Political crisis crippling race to save key Moldovan bank

By bne IntelliNews February 19, 2013

Graham Stack in Berlin -

Embezzlement on a massive scale uncovered at Moldova's state-owned savings bank means it will go under by end of March unless decisive action is taken, according to a leaked International Monetary Fund (IMF) report. But political feuding in the governing coalition exploded into open warfare during the week of February 11, minimising the chances of a timely solution.

"The financial situation at the Banca de Economii a Moldovei (BEM) has been deteriorating since mid-2009, as a consequence of apparently fraudulent lending," reads the apparent rough draft of a report by the IMF filed in January and subsequently leaked to the press and internet. "In fact, if the National Bank of Moldova had not relaxed its provisions for seized assets 1 December 2012, BEM would have already become insolvent and its licence withdrawn... On the basis of subsequent significant provisions and with lack of recovery of major non-performing loans or seized assets or an injection of capital, it is expected that BEM will become insolvent by March 31, 2013."

A letter also leaked to the press in early February detailing an interim audit by Grant Thornton found that at the end of September 2012, BEM had been in violation of national bank regulations concerning minimum capital requirements, risk-weighted capital adequacy, the ratio of the ten largest borrowers to the total loan portfolio, net exposure to a group of people acting in concert, and the sum of all large exposures.

Both the IMF and Grant Thornton have refused to deny or confirm the authenticity of the leaked documents.

Social bank

BEM is only Moldova's sixth largest bank by assets, holding around 13% of total deposits, but its key position in Moldova's banking system is its monopoly on paying out pensions and other social payments, thanks to its majority state ownership and extensive network of branches, particularly those in villages where a majority of inhabitants live. BEM also holds the deposits of almost all public agencies and institutions, such as hospitals and schools, with a total of MDL707m (€43.65m) in insured deposits, while the state's deposit guarantee fund contains a total of only MDL134m, reads the leaked IMF report.

This makes it a disaster that the bank has been the centre of massive embezzlement over the last three years, which now threatens to drag it under.

According its declared results for 2012, the bank lost around $25m in 2012 due to provisions for non-performing loans, a huge sum for a Moldovan bank, with the bank's problems resulting from criminal fraud. And Grant Thornton wrote in December that its discovery of systematic fraud at the bank from 2009-2012 meant it was pointless to continue its audit. The auditors detailed one example of obviously fraudulent loans, just under €10m paid to Moldovan companies that had been secured by fake real estate. The funds were then transferred to accounts offshore. "There is a large probability that there are more such transactions," read the accountant's report.

The IMF in its report spoke of the "omnipresent activity of fraudulent crediting" at the bank, implying involvement of all departments of the state-owned bank, and that despite a change in top management at the bank in April 2012, many implicated in the fraud remain in their old positions.

A final straw for the authorities has been growing evidence the bank was used to launder funds embezzled from the Russian budget in the so-called "Magnitsky case". On February 11, Moldova became the sixth country to launch a probe into the notorious $230m fraud case that involved the death of anti-corruption lawyer Sergei Magnitsky while in Russian custody. Switzerland, Cyprus, Estonia, Latvia and Lithuania are conducting similar investigations, while the US Congress last year adopted the Magnitsky Act, which imposed asset freezes and barred from entry to the US anyone suspected of a role in his death.

According to the IMF report - apparently penned by David C. Parker, an expert on closing down defunct banks - there are now two options facing Moldova's financial authorities, one of which must be taken in the coming weeks: either Moldova creates a bridge bank or it recapitalises BEM.

The report says both options "would require significant state funds calling for an amendment of the budget." But, crucially, the bank is only 66% owned by the state, so a capital injection could either see public money benefitting murky private interests, or in the event of diluting the private owners, the certainty of legal action against the move. And given that no one understands the extent of the bank's losses, "this would be a classic example of sending good money after bad," warns the report, which comes down on the side of setting up a bridge bank.

Political crisis

Yet Moldovan politics is the last place to turn for a swift solution to a banking crisis, because one party in the governing Alliance for European Integration - the Democratic Party - is widely viewed as a pocket party of the very oligarch accused by opponents of the looting of BEM and numerous other banks.

The coalition's majority is dependent on the small Democrat Party and this kingmaker position has allowed the party to take control of the crucial law-enforcement offices of General Prosecutor and the Anti-corruption Office. The Democratic Party's financial backer is its deputy head, reputedly Moldova's richest man, MP Vlad Plahotniuc, who also has great media clout thanks to his ownership of TV channels.

