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Bank Clean-up: How Millions of Russians Lost their Deposits Forbes Interview of Valeriy Miroshnikov, First Deputy Director General, Deposit Insurance Agency

Date: 28.08.2014

Valeriy Miroshnikov, Deputy Director General, Deposit Insurance Agency, has told to Forbes, how millions of citizens had lost their deposits and what the Deposit Insurance Agency thinks about some bankers from the Forbes list.

Almost a year ago, in September 2013, the Bank of Russia revoked the license of Pushkino Bank. This was the time, when 30,000 depositors lost their savings all of sudden, and it was just the beginning. Extensive clean-up of the banking sector resulted in almost million citizens suffering loss from bad-faith bankers. They could recover the loss only within the state insured amount not exceeding 700,000 rubles. Valeriy Miroshnikov, Deputy Director General, Deposit Insurance Agency, tells how bankers fob off depositors, and which claims it has against bankers from the Forbes list.

— How much the clean-up of the banking system cost, what payouts were received by insured depositors?

— The end of the last year saw quite a complicated situation shaped in the banking system. The situation revealed issues and “holes” in the balance sheets of banks that would otherwise not prevent their existence for many years, though finally would result in ever more dramatic consequences.

Pay-outs to insured to depositors increased, but the deposit insurance system continued its reliable operation. Throughout the time of its work, the Agency has paid 330 billion rubles to reimburse 1.2 million insured depositors. The largest part of these are the payouts made in 2013 – 2014, in the amount of 260 billion rubles. They were received by almost 800,000 depositors.

— With such dynamics in place, is there a possibility that deposit insurance fund might finally lack resources to cover all failing banks?

— Currently, the fund amount, less reserve for insured events, is equal to 97 billion rubles. By the end of the year, receipts to the fund are supposed to comprise other 50 billion rubles. According to our estimates, these funds will be sufficient for all potential insurance payouts, considering we are over the largest occurrences.

In the worst-case scenario, we may ask additional funds from the Bank of Russia and the government, with such opportunity provided for in the Deposit Insurance Act.

— Previously, lending to bank owners to finance their businesses was considered the main problem of failed banks. What is the main reason of bank failures now?

— Financing business of bank owners on non-arm's length terms still remains one of the main reasons of bank failures or weakening of their financial standing. This is clearly seen from such examples as Master Bank, Solidarnost Bank, Perviy Ekspress etc.

Another problem coming to the fore now is commonplace stealing. If a bank faces financial uncertainty and is threatened with license revocation, instead of supporting the bank, bad-faith bankers start withdrawing money – which is actually stealing.

To conceal any traces, some banks destroy electronic databases and burnbag documents.

This is what happened in Project Financing Bank and Russian Land Bank.

— Are there innovative schemes of drawing balance sheets and stripping assets?

— We identify new schemes every year. These are new for us, but not for the banks that apparently have been using them for a while. For example, two years ago we discovered Urin’s schemes of fake securities confirmed by puppet depositories. At the same time, the schemes employed are improved under the pressure of tightening bank supervision.

— Which are the most large-scale schemes of those new for you?

— Last year, we faced a great number of fictitious obligations to individuals in anticipation of license revocation. Only in two banks, Express Bank and TRANSENERGOBANK, the amount of such fake deposits totalled to almost 12 billion rubles.

Besides, this year was remarkable in what refers to the wide-scale off-balance concealment of bank obligations to household depositors. We have already faced it in a number of banks, including Mosoblbank (60 billion rubles), Ogni Moskvy (1 billion rubles), with similar situation observed in Zamoskvoretskiy bank and Novosibisrk subsidiary of Project Financing Bank.

— Which schemes are the most difficult to reveal?

— These are fictitious lending to market borrowers and secured lending to technical borrowers. In the first case, the bank provides loans to an actually existing borrower that, according to the agreement, uses part of the loan for its own purpose, and transfers the other part (up to 80%) to the parties specified by the bank. Sometimes, when the license is revoked, such half-borrowers have to discharge full amount of debt, but oftener it is found out that borrower’s obligation is executed properly, while “third-party” obligations are withdrawn from repayment by means of various schemes. However, until the bank is alive, such half-fictitious assets look absolutely liquid, with no question arising from supervisory authorities.

In the second case, technical assets are collaterized with real estate, securities, whose value is confirmed by reports of independent appraisers, though actually such value is considerably overstated.

