The exit of Mikhailovsky Bank from the market has once again demonstrated that the existing banking supervision system is incapable of either preventing fraudulent actions by the owners of financial groups or responding to them in a timely manner.
The Mikhailovsky Bank Pyramid
The scam centered on the now-insolvent Mykhailovskiy Bank (until its very last days, it was owned by Viktor Polischuk, the owner of the Eldorado chain) set a precedent in the market. Thanks to the shareholders' extensive financial group, which included several financial institutions in addition to the bank, Mykhailovskiy was gutted in an unprecedentedly short time, and the number of affected clients increased dramatically. Furthermore, the state was unlawfully saddled with a debt of approximately 1 billion hryvnias.
It was discovered that, since late 2014, Mykhailovskiy Bank had been regularly taking deposits, which it had registered with a related financial company, Investment and Settlement Center, to avoid paying taxes and contributions to the Deposit Guarantee Fund. However, on the eve of the temporary administration, these deposits were returned to the bank's balance sheet. According to a source at DS, to pull off this operation, the bank processed approximately 60,000 transactions in a single day: "If one person sat all day without lunch and did nothing but post entries, they could process around 300 transactions. This means that several hundred people were involved in this process," says a banking expert. Everything was accomplished in less than 24 hours, while the bank's operating system was allegedly "disabled." As NBU Deputy Governor Kateryna Rozhkova admitted in an interview with LigaBusinessInform, "what happened at Mykhailovskiy Bank was pure fraud." The Deposit Guarantee Fund stated that they would challenge the additional burden in the form of the transferred deposits. This means deposit holders may not receive payments from the Fund. On the eve of its insolvency, Mykhailovskiy managed to sell its retail loan portfolio, worth almost UAH 0,7 billion, to another affiliated entity, Fagor Financial Company LLC. Now the new lender is demanding that borrowers repay their debts to the company's accounts. Otherwise, they are threatened with penalties and fines. If borrowers follow Fagor's instructions, the Deposit Guarantee Fund will be left holding the bag.
This almost detective-like story also involves a third company affiliated with Mikhailovsky, SK Forte. It insured the financial risks of depositors of FC Investment and Settlement Center, charging 1,5% of the deposit amount for its services. Most likely, the affiliated insurer's insurance reserves are also deposited in Mikhailovsky, or perhaps even "disappeared" altogether. Therefore, it's unlikely that the SK will reimburse depositors for their losses. Viktor Polishchuk has been listed as the owner of SK Forte since November 2013. However, as with the bank and the financial company, the businessman resigned as a shareholder just before the temporary administration of Mikhailovsky was appointed. Now, law enforcement agencies will investigate the scam. Whether the former owner and top managers of the group, which was essentially a massive financial pyramid, will be punished remains to be seen.
Powerless National Bank
With the help of financial companies they control, and often their affiliated banks, financiers conduct transactions worth hundreds of millions of dollars right under the regulator's nose. Mikhailovsky Bank isn't the only case, but rather the most egregious. For example, a scandal once caused widespread controversy when CityCommerceBank shareholders transferred all of its assets through a second financial institution they controlled, Profinbank (the owner of both was said to be businessman Reins Tumovs).
Several media outlets reported on the transfer of assets from Fidobank to Eurobank (both banks were owned by Oleksandr Adarich) just before the temporary administration was introduced. However, both the bank itself and the NBU denied this information. The press also voiced suspicions of some "business" ties between Dmytro Firtash's Nadra Bank (read more: DMYTRO FIRTASH. THE STORY OF A TERNOPIL BILLIONAIRE ) and Clearing House Bank (one of its owners, Ivan Fursin, is a business partner of Firtash). According to Finbalance, at the end of 2014, some of the deposits of legal entities from Nadra Bank may have migrated to Clearing House. The publication suggested that this process could have been part of the "preparatory" work before the temporary administration was introduced at the bank.
Many banks use affiliated financial companies to optimize their own operations and adjust their reporting. Rumor has it that one of the largest banks managed to transfer problematic assets remaining in Crimea and the occupied territory to a related financial company. It also transferred its deposit obligations to Crimean depositors to the same company. Thus, the bank killed two birds with one stone: it eliminated the need to create reserves for "toxic" assets and, at the same time, eliminated deposit obligations, which it should have repaid. After this, the bank's owner successfully sold the financial company to a group of "foreign" shareholders registered in Cyprus and forgot about the problem.
To what extent was such a transfer legal? It's unknown. According to Article 520 of the Civil Code of Ukraine, transferring a debt to a third party without the consent of the creditor (depositor) is prohibited. However, this provision is easily circumvented. Bank agreements may have initially contained a clause allowing for the transfer of the loan or deposit portfolio to a third party. "Banks partner with collection agencies or factoring companies to sell their distressed assets. But if we're talking about a portfolio of creditors or deposits, the transfer is only possible with the consent of the borrower/depositor, unless they initially sign an agreement with the financial company," says Anna Apostolova, Director of the Financial Department at IBI-Rating.
According to the Law of Ukraine "On Banks and Banking Activities," banks must inform the National Bank of all related parties, including related non-bank financial institutions. They are also required to provide the regulator with information on transactions between banks and related parties to ensure that these transactions comply with market conditions.
"Unfortunately, banks do not always inform the regulator about the presence of a particular legal entity within their banking group. Obtaining information from participants in the non-banking financial sector is also problematic, as their ownership structure is opaque," the NBU press service stated. Essentially, the National Bank has no choice but to admit its own impotence.
Other regulators also lack effective oversight. The National Commission for Financial Services, for example, notes that sometimes, after a bank's bankruptcy, related entities also begin to violate payment discipline. "A striking example is Delta Bank's insurance subsidiary. Its funds were frozen in the bank, and the company began to suffer greatly. This issue has already been heard by the commission several times, and a decision is about to be made. This could include revoking the insurer's license. Financial recovery is difficult to discuss in this case," Igor Pashko, head of the non-banking regulator, told DS.
Only legislative amendments can change the situation. More comprehensive oversight of financial groups can be achieved through consolidated supervision of the financial sector. In this regard, the NBU is counting on the Verkhovna Rada of Ukraine adopting bills No. 2413-a and No. 2414-a, which provide for the introduction of unified supervision of financial institutions.
High risks
According to the NBU press service, the regulator is currently working on developing a regulatory framework that will identify all participants in a banking group and monitor their transactions. However, experts doubt the National Bank will be able to accomplish this task. "It's quite easy for related parties to hide their tracks. In our country, there's an entire industry for registering companies in offshore jurisdictions that allow them to remain anonymous for the required period. The NBU, however, doesn't have the authority to demand that everyone disclose their ownership, and it's physically impossible to audit every company," says a lawyer at a major law firm.
Vitaliy Shapran, a member of the Ukrainian Society of Financial Analysts, believes that the optimal solution would be to divide banks into two categories—market and non-market. Each category should have its own prudential oversight standards. "Banks that work with related parties shouldn't be considered criminals, but such banks probably shouldn't be allowed to participate in the retail deposit market. While it should be possible to work closely with related parties, banks must understand that they will be subject to stricter regulatory requirements," the analyst says. Currently, although the NBU has divided banks into arbitrary groups, their regulatory requirements remain the same.
On the topic: DMYTRO FIRTASH. THE STORY OF THE TERNOPIL BILLIONAIRE
Subscribe to our channels on Telegram, Facebook , Twitter , VK - Only new faces from the SKLEP section!