Radiography Of A Bank Fraud In Moldova: From Money Laundering To Billion Fraud And State Debt

The problems of the financial sector, generally, as well as of the bank sector, particularly in Moldova, have been accumulated in Moldova regardless of the regime and governing parties. The bank sector in Moldova is the element that made possible the transformation of the country into a regional machine for laundering the money with doubtful provenience since 2005. This sector was used to squeeze financial resources from the reserves of the National Bank of Moldova (BNM) in 2014, commit a Billions bank fraud converting later the lacking money into the state debt. All the above mentioned generate major risks for the state security, its’ financial system and citizen.

Recent developments marked in the local financial-banking sector revealed two distinctly visible stages of erosion looming over its safety, which at a given instance of time have interleaved:

2005-2014 –money laundering using funds of illegal and doubtful origin within the region through banking system propped up by the judicial system and under the umbrella/guidance/instruction of those vested with power;

2014-2016 – theft of billions from the banking system, including from the National Bank of Moldova (NBM), by converting created gaps into public debt, thus placing the burden billions recovery onto the shoulders of simple citizens while the theft was devised and perpetrated by the certain interest groups supported by the political elite actors at the background of captive government institutions headed by rather vulnerable and corruptible management.

The concept of a „laundry” has being described with a lot of detail in a memo filed by one of the presidential advisers in June 2005. The events described developed over the years, which fact contributed to laundering and transiting of billions of US dollars flown from abroad through the banking system with due legalization of the process by the local justice. This scheme applied until 2014 in dealing with banks from Latvia. One of the conditions strictly imposed upon Latvia’s adherence to the European Union was to ensure transparency of banking sector and eliminate financial laundries from banking practice. Accordingly, rather influential supporters of the schemes devised were found in the Republic of Moldova.

The following are the key elements that have determined and converted Moldova into a regional large scale laundry:

  • substantial changes and amendment to the legislative framework governing banking sector activity – the NBM Law as well as the Law on Financial Institutions, made effective in 2007;
  • amendments to the Tax Code and income tax abolition, the banks were not obliged to report on the origin of proceeds generated by the billions-worth financial flows intended for transiting Moldova, made effective in 2007;
  • abolishing from the Criminal Code provisions referred to collateral transaction and criminal liability of bank managers for the absence and understating of the value of collateral, made effective in 2008;
  • abolishing the state tax setad-valorem and capping of payments, thus facilitating legalization within the institutions of the billions transited, made effective in 2010;
  • attempts of attack and taking control over the BEM, initially targeted against minority shareholders and subsequently against the state with inclusion of the bank into the regional laundry became definitely successful in September 2013 when the state voluntarily ceded its legally held   majority interest of 56.1% in favor of the interest groups representatives (see Kroll 1 report and other relevant reports made publicly known).

The Moldovan Economy Bank (BEM) case

The BEM case (a bank having the state as its majority shareholder) is a classical case of raider attack, of plundering and decapitaliziation attempted by a number of interest groups, having the situation further aggravated in 2011 through raider attack for acquiring 18.5 %  ownership interest in BEM.

The BEM has been periodically controlled by the state while during certain time periods by the interest groups non-transparently creeping into the shareholding structure of BEM, due to tacit interaction and approvals on behalf of the state institutions, including NBM.

The attack against BEM was pursuing the purpose of depriving the state of its majority shareholding in two steps staged differently:

  • before August 2012, the stake underpinning the attack was to declare unconstitutional Government Decision No. 1214 of 17.12.1998 and Government Decision No. 78 of 02.02.1999. As a consequence, the newly emerged „shareholders” were abusively legalized by the NBM in 2012 and turned into majority shareholders leaving the state with minority interest of 14.2 %. This scenario was subsequently rendered invalid and blocked despite of the fact that in the appeal filed with the Constitutional Court by the members of Parliament Reidman, Sirbu and Vitiuc it has been pointed out that the state should have remained the minority shareholder of 14.2%;
  • during the period from September 2012 through September 2013, the stake was to carry out enforced and rapid decapitalization of BEM, staged by certain decision making centres. The idea underpinning this scenario was to create such a perception of financial problems that would determine the state on ceding its control over the BEM, which was in fact materialized in September 2013. Subsequently, the state has illegally ceded the majority interest in BEM gratuitously, bearing on a scheme imposed by certain interest centres maintaining links with the regional interests outside the country.

