The Baltic banking bust

By bne IntelliNews June 11, 2012

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Since the financial crisis first broke in the US in 2007, the public have been treated to an ever-lengthening list of outright fraud, theft, cheating, lying, unethical and amoral behaviour, greed, hubris and incompetence on a galactic scale in the world's financial industry. One of the latest chapters in this sorry saga is the 2011 collapse of Lithuania's Bank Snoras and its Latvian subsidiary Latvijas Krajbanka amid hundreds of millions of missing euros, the circumstances surrounding which the investigative outfit Re:Baltica has done a forensic examination. Its conclusion is that patently unfit owners were allowed to buy the banks by governments and regulators, who then didn't see fit to oversee them properly.

The main villain in the piece is the 36-year-old Vladimir Antonov, an Anglo-Russian son of a Russian oligarch, who describes himself on the business-networking site LinkedIn as a "banker, entrepreneur and investor", but to everyone else is a chancer who is now facing serious jail time for alleged fraud on a massive scale. He and his Lithuanian business partner Raimondas Baranauskas are, according to the European arrest warrant, "recognized as suspects with regard to misappropriation of property on a large scale and forgery of documents. The grounds are allegations of fraudulent accounting, forgery of documents, abuse of authority, misappropriation of property, money laundering and other criminal offenses committed by the bank Snoras."

Antonov may include the word "banker" in the description of himself, though Re:Baltica says he is not a typical banker. The banks were merely a means to an end to allegedly illegally funnel money to other types of larger and riskier business dealings. By the time Antonov and Baranauskas were picked up on November 24 in London after the Lithuanian authorities found around €290m in assets missing from Snoras, which the pair had a majority stake in, he had numerous interests in manufacturing, transport, media and real estate, not to mention the typical fleet of Aston Martins, Maseratis and Ferraris that every flash financial spiv sports these days.

Re:Baltica identifes two main modus operandi of Snoras as a bank. One of them is the Ponzi scheme - that old faithful of fraudsters from Charles Ponzi, who it was named after, to Bernie Madoff, who took it to a whole new level - where old liabilities are covered with new deposits. The targets seduced this time with the promised high returns were small depositors around Lithuania and Latvia, with plans in the works to expand into other countries such as the Czech Republic. The other strategy of the bank, Re:Baltica says, was to create an international network of banks that enabled the owners to transfer money from bank to bank according to their needs, helping to disguise the real capital level of the group. This has two benefits: first, if payments go to certain companies or individuals, they are subject to money-laundering prevention investigations, but bank-to-bank payments avoid such supervision; second, as one of the Lithuanian professional investigators told Re:Baltica, if one looks just at the figures, everything seems in good order, and extra effort is needed to find out to make sure the bank deposits aren't pledged elsewhere.

The schemes for the dealings had a similar model: for example, using offshore companies in Cyprus, trusted partners or investment bankers, Antonov became a direct or indirect co-owner in companies to which "his" banks made business loans. These transactions were illegal, as the law forbids persons associated with a bank of receiving loans exceeding 15% of the bank's own capital. For example, if Antonov owned at least 25% of a company, then Krajbanka was allowed to loan a sum not exceeding €3.7m to his company (which was 15% of Krajbanka's capital in 2005). Three years later, this ceiling was raised to €12m. The offshore schemes were developed to bypass this restriction.

According to insolvency experts Zolfo Cooper, which was brought in after the collapse to find out where the money went, more than €283m was funnelled into accounts linked with Antonov and Baranauskas, though the company says that it's chasing at least €567m in assets that have disappeared from Snoras. On June 4, Lithuanian prosecutors raised the estimate of how much the men allegedly stole to about €490m.

Past catches up

That extra effort identified by the Lithuanian professional investigator that was needed to keep on top of Snoras' inter-bank dealings was conspicuously absent when it came to the regulators of both countries, argues Re:Baltica.

Since its founding 20 years ago, Snoras has had a chequered past, with links to Russian organised crime. By the spring of 2003, Snoras had 695 shareholders, many of them little more than shell companies registered in places like Cyprus. No one in authority seemed to worry about who was behind those shell companies.

Even before Antonov took over the bank later that year, his shady business practices were well known and he was clearly not the kind of person who should've been allowed to take over what would become Lithuania's fifth biggest bank by assets. In 2007, for example, the UK rejected Snoras' attempts to open shop in its jurisdiction. Janis Brazovskis, a board member of Latvia's banking watchdog tells Re:Baltica that, "Next time I wouldn't let persons like Antonov come into the banking sector in Latvia. It was a mistake."

