Emerging Europe’s greatest scams

Emerging Europe’s greatest scams
Huge scams have bedeviled a slew of countries across Emerging Europe and the FSU over the last 30 years. / bne IntelliNews
By bne IntelliNews December 16, 2022

As thousands of Mongolians besiege the government offices in Ulanbataar over the alleged embezzlement of up to MNT44 trillion ($12.8bn) in state coal export revenues, bne IntelliNews takes a look at some of the other great scams across Emerging Europe, Central Asia and Iran over the last three decades.

The ‘Wild East’ years of the early transition proved fertile ground for people to get rich quick while their less savvy (or less ruthless) compatriots were still adjusting to the new capitalist era. That period of barely regulated capitalism and murky privatisations led to the emergence of a new class of super-rich in a region where most people were struggling to survive.

Even now, more than 30 years later, persistent corruption and cosy relationships between government officials, businesspeople, bankers and criminal elites have facilitated a series of multi-billion dollar scams, of which the events in Mongolia are just the latest.


Ponzi schemes prey on financially illiterate East Europeans

The first really big financial scams in the Former Soviet Union (FSU) were a raft of pyramid schemes inflicted on the financially illiterate people who were just coming to grips with capitalism.

One of the most famous was the MMM scheme, set up in 1989 by small-time computer trader Sergei Mavrodi and his brother. It quickly ballooned into one of the biggest Ponzi schemes in history, pulling in 5mn-10mn people who sunk their life’s savings into the scam and quickly lost everything.

At its peak MMM was taking in millions of dollars a day and Mavrodi himself has obtained a sort of cult status amongst Russians. He died in 2018 at the age of 62 from heart problems. The quirk in the story is most investors knew it was a scam but hoped to get their money and profits out before it collapsed.

If Russia had a very large scheme that duped a lot of people, then Albania had a plague of huge pyramid schemes, many of them endorsed by government officials, that started to collapse in 1997. Lax financial regulation and a lack of financial literacy led to around two-thirds of the entire population sinking an estimated $1.2bn into these schemes.

Violent protests and demands for then president Sali Berisha, still an influential figure in Albanian politics today, to resign erupted into mass unrest, bringing the country to the verge of civil war.

Albania was flooded with firearms as rebels looted army stockpiles in the south, while in the north Berisha opened depots to allow citizens to arm themselves against rebel groups. Virtually every man and boy over the age of 10 had at least one firearm.

The government managed to bring the situation under control in the north, but rebel groups and criminal gangs seized control of much of the south. The unrest only ended when an international peacekeeping force was sent in. More than 2,000 people were killed.

The Albanian author and academic Lea Ypi lived through the violence. In her memoir, Free, Ypi recalls crying in her room as fighting raged on the streets, and being told to stay away from the window to avoid stray Kalashnikov bullets.

The collapse of the pyramid schemes and subsequent violence continued to have repercussions decades later. Some of the weapons that Albanians took hold of during the unrest have still not been accounted for, despite a series of amnesties encouraging people to hand in illegal weapons. The vigilante gangs formed during this period were the precursors of some later criminal organisations. Distrust in the financial sector has held back the development of the local capital market.


Boom and bust for BTA in Kazakhstan

In Kazakhstan, BTA was the country’s largest bank in the boom years of the mid-2000s, when the country experienced an explosion in real estate prices that rivalled those in Western financial centres. But when the subprime crisis broke in the US, the inflated real estate market in Kazakhstan also started to unravel, which in turn hit the banking sector, with disastrous consequences for its biggest bank.

Mukhtar Ablyazov was chairman of the board of directors at BTA, until it defaulted on $12bn of debt in 2009. BTA accuses Ablyazov of diverting much of those funds for his own gain. Investigators claim Ablyazov developed several complex schemes aimed at financing investment projects in Russia, enabling him to systematically embezzle the bank’s funds in large amounts.

