Sergiu Cioclea is not what one would expect from a central bank governor. During an investment outlook session at the European Bank for Reconstruction and Development (EBRD) annual meeting in Nicosia in early May, the man tasked with aiding the embattled Moldovan banking sector back to health little over a year ago managed to be funny, open, and upbeat at the same time, all the while talking about one of the worst banking crises in Europe in recent years.

In a presentation that he peppered with road signs, Cioclea – a veteran banker who worked for BNP Paribas for almost two decades – sought to convince the audience that Moldova was largely over the banking crisis that took down the three largest banks in the country three years ago.

"People know more about the crisis and less about the reforms that we've made to get out of it. So I wanted to call the presentation 'The Road' to show you the road we've travelled. And, to keep you awake, I've put in some road signs," he joked.

That the three largest banks in the country collapsed days after the parliamentary election of November 2014 in a massive fraud scandal that dug a $1bn hole in the small country's budget is no joking matter. And Cioclea quickly became serious as he explained the why and the how of the crisis. Led by a bank that was privatised in 2012, Banca de Economii (' Savings Bank'), the country's three largest lenders became involved in a money laundering scheme that "dissipated" money from Moldova to offshore destinations ranging from Cyprus to Latvia and from the UK to Hong Kong.

Chisinau was left to pick up the tab after the lenders became insolvent in 2014, which pushed the public debt to GDP ratio up from 37.5% in 2014 to 52% in 2015. "But this helped to reimburse depositors and to preserve stability. The government had to step in to guarantee the deposits, became there were no deposit guarantee funds at the time," Cioclea explained.

The alleged mastermind behind the fraud scheme was 28-year-old Moldovan-Israeli businessman Ilan Shor, according to a report by American investigation agency Kroll. The then-chairman of Banca de Economii, Shor reportedly set up a carousel borrowing scheme for the three largest banks in the country, whereby the lenders attracted as much financing as possible without actually spending it on projects, and used money from one loan to pay off another.

Shor, who denies any wrongdoing, had become a shareholder not only in Banca de Economii, but also, through business partners, in the third largest lender Unibank. In the weeks before the election in 2014, $750mn were withdrawn from the banks and stacks of documentation removed from their registries and online databases.

Dubbed "the theft of the century" because of its huge size compared to the small and impoverished country's economy (the theft represented 12% of Moldova's GDP at the time), the crisis affected not only the banking sector, but the entire economy, prompting an acute political crisis that landed former prime minister Vlad Filat in jail; affected Moldova's reputation as an investment destination and its ability to raise external financing and even brought about drug shortages in Moldovan hospitals after the state health insurance company lost its deposits in Banca de Economii.

The World Bank, the International Monetary Fund (IMF) and the EU temporarily froze financial assistance for the country following the banking defaults. It did not help Moldova's case that the country was known as an intermediary in money laundering schemes involving Russian and Ukrainian businesses. 

Unknown beneficiaries

Also unhelpful was the alleged top-level political involvement in the looting – including Filat, and his brother-in-law, but also 15 judges, one MP and several politically-connected businessmen.

Moreover, Filat’s political rival Vladimir Plahotniuc, who is now the formal leader of the ruling majority, has been accused of protecting Shor, whose investigation has been proceeding extremely slowly.

According to Cioclea, "the national bank had to act immediately", and it did so by granting the banks $870mn in emergency loans, doubling the minimum reserve requirement in local currency for all 14 lenders at the time, reshuffling the management at the banks, instituting a special supervision regime on the lenders, increasing the reference base rate from 3.5% to 19% and eventually deciding to liquidate the banks in October 2015.

"In October 2016, the emergency loans we gave the banks [two years prior] were converted into government securities to recapitalise the national bank. This was quite a brave decision, because the Moldovan society was against taxpayers assuming the hole in the commercial banks," Cioclea said.

The root cause of the banking crisis was the lack of transparency in the lenders' shareholding structure, a problem that the central bank failed to spot at time.

