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Greedy Sharks: The new rule for banking in Eastern Europe that makes fraudulent oligarchs billions

By John Christmas

Years ago, people in America talked about the “3-6-3 Rule” in banking. Bankers paid out 3% interest on deposits, collected 6% interest on loans, and were on the golf course at 3 o'clock.

But now in Eastern Europe, bankers have a new rule. They collect deposits, book “loans” that are actually uncollateralized transfers to mysterious shell companies, then they ask taxpayers to pay back the deposits. These bankers don't waste time playing golf and instead buy giant palaces, airplanes, or superyachts.

The champion of this concept of banking is oligarch Ihor Kolomoisky. Based in Dnipropetrovsk, Ukraine, but with his family kept safe in Switzerland, Kolomoisky is best known as the billionaire former owner of Ukraine's largest bank PrivatBank.

Kolomoisky is extreme and eccentric even by the standard of his peers, the other Soviet oligarchs who continue to control the supposedly-democratic governments of Russia, Ukraine, Moldova, and Latvia.

Perhaps because of watching too many James Bond movies, Kolomoisky installed a gigantic shark aquarium in his office, with a remote control on his desk that drops meat into the tank. Imagine sitting on the other side of that desk and trying to negotiate a business deal!

He also maintains a private army. The Wall Street Journal published an estimate that he provides $10 million per month to maintain militias in Dnipropetrovsk. Supposedly the purpose of these militias is to defend Ukraine, however this mission isn't always clear. His soldiers have been known to show up at board meetings of major Ukrainian corporations, armed, giving the directors advice they can't refuse.

PrivatBank held 34% of Ukrainian bank deposits in December 2016 when it was suddenly nationalized. According to National Bank of Ukraine Governor Valeria Gontareva, PrivatBank made 97% of its commercial loans to related parties. She later increased this estimate to 100%. Now, the bank needs a capital injection of $5.6 billion from taxpayers to make up for all of that missing money.

This sort of fraud is remarkably easy for bank insiders to pull off, even with a Western auditor such as PWC at PrivatBank. Transfers that represent embezzlement or pay-offs can be booked as loans and the loss of the money can be hidden for years. The insiders can trick the auditors. For example, they can make multiple loans to the same oligarch by using different companies as borrowers without revealing that the borrowers are really one and the same. The insiders can also make fake collateral documents and arrange a few years of fake monthly payments to make it look like a loan, even though actually it was a gift.

Or, the insiders can organize the fraud with full knowledge of the auditors, assuming they can find auditors who will pretend not to know about it. It seems there is no shortage of willfully blind auditors these days, even at the major Western firms, since governments rarely prosecute auditors who sign false financial statements and sometimes governments do the opposite and encourage auditors to sign false financial statements.

A bank with a balance sheet loaded up with fake uncollectible loan assets only gets exposed if the bank needs to sell the assets, for example if a lot of depositors request withdrawals. This is how the modern-day phenomenon of bank bailouts has become very useful to crooks. Exposure of fraud can be temporarily avoided if the bank can borrow from the central bank to fund deposit withdrawals and therefore doesn't have to sell its assets immediately. Then, the central bank can turn around and make funding deals with the International Monetary Fund (IMF), audited by PWC, or sometimes even less transparent deals with the European Bank for Reconstruction and Development (EBRD), audited by Deloitte.

I previously wrote about how this process was applied in Latvia. Latvia is an offshore center for Kremlin-linked banks. In 2008-2009, the government decided to transfer about two billion euros to the largest of these, Parex Bank, to fund deposit withdrawals so that the bank wouldn't have to reveal that 50% of its assets were bad, including “loans” that were uncollateralized cash transfers to oligarchs. The government decided not to try to recover the lost money from the oligarchs or auditor EY. Instead, the loss was transferred to taxpayers thanks to an opaque arrangement with the IMF and EBRD which was confirmed to be a cover-up fraud when it was reversed in 2014. Amazingly, the IMF was able to get out of that by convincing ratings agencies to upgrade Latvia even though it's national debt doubled, and then having Latvia issue bonds that were mostly bought by the European Central Bank. Since the oligarchs remain in power, it's just a matter of time until Latvia will be asking for another bailout.

After the IMF/EBRD fraud in Latvia, but before the nationalization of PrivatBank in Ukraine, the IMF was involved in another major heist in Ukraine. In 2014, the IMF transferred $1.8 billion to the National Bank of Ukraine which transferred the money onward to PrivatBank which paid out the money to opaque foreign companies supposedly for imports which were never delivered. Some of that money was laundered through Latvia, where remember the IMF and EBRD were fraudulently supporting the offshore banking sector. The IMF also organized something similar with oligarch Victor Pinchuk's bank Credit Dnepr.

