The Financial Monitor ”Four years from the bank fraud: what we have found out during this time”

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Publishing date: Tuesday, 13 November 2018
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Starting with the end of 2014, the national financial system was subjected to one of the most severe crises with direct implications on the national economy and the entire society. Even if the Government through its decisions tried to promote the idea of ​​an unfavorable regional economic environment, the crisis was the result of a huge bank fraud with the effective stealing of money from several commercial banks. Lack of coordination between the State institutions, poor combating of money laundering, as well as political disputes of that time were only a few elements that allowed defrauding three banks and embezzling billions of lei by malicious stakeholders. In the absence of a precedent of such a dimension, the national legislation did not expressly provide how such a crisis can be resolved. Limited by this situation, policy makers used a last resort measure – secret granting of emergency loans guaranteed by the Government. Banks’ debt to the NBM was not honored, hence it was converted into Government debt to be paid over 25 years from public sources. 

Four years after the bank fraud we know that it was not a separate event, but a number of well-defined actions that were taken over several years. Generally speaking, this process was carried out in several directions, covering a large part of the financial and banking environment, involving high-level officials from State institutions and having strong support in the political environment. At the same time, the fraud reveals several distinct stages and elements. If these are viewed individually, they do not necessarily imply any fraudulent violations or intentions but viewing them as a whole provides a clear picture of the phenomenon we know as ‘the billion dollar theft’. Ensuring ownership and control of the three banks[1], concentrating lending activity to a single group, using money laundering mechanisms to hide cash route are the most important elements that allowed stealing billions of lei from the banking sector.

Currently, direct costs of bank fraud amount to MDL 1.5 billion, at the same time, payments of about MDL 23 billion for the following 23 years are planned. So far, MDL 1.2 billion were recovered from the liquidation of the three banks (MDL 780 million before the conversion of Government guarantee into public debt and MDL 427 million – after). At the same time, this money was not used to prepay the debt to the NBM. Transferring the recovered money into the State budget in other ways rather than early reimbursement of the debt means that, even in the unlikely case of full funds recovery, the burden of interest on this debt will remain on citizens (about MDL 10 billion). Recently, the General Prosecutor’s Office presented the Strategy for Recovering the Fraudulent Funds. The Strategy operates with MDL 13.34 billion – equivalent of the bonds issued to cover the guarantee, recognizing that exact amount of the bank fraud was not established. Also, there is no clarity regarding the income obtained by selling the shares to replace the ones blocked and cancelled by the NBM. The Strategy mentions that up to MDL 2 billion will be collected by selling these blocks of shares, but the value of shares does not exceed MDL 1.2 billion.

In addition to the direct costs, the bank fraud also had other costs on the country’s economy through reducing the purchasing power of citizens, rising public debt servicing costs, and slowing down the economic growth rate. The purchasing power of one leu today is 29% lower than in December 2014. At the same time, due to restrictive monetary policy, the financing costs increased for both the State and for the private sector. On the other hand, a positive collateral effect of the crisis was the beginning of the banking sector reform. It seems that shareholding problems and obscure interests that have dominated the banking sector since the declaration of country's independence and were the basis of the bank fraud finally start to vanish.

In addition to the amount of fraud, investigations revealed a number of legislative and institutional shortcomings in the regulation and supervision of financial institutions. As a result, reform actions started at a rapid pace. Initially, emphasis was put on stabilizing the situation and overcoming the crisis, and subsequently, on modernizing the supervisory and intervention practices in the activity of banks. Thus, during 2016 a new management of the NBM was elected and the legal framework was amended in order to strengthen the supervisory competences and ensure the regulator’s independence from court decisions. Also, once the Law on Bank Recovery and Resolution was adopted in October 2016, new instruments of crisis intervention were transposed into the national law. They are sufficiently quick and diversified for different critical situations in which a bank may get. On the basis of these new competences, NBM started a complex assessment of the real situation in the largest banks, preparing individual situational rehabilitation plans on different aspects on a case-by-case basis.

After the implementation of stabilization measures, a number of other actions were initiated, aiming to strengthen the stability and role of the financial system for the economy and the entire society. Many of these actions are commitments undertaken under the Memorandum with the IMF or under the EU Association Agreement and aim to strengthen all sectors of domestic financial market in line with the latest and the best international practices in the field. Thus, reform actions were initiated in the banking, microfinance, insurance or capital market sectors. At the banking sector level, national regulatory and supervisory framework experiences a leap to the most modern and best existing international practices, known as Basel III standards. The new regime offers solutions and tools that are much more appropriate both legally — for the regulator’s intervention capacity, and prudentially — for proper risk management by commercial banks, prevention of destabilizing elements and strengthening public confidence.

Against the backdrop of reforms, the risk of using public funds to bailout insolvent banks decreased considerably, but was not eliminated fully. Approval of the new Law on Bank Recovery and Resolution reduced this risk, but there are still some inconsistencies between regulatory acts regarding granting emergency loans to banks by the NBM. Moreover, the negative consequences already experienced by the society, together with the costs to be covered, require urgent implementation of a number of actions, such as: (i) recover the embezzled funds and repay early the debt; (ii) establish an efficient and regular mechanism for public communication on the investigation and recovery of fraudulent funds; (iii) investigate how the money, granted by the NBM to the three banks, was used and determine the role of other banks involved; (iv) adjust fully the law to prevent insolvent banks from benefiting from state guarantees in the future.

Based on the above mentioned, the special eighth edition of the Financial Monitor focuses on an objective hindsight of what has happened amid the bank fraud. To understand the situation we are currently experiencing, this report draws attention to four distinct moments, each chapter presenting separate stages of the bank fraud. Guided by the expression ‘where we were, where we are and where we want to be’, the analysis is presented as follows:

  • Chapter I ‘What triggered the financial crisis of 2014-2015’: huge fraud which comprised of non-transparent shareholding, poor corporate governance, fraudulent lending or money laundering was at the basis of the banking crisis.
  • Chapter II ‘Damage caused by the bank fraud’: direct damage inflicted by the fraud on the country’s budget is about MDL 24.5 billion (principal and interest). In addition, there are other collateral costs and irremediable damage for citizens.
  • Chapter III ‘The Process of Financial System Reform’: the fraud highlighted the need to rethink how the banking activity is conducted in our country. The initiated reforms aim, inter alia, at strengthening the soundness of banks, raising the accountability of key persons, increased protection of depositors, and considering financial stability as a public good that every citizen can enjoy.
  • Chapter IV ‘Is there a risk of repeating similar crisis?’: The legal framework was quickly adjusted to strengthen the supervision of banks. Despite this, due to the lack of consistency in different legal acts, there is still a low risk of using public funds to bail out an insolvent bank in the future.

Read the report  Infographic 


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