How PrivatBank billions vanished through Alpine "transit banks"

How PrivatBank billions vanished through Alpine
/ Photo by CC
By Graham Stack in Berlin December 20, 2016

Billions of euros of clients’ money placed with a handful of obscure Alpine banks by Ukraine’s largest lender PrivatBank have vanished in the past three years prior to the December 19 cabinet announcement of the institution’s nationalisation, bne IntelliNews can reveal.

The news adds to the growing consternation of how Ukraine’s largest commercial lender has been “bled dry” by its oligarch owners Ihor Kolomoisky and his partner Hennady Boholyubov, according to Bloomberg, with the total capital shortage now estimated at UAH116bn-148bn (€4.25bn-5.43bn) that will need to be met at least in part by Ukraine’s hard-pressed taxpayers.

In January 2014, PrivatBank had placed UAH7.6bn (€760mn at the time) of client funds on correspondent accounts at the tiny Austrian Bank Winter, and UAH4bn (€400mn) on correspondent accounts with the equally obscure Luxembourg bank East-West United. But in July 2016, the PrivatBank liabilities book that was leaked to bne no longer listed these funds.

PrivatBank staff were no longer available to answer bne enquiries regarding the fate of the Alpine funds. Neither of the Alpine banks responded to requests for comment.

Winter and East-West were two of four niche Alpine banks specialising in Eastern European business that received billions of dollars in correspondent funds from Ukrainian banks starting from 2011, according to press reports, as well as figures and documents sourced from the National Bank of Ukraine (NBU) and the State Deposit Guarantee Fund, Ukraine’s bank resolution body.

Ticking time bomb

The back-to-back funding scheme worked thus: Ukrainian banks placed depositors’ funds with the Alpine banks, and the Ukrainian bank shareholders received loans from the Alpine banks using their depositors’ funds as collateral. The shareholders then used at least part of these loans to recapitalise their banks, another part they simply moved offshore.

There is no reason to believe that PrivatBank’s arrangement with the niche Alpine banks was any different to that of around a dozen smaller brethren. Since 2011 up to 10 Ukrainian banks were reportedly involved in a scheme of siphoning of assets, where money was said to be unlawfully withdrawn by the owners and/or insiders of the insolvent Ukrainian banks through correspondent accounts of different banks incorporated in EU.

When the NBU started its clean sweep of Ukraine’s banking sector in 2014, closing over a hundred banks to date, it found the Alpine back-to-back loans were a ticking time bomb. As soon as the NBU made moves to take over the banks, the Alpine banks simply booked the collateralised funds to their own accounts – entirely legally, according to the loan agreements.

bne has seen a typical such loan agreement between one of the Austrian banks and a small Ukrainian bank. The loan agreement stipulated that in the event of any pending loss of a Ukrainian banking license, the Ukrainian bank’s funds placed on correspondent accounts in Austria would automatically be booked to the Austrian bank in lieu of loan repayment.

Exactly this happened for a total of around €800mn in assets that Ukraine’s state deposit guarantee fund has now given up hope of recovering, instead opening scores of criminal cases against former bank managers, and more rarely shareholders.

On April 1, the NBU officially prohibited banks from correspondent banking relations with Winter and East-West, as well as Austria’s Meinl Bank and Liechtenstein's Bank Frick – referring to them derogatively as “transit banks” due to their role in channelling bank funds out of Ukraine. “I want to congratulate all of us: now banks that operate in Ukraine have completely stopped cooperation with these infamous transit banks,“ Interfax Ukraine quoted NBU head Valeriya Gontareva as saying. 

In a letter circulated among Ukrainian banks on August 28, seen by bne, the NBU again warned of dealings with these four banks due to their “involvement in operations with heightened risk”.

bne could not establish whether the PrivatBank correspondent accounts at Winter and Frick were booked by the respective banks in lieu of loan repayment. Alternatively, PrivatBank shareholders may have unwound the arrangement themselves by paying back any loans received from the Alpine banks. Given the stricken Ukrainian economy and a massive devaluation since 2014, it is unclear how the PrivatBank shareholders could have got the funds to unwind the arrangement without a mass sale of their industrial assets, which has not occurred.

Besides the missing funds placed with the four Alpine banks, in July PrivatBank still had UAH4.6bn  (€168mn) in funds placed with Swiss private bank Julius Baer. Apparently as part of a back-to-back loan arrangement dating back to before 2014, Julius Baer had placed an equivalent volume of funds on deposit with PrivatBank. Julius Baer declined to respond to emails requesting comment on the arrangement.

In July, PrivatBank held UAH10.7bn (€390mn) with two of the world’s largest commodity traders and financial firms, Cargill (UAH4bn/€146mn) and Louis Dreyfus (UAH 6.7bn/€244mn). PrivatBank placed the funds with the traders since January 2014. PrivatBank may have placed the funds with the commodity traders as security for loans received. There are no funds from Cargill or Louis Dreyfus on the bank’s liabilities sheet, suggesting that any back-to-back loans may have been directed towards recapitalisation or simply moved to offshores.

Insider lending, offshore empire

Little is known of the fate of the €1.16bn in PrivatBank funds placed with Winter and East-West in 2014. However, the fate of another approximately €2bn in insider loans made by PrivatBank between 2014 and 2016 is more clear: they were siphoned out of the bank through a massive fuel retailing business run by largest shareholder Ihor Kolomoisky.

As bne revealed in a special report in November, in 2015-16 PrivatBank made nearly €1bn in loans to a group of 21 newly incorporated firms located in central Kharkiv, each with share capital of UAH1000 (€36). The owners of the firms were largely former managers of firms with links to PrivatBank shareholders. Most of these firms appear to have played a role in Kolomoisky’s vast shadowy fuel retail business.

In 2014, PrivatBank likewise made nearly €1bn in loans to Dnipropetrovsk firms involved in the Kolomoisky’s fuel retail business. The Dnipropetrovsk firms moved these funds to offshores linked to the Privat group as advance payment for deliveries of oil that were never made, meaning that the funds were simply moved offshore. The scheme resulted in a slew of pro-forma court cases brought by the Dnipropetrovsk firms against the offshores, and is also reflected in the leaked PrivatBank loan book.

As bne wrote, overall around 90% of the PrivatBank loan book comprises loans to related parties, mostly shell firms linked to the fuel trading business. Apart from the 2015 shell firms owned by former Privat group managers, most of the borrowers are Ukrainian firms owned by offshore companies or directly offshore firms. An analysis of the deposit book shows likewise the bulk of corporate depositors comprise either Ukrainian firms owned by offshores, or directly offshore firms.

For instance, five English limited liability partnerships (the notorious LLCs are often shell companies that are used for landering money) registered at the same London address on the same day, hold UAH9bn (€320mn) in deposits at PrivatBank, 22.5% of total corporate deposits. PrivatBank’s corporate deposits are at UAH40bn puny compared with the UAH147bn in retail deposits held by the bank, thus limiting the effect of any planned bail-in of large depositors.