Sergei Kuznetsov in Minsk -

The banking authorities of Belarus and the temporary administrator of Delta Bank, owned by Kyiv-based businessman Mykola Lagun, are considering launching lawsuits against the European banks that were allegedly used to fraudulently siphon off funds. In Ukraine itself, where another of Lagun’s banks with the same name collapsed amid controversy, the regulator has announced the successful completion of “the first stage” of its clean up of the country’s rotten banking system, claiming the number of banks involved in money laundering and fraud is falling.

In its first meeting on August 6, up to 100 representatives of creditors of Delta Bank in Belarus gathered in the dimly lit premises of a cultural centre in one of Minsk’s industrial districts. Their objective was to discuss the activities of Delta Bank’s temporary administrator, who was appointed by the central bank in March a week after the regulator withdrew the bank’s licence because it was experiencing serious financial difficulties.

Among the companies unable to withdraw funds from Delta Bank are Beltechexport, a Belarusian exporter of weapons and military equipment, and mobile operator MTS, 51% of which is controlled by the Belarusian government with the remaining 49% owned by the Russian mobile firm with the same name.

“$40mn of Delta Bank’s funds [held in correspondent accounts in European banks] were used as collateral [for agreements with third parties], and at the beginning of this year we discovered that these funds had been lost by the bank,” Aleksandr Pedko, who heads the temporary administration team, said at the meeting. He added that law enforcement bodies had initiated two criminal proceedings: regarding intentional bankruptcy and the concealment of bankruptcy.

Show me the money

The Belarusian law enforcement authorities have announced that funds from Delta Bank were siphoned off into the account of a Belize-registered firm, without revealing its name. According to information obtained by bne IntelliNews from Ukraine's central bank, Lagun had business links with Belize: the businessman controlled a Belize-registered company called Rupsel Developments Ltd, which in turn controlled Astra Bank via a Cyprus-based firm.

The Delta Bank funds were diverted using what’s called a back-to-back loan scheme, whereby a loan is made by two companies in different countries, often borrowing offsetting amounts from one another in each other's currency in order to avoid foreign-exchange losses. With the advent of currency swaps this type of transaction is no longer used very often, though it became something of a speciality at Lagun’s banks in Belarus and Ukraine.

According to experts, the Belarusian authorities have uncovered that Delta Bank funds in accounts at Liechtenstein’s Bank Frick & Co. and Austria’s Bank Winter & Co. were used as collateral for loans to the Belize company that were provided by the EU banks. As a result of the Belize company’s intentional failure to repay these loans, the funds were debited by the European banks.

Meanwhile, Delta Bank in Ukraine, a separate bank owned by Lagun which was also declared insolvent in March, appears to have acted in a similar fashion. The lender allegedly siphoned off up to $480mn into accounts at European banks, including the two aforementioned lenders alongside Luxembourg’s East-West United Bank and Austria’s Meinl Bank.

The Belize company is believed to be either controlled by Lagun, or was acting in his interests. However, Pedko underlined that “there are no juridical connections” between Lagun and this Belize company. “However, Lagun knows what actions he is suspected of”, the head of temporary administration team added.

Pedko also noted that the aforementioned transaction was carried out “behind the backs” of the bank's employees who should have been notified. “Currently, the investigating authorities are finding out who carried out these deeds on behalf of the bank," he said.

“With assistance from the central bank, we are studying the possibility of taking action against the banks if they can be suspected of misconduct,” Pedko went on, adding that the temporary administration team and the country’s authorities “are also searching for the final recipients of the funds with the aim of filing a lawsuit”.

Later the same day, Pedko told bne IntelliNews that Bank Frick and Bank Winter were reluctant to enter into direct cooperation with the temporary administration team. As a result, the administrator and the Belarusian central bank have been forced to request the relevant information via the regulatory authorities of Liechtenstein and Austria. “Bank Frick & Co was recently contacted by the Liechtenstein Financial Market Authority (FMA) regarding loans to foreign clients, for which foreign banks provided the necessary guarantee. The FMA examines in detail all notifications it receives regarding persons from Liechtenstein and abroad, thereby proactively ensuring compliance with the high standards it prescribes as well as protection of the clients of Liechtenstein’s financial service providers and banks,” Sigvard Wohlwend, a spokesperson for Bank Frick, told bne IntelliNews.