As a result of regional money laundering bearing on Moldovan banking and judicial systems laundered were financial means resulting from misappropriation of budgetary funds of Russian Federation (Magnitsky case, through BEM, the fact corroborated in the correspondence with the authorities of the Republic of Moldova),  tenths of millions of US Dollars of doubtful origin channelled from Russia through Moldinconbank (international as well as national level investigation is on but took off with an unpardonable delay). Also known are numerous other cases of using Moldovan banks with regard to which launched were international investigations, including such in the USA, on money laundering, misappropriation of funds owned by customer as well as by the foreign-based corporate entities. The list of implicated Moldovan banks keeps expanding.

The procedure of incorporation of BEM and creation of a nuclear of large scale scheme was probably pursuing the idea of carrying it over simultaneously with cession of a significant interest in favour of certain influential groups based in the Russian Federation in 2014 (partially accomplished by cession of the first 25% of BEM shares to VEB Kapital, FR).This scenario was halted in view of some internal investigations launched by the Russian Federation in 2014accompanied by detention of certain influential persons from political and banking environment, that were connected to the regional laundry and schemes applied in the Republic of Moldova. At the same time, a number of Russian banks had their licenses withdrawn as a result of implication in money laundering schemes. Accordingly, the purpose pursuing incorporation of BEM as well on the other two banks (each making part of the same group of owners and beneficiaries, Kroll 1) has vanished while these 3 banks turned into a burden for the new owners and beneficiaries desiring to discard such.

Since June 2014 noticed was a process of crossing over from the regional money laundering schemes to the theft of billions from the local banking sector

The following are the decisive elements that have triggered the theft of billions from the banking sector of the Republic of Moldova with implication, support and coordination of institutions, their management and political figures:

  • the BEM, having lost its attractiveness as a component part of a laundry, became a “hot ball” in the hands of its holders. Since June 2014, in lack of special supervision that the NBM failed to timely institute, triggered at BEM was a rather aggressive attraction of bank deposits from population offering highest interest rates possible within banking system, to cope up with which the bank had to request emergency loans from the NBM;
  • in July and September 2014, amended was the legislation governing banking and financial domain.   Thus, through the commitment undertaken by Leanca Cabinet, created were legal grounds for emergency lending to commercial banks by the NBM under government guarantee;
  • in November 2014, at a secret sitting, the government decides on allocation by the NBM of MDL 9,6 billion to the three banks  (BEM, Banca Sociala and Unibank). The decision was taken contrary to the legislative provisions, since no authority has been instituted and/or vested with the competencies of making a statement on crisis and no official statement of crisis outbreak ever followed;
  • Kroll 1 report shows the fraudulent nature of financial transactions between the banking institutions (not only between the 3 banks, but at least total of 7 banks involved), conducted with the purpose of pumping out billions from the banking system into doubtful and off-shore jurisdictions and offsetting the gaps using NBM reserves;
  • it is worth mentioning the complicity and coordination of decisions by the three autonomous institutions on the same day of 27 November 2014: the NBM takes decision on establishing special administration; the Supreme Court of Justice rules that the issue of shares through which the state has lost its majority shareholding position and left with 33% (September 2013) was illegal and the state resumes its majority shareholder’s position; the Competition Council decides on launching investigation on the assistance granted by the state, i.e. NBM lending to the 3 banks. Actually, through these concerted actions the state ended up with the accumulated debt and the financial gap created by the BEM;
  • on 28 November 2014, with a great delay and bypassing the stage of special supervision provided for by the Law on financial institutions, the NBM proceeded to establishing special administration at the BEM and Banca Sociala by the time when the financial resources were already gone from these banks;
  • the NBM report shows clearly thatless than halfof the resources offered by the NBM during 2014-2015 to the three banks were used according to destination, i.e. for customer deposits coverage ( rest was used for covering other issues, including for creation of undeserved profit on currency speculation during the first 6 months of 2015;
  • through its second secret decision taken in March 2015 by Gaburici Cabinet allocated was MDL 5,4 billion for customer deposits coverage and paying out.