A similar IMF and EBRD project is now beginning in Moldova. In 2014, the central bank of Moldova transferred $870 million to three private banks: Banca de Economii, Unibank, and Banca Sociala, all with the same auditor Grant Thornton. The assets of those three banks had disappeared through uncollectible loans to mysterious offshore companies. Much of that money also disappeared through Latvia, using Parex Bank's successor AB.LV and PrivatBank's Latvian subsidiary. Therefore, that heist is also linked to the IMF and EBRD. Moldova has hired the attorney for the responsible oligarch to try to find the money he took, with the predictable result that the money is still missing. Therefore, the IMF made a funding package for Moldova which begins with $178.7 million package and doubtlessly will grow larger.

Who suffers the loss? For now, the victims appear to be the taxpayers of Ukraine, Latvia, and Moldova who are expected to repay huge loans even though they didn't receive the loans. They seem like fools borrowing more and more and giving the money to oligarchs thus making their national debts higher and higher. However, maybe at the end of this we will discover that the victims will be American taxpayers. The U.S. government's IMF “quota” is 18%. And the U.S. government owns 10% of the EBRD. U.S. taxpayers are the biggest investors in both.

The total current funding package from the IMF to Ukraine is 17.5 billion dollars. The current funding package from the EBRD to Ukraine is 4.2 billion euros. The real amount owed is unknown since the IMF/EBRD fraud in Latvia in 2009 showed that a country's actual obligation can be larger than what is publicly announced. Presumably there will be a time, maybe when the total lending reaches 50 billion or 100 billion, when Ukraine will wisely repudiate the debt which anyway will be impossible to repay. What will the U.S. do then?

What are the IMF and EBRD trying to accomplish? They are supposed to be using Western taxpayer money to help the poor people in Eastern Europe with economic development. This is the reason why many Democrats and Republicans support the IMF and EBRD. The IMF and EBRD keep boasting that their bailouts are “rescuing” and “stabilizing” recipient countries. But can anyone honestly look at what the IMF and EBRD are doing and conclude that they are helping anyone, besides a tiny circle of billionaire oligarchs? The development banks demand “reforms” in their target countries, however the reforms don't include any real action, like arresting fraud perpetrators and taking back stolen money.

There is a more cynical alternative theory – that the IMF and EBRD are intentionally trying to destroy the countries where they are lending. Russian politicians started making such claims in the 1990s as their country was looted by oligarchs and the IMF and EBRD were involved. Popular left-wing book “Confessions of an Economic Hitman” by John Perkins contains insights into the minds of the so-called “development bankers.” Perkins, an insider familiar with IMF bailout packages, describes the problem as “greed” when development bankers design loans such that the proceeds are stolen by a few corrupt officials and the impoverished local population of the target country cannot repay and therefore is forced to borrow ever-increasing amounts. He says the purpose is to gain control over the nearly-defaulted borrower. It is a strange sort of “greed.” I worked in bank lending in the U.S. in the 1990s and I always understood that banks wanted borrowers to repay the loans.

Maybe the problem is that the IMF and EBRD won't be necessary anymore if they actually crackdown on corruption. Nobody would need bailout loans anymore.

Getting back to Ukraine, there is a battle to recover assets. However, the battle isn't between the government and the oligarchs. Rather it is between Pinchuk and Kolomoisky.

The two oligarchs are feuding about ownership of former Ukrainian state assets. The dispute has been going on partly in court in London and partly in the media. Each oligarch produced evidence that the other oligarch was threatening and killing people.

In the middle of this, Kolomoisky made an astonishing confession to the Ukrainian Parliament that he controlled state oil company Ukrnafta by paying $5 million per month protection money to Pinchuk. Had Kolomoisky gone insane? Why did he publicly describe his own corruption, for which he could go to prison for many years? However, it seems that he isn't insane because the parliament and prosecutors ignored the confession and took no action. I guess he knows them better than we do.

Can anything change? It seems impossible that this new rule for Eastern European banking can be sustainable forever. Maybe Western countries will stop funding the IMF and EBRD or more whistleblowers will come forward from the governments of Ukraine, Latvia, and Moldova. I don't know. However, I'm sure National Bank of Ukraine Governor Valeria Gontareva won't get in Kolomoisky's way anymore. She resigned last month when someone placed a coffin in front of her door, with an effigy of her head inside.

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