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By John Helmer, Moscow

Investigations into the collapse of National Bank Trust, one of the largest Moscow banks to be rescued by the Central Bank of Russia and the Deposit Insurance Agency, have targeted a Cyprus-based management group as the operational headquarters of a scheme which, according to current calculations, may have diverted more than $3 billion in bank funds over a decade between 2004 and 2014.

If and when the grand total of losses is toted up, this may beat the Bank of Moscow as the largest Russian bank fraud in history. But there may never be a toting-up — not by the Central Bank of Russia (CBR) which has provided Rb129 billion in bailout financing, nor by the Deposit Insurance Agency (DIA), the state organ in charge of supervising the bailout. Otkritie, the top-5 Russian bank selected by the government to take over Trust and keep it running, has yet to agree with the government on the results of the investigations and attempts at recovery of the funds from offshore.

According to a well-informed Russian state banker, Trust Bank had a high-level krysha, and he’s still at work to assure that the state refinancing of the losses, and the takeover by Otkritie, continue without embarrassment to the Central Bank, without risk for the stakeholders, and without cost for the perpetrators and beneficiaries. With shareholders as well-known as Mikhail Khodorkovsky who started by calling the bank Menatep St. Petersburg; then transferred it to Ilya Yurov, who renamed it Trust; and the current shareholders who have taken over — Ruben Aganbegyan, Vadim Belyaev, Alexander Nessis, Vagit Alekperov, and Alexander Mamut — the duration of the protective cover over the bank’s offshore operations also makes a record by Russian standards.

Moscow prosecutors have publicly confirmed the indictments and arrests of five former Trust executives — Oleg Dikusar, a deputy chairman of the bank board; Evgeny Romakov, the bank’s former treasurer ; Ekaterina Krivosheeva, a senior financial officer; Marat Iskandyrov, the chief internal auditor; and Andrei Popov, the chief accountant. Krivosheeva is reported to have been detained as a witness rather than as a perpetrator. No charges have been announced for Trust’s control shareholder, Ilya Yurov, or his partners Nikolai Fetisov and Sergei Belayev. For more on their story, read this.

yurov_1728To date, the prosecutors in Moscow are charging that fraudulent loans were issued to offshore companies of $118 million, plus more than Rb7 billion ($138 million), between 2012 and 2014. Much more money has disappeared from the Trust accounts over the much longer period since Khodorkovsky first employed Yurov (right) to run the bank when it was part of Khodorkovsky’s Menatep group. After Khodorkovsky’s arrest in October 2003 Yurov says he and his partners took over, renaming the bank, and completing their purchase in 2005.

Investigations by Russian prosecutors and others involved in the rescue of Trust by the CBR, DIA, and Otkritie have identified a number of Cyprus-based management companies acting on the instruction of Yurov and other Trust executives. Reportedly, the Cyprus managers were ordered to establish companies to which bank loans were then made. This cash was deposited in the new company names at bank accounts in Cyprus, Switzerland and Austria. Again acting on instructions from Yurov in Moscow, the Cyprus managers are believed to have engaged in buying and selling of bonds, other securities, and stock trading for the related-party companies. Much, if not most of this trading was concentrated in the Russian bond and stock market. Dozens of companies, making thousands of transactions each year, were supervised by a handful of managers based in Cyprus.

When the trading was profitable, some of the cash was returned to the Trust Bank balance-sheet in the form of loan repayments. Other cash was used to buy Trust securities, reducing the liabilities side of the bank’s balance-sheet. How much money was recycled back to the bank over how many years is not yet known. How much cash remains in the offshore accounts of the network also isn’t known.

VassiliadesAmong the Cyprus management company names which have surfaced in the investigations so far, according to investigators, one is Ledra Management Ltd. It describes itself as “an accounting firm founded in February, 1994 in Nicosia, Cyprus by Christodoulos G. Vassiliades (right) which has now developed into a leading accounting firm with more than 20 specialist employees. Ledra Management also specializes in the provision of a highly personalized, professional and comprehensive range of international trust and fiduciary services to corporate and private clients throughout the world.” The Vassiliades law firm describes itself as headquartered at Ledra House in a suburb of Nicosia. It also has offices at Moscow, Malta, Belize, Seychelles, Budapest, and Athens.

In April 2014 another management company, Teos Corporate Services Ltd., was established in Nicosia. First Ledra, then Teos are believed to have been instructed by Yurov and Trust, and to have managed the latter’s offshore loan portfolio. Whether they acted for management time and service fees, or whether they were also beneficiaries in the trading profits earned, is not known.

Christodoulos Vassiliades, the founder of the eponymous law firm, was asked this week to say “what relationship you, your law firm, and your associated firm Ledra Management have had with NBT Trust Bank, and with its principals including Ilya Yurov, Sergei Belayev, and Nikolai Fetisov.” He was also asked to say what role, if any, he and his subordinates and associates may have played in “implementing loans to offshore companies and for coordinating the bank’s cashflow through these companies by Ledra Management and other management companies, also based in Nicosia, including Teos Management and Intertax Audit.” Vassiliades’s assistants have confirmed receiving the questions. To date, there has been no reply.