Thus the growing crisis at BEM has also plunged the coalition into crisis. "Today we witness a campaign of sacrificing the interests of the state in the name of the interests one of single shadowy person, who has purchased a place in politics and now wants to buy the country," Prime Minister Vlad Filat raged in a TV address on February 13, announcing he was taking his Liberal Democratic Party (PLDM) out of the coalition agreement. "For him notions such as rule of law, democracy, European integration and welfare of citizens are words without meaning... I tell you I am not interested in one individual or another or their identities: I am concerned about the criminal system they have set up."

And so the unbelievable occurred: Filat's party entered into talks with its archenemies, the opposition Communist Party of Moldova. As a result, the two largest parties in parliament voted together at the opening session of the Parliament on February 15 to abolish the post of first deputy speaker of parliament - held by Plahotniuc - which then duly occurred, with the second coalition partner, the Liberal Party, abstaining from the vote.

Plahotniuc was not lost for an answer. In the same week, the National Anti-corruption Centre, the head of which was appointed on the quota of the Democratic Party, announced investigations against three Filat allies in the government - the finance minister, health minister and culture minister. On February 15, the day of the crucial vote on abolishing Plahotniuc's state post, anti-corruption officers in a glare of publicity picked up and charged the head of the tax service, and also raided government buildings as part of the purported anti-corruption campaign.

The official reason for the outbreak of hostilities between the two former allies is the so-called "Huntgate" scandal: a Christmas shooting party held in a nature reserve and involving top officials such as the former General Prosecutor, a Plahotniuc appointee called Valeriu Zubco, who managed to inadvertently shoot one of their own number, young businessman Sorin Paciu. The bigwigs then tried to unsuccessfully hush up the affair, and the ensuing scandal allowed Filat to push successfully for Zubco's resignation in January - seen as a blow against Plahotniuc's power.

A first sign of Plathoniuc's weakening grip on the General Prosecutor's office was the announcement of charges against former BEM manager Grigore Gacikevici for fraud on February 8. Gacikeviki was removed from the bank in April 2012. And analysts surmise the real context for Filat finally turning on Plahotniuc after three years of tolerating his activities was not in fact "Huntgate", but the emergency at state-owned BEM.

Plahotniuc's critics have alleged, and gathered some damning proof, that the oligarch has been raiding Moldova's banking system with impunity over the last three years, protected by his control of prosecutor and anti-corruption offices, and aided by his influence over the economic bloc of the government and the National Bank of Moldova.

While there is no documented link between Plahotniuc and the fraud at BEM specifically, the bank figured in 2010 and 2011 as one of a group of banks where minority share packets were expropriated by dodgy court decisions in Moldova, and transferred to non-resident companies, chiefly in the UK. In the case of one of the other banks affected, Victoria Bank, litigation in London subsequently established that Plahotniuc was now the beneficiary owner of the UK shell company owning the share packet. Plahotniuc says that the UK documents bearing his name are forgeries. Large outflows of funds seem to have taken place from the banks subsequent to the "raids".

Paradoxically, however, it seems the seriousness of the situation at BEM is such that Filat and his government allies are in fact denying there is an emergency there, to avoid a run on the bank that could spell disaster for the entire fragile economy. Plahotniuc's party and media, conversely, are hyping the situation around BEM, ran the leaked IMF reports and audit, and are calling for a parliamentary enquiry. This even prompted Filat in his address to the nation to talk of a "dirty campaign" being waged against the bank, created in order to distract attention from "Huntgate". In a TV interview, Filat said he had never seen the IMF report.

Filat is thus in the unenviable position of having to publicly whitewash the BEM emergency, a fact that Plahotniuc seems to be using to pin the blame on Filat, thus blackmailing the government over a fraud situation he may himself be suspected of creating.

Meanwhile, the future of the governing coalition going into the new parliamentary session looks very black, following the joint agreement between Communists and Filat's Liberal Democrats last week. Filat has called for the coalition agreement to be renegotiated, but may be forced to try and muddle through with a minority government to avoid pre-term elections. His biggest trump card is the high level of support from the EU and international financial institutions, who have been talking Moldova up as a reform success story and moving swiftly towards the signing of an association agreement. Filat discussed the political crisis with the EU's commissioner for expansion, Stefan Fule, and Polish Prime Minister Donald Tusk on February 14 by telephone, according to newswires.

But Plahotniuc could also claim some sort of international support on February 15 in his appearance in parliament: brandishing papers he said were confirmation from Italy's Interpol bureau that he was not under investigation as a member of an organized crime group, as leaked documents and statements by the interior minister had suggested.

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