"To understand why the central bank failed to see the problems at the time, you must understand that there were problems in the functioning and communication between the regulator and other agencies. For instance, three years ago, any decision by the [central bank] governor had to be registered with the justice ministry and could be overturned if challenged in court. There is also a question as to whether there was political interference at the time," he added pointedly. Cioclea was appointed governor after his predecessor had resigned, citing political interference in the banking sector investigation.

It did not help that the management boards of the lenders acted as pawns of the shareholders, which resulted in the granting of "a lot of related-party lending in a classic oligarch banking style. There was no risk management or financial control at all," Cioclea said.

But things are looking up for Moldovan banks, the governor claims. After signing a $179mn agreement with the IMF in July 2016 to reform the financial sector, Chisinau has moved to clean up the remaining 11 lenders. Long-standing efforts to identify the ultimate beneficiary owners (UBOs) of the three largest banks at the moment  – Agroinbank, Moldindconbank and Victoria Bank – will render concrete results by year-end, he vowed.

Agroindbank, which accounts for a market share of 27% by assets, had 43% of its shares blocked in March 2016 after their owners were found to be acting as a coordinated group, and the package was put up for sale on the stock exchange.

"These shares were offered on sale forcefully. Then, the existing shareholder brought his son and business partners in to buy the shares. But these buyers did not receive permission from the central bank to purchase them, so we are now organising a second round of issuance," Cioclea explains.

If no buyer expresses interest in the shares by June 27, the financial markets regulator will invalidate them and decrease the bank's capital accordingly.  However, Cioclea hinted that a private consortium sponsored by an unspecified international group would buy the shares by the new deadline. "We hope to see this transaction finalised by the end of the summer," he said.

Similarly, the central bank blocked 64% of the shares in Moldindconbank, which accounts for a fifth of the banking assets in the country, in October 2016 and put them on sale.

"Since we blocked the majority stake in the bank, we had to apply a temporary administrative regime; we changed the management entirely, appointing our vice governor, who has experience in the private banking sector, as president of the bank. We appointed a completely independent board that has the objective to clean up the bank, make an [asset quality] audit [conducted by consultancy KPMG] and prepare it for sale," Cioclea said, adding that the central bank was in negotiations with "reputable strategic investors".

The last of the problem lenders, Victoriabank, also has issues with "a private Russian investor" that is a shareholder, Cioclea revealed. "He was sanctioned last month for not providing the information and we will continue to monitor the situation. He announced that he is willing to sell his shares as well, probably in order to prevent outside intervention," he added.

The EBRD, which owns 27.5% of Victoriabank, is involved in a longstanding fight with Sergei Lobanov for control of the bank.

In order to address the banking crisis, Moldova has had to overhaul its entire banking law, Cioclea said. "In the beginning, I had to sign sanctions worth $2,000 for the bank managers involved in the billion-dollar fraud," he complained.

Moldova has since toughened the sanctions for banking fraud, setting the upper limit to 100 months' worth of income and even jail sentences for individual managers and the confiscation of 100% of shares for shareholders, up from 10% previously.

Taking inspiration from neighbouring Ukraine and with the help of the EBRD and the World Bank, Chisnau has passed another legislative package meant to prevent related-party lending. The new bank recovery and resolution law grants financial authorities more flexibility to intervene in commercial banks. Cioclea says: "My predecessor only had supervision and liquidation [responsibilities when it comes to private banks]. I have all the instruments – temporary administration, revenue plans, prevention needs assessments (PNA). We are now using the entire toolbox."

Lastly, to ensure that no documents are altered or stolen in the future like it happened in 2014, the central bank is working on setting up a single depository this year, where companies can store their ownership and transaction documentation "in a non-material basis".

Looking ahead, Cioclea says that the country is working on toughening its anti-money-laundering laws with the help of the EU, Romania and the Netherlands; to complete related-party-lending audits at all the banks; to approve new fit-and-proper supervision for banking sector managers; and to implement the asset recovery strategy that Kroll prepared in April.

While Cioclea made a compelling case for his institution's efforts to clean up the banking sector, investors may be reluctant to heed his calls to come and invest in the Moldovan banking sector quite yet. "Four banks in the country already belong to international groups. And there are opportunities to invest. There is no internet banking yet," he urged.