Ben Worsley, an Englishman based in Cyprus, has been confirmed by sources at Teos as running that company at present. Earlier he is believed to have worked for Yurov and Trust Bank at the Ledra address in Nicosia. Worsley was contacted at his office in Nicosia and asked to clarify his relationship, if there had been one, with Yurov, Trust Bank, and the individuals and transactions which the latter are believed to have ordered through the Cyprus network. Worsley was travelling, according to his spokesman. He has not responded to telephone call and emails.

Vassiliades and Worsley have not been accused of wrongdoing by any authority in Russia or Cyprus. There is no reference to Ledra or Teos in the Russian press. Vassiliades’s involvement with a well-known Ukrainian was reported in 2011; with well-known Russian clients in 2013. No wrongdoing was alleged in either case, and Vassiliades insisted on client confidentiality in both instances. He and Worsley aren’t the only ones not responding to questions about where the Trust money went, and who was in charge of it when it was lost from the Trust Bank’s books. If it was lost.

Yuri IsayevThe Russian government administrator for the bank’s “rehabilitation” is the Deposit Insurance Agency (DIA), which is acting for the Central Bank of Russia (CBR). The DIA is headed by Yury Isaev (right) and supervised by a board of CBR and government officials.

Trust was rescued on the brink of bankruptcy last December. Legally it’s alive, but on artificial resuscitation. DIA reported the start of its “financial rehabilitation” on December 22. This involved the introduction of temporary administration for the bank; the opening of an investigation of the bank’s records; and a loan of Rb30 billion to stop a run on deposits and preserve the bank’s liquidity.

Four days later DIA announced it had selected Otkritie Bank as the state-directed investor to take over Trust. Another Rb99 billion in a 10-year CBR loan were provided to Trust, while a 6-year loan of Rb28 billion was given to Otkritie. The interest rate and other terms of these loans have not been published. The agency declared: “DIA will provide full control over the financial recovery on the basis of the general agreement concluded with the investor and provides for regular provision of comprehensive information on the financial condition of the Bank. As a result of the joint work of DIA and [Otkritie] investors, the [Trust] Bank will conduct its business as usual, providing a full range of services to customers of the Bank.”

DIA repeated its pro forma announcements in its annual report for 2014. The total CBR loan for Trust was confirmed at Rb129 billion. This compares with Rb395 billion in the bailout of Bank of Moscow in 2011; Rb117 billion for Mosoblbank in 2014; and Rb76 billion for Mezhprombank in 2010. Andrei Borodin (below, left), the control shareholder of Bank of Moscow, fled to the UK and has been granted asylum to avoid extradition on criminal charges filed in Moscow. Read more. Russian prosecutors are also pursuing Borodin’s funds in Switzerland and Bahamas. Mosoblbank’s control shareholder Alexander Malchevsky (right) and another executive have been arrested for embezzlement and are currently awaiting trial in Moscow; their subordinates have already been convicted and sent to prison.

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Sergei Pugachev, the owner of Mezhprombank, fled to the UK and then to France. He has been condemned in the UK High Court, but his perjury and fraud have been promoted by the Financial Times.

In its report for the first half of 2015, issued on August 28, the DIA has nothing at all to say on Trust. Here is the report. In the DIA report for last year, there is only a passing reference: “The resolution projects were implemented in a number of major banks (Baltiyskiy Bank OJSC and TRUST National Bank OJSC).” DIA has been actively litigating in the UK courts against Pugachev for recovery of the funds allegedly stolen from the CBR. Asked to clarify what steps, including criminal and civil proceedings, the agency is taking to recover Trust Bank funds from Yurov and other shareholders, DIA has promised to reply.

RubenThe Central Bank refuses to answer questions about Trust, and in the customary practice it doesn’t take seats on the boards of banks it is refinancing out of insolvency. The DIA occupies no seat either on the Trust Bank board. Reconstituted by Otkiritie in July, the new Trust board is filled by employees of Otkritie, led by Otkritie’s shareholder chairman, Ruben Aganbegyan (right).

The other Trust Bank board members are Yelena Budnik; Yevgeniy Dankevich; Veronika Dolenko; Sergey Kovtun; Dmitriy Popkov; and Viktor Tyutin. Aganbegyan has been a senior executive at Troika Dialog and Renaissance Capital, then chief executive of the Moscow exchange company, MICEX-RTS. He became the head of Otkritie at the end of 2012. According to a London business friend, Aganbegyan is “bound to be a reluctant participant. But he owes many favours, and they have been called in for this case.”

