a person's liability. However, the adopted law, on the contrary, only increases the liability of bank owners and controllers," notes Yevhen Starikov, senior lawyer at ILF Law Firm.
Therefore, if the actions of the bank's shareholders weren't prohibited at the time they were committed, it's impossible to impose sanctions against them. "For example, by adding a new Article 218-1 (bringing a bank into insolvency) to the relevant section of the Criminal Code, the state effectively criminalizes acts that weren't previously considered crimes. Therefore, holding a banker criminally liable under Article 218-1 of the Criminal Code for acts committed before the new law came into force and that weren't criminally punishable at the time is questionable," explains Yevgeny Starikov. However, the National Bank previously stated that the "retroactivity" rule doesn't apply in this case, since parliament clarified or strengthened the current provisions of the Criminal Code.
Political will
Lawyers believe the effectiveness of the actions of the Deposit Guarantee Fund, the Prosecutor General's Office, and the Ministry of Internal Affairs will depend on the work of the judicial system. "The question is whether authorized government agencies will, in practice, hold shareholders and individuals associated with banks accountable for driving a bank into bankruptcy. It's no secret that shareholders, beneficiaries, and/or individuals associated with banks are often government officials. Law enforcement and regulatory agencies currently operate selectively, and cases against individuals close to the government are often not brought for unknown reasons. Once the political component is removed from the work of law enforcement and regulatory agencies, the rate of uncovering schemes to drive banks into bankruptcy and bringing those responsible to justice will increase significantly," Inna Rudnik believes.
At the same time, Andrey Olenchik remains optimistic. "Our most important focus has been and remains the recovery of damages inflicted on banks from the owners and executives of these banks. In the near future, we want to restructure the Fund's work in this area to maximize the effective use of the provisions of the recently adopted 'presidential' law," Olenchik told FinMaidan. Law enforcement is currently handling these investigations. However, these investigations are not always carried out promptly and effectively.
The Fund hopes to gain the right to file direct lawsuits, bypassing the stage where law enforcement agencies must gather evidence for the claim. Currently, the Fund only submits a reasoned request to initiate criminal proceedings. "We are actively developing a methodology for conducting such investigations. In this regard, we are already collaborating with the US Treasury and the Federal Deposit Insurance Corporation: their specialists are helping us develop approaches to identifying violations, actions, or inactions of bank owners or officials that led to its bankruptcy," Andrey Olenchik explains to FinMaidan. "Furthermore, we continue to collaborate with the International Monetary Fund to develop a special audit using independent audit firms."
Victoria RUDENKO, FinMaidan
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