Privatbank fraud cost USD 5.5 bln, NBU says citing forensic audit

Privatbank, Ukraine’s largest commercial bank until it
was taken over by the state in 2016, engaged in “large-scale and
coordinated fraud” for at least ten years that incurred at least USD 5.5
bln in losses, the National Bank of Ukraine (NBU) reported on Jan. 16, citing a
report produced by the Kroll Inc. risk management consultancy that it hired to
perform a forensic audit. Kroll confirmed that more than 95% of Privatbank’s
corporate loans were used to finance the related businesses of the former
primary shareholders, according to the regulator’s press release.

The investigators also identified mechanisms employed
by the bank to “disguise the origin and destination of loan funds” via multiple
transactions between various SPVs based in offshore jurisdictions, the NBU
alleged, citing the report. These mechanisms included a “bank within bank” that
facilitated and controlled such operations, as well as administered a “loan
recycling scheme” under which related borrowers were taking new loans from the
bank to repay other related borrowers’ old loans and interest.

The investigation was part of Ukraine’s commitment to
the IMF “to perform a forensic audit of Privatbank’s operations to identify
whether wrongdoing or bad banking practices took place prior to the bank’s
nationalization,“ the NBU reported. Recall, Privatbank was declared insolvent
and nationalized in December 2016, with total funds spent for its bailout
having reached UAH 185 bln (over USD 6.8 bln), including a UAH 155 bln (USD 4.2
bln) contribution from the state and the rest from the bank’s bailed-in
creditors.

The results of the Kroll investigation have already
been sent to Ukrainian law enforcement bodies and Ukraine’s international
partners, Deputy NBU Head Kateryna Rozhkova said during the report’s Jan. 16
presentation. “We are sure that the investigation’s conclusions will help bring
the Privatbank case to an end,” she said. In response, former shareholder Ihor
Kolomoyskyi called the report “a rant that makes no sense in commenting on.” In
his comments to the lb.ua news site, he stressed that the alleged “fraud” has
yet to be proven, calling the presentation just part of the NBU’s attempts to
distract public attention from other scandals.

Alexander Paraschiy: According
to the NBU, Privatbank was using a scheme to collect deposits to finance the
businesses of the bank’s shareholders. This “business model,” in our view, was
typical for some other failed banks, including Oleg Bakhmatyuk’s VAB Bank and
Finansova Initsiatyva; Kostiantyn Zhevago’s Finance & Credit Bank; and even
Platinum Bank, which was headed by Rozhkova herself. In its activities,
Privatbank was much bigger and possibly much more creative than the mentioned
banks. Therefore, it generated much bigger losses for the state and it will be
much harder to prove the bank did something unlawful.

So far, it is hard to conclude whether the results
of the Kroll investigation can help the government to reclaim any compensation
from Privatbank’s former shareholders, but now there is a better chance for
some success, in our view. All this does not change the likelihood of
Privatbank bondholders recovering their bailed-in notes.