ALACO DISPATCHES: Moldovan banking scandal casts a long shadow

ALACO DISPATCHES:  Moldovan banking scandal casts a long shadow
By Nicolae Reutoi of Alaco July 8, 2016

The ability of Moldova’s coalition government to clean up the country’s institutions in the wake of a major banking scandal, which saw the theft of almost $1bn, has been thrown into doubt by recent revelations that the ruling parties were allegedly aware of the fraud a year before it was exposed.

The scandal, which broke in late 2014, led to the collapse of the largest lender Banca de Economii (BEM) and two other banks, Banca Sociala and Unibank, sparking a political and financial crisis that dealt a blow to the impoverished country’s hopes of EU integration. The government fell amid accusations of widespread corruption and concerns that the country was close to economic ruin.

Last month it emerged that in August 2013 the then-Prime Minister Iurie Leanca, responding to a recommendation from the Prosecutor General’s Office, issued a secret decree establishing a secret commission – including representatives of the Prosecutor General’s Office and the interior and justice ministries – that was tasked with monitoring the troubled banking sector. This decision reportedly followed substantial evidence from prosecutors that BEM’s finances were in a parlous state.

A former member of the commission, Mihail Gofman, claimed last month that the body had discovered that the banks’ assets were being looted through opaque loans, long before their eventual collapse in November 2014. An external investigation, conducted following BEM’s demise, revealed that hundreds of millions of dollars had been siphoned out of the three banks through non-performing loans, with the stolen funds deposited in accounts in offshore jurisdictions.

The new revelations suggest that the external investigation simply confirmed what the government already knew. Key officials – including Leanca – and MPs from the ruling coalition parties were allegedly informed of the ongoing fraud in November 2013, but did little to stop it. Leanca claims that he was told of the rapidly deteriorating situation when it was too late to avert the collapse of the banks. He also insists that his decision a year later to issue a government guarantee of some MDL9.5bn (approximately $500mn), to cover part of the financial hole resulting from the scandal, was necessary to prevent depositors losing their savings.

Many local observers take the view that the authorities did possess sufficient information to stop the fraud from escalating, and only informed the public of the unfolding crisis when the collapse of BEM was inevitable. Moldovans were told in December 2014 that the equivalent of $1bn would need to be transferred from the national reserves to replace the missing funds.

The scandal shocked supporters of the ruling coalition – causing divisions within the administration – and enraged the opposition, especially since news of the affair broke weeks after elections delivered the ruling coalition another four-year term.

Some politicians threatened to disclose further evidence of the fraud – allegedly carried out by oligarchs with close government ties – but they apparently held back because of concerns over the possible consequences.

One official, Ion Butmalai, a former member of the parliament's national security committee who is said to have been among those informed of the secret commission’s findings, was found dead in his country house in December 2014, days after details of the fraud became public. His death was recorded as suicide, but there are indications that he may have been murdered. Two other individuals who also appear to have had knowledge of the fraud – an ex-member of the commission and a BEM driver who was transporting the bank’s hardcopy archive when it was stolen and burnt – were also later found dead under suspicious circumstances.

The government claims it is committed to identifying the perpetrators of the banking fraud and holding them to account. In June Vlad Filat, a former prime minister and ruling coalition leader, was sentenced to nine years in prison for abuse of power following a seven-month investigation into his alleged role in the scandal. Filat has denied wrongdoing and insisted the case was politically motivated. There have been several other high profile probes, including one into Filat’s erstwhile associate, businessman Ilan Shor, who denies any involvement in the fraud. But the investigative process has been criticised as highly selective, with many suspects escaping scrutiny.

Following the banking scandal, the government resigned, and its successor was charged with reforming the country’s institutions. But since its members have been appointed by ruling coalition MPs who were reportedly aware of the looming bank crisis – and did nothing – it is debatable whether the new administration is up to the task. Certainly, the early signs are not encouraging. Efforts to prosecute the main suspects in the banking scandal are making little headway, while the government’s response to the resulting economic mess has been to shift the financial burden onto its citizens. It is about to pass a law converting the missing $1bn into public debt to be repaid by the taxpayer over the next 25 years – with interest.

Nicolae Reutoi is a senior analyst at Alaco. Alaco Dispatches is the business intelligence consultancy’s take on events and developments shaping the CIS region.