Bank Plundering Ukraine’s Bonnie and Clyde

Ukraine, still reeling from the crisis with Russia and struggling to repay debt, is cleaning up its financial sector. The central bank has discovered that almost $300 million was siphoned from the country’s fourth largest bank to shell companies, including one named “Bonnie and Clyde”.
Shady affairs took place at Delta Bank, of which a branch is shown above, before it went bankrupt in March.

Ukraine plunged into political and financial crisis following the Crimea’s annexation by Russia last year and the separation of eastern territory by rebel fighters. Faced with a declining economy, the country might not be able to repay its debts.

Ukrainian banks have suffered as well. Delta Bank, once Ukraine’s fourth largest bank, went bankrupt in March. Before having its license withdrawn, its owners kept it artificially alive for months. During that time, Delta Bank was systematically plundered, according to internal documents reviewed by the country’s central bank.

The looting took place via shell companies, including one named after the notorious American bank-robbing duo of the 1930s, Bonnie and Clyde.

This shell company and 11 others based in the Caribbean tax haven Cayman Islands withdrew the equivalent of $272 million from Delta Bank. All of the firms were dubious, pure shell companies, according to respected Kiev newspaper Mirror of the Week.

The zombie banks simply continued to exist. Now we are pursuing a policy of zero tolerance and are cleaning out the pigsty. Dimitrij Solohub, Deputy governor, Ukraine's central bank

The companies obtained loans from Delta Bank and were supposed to use the money to pay for goods, which in fact were never delivered. Half a billion dollars were also said to be bunkered in Delta Bank’s correspondent accounts at Austrian institutions, such as Meinl Bank, Bank Frick, Bank Winter & Co., and East-West United Bank.

“We didn’t siphon off any funds from the bank,” said Delta Bank founder and owner Mykola Lagun.

The funds, however, were withdrawn from Delta Bank through Delta companies on exactly the same days that Mr. Lagun carried out capital increases for his financial institution in cash.

In March, the Ukrainian parliament passed a law which allows prosecutors to jail bankers who drive their institutions to ruin through mismanagement. “A lot less money would have been stolen from banks, if we had already had such an instrument in hand,” Ukraine’s central bank governor, Valeria Gontareva, said.

This tightening of criminal law was passed by Ukraine’s parliament on March 2 -- a few hours after the central bank withdrew Delta’s banking license and the bank was declared insolvent after months of unsuccessful attempts at turning it around.

Ukraine's Finances-01

The victims of Ukraine’s financial crisis are Ukrainians who had invested or held savings accounts. Last year, citizens had to cope with a devaluation of the country’s currency, the Ukrainian hryvnia, by more than 60 percent. In addition, Ukrainians have limited ability to convert the hryvnia into foreign currencies or withdraw money from their accounts.

Delta Bank’s insolvency comes on top of these financial woes. Based on its assets, Delta Bank was the country’s fourth largest, representing 4.6 percent of all Ukrainian bank assets. Based on savings deposits, it was the country’s third largest financial institution, holding 5.7 percent of all savings deposits with Ukrainian financial institutions.

The country’s aim is to put a stop to shady dealings. “It was long believed that bank insolvencies would shake the Ukrainians’ trust in the financial sector. But the opposite is the case. The bankruptcy proceedings were a courageous step by the Kiev central bank,” said Volodymyr Lavrenchuk, chief executive of Aval, a Ukrainian subsidiary of Austria’s Raiffeisen Bank International.

Due to the Russian and Ukrainian crisis of 2014, the Vienna-based Raiffeisen Bank had a record loss of €493 million, or $546.3 million. Raiffeisen had unsuccessfully tried to sell the expensively-purchased Ukrainian subsidiary, and now the European Bank for Reconstruction and Development is supposed to become a Raiffeisen Aval shareholder.

Mr. Lavrenchuk said he was confident that “every bank closing in Ukraine strengthens the trust,” because bank deposits in the eastern European country have been on the rise again since April.

Ukraine Map-Crimea and contested area

Ukraine’s new central bank deputy governor, Dimitrij Solohub, said the banking crisis was caused by a lack of actions during the international financial meltdown that started in 2008 and hit Ukraine particularly hard.

“The zombie banks simply continued to exist,” Mr. Solohub said. “Now we are pursuing a policy of zero tolerance and are cleaning out the pigsty.”

The result is that 49 of Ukraine’s 180 banks have been closed down so far. Because of this, trust and depositors’ money are returning.

“The new government in Kiev is earning our trust,” said Herbert Stepic, the former longtime chief executive officer of Raiffeisen. But the cabinet and central bank leadership need time, he said.

“You can’t achieve in a year what was botched in the 23 years before,” said Mr. Stepic, who is currently a senior advisor at Bank Lazard that is leading debt rescheduling negotiations for Ukraine with the country’s international creditors. Billions of dollars could be affected.

At any rate, the financial sector reforms are the basis for a resurgence of a Ukraine facing bankruptcy.


Mathias Brüggmann is the head of Handelsblatt's foreign affairs desk, leading the coverage of the Ukraine crisis. To contact the author: [email protected]