CURRENT SHAREHOLDERS OF OTKRITIE BANK

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Source: http://www.otkritie.com/en/about/business_structure/

On August 28, Otkritie issued what it calls “interim condensed consolidated financial reports” for the first half of 2015. The bank’s auditor Ernst & Young attaches to the report its disclaimer: “nothing has come to our attention that the accompanying…financial statements are not prepared, in all material respects, in accordance with IAS34 Interim Financial Reporting.” That wasn’t saying much, as Ernst & Young also say in their note that its review of the records is not an audit. “Consequently, [it] does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit.”

Ernst & Young was also the auditor of Trust Bank in the past two years, so in theory it ought to be able to elucidate for Otkritie where Trust’s lost loan money had gone. Otkritie denies there is any conflict of interest in having the same auditor continue to work on both sets of books. Ernest & Young refuses to comment on its performance as Trust’s auditor in the last period of the lossmaking. For more on the role KPMG, Deloitte & Touche, and Ernst & Young have played in Trust’s operations since 2010, read this.

In its latest report, at page 41, Otkritie says it bought some 4.6 trillion shares of Trust for “the nominal value of Rb10 million.” At page 46 it reports the “acquisition cost” as zero. Otkritie also reveals that after more than six months of forensic accounting and collaboration with prosecutors, no agreement has been reached yet with the CBR on the value of Trust Bank’s liabilities, recoverable funds, or losses. “The results of the Complex review… were not approved”, Otkritie says, without giving a reason. The bank said this week the numbers are “currently pending approval by the Central Bank.”

It is also reported that the “contractual value” of Trust Bank loans to customers before impairment was Rb159.3 billion; the “fair value” now Rb59.3 billion, and the writeoff – “contractual cashflows not expected to be received” – Rb108.2 billion. If CBR has provided Trust with a loan of Rb129 billion, then it is filling a smaller hole with a somewhat larger amount. Exactly how much CBR has provided Trust is not identified by the Otkritie report.

“In a case like this,” reports a state banking source in Moscow, “face values mean little. Trust was not an income producer but a huge black hole whose size is unknown. Even if it has been reporting some profit, most probably it was a scheme. It may turn out that the majority of the ‘good loans to customers’ reported to be worth Rb59.3 billion are also schemes that will fall apart the moment the ownership changes. So, the bank has most probably negative equity, i.e. it is worth less than zero, as the acquirer will be liable for the claims and debts. The incentive is simple: the CBR loan is a loan and not a grant, so whatever Otkritie can recover from Trust or Yurov will become a gain.”

Among bankers and bank analysts in Moscow there are differences of opinion about whether Trust or Otkritie now carries the liability for the yet to be finalized Trust losses.

RusRating, the only Russian-owned ratings agency, said it believes Otkritie should consolidate the financial flows of Trust in a single balance-sheet from now on, but must obtain approval for Trust’s operational balance-sheet from DIA and CBR. If Otkritie and Trust recover money owed by the former directors and shareholders of Trust, or from the offshore loan schemes they directed, these may appear on Trust’s books, but they may not be disclosed by Otkritie.

Early this month RusRating assessed the financial benefits of Otkritie’s takeover of Trust as outweighing the costs and risks, and it raised Otkritie’s rating. “The rating increase,” said the rating agency, “reflects completion of the key stages of the Bank’s integration into the FC Otkritie group, a substantial reinforcement of its market positions, and increased lobbying capacity in both business and political circles. The rating itself is based on a solid and well-developed presence in chosen markets at the national level, a stable client base and the support of the Bank’s owners, who are well placed to lobby in both political and business circles.”

THE TOP TEN RUSSIAN BANKS BY ASSET VALUE

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Source: http://www.rusrating.ru/en/index.php?option=com_content&task=view&id=890&Itemid=11

RusRating also charts the meteoric rise of Otkritie’s asset value:

rusrat_

Source: http://www.rusrating.ru/en/content/graphs/ranking.php?id=2209

An international banker, with two decades of experience in Russian banking, says Otkritie is acting “as a quasi-state institution with the regulator, the clean-up vehicle with state backing. Their job is to clean up this mess.” According to this source, “there would have been a negotiation between the Kremlin, the CBR and Otkritie on the terms for the clean-up. The bank would have been told: ‘We’ve given you your position [in the market] so here is what we want you to do for the clean-up’. The bank would then have replied: ‘Okay, but I’ll need twice the financing you’ve been offering.’ These numbers are red herrings. The job has been assigned. Otkritie must do what it’s told. The people running the CBR think they inherited the mess. Noone doubts that some people are being protected in the process of the clean-up.”

Another Moscow source who is familiar with Trust’s offshore operations adds: “The Central Bank plugged in the losses and handed a gift to Otkritie. This still leaves a big question unanswered — who is operating all the accounts which have borrowed from NBT and still have monies and accounts on them? It would be interesting to see what’s been happening on those hundreds of accounts since the takeover.”

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