Chaotic sales of collapsed bank loan portfolios opens many opportunities for fraud
– Yulia Bereshchenko, head of the Deposit Guarantee Fund's asset management and sales department.
Ukrainians have lost billions of hryvnias in uninsured bank deposits over the past two years as the government has taken over and liquidated dozens of banks whose main business model was embezzlement and fraud.
But for some, the resulting chaos is a lucrative opportunity.
Ukraine’s Deposit Guarantee Fund is tasked with selling the assets of liquidated banks back into the market. The juiciest assets are the bank’s loan portfolios, which can include collateral for businesses around the world.
Not only is the DGF overwhelmed with its caseload of hundreds of millions of dollars worth of assets to sell, but it lacks control over the exchanges it uses to sell them. This opens up an opportunity for fraud in the buying of the assets. Some of the best assets are sold at cut-rate prices to the former owners of the banks, managers of the exchanges, and assistants of members of parliament.
One investigation by Radio Liberty’s Schemes program demonstrated how former Delta Bank owner Mykola Lagun was able to buy back chunks of Delta’s loan portfolio at a fraction of their value.
Practitioners in Ukrainian banking law agree that these assets are often sold back to the same bankers whose insider lending destroyed the financial institution in the first place.
Ihor Olekhov, head of Baker Mckenzie’s Kyiv banking practice, said that this will likely continue to happen as long as law enforcement does not bring cases against the owners of collapsed banks.
Conflicts of interest The Deposit Guarantee Fund started to disclose the details of the sales - including selling price and buyer - on its website in June, revealing transactions in which the fund has sold off loan portfolios to companies with unknown beneficial ownership for less than 7 percent of their value.
According to the Anti-corruption Centre, many of the purchasing companies were only registered in 2015 and have no clear ownership structure.
The exchanges that sell the loans themselves may also be caught up in the problem.
“There are so-called pocket exchanges - exchanges which were apparently created only for certain low aims,” said Antonina Volkotrub, financial manager at the Anti-corruption Action Center. “They have nominal directors, and don’t always meet all the requirements.”
All of this lack of transparency allows for striking conflicts of interest to occur. For example, a firm called Morgan Capital won a number of auctions to cheaply buy up portfolios in July and August.
One sale in July saw Morgan Capital buy a loan originally valued at Hr 7 million ($270,000) for Hr 550,000 ($20,800).
The sale occurred on an exchange called “Electronic Trades of Ukraine.”
But both Morgan Capital and the exchange appear to be controlled by the same person: a man named Ruslan Kharchenko.
Looking further through the roster of purchasers reveals a number of politically exposed people. In one case, a loan valued initially at Hr 106 million ($4 million) was bought for Hr 6.5 million ($246,000) by a company apparently controlled by a nominee director linked to allegedly rigged tenders run by one-time Odesa Governor Vladimir Nemirovsky.
Other transactions, of which there are hundreds, appear to be linked to former Party of Regions deputies.
Bereshchenko said the fund typically starts with the highest price, which is reduced by 10 percent every two weeks until the asset is sold.
Alexander Paraschiy, Concorde Capital’s head of research, said that because there is no unified valuation approach, the price of loan portfolio may vary, which means “there is big room for pricing and for corruption.”
(1993), earlier Bank Vito (until 1997) and Kyivinvestbank (1997-2001)
Bereshchenko said the fund does not have the power to restructure loans, which includes deep haircuts, but borrowers have pursued other routes to buy back their loans on the cheap - including dragging it through the courts.
Moreover, according to allegations received by the fund, auctions hosted by independent online platforms can be manipulated to act in the interests of one particular buyer, or prevent other bidders from participating in or winning the auction.
The fund recently started to move its auctions to Prozorro, the public e-procurement system, a move that Bereshchenko believes will eliminate such allegations.
Asset sales through Prozorro have generated Hr 30 million ($1.2 million) for the fund, with around 1,000 individual assets listed on the system.
Bereshchenko said the fund was preparing for the decision to move all asset sales to Prozoro, which is managed by Transparency International.
But she admitted that even a shift to Prozorro will not give the fund control over whose hands the assets fall into in the end.
Furthermore, there is currently no legal obligation to prevent the asset from being sold back to the original borrower.
“I know that buyers may not be the ultimate buyers but, in the Ukrainian environment, by law we are not allowed to restrict the circle of buyers,” Bereshchenko said.
“By law we are obliged to sell at the maximum price in the shortest period of time, which means to anyone. The only restriction is embedded into our regulation number two - that a loan may be sold only to a (certified) financial institution.”
Bereshchenko says that given Ukraine’s macroeconomic status, handing the loan back its original borrower who defaulted on the loan may not be altogether negative.
“If strategically, the government decides that selling loans back to bad borrowers... is the wrong thing to do, then they should impose pre-qualification criteria. But the competition will probably be lower, and we do not know whether the prices will be lower, because the borrowers are not allowed to participate in the auction.”
“If we are selling to the highest bidder, no one should care if that bidder is (actually) the borrower.”