The ex-banker who represents himself as an exiled dissident campaigning for political reforms as head of the banned Democratic Choice of Kazakhstan (QDT) party and is a constant thorn in the side of the Kazakh ruling establishment, using online means to prompt street demonstrations of his supporters stands charged with abuse of office, nine instances of serious fraud, three instances of money laundering and causing significant damages via fraudulent misrepresentation carried out by an organised group.

Ablyazov, a critic of former president Nursultan Nazarbayev, has been living in self-imposed exile in Europe since 2009. He was tried in absentia in the Kazakh business capital Almaty in June 2017 and sentenced to 20 years in prison on charges of organising and leading a criminal group, abuse of office, embezzlement of around $6bn and financial mismanagement. He has protested his innocence, describing his trial as politically motivated.

The fugitive banker's lawyers maintain that Ablyazov, rather than embezzling the $6bn claimed by the Kazakh government, restructured the bank's holdings with the goal of protecting them from a government takeover of the bank that took place in 2009.

A year later, another court in Kazakhstan sentenced Ablyazov to life in prison in absentia following his conviction for orchestrating the murder of ex-head of BTA Bank Yerlan Tatishev. Ablyazov is accused of hiring Muratkhan Tokmadi in 2004 to assassinate Tatishev to gain control over the bank. According to the special inter-district court of Jambyl region, businessman Tokmadi shot Tatishev on December 19, 2004. Ablyazov was elected as the chairman of the bank’s board of directors after Tatishev’s death.

Ablyazov initially fled Kazakhstan to the UK, where he was granted political asylum. After a British court issued an order to arrest him for contempt of court, he then fled to France, where he is last known to have resided until now. He has reportedly recently been denied refugee status in France, according to reports by local Kazakh news agency KazTAG. It is unclear what the removal of the refugee status would mean for his future.


Daylight robbery in Moscow’s Garden Ring

In the decade after the boom years of the noughties Russia’s banking sector became the scene of a daylight robbery as banker after banker helped themselves to their depositors' money. When the Central Bank of Russia (CBR) finally stepped in and started closing down banks it eventually cost the country the equivalent of 5% of GDP to bail out the strategically important banks and reimburse the depositors under the deposit insurance scheme.

When the regulator got round to shuttering a dodgy bank it typically found at least a $1bn hole in the balance sheet and the owners long gone. As the first RUB1.4mn ($23,555 at 2017 exchange rates) of deposits are covered by an insurance scheme the clean-up cost the government about $50bn by 2017, and that was before it that year took on the really big commercial banks, the so-called Garden Ring banks, that could threaten the entire financial system’s stability if they collapsed.

It took the regulator almost two decades to tackle the problem of insiders stealing from their own banks. The campaign started when the central bank decided to close the aptly named Sodbiznesbank in July 2004. It was the first time the CBR had pulled a bank licence and accused the management of breaking money-laundering laws. The decision came as such a shock it caused a mini-banking crisis as rumours flashed around the market that the CBR had a “blacklist” of smaller banks it wanted to shutter.

The closure of Sodbiznesbank was the start of a campaign championed by the CBR’s deputy governor Andrey Kozlov, but he paid a high price for cutting off some of Russia’s most powerful businessmen from their easy gains. Kozlov was shot dead on September 13, 2006, just as the bank sector clean-up was gathering momentum.

Many of Russia’s banks are little more than sham Potemkin fronts or glorified treasury operations for their oligarch owners. “Bank-like institutions” Renaissance Capital analyst Kim Iskyan famously dubbed them.

But to date the biggest of all the shutdowns was Bank of Moscow, which at its peak in 2011 was the fifth-largest bank in the country. The bank collapsed in spectacular fashion after it became clear its management was robbing it blind, and it was eventually rescued by VTB in 2016.

A pocket bank of the Moscow city government, the bank was set up during Moscow mayor Yuri Luzhkov’s tenure and became an “authorised” bank of the city government, allowing it to hold city company funds and run the payroll for its civil servants. Just how badly the bank had been robbed only became clear after VTB took control.

