Where Did the Billions Go, or How Is the Toxic Asset Cleanup in Failed Banks Progressing?

And whom the Prosecutor General’s Office is Willing to “Forget”

In late December, just before the New Year 2022, the Prosecutor General’s Office published a report about the criminal prosecution of ex-owners and senior managers of failed banks. The report covers a period starting in 2014. Andriy Volkov, Investohills Group founder and partner, tells Mind who was mentioned in this document and who was conveniently left out.

As reported by the Prosecutor General’s Office, pretrial investigation of 2000 failed-bank cases has been completed since 2014. The investigation of 450 more cases is going on. The report also mentions that, in 2021, experts confirmed losses in excess of UAH 8 bn caused by unlawful transactions with failed banks’ assets, and assets worth UAH 2 bn were garnished. In addition, the PGO ascertained losses in the amount of UAH 5 bn, submitted 16 charging documents to courts, and neutralized six criminal groups in 2021.

The report provides information about the progress of the investigation into officers of some banks. For instance, PrivatBank’s former CEO, his deputy, and the former head of the interbank transactions department were notified of being suspected of misappropriation to the tune of UAH 8.2 bn; the pretrial investigation of a case of a UAH 1.2 bn stabilization loan granted to VAB Banks was completed; the investigation of 14 ex-officers of Arkada bank and their related parties was ongoing.

What did the PGO choose to leave out?

However, PGO’s report hardly covers the entire scale of the toxic debt in the banking sector. For example, the largest volume of NPLs is concentrated in PrivatBank. However, it totals about UAH 175 bn, rather than UAH 8 bn mentioned by the PGO.

In fact, almost all failed banks were stripped of their assets unlawfully. In addition to PrivatBank and VAB mentioned before, they also include Finance and Credit, Ukrprofbank, CityCommerce Bank, Diamantbank, Khreshchatyk Bank, and Platinum Bank. Thus, officers of the law will have to do a lot more to uncover and prove unlawful deals with assets of the failed banks.

Some statements made in PGO’s report suggest that law enforcement agencies have hardly done anything on cases of many banks. It is quite strange.

For instance, the report states that a deputy chair of the board of one bank extracted UAH 2.5 bn from the bank, while a financial department director of another bank schemed to take several hundred million hryvnias. This statement is hardly true because no one can get away successfully with such a scheme in a bank. Most decisions in banks are made collectively; it is not possible to undertake a large transaction without endorsement by the CEO, the Supervisory Board, and the owners. Even if this was true, the investigation must look into senior managers and owners of the bank, who must have been involved in these schemes either formally or informally, rather than deputy CEOs or department heads.

Where and how were assets extracted?

There is nothing remarkable about the actual arrangements to strip banks of the assets. One of the most popular schemes encountered in almost every other failed bank involved transfers to correspondent accounts of foreign banks. These funds were then offered as collateral against a loan for a controlled foreign company that would either channel funds back to Ukraine at a later stage, this time as a contribution of a “foreign investor” to the bank’s capital or just keep money abroad, accessible to the bank’s owners.

Another widespread scheme was based on granting loans to dummy companies related to the bank’s owners. Usually, such companies did not have liquid assets and could not furnish collateral; nevertheless, they were given huge amounts hardly commensurate to their financial status. It was the scheme used by the former owners of PrivatBank and Nadra Bank.

The third scheme involved viable and solvent companies. They were given loans, with the borrower colluding with the bank’s management and owners to siphon off the collateral at a later stage. It usually happened with the bank being on the brink of failure and its unscrupulous clients’ deciding to use the sorry state of the financial institution.

Yet another scheme used massively just before the appointment of the temporary administration relied on the so-called setoffs or “implosions,” with third-party deposits used to repay loans. The banks’ management or even temporary administrators engaged in such deals without having funds on the correspondent account, with loans “covered” by deposits on paper because the bank would hardly have any money left by that time. In Investohills, we often encounter debtors of this kind—having “covered” their loan with somebody’s deposit, they believe to have come free of any debt to the bank. However, these loans still exist, and the borrower remains in debt.

What can the government do to address the issue of distressed assets?

Firstly, it needs to become involved in this process. It can be done, for example, by setting up a dedicated unit within the PGO to deal with such cases. This is what Turkey did. After their banking crisis, they established a dedicated agency (TMSF) in the early 2000s; it successfully “located” unscrupulous debtors and failed banks’ managers and owners.

Secondly, the law needs to be amended to strengthen the protection of creditors and the liability of unscrupulous borrowers and bank owners implicated in siphoning off deposits and granting loans to related parties. It would make it much easier for law enforcement to actually complete their investigations.

However, I would not expect any rapid action on the part of the government. At the moment, selling troubled debt to specialized institutions experienced in dealing with toxic assets and equipped with tools to do so is the only efficient way to manage it. It is a win-win situation. Companies that collect the troubled debt will help the state budget recover funds spent on deposit payouts via the Deposit Guarantee Fund.

It would also defuse social tension because affected depositors would get back their deposits frozen in the failed banks. Finally, taking stolen assets from fraudsters and bringing them before a court will contribute to achieving social justice.