Antonov's partner at the bank, Baranauskas, who had worked at the bank since its inception and survived various changes of ownership, was an equally ludicrous, puffed-up individual, who had introduced the habit at the bank that all employees had to stand up when he, the director, entered the office.

The Snoras owners' kept to that time-tested strategy of keeping your friends close and your enemies closer still. Re:Baltica says Kazys Ramonas, head of the bank surveillance department at Bank of Lithuania, was among the select guests at Baranauskas' son's wedding. At the same time, influential individuals were invited to work in the bank.

The core of Re:Baltica criticisms is that, "Regulators in both countries [Lithuania and Latvia] not only were slow to act on growing warning signs reaching them, but missed supposedly clear signals they sent to each other."

When the Lithuanian authorities discovered in the spring of 2011 with the help of the Swiss banking authorities that Snoras had no securities at the stated value in banks that Snoras said it had, and the Swiss had instead found the securities in the private Swiss accounts of "persons connected to the bank" - later identified as Antonov and Baranauskas - they planned to drop a hint to their Latvian counterparts on their worries concerning Snoras and its Latvian subsidiary Krajbanka.

According to Re:Baltica, a few discussions with the Latvians ensued, in which the Lithuanian authorities asked about the situation at Krajbanka, hoping it would spur the Latvians to do some digging. Yet all they received back from the Latvians was a simple reply that Krajbanka had €200m in liquid assets - nothing more.

So the director of the economics department at the Bank of Lithuania, Mindaugas Leika, who had been put in charge of the investigation because the surveillance chief Ramonas was deemed too close to Snoras, decided to meet with Irena Krumane, head of Latvia's securities watchdog, the Financial and Capital Market Commission (FCMC), to mention again the concerns about Krajbanka's liquidity. "The Lithuanians' thinking," says Re:Baltica, "was that it would have been obvious, to any professional that something was wrong at Krajbanka, due to their twice raising, albeit indirectly, the issue."

Yet Krumane maintains even today that the Latvians had not been warned by the Lithuanian side about their investigations or suspicions about Snoras, not in September there was a meeting of the Latvian and Lithuanian monitoring officials, nor in October.

Why could the Lithuanians not be more explicit? Their argument is that they couldn't give anything more than these hints, as the annual inspection of Snoras had just started. In addition, the information from Switzerland was only informal at that point. On top of all this, there was probably a dose of mistrust of the Latvians, that the information could have been leaked to the Snoras owners. "No one is saying it out loud, but it seems like Lithuanian officials didn't trust the Latvian regulators. They were afraid that information would be leaked to Antonov," claims Re:Baltica.

Perhaps most emblematic of the lack of communication and trust between the regulators was that on November 11, 2011 the Bank of Lithuania appealed to the General Prosecutor's Office to bring charges against Snoras. Yet no notice was sent to the Latvians. "Ultimately, the Latvians were not informed, officially or fully, on the Lithuanians' growing concerns, despite what the Lithuanians may have thought," says Re:Baltica. "It seems that the problem was handled in a typically bureaucratic fashion: no formal notice on paper, no action taken."

The state of play

In spite of the obvious fraud, there is still a battle to be fought in the courts. Lawyers for Antonov and Baranauskas working to save them from extradition back to Lithuania from the UK are arguing that this is a political issue and the court system in Lithuania is politicized. Antonov claims his life would be in danger if he's sent back to Lithuania. Both Antonov and Baranauskas are out on bail.

Their line of attack could be seen in a court case in Latvia in earlier this year, in which they and other major creditors had sought to halt the bankruptcy process of Krajbanka and remove KPMG as administrator, claiming the accountancy firm bungled the insolvency, charged too much in fees, had violated the law and was motivated by political goals rather than maximizing returns for all creditors. They lost, and the judge on May 8 ruled that bankruptcy proceedings could begin against Krajbanka.

Already the case is becoming murkier and drawing in other shady actors. In March, exiled Russian banker German Gorbuntsov was shot six times on his doorstep in London in an attempted assassination attempt, which he claims is tied to his giving evidence to Russian prosecutors about a botched assassination attempt on his former business partner Alexander Antonov, the father of Vladimir, who was shot in Moscow in 2009.

The apple never seems to fall far from the tree.

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