“There were two banks,” VTB’s former CFO Herbert Moos told bne IntelliNews in an exclusive interview at the time. “Downstairs there was a normal and successful commercial bank, but upstairs in some small offices we found a loan factory.” The former chairman Andrey Borodin was allegedly cutting up hundreds of millions of dollars’ worth of credits to fictitious companies into small enough pieces that they wouldn’t trigger the CBR money-laundering red flags, and to obfuscate inspections due to the sheer volume of the paperwork.

In the final tally, VTB estimated that there was a $9bn hole in the bank’s balance sheet, which required the largest bailout in Russia’s banking history of $14bn – more than the entire amount lent by the CBR to shore up the entire banking sector during the worst of the 2008 financial instability.

Borodin skipped town after an investigation into his bank started, and now lives in London, where the British government has granted him and his supermodel wife “political asylum” despite the fact he has never been involved in opposition politics, or any other sort of politics either. The British press write breathless articles after he bought a GBP140mn-plus ($170mn) house in Henley, dubbing him an “alleged fugitive” rather than being accused by the Russian regulator of probably being the most successful bank robber of all time.

Almost as bad, but not on the same scale, Russia’s other most notorious bank robbery involved International Industrial bank (Mezhprombank), owned by Sergei Pugachev, who came to fame as being a key Kremlin-insider source for Catherine Belton’s award winning book “Putin’s People”. Mezhprombank was amongst the very last banks to be bailed out by the CBR in the immediate aftermath of the 2008 financial crisis. Formerly a close associate of Russian President Vladimir Putin, Pugachev was for a time considered to be the last of the old-school oligarchs that rose to prominence under Boris Yeltsin in the 1990s, as he seemed to have successfully made the transition to the Putin regime.

The 2008 crisis wrecked his bank, but the CBR stepped in with a $1bn bailout loan. Except rather than use the money to shore up Mexhprombank’s rocky balance sheet, Pugachev skipped town and moved to London. In 2010 the state appropriated all his Russian assets and started a legal campaign to try to recover its cash.

Unlike Borodin, Pugachev has not had an easy time in exile, as detailed in a bne IntelliNews profile of him after he became famous to the international audience. The DIA successfully brought a case against him in London accusing him of extracting money from the bank for his personal benefit after it became insolvent but had already been bailed out by the central bank. He was convicted of contempt of court in the UK in 2016 for lying to the court during the case and sentenced to two years in prison, but had already jumped bail and moved to France where, as a French passport holder, he cannot be extradited.

The Kremlin has put Pugachev’s name on the Interpol wanted list and successfully managed to get the UK courts to freeze $1bn of his assets, limiting him to GBP10,000 ($12,100) a week spending money. There is a warrant on Interpol on charges of “misappropriation or embezzlement” outstanding.

Privat investigations

Ukraine’s banking sector was as rotten as that of Russia, only even more so. In the last decade the National Bank of Ukraine (NBU), under the leadership of former NBU governor Valeria Gontareva, took a leaf out of the CBR’s playbook and carried out an identical clean-up of the sector, which is now considered to be healthy and well run. But that was not until the state had shelled out $5bn in 2016 to bail out the country’s biggest lender PrivatBank, which had been virtually emptied of all its money by its owners oligarch Ihor Kolomoisky and his partner, Hennadiy Boholyubov.

bne IntelliNews played an instrumental role in the collapse of PrivatBank. In November 2016 we carried out an investigation after sources leaked a copy of its loan book. Checking the names of the bank’s creditors on the list it transpired that about two thirds of the names were fake shell companies that were connected to the owners.

The results of the bne IntelliNews investigation were published as a cover story “Privat Investigations” the same month and caused a scandal in Ukraine. The local press followed up with their own investigations that showed even more the names on the list were fake. By December the scandal had become so big that the NBU stepped in and nationalised PrivatBank, which remains in state hands to this day.

After the bank was nationalised, the NBU carried out its own audit and found that 95% of the loans were sham, leaving a $5.5bn hole in its balance sheet. As by far the largest retail bank in the country, the Ministry of Finance had to step in to bail the bank out with a $5bn cash injection – in relative terms to the size of their respective economies, the Ukrainian bailout of PrivatBank was far bigger than the CBR’s bailout of Bank of Moscow.

