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.

Kyiv Post Legal Quarterly - - News - By Natalie Vikhrov and Josh Koven­sky natalie.vikhrov@gmail. com and koven­sky@kyiv­post. com

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.”

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