Ukraine’s PrivatBank was the “object of large scale and coordinated fraudulent actions” which led to the loss of $5.5bn, corporate sleuths Kroll found in a report on the collapse of Ukraine’s largest commercial bank at the end of 2016.
PrivatBank, formerly the property of Ukrainian oligarchs Ihor Kolomoisky and Hennadiy Bogolyubov, was drained of cash by the use of dodgy loans made to shell companies controlled by the shareholders in November 2016, as revealed in an award-winning investigation by bne IntelliNews. The ensuing scandal led the National Bank of Ukraine (NBU) to nationalise the bank six weeks later and then hire Kroll to investigate the bank’s loan book. Eventually the NBU said that 99% of the loans in the bank’s loan book were fake and that the shareholders had walked off with over $5bn in deposits.
"The results of an independent investigation by the company Kroll have been presented to the National Bank of Ukraine. The investigation has identified that PrivatBank was subjected to a large scale and coordinated fraud over at least a 10-year period ending December 2016, which resulted in the bank suffering a loss of at least $5.5bn," reads a report on the NBU's website as cited by Interfax.
"There are clear indications that loan proceeds were used to purchase assets and to finance business enterprises inside and outside of Ukraine for the benefit of former shareholders and their affiliates," it says.
"The mechanisms used to disguise the origin and destination of loan funds demonstrated the characteristics of a large-scale money laundering scheme. The volume and timing of the transactions within minutes of each other and with no declared connection between the entity repaying the loan and the original borrower and the extensive use of Special Purpose Vehicle (SPV) companies based in offshore jurisdictions, demonstrated indications of a concerted attempt to disguise the true nature of the economic purpose from regulatory and other stakeholders for the benefit of the former shareholders and their affiliates," the NBU states.
"Central to the coordinated manipulation of the loan book, and extraction of benefit was a shadow banking structure within PrivatBank. The secretive structure processed and facilitated the movement of the proceeds of hundreds of loans worth billions of dollars to parties related to the former shareholders and their affiliates. This shadow banking structure used hundreds of employees embedded within the bank," the report says.
"The shadow bank administered the related party corporate loan portfolio. It issued new loans, typically used to repay principal and interest on existing related party loans, and was the architect of fund flow mechanisms to disguise the origin and destination of the loan funds, presenting a facade of an ordinary client-focused bank. The bank attracted funds from private and commercial depositors from Ukraine and other countries, which facilitated the loan recycling scheme. This long term hiding of such a large exposure to related parties required PrivatBank to make repeated false representations of its financial position. This misrepresentation could only have been achieved through multiple instances of banking fraud and false accounting by the former management of the bank," according to the document.
"Prior to nationalisation in December 2016, more than 95% of corporate lending was to parties related to former shareholders and their affiliates. Towards the end of 2016, 75% of the loan book was consolidated into loans to 36 borrowers related to the former shareholders and their affiliates. The majority of these loans remain overdue and unpaid, resulting in a loss to the bank of at least $5.5bn," the central bank added.
So far the former shareholders – who deny any wrongdoing – have not been held to account. The previous NBU governor Valeriya Gontareva told the owners that they had to repay the loans by August last year or “face criminal charges”. The current Ukraine Finance Minister Oleksandr Danylyuk also told bne IntelliNews in April that “no one was going to be allowed to get away with stealing $5bn”. However, no action has been taken against the two oligarchs, who remain extremely well connected and able to derail legal attacks due to the corruption of the judicial system.
The National Bank confirms its readiness to share the results of investigations with law enforcement authorities, but the case has already been bogged down in counter suits by former depositors who have successfully sued to have their savings returned to them, despite being bailed-in during the bank’s restructuring.
The state has scored one victory in the ongoing war, but only in a foreign court. A UK court has slapped a worldwide freeze on $2.5bn worth of assets of Kolomoisky and Bogolyubov on December 19, the result of one of more than 400 lawsuits brought against PrivatBank.