Graham Stack in Kyiv -

A two-year operation to wrest control over top Moldovan banks is nearing an end, with the apparent overnight privatisation of the savings bank Banca de Economii Moldova, and a change in shareholders and managers at the country's largest bank, Moldovan Agroindbank. Former shareholders in both banks claim they fell victim to "raider attacks", ie. illegal expropriation. The identity of the new owners is unknown, but are allegedly linked to oligarch Vlad Plahotniuc and his group.

As a result of a closed share issue, the state's stake in the savings bank Banca de Economii (BEM) has dropped from 56% to 33.3%, the head of the National Bank of Moldova, Dorin Dragutanu, confirmed on September 2. This means that the state has lost its controlling stake in the bank that has a monopoly on paying out of pensions to Moldovan's villagers - the majority of the population - thanks to its extensive network inherited from Soviet times. BEM is also the bank where state organisations and state-owned companies hold most of their funds. As with most Moldovan banks, there is no official information on who the new owners are.

Prompting the share issue, to which the state did not subscribe, was the need to recapitalise the bank that was close to failure, after being looted by its management since 2009. As bne reported in February, a secret report by the International Monetary Fund (IMF) on the bank leaked to media in January described how massive fraudulent lending at the bank had driven it to the brink of ruin. Former BEM head Grigore Gacichevici was arrested that month and charged with disbursing a fraudulent $2m loan.

Auditors Grant Thornton, in a leaked audit, analysed another case where loans totaling €10m were paid to a group of Moldovan companies, secured by fake real estate, and then transferred to offshore accounts. It noted that, "there is a large probability of further such transactions."

The IMF leaned toward winding up the bank, but the situation at BEM was eased by the sale of a swathe of non-performing loans in May, and August's closed share issue may have been a secret part of the same agreement. With only existing shareholders allowed to participate, and the state abstaining, BEM's minority shareholders would now seem to control the bank, although the results of the share issue won't be published for another week.

The minorities gained a stake in the bank in 2011-2012 during the "raider attacks", where dubious court decisions transferred stakes in top banks from former shareholders to offshore shell companies. They would thus appear linked to oligarch Vladimir Plahotniuc, whom UK court documents have connected to the "raiding" of second largest bank Victoriabank. Other reports circulating in the media allege that former prime minister Vlad Filat, an oligarch in his own right, is a new shareholder, but analysts say this could be smears by his enemies.

The share issue in fact raised only MDL80m ($6.3m) for the bank, after an earlier deal saw the bank's non-performing loans sold off. Government officials say the state will retain a blocking stake, but are also talking up the need for private ownership of the bank to save it from further looting. And given the bank's continued capital inadequacy, further dilution of the state's stake in favour of the new owners may be just a matter of time.

Bad designs

BEM is the last of the three main banks that have been the subject of "raider attacks" to surrender. In 2011, new shareholders controversially gained control of Moldova's second largest bank Victoriabank. And in July, Moldova's biggest and best bank, Moldovan Agroindbank, saw controversial new shareholders vote out management that had built the bank up since 1996, despite attempts by the European Bank of Reconstruction and Development (EBRD), the bank's main creditor, to fend off the attack.

"We have held talks both with the government and the regulator about a series of opaque deals resulting in shareholder change," the EBRD's Olivier Decamp told Kommersant Moldova in early August.

Agroindbank's now ex-CEO, Natalia Vrabie, was less diplomatic: "The scale and odious nature of these fraudulent actions are sufficient to undermine the financial stability of the bank and of the country," she said earlier, warning that a change in the bank's shareholders without consent of creditors such as the EBRD could trigger default on the bank's funding.

The deals referred to saw a total of 28% of the bank's shares transferred between February and May from existing shareholders to a gaggle of UK and Latvian shell companies. Each shell company acquired less than 5% of the bank's shares, thus remaining under the threshold for mandatory approval by the regulator. But, as demanded by the EBRD, the National Bank declared that it had identified one beneficiary behind the various shell companies, and suspended the companies' voting rights given their evasion of approval procedures.

But on June 12, in a sign of the subjugation of the court system to oligarchic interests, a regional court overruled the regulator's decision. As a result, the new shareholdings voted at a meeting on June 28 to replace Vrabie with a new face, Serghei Cebotari. Central bank chief Dragutanu said it could "not be excluded" that the new shareholder(s) already had a controlling stake in the bank.

What the future holds

The question now is what the future holds for Moldova's banking system? The answer may lie to the east, reckon bne sources.

Earlier in 2013, the former head of Russia's central bank, Sergei Ignatiev, said that around $50bn had been channelled out of the country illegally via rafts of shell companies in 2012 alone. As bne reported, according to a letter circulated by the National Bank of Belarus, a swathe of these funds flowed historically through the banking systems of the Baltics, Cyprus and Kyrgyzstan.

But with the Cyprus banks paralysed by the financial crisis there, Kyrgystan's banking system in turmoil following the 2010 revolution, and two Lithuanian banks with core clientele from the former Soviet Union closed down 2012-2013, there is room for more mini-jurisdictions on the fringes of the former Soviet space to get in on "non-resident banking" alongside Latvia - and thus non-resident banking may be the market niche that Moldova's new banking masters are eyeing. Former Agroindbank CEO Vrabie warned that the change in shareholders would herald a "radical shift in politics and strategy" at the bank.

There are signs that this already happening. According to investigations of the Russian tax rebate fraud that led to the death and imprisonment of Russian investigator Sergei Magnitsky, $53m of the dirty funds passed through Moldovan shell companies with accounts at Banca de Economii in 2008, and then onto Latvian banks, apparently without ringing any alarm bells.

A further indication may be that many shell companies used in the raider attacks were set up by company service providers associated with Latvian banks, as bne has described. Plahotniuc and other Moldovan oligarchs are believed to have close links to Latvian bankers, according to bne sources.