The NBU hired corporate investigator firm Kroll to find the missing money and then started civil cases against the owners in both London and Cyprus. A lot of the money was also found in Cleveland in the US, which triggered a Grand Jury investigation there and got Kolomoisky sanctioned by the US. The London court has frozen some $2bn worth of Kolomoisky’s assets as the legal battle continues and the Cypriot case is ongoing.

Almost none of the money has been recovered, yet no charges have been brought against Kolomoisky, who has been living openly in Ukraine and until the war started was lobbying vigorously for the state to return the ownership of PrivatBank to him or pay him $2bn in compensation for capital he says he had in the bank at the time. In 2019 the NBU accused Kolomoisky of orchestrating a “terror campaign” against its staff as part of this effort. Among other things Gontareva's house in Kyiv was burnt down by unidentified arsonists. She told bne IntelliNews that she quit her job as NBU governor after a coffin with a mannequin dressed up as herself was delivered to the front door of the central bank and said Kolomoisky had personally threatened her with violence.

Kolomoisky has also been a mentor to Ukrainian President Volodymyr Zelenskiy and threw his media empire’s weight behind Zelenskiy's presidential election campaign in 2019, although the president has since distanced himself from his oligarch friend, and stripped him of his citizenship in July this year.

Moldova’s $1bn bank frauds

In Moldova’s notorious $1bn bank frauds around $1bn was stolen via three local banks in one of Europe’s poorest countries. The money was siphoned off from three major Moldovan banks, Banca de Economii, Unibank and Banca Sociala. The funds were transferred to shell companies in the UK and Hong Kong and then deposited in Latvian bank accounts opened under various names.

News of the frauds rocked Moldova when it was revealed that the central bank had extended MDL13.6bn ($1bn) in emergency loans to the three banks, which were later liquidated. In 2016, Moldova’s government issued bonds to compensate the central bank for the loans. This means that unless the funds can be recovered, ultimately the cost will be borne by Moldovan taxpayers, as the bonds will be repaid from the public purse over a 25-year period.

Like Ukraine’s NBU, the Moldovan authorities called in Kroll, which identified businessman and politician Ilan Shor as the visible beneficiary of the frauds. Shor has been convicted, but he fled the country before receiving a final sentence. He remains a key player in Moldovan politics, directing from abroad the regular protests against the pro-EU government in Chisinau his Shor Party has been holding this autumn.

Former prime minister Vlad Filat and reputed corporate raider Veaceslav Platon received prison sentences in connection to the frauds, though both have since been freed. Several other former top politicians, central bank officials and businessmen are suspected of either involvement in the frauds or of turning a blind eye while the money was siphoned off.

Years later, the authorities in Chisinau still hope to recover at least some of the stolen money but progress is slow. After the new parliament was elected in 2021, with the reformist Party of Action and Solidarity (PAS) having a majority, MPs strongly criticised both the General Prosecutor's Office and the National Anticorruption Centre for their lack of progress in recovering the money.

To give an idea of the sheer scale of the frauds, estimated at around 10% of Moldova’s GDP at the time, in 2017 local artist Stefan Esanu created an installation of 10mn pieces of paper the size of dollar bills, each representing $100. The installation, with papers stacked in ten huge blocks, was intended to give the abstract notion of $1bn a concrete representation for Moldovans.

Iran's 'traitorous hands'

It was October, 2011 when Iran’s supreme leader Ali Khamenei exclaimed on state TV: “God willing, the traitorous hands will be cut!”

The reason? Stunned Iranians were digesting “The 3,000 billion toman embezzlement scandal” in which scammers had got their greedy paws on ill-gotten gains equivalent then to just short of a billion dollars by using forged documents to obtain credit from at least seven Iranian state and private banks.

The credit, fraudulently drawn over a four-year period, was supposedly required to purchase recently privatised state companies. When the scandal broke, the focus fell on Iranian businessman Mahafarid Amir Khosravi (also known as Amir-Mansour Aria), the mastermind of the scam. Aria was executed for his sins in 2014. It was his Aria Investment Development Company that was the primary recipient of the loans. Another suspect, Bank Melli chairman Mahmoud Reza Khavari, fled to Canada, where, now 70, he remains a fugitive to this day, denying all wrongdoing.