As a consequence there was massive withdrawal of billions from the commercial banks, followed by the withdrawal from the state international reserves.Subsequently, all of the financial consequences were placed again in care of the state, i.e. to each of the citizens in the form of higher tax burden, withdrawal of budgetary means to cover the gaps to the detriment of social projects (education, health, social protection) and infrastructure (roads, water supply and development).

From money laundering through the theft to public debt

On 26 September 2016, by assuming the responsibility, the government decides on putting the burden of the accumulated debt onto the shoulders of taxpayers. Thus implemented was the scenario devised by the governance in 2014, when the laws were amended so as to allow for the theft to take place, when bearing on the secret decisions on loans disbursement by the NBM while being aware that that the commercial banks will never repay the loans to the NBM – kind of billion-worth nonperforming loans offered by the NBM.

Converting MDL 13,34 billion into public debt for the next 25 years means:

  • tripling the size of domestic debt from MDL 7,2 billion at the beginning of 2016 to over MDL 22 billion at the end of 2016;
  • the budget cost incurred with repayment and service of MDL 13,34 billion worth total of MDL 25 billion at the extent of the following 25 years.

It is also worth noticing the double standards applied in setting the interest rates by the governance and the NBM. Thus, the cost of same resources for the bank beneficiaries and owners amounted to merely 0.1%, while the citizens will pay 5% annual rate during the next 25 years, i.e. the interest rates that are 50 times as much. Produced below are some of the NBM explanations on the different approaches to setting these interest rates (Source:

“The interest rate on emergency loans worth 0.1 percent annually was set taking into consideration the limited capacities of loans service by the distressed banks. Application of higher interest rate is expected to decrease the funds available with the banks for paying the outstanding debts to the creditors.  Likewise, higher value of interest rates would have further increased the amounts to be recuperated from the respective banks.” –on the interest rates applied to emergency loans disbursed by the NBM to the three banks in 2014-2015, knowing from the start that these will never be recovered.

“The 5.0 annual interest rate was applied bearing on the fact that at the moment the National Bank of Moldova is promoting the procedure of maintaining annual inflation rate at 5.0 percent. This allows for the amount paid in real terms to remain unchanged while the National Bank of Moldova is thus protected against additional losses bound to devaluation of debt  (also, in real terms). In case of applying the average rate less than 5.0 percent, the interest rate in real terms would be negative, meaning thus direct lending by the NBM to the Government, which is banned by the law and by the international standards.” –on interest rates applied to the public debt assumed through the “Filip Law” (26 September 2016).

From the above statements it follows that the direct lending by the NBM to the government is forbidden by the law as well as by the international standards while at the same time it is possible for the NBM to lend to the beneficiaries of banking fraud. How should one interpret such statement? Double standards?  Failure of common sense? Interest and complicities?

The banking sector is being controlled by a number of interest groups, thus generating additional risks.Lack of transparencywith regard to the beneficial owners is clearly obvious, same aslarge exposures to some of the customers, loans extended to affiliated personsin banks portfolio as well as high levels ofnonperforming loansaccumulated as a result. And this does not apply to the banks in the process of liquidation only. These conclusions also come as a consequence of events that have taken place back in 2014 when the 3 banking institutions in question ended up in a „deplorable” situation through coordinated application of similar scenarios.

The experts believe that the risks incurred with contamination of financial system are still persisting. A number of other financial institutions could follow on the same scenario in the future and not in the banking sector alone. Same could happen with the insurance and leasing companies as well as with loan and saving associations. The money entrusted by the citizens to these entities are in danger, mainly because of complicity of the government authorities with different interest groups managing the financial flows in the Republic of Moldova.

This document was elaborated within the project „Building the State of Law and Democracy: the Contribution of Civil Society”funded by the Embassy of the Kingdom of the Netherlands to Romania and Moldova

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