— Closed-end investment fund schemes are much easier, are they still widely spread?

— Bankers continue using units of closed-end investment funds to strip assets and conceal bad assets. Sometimes the schemes turn out to be of some fantastic character. For example, Nizhny Novgorod’s Ellips Bank packaged a 600 million rubles’ asset in a closed-end investment fund, and then has revalued it by 10 times by increasing its value up to 6 billion rubles.

What asset could skyrocket in value that much?! Surprising, as there is no oil and diamonds in the region! This turned out to be usual land.

Virtually any reason can be used for overstating the asset value. For example, in one case a land lot bordering with permafrost area was classified as flood meadows that could allegedly be formed after land rehabilitation. In this case, reappraisal is made by a management company engaging subordinate appraiser that can hardly be considered independent, with the changes registered in the specialized depository.

It is necessary to introduce stricter regulations for management companies, We have already submitted this issue to the Bank of Russia. According to our opinion, there are cases when a regulator should be entitled to arrange temporary administration of the management company before the license is revoked. This should be allowable, when there are evident evidences of falsifying the reporting, market manipulation and use of insider information.

— Has the number of criminal actions initiated based on claims of the Agency and the Bank of Russia grown?

— According to our data, share of criminal bankruptcies of banks is increasing coming up to 85%. And the number of criminal cases is growing: last year, 22 cases related to illegal actions of bank management were initiated, while during 7 months of this year, the number of cases already came up to 21.

The problem is that minor part of the cases results in the court trial awarding imprisonment. Criminal responsibility of bank owners for committed crimes must be apparently tightened. Currently, a banker caught stealing may be sentenced to up to 10 years of imprisonment for theft in the form of fraud, conversion or embezzlement under articles 159 or 160 of the Criminal Code. And only to six years’ imprisonment for deliberate bankruptcy under article 196 of the Criminal Code, though in essence it is a series of thefts. And it means the more they steal, the shorter imprisonment they are sentenced to, and the sentence often turns out to be suspended.

The Agency has repeatedly suggested that the criminal penalty for deliberate bankruptcy should be tightened, but this didn’t happen until now.

— How much money do you manage to return to creditors of the failed banks?

— There is positive dynamics for eight banks liquidated since the beginning of the year. The average percentage of satisfying their creditors’ claims amounted to almost 40%, which is 1.7 above the average historic ratio throughout the time of operations of the Agency. However most bankrupt banks have actual value of assets less than 10% of their book value, and, as a rule, these are criminal bankruptcies.

Often, whether creditors are repaid their money depends of the age of the problems of a certain bank. For example, Master Bank’s negative gap between assets and liabilities was equal to 4 billion rubles two years ago, and is equal to 17 billion rubles now. This is a general problem for the sector: most banks, whose banking license has been revoked recently, had negative equity for more than two years.

— Which “clients” of the Agency are the hardest to deal with?

— All in all, we have been appointed as liquidator in 65 banks since the beginning of 2013, with 38 in 2014. As a rule, the larger is the bank, the more problems we have in recovering assets and working with their creditors. The list of “hard-to-deal-with” banks, with revocation of their licenses having sparked public outcry, include Master Bank, Investbank and Pushkino.

For example, depositors that were not given any documents by the bank that confirm money acceptance assert claims against Master Bank. In Investbank and Pushkino, bad loans to legal entities amount to about 80%.

— In July, based on your claim, the English court froze assets of Sergey Pugachyov, owner of Mezhprombank, for the amount of 1.2 billion pounds sterling. Earlier you have managed to seize his villa in France, though Pugachyov representatives claim this was only a house for servants. So what was actually seized?

— Currently, the litigation is held in the High Court of England and Wales. In July, Pugachyov assets were seized based on the Agency’s suit. Writ of capias was delivered to sustain the petition brought before the Russian commercial court. We do not disclose details of the litigation for the purpose of the case.

— Buyers happen to pay for the bank purchase with the funds withdrawn from this bank. For example, such criminal episode is incriminated to Gleb Fetisov, ex-banker and billionaire. Who should be held liable – buyers or sellers?

— We often face the case, when new owners of credit institutions pay to ex-owners with funds stolen from the purchased banks. We think that in these cases people that committed stealing must be held liable; these are new owners. However, if ex-owners are involved in stealing for paying for their shares, they must be also held liable.

Interviewed by Elena Zubova, Forbes correspondent

The Interview was published by Forbes (Russian version) on August 28, 2014

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