Bank Frick “fully supports” the thorough approach taken by the FMA, Wohlwend adds. All dossiers held by Bank Frick that relate to the FMA request are available for inspection and examination by the authority, he underlined.

Commenting on the potential risks of back-to-back loan deals with clients from the former Soviet Union, Wohlwend underlined that, “the national courts of the respective country are responsible for establishing whether any breaches of national legislation have occurred as a result of providing loans to clients of third countries, for which third-party banks provide the guarantee”.

Wohlwend said that the bank “takes a highly diligent approach to assessing potential risk, regardless of where the client is from”. “One – and certainly not the only – decisive factor in these assessments is the question of whether the transaction conforms to the legal requirements of the country from which the funds and/or clients originate. In order to establish if this is the case, Bank Frick calls upon the legal opinions of third-party experts,” he explained.

Due diligence investigations are also a part of the bank’s procedures. “These investigations concern the origins of the funds and the beneficiary, as well as a number of other factors, and serve to ensure the legality (in accordance with both national and international legislation) of the transaction. Specific contract negotiations are only entered into if the findings of all investigations are positive,” Wohlwend said.

Bank Winter ignored requests for comment sent by bne IntelliNews, while East-West United Bank and Meinl Bank were not able to provide answers to questions before this article went to press.

Through the back-to-back door

The Austrian regulator also ignored a request for comment sent by bne IntelliNews. Meanwhile, Beat Krieger, spokesman for Liechtenstein's FMA, avoided commenting on any particular issues related to Frick Bank, underlining that “possible supervisory provisions are under professional confidentiality and thus cannot be published”.

The Luxembourgian regulator recognises that back-to-back transactions could bear significant risks for banks. “In general, back-to-back transactions can be used by banks in the normal course of business and are not forbidden as such. We consider that back-to-back transactions could bear significant risks (reputation, legal or fraud),” Patrick Hommel, a member of the secretariat general at the Commission de Surveillance du Secteur Financier (CSSF), told bne IntelliNews.

Hommel added that the regulator therefore requires that banks define “a prudent risk policy, set up adequate risk management and implement appropriate independent risk controls”. He also stated that, “We would intervene if we detected a back-to-back transaction of an illegal or fraudulent nature”.

On the other hand, the CSSF has no specific requirements regarding operations conducted by lenders with clients from the former Soviet Union. “More generally, whatever the location of the client, the CSSF has not issued specific requirements. However, banks have to observe existing sanctions,” Hommel said.

Purification

While the offshore schemes of the Kyiv-based banker have hit the business reputation of these European lenders, the Ukrainian central bank is continuing the long-overdue and crucial task of cleaning up the country’s banks that are used by for money-laundering and other criminal schemes.

In July, the governor of the central bank, Valeriya Gontareva, announced that "the purification of the banking system” is largely complete. “I cannot say this about banks of the third and fourth groups [small and medium-sized lenders], as we're checking them thoroughly at present. However, these are very small banks: they do not affect the banking system, as the share of the 35 largest banks in our banking sector is 85%," Gontareva said.

She explained that the regulator had started “the second phase” of its reform of the banking system, with the aim of “restoring trust, improving the protection of the rights of creditors and consumers, and developing infrastructure”. “The second phase has started – the so-called reloading of the banking system.”

According to information provided by the Ukrainian central bank to bne IntelliNews, since 2014 the regulator “has stepped up its efforts to prevent the use of the banking system for money laundering”, paying special attention to transactions with large volumes of cash that “may indicate illegal activity”. “For this purpose, some banks have been audited, during which financial operations with cash in large amounts were recorded,” the regulator’s media office said.

In July 2014, thanks to an adjustment of the country’s legislation, the regulator obtained additional powers to implement “more effective sanctions with the aim of suspending the risk operations of some banks”, as well as starting the withdrawal of “dishonest” banks from the market.

Between September 2014 and January 2015, the central bank recognised six lenders as insolvent for their “risky activities” in the sphere of financial monitoring. The licences of these banks were withdrawn, and elimination procedures are currently under way. “In addition, in April 2015 one more bank was declared problematic because of systematic violations of legislation in the sphere of financial monitoring,” the central bank’s media office told bne IntelliNews.