Belarus preparing action over offshore fraud scheme

By bne IntelliNews July 20, 2015

Sergei Kuznetsov in Minsk -


Belarus is considering action against Kyiv-based millionaire Mykola Lagun over an alleged fraud that led to the collapse of a bank he controlled in the country.

In April, the State Control Committee (SCC) of Belarus, one of the country’s main law enforcement agencies, initiated criminal proceedings in connection with the collapse of Delta Bank. According to the SCC, the bank siphoned off $35mn to accounts held in European banks, after which those funds were burdened with debt obligations. “Subsequently, these funds were transferred to a foreign offshore company through a chain of banking operations,” the government body said in a statement.

A financial official in Minsk told bne IntelliNews that the current situation would have “consequences” for Lagun. “We react strongly when we are deceived,” he said, whilst refusing to speculate whether the Belarusian authorities are considering a request to extradite the businessman to Belarus.

The Belarus central bank, which has won a reputation for strict supervision of the market, had put Delta Bank under temporary administration in early March and was forced to withdraw its licence on March 18 after the lender experienced serious financial problems. In late April, the temporary administrator of Delta Bank filed a request to the country’s Supreme Court to start insolvency procedures, as the lender’s assets were insufficient to meet obligations to its creditors.

The events in Belarus unfolded against the background of a crisis at Delta Bank’s sister bank in Ukraine (also called Delta). On March 2, the country’s central bank declared Delta Bank, the country’s fourth largest bank by assets, insolvent as its owner had been unable to take effective, efficient and timely measures to improve the financial state of the bank. Simultaneously, two other Lagun-controlled lenders – the small-sized Kreditprombank and Omega Bank – were also declared insolvent by the regulator. Two weeks later, the same action was imposed against Astra Bank, also owned by Lagun. 

Delta’s founder and owner, Lagun, has refused to comment on the allegations since March 17, when he told in an interview to Ukraine’s web portal Ukrainska Pravda that he “did not siphon off any assets from the bank”. He has not yet been charged with any crime.

Back-to-back loan scheme

According to the letter of the temporary administrator of Delta Bank in Belarus to the Supreme Court, obtained by bne IntelliNews, its performance significantly deteriorated at the beginning of the year, after which the central bank demanded a return of the lender’s funds from Lichtenstein’s Bank Frick & Co as well as Austria’s Bank Winter & Co. Simultaneously, the regulator asked Delta Bank in Belarus to cease allocating funds “in any form” to Ukraine’s Delta Bank, and to stop providing guarantees in favour of third parties within the obligations of Ukraine’s troubled bank.

However, it appears that these requests were ignored, and in February the Belarusian central bank was forced to prohibit the allocation of funds to Bank Frick & Co, Bank Winter & Co, and Ukraine’s Delta Bank and other companies in Belarus that were allegedly either controlled by Lagun or associated with him. This list included, in particular, two insurance companies, the Minsk-headquartered retail operator HTC, and a construction company heading a golf club project.

Experts believe that Delta Bank siphoned the funds from Belarus to an offshore company through a back-to-back loan scheme, in which the funds in European accounts were used as collateral for loans to this firm. As a result of intentional failure to repay the loans by the firm, the funds were debited by the European banks.

“It looks like Delta Bank transferred its funds to correspondent accounts in several EU banks, after which this cash became collateral in deals with third parties that were most likely connected to Lagun,” Alexander Mukha, a Minsk-based independent financial analyst, tells bne IntelliNews.

Transit hub

“This situation is atypical for Belarus,” a high-ranking financial official in Minsk tells bne IntelliNews on condition of remaining anonymous. “Delta Bank transferred its funds to the EU and didn’t reflect their collateralisation in its balance sheets. The bank provided false financial reports to the central bank.”

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

“I believe that the company mentioned by the Belarusian law enforcement agencies is most likely either controlled by Lagun, or was acting in his interests,” Mukha says.

Delta Bank in Ukraine acted according to a similar pattern, according to media reports in the country. Ukraine’s Zerkalo Nedeli web portal claimed in March, citing data from the central bank, that the lender siphoned up to $480mn to accounts in European banks, including the two aforementioned lenders alongside Luxembourg’s East-West United Bank and Austria’s Meinl Bank.

As in the case of Belarus, the funds in these accounts had either already been debited to the EU banks, or such transfers were planned in order “to secure contractual encumbrances” with third parties.

Ukraine’s central bank did not answer questions posed by bne IntelliNews before this article went to press. However, it appears that the regulator is concerned about the siphoning of funds via European lenders. According to the Ukrainian publication of Forbes, in summer 2014 the regulator sent a written request to dozens of the country’s banks requesting whether they have correspondent accounts in Meinl Bank with collateralised cash.

Oleksandr Savchenko, a former deputy governor of Ukraine's central bank, tells bne IntelliNews that fictitious import operations for siphoning funds are another popular trick among Ukrainian banks. “Usually, small-sized banks use this pattern. Large-scale banks use more sophisticated schemes,” he says.

The anonymous financial official in Minsk underlines that the Belarusian authorities recognise that some banks could use European banks as “transit hub” for siphoning money. “And we closely monitor this issue,” he adds.





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