Mostafa Pour Mohammadi, the then head of a judicial investigations unit, described the case as "the most unprecedented financial corruption case in the history of Iran".

Some defendants argued that while prosecutors focused on pursuing small fry involved in the fraud, senior regime officials, without whom it could not have taken place, walked away. To this day, many Iranians remain convinced that was the case.

Danske's Estonian money-laundering scandal

Even banks in EU countries are not immune from scandal. In the late 2010s, Denmark’s Danske Bank was revealed to be involved in a huge money-laundering scandal in Estonia in which around $160bn was processed on behalf of customers deemed high risk by the US Department of Justice (DoJ).

Danske defrauded US lenders over its anti-money-laundering measures at its Estonia branch, allowing “high-risk customers”, including many from Russia, to access the US financial system, according to the DoJ.

Court documents cited by the DoJ show Danske’s Estonia branch attracted foreign customers between 2008 and 2016 by allowing them to transfer large sums of money through it “with little, if any, oversight”. The DoJ says the branch processed $160bn through US institutions on behalf of these clients, and conspired with these individuals to mask the real nature of the transactions, sometimes via shell companies.

According to a bne IntelliNews investigation in 2019, Danske even laundered money for the Ukrainian arms mafia’s sanctions-busting activities in North Korea and Iran.

Now the bank will pay a $2bn penalty in relation to the scandal, the Financial Times reported on December 13. US authorities said that while the bank knew by at least February 2014 that some of these customers were involved in potentially criminal behaviour, it lied to US banks about the Estonia branch’s anti-money-laundering programme.

The $2bn penalty is the largest forfeiture imposed by the US Department of Justice on a financial institution compared to its market capitalisation, Kenneth Polite, assistant attorney-general for the DoJ’s criminal division, told the Financial Times.

Danske withdrew from Estonia when the scandal broke in 2018, selling its operations to local player LHV Pank. Danske Bank has also withdrawn from Russia and Latvia.

The former head of Danske's Estonian branch, Aivar Rehe, was found dead in September 2019, two days after being reported missing. The Estonian police determined he had committed suicide.

The lender still faces several civil lawsuits from shareholders, and on December 13 it said it would defend itself “vigorously” against them.

All three Baltic states have struggled to control the influx of dubious money from the East into their banking systems, but have been forced to improve their supervision following pressure from the European Union and, in particular, from US prosecutors and regulators.


Mongolia's 'coal mafia'

The latest massive scandal to break in the region is the “coal mafia” scandal in Mongolia. Officials and company executives allegedly stole billions of dollars of export proceeds for coal clandestinely hauled to China.

The fact that huge volumes of coal have allegedly been pilfered in the past decade at least was discovered after officials compared Mongolian export data with import data reported by China, which buys almost all of Mongolia’s coal exports.

Coal accounted for more than half of Mongolia's export revenue in the first 10 months of this year, according to central bank data.

The authorities said that part of the coal mafia investigation was focused on 7,373 trucks that repeatedly carried coal to the Chinese border between 2013 and 2017 but appeared to have arrived “empty”.

Reports of the alleged embezzlement sparked mass protests. Among protesters braving sub-zero winter cold to maintain protests were some who set up traditional tents, gers, to allow them to stay in the capital’s central square overnight.

On December 13, the Independent Authority Against Corruption (IAAC) announced the arrest of 17 people for coal theft. Former President Battulga Khaltmaa, two of his former staff and seven MPs were named, along with four South Gobi Province lawmakers, both current and former, and former ETT directors.

However, some protesters told bne IntelliNews that names of suspects provided by the authorities in the affair so far were “just scraps” and that the government was protecting some of the criminals.

In a lament often heard after similar scandals broke in other parts of Emerging Europe and Central Asia, protesters are slamming those who “stole prosperity from the people”.