Kroll report backs PrivatBank fraud claims


Lucy Fitzgeorge-Parker
Published on:

UK court freezes former shareholders’ assets; new CEO appointed by supervisory board.

Ukrainian authorities have received support for their case against former shareholders of nationalized lender PrivatBank from investigators at US consultancy Kroll, according to the country’s central bank. 

On January 16, the National Bank of Ukraine (NBU) published key findings from a report by Kroll that backed allegations of large-scale fraud at PrivatBank, which was taken over by the state in December 2016.

160x186newsfebIgor Kolomoisky
Igor Kolomoisky

These include claims by employees that the bank acted as a “vacuum cleaner”, with business development geared towards attracting deposits that were then dispersed as loans to companies related to the bank’s owners, Igor Kolomoisky and Gennadiy Bogolyubov.

According to Kroll, a “loan recycling scheme” was devised to conceal the fraud, whereby new loans were continually issued to new related parties to repay the principal and interest on older loans. 

Multiple internal transactions within the Privat group, including between the Ukrainian operation and units in Cyprus and Latvia, were also reportedly used to disguise fund flows. 

“[This] demonstrated the characteristics of a large-scale coordinated money-laundering scheme,” NBU officials said in the report presentation.

‘Shadow structure’

The summary of Kroll’s findings also described a “shadow banking structure” in PrivatBank’s head office in Dnipro. Directed by the former shareholders, this “bank within a bank” was allegedly responsible for creating a network of related-party borrowers, structuring deals between them and falsifying the bank’s balance sheet.

Kroll concluded that the fraud had been in operation for more than a decade and had caused a loss to PrivatBank of at least $5.5 billion – almost exactly the amount it has cost Ukrainian authorities to recapitalize the lender since nationalization.

The US firm’s report is expected to be used as evidence in litigation in the UK against Kolomoisky and Bogolyubov. PrivatBank is suing its former shareholders for the recovery of $2.5 billion of allegedly misappropriated assets. 

Early indications have been positive for the bank’s new owners. On December 19, the anniversary of the nationalization, the High Court in London ordered a freeze on more than $2.5 billion of worldwide assets belonging to Kolomoisky and Bogolyubov, as well as six companies associated with them. 

Ukrainian authorities are also hoping that publication of details of the Kroll report will encourage domestic prosecutors to bring criminal charges against Privat’s former shareholders. 

To date, no action has been taken. Prosecutor general Yuriy Lutsenko has, however, come under pressure after being photographed by two Ukrainian students having coffee with Kolomoisky in Amsterdam in late November. Lutsenko insists the meeting was accidental but finance minister Oleksandr Danylyuk has called for his resignation. 

Kolomoisky and Bogolyubov did not respond directly to the NBU’s statement last month but have repeatedly denied wrongdoing in connection with PrivatBank. 

They did, however, attempt to prevent publication of the Kroll report. On December 15, a district court in Kiev backed claims by Kolomoisky that the NBU had infringed state procurement laws in hiring Kroll and ruled against further cooperation between Ukrainian authorities and the consultancy. A similar judgement was also handed down by a court in Odessa. Both rulings were subsequently overturned. 

Meanwhile, the rehabilitation of PrivatBank moved a step closer in January with the appointment of a new chief executive. The post has been vacant since July, when post-nationalization CEO Oleksandr Shlapak stepped down amid accusations of inaction.

His replacement, Petr Krumphanzl, has a track record of trouble-shooting, as well as experience of Ukraine’s idiosyncratic banking market. 

A Czech native, he was in charge of operations at Raiffeisen’s Ukrainian subsidiary at the time of the global financial crisis and subsequently spent three years as COO of Heta Asset Resolution, the vehicle set up by the Austrian government to deal with bad debts from Hypo Alpe Adria.

His most recent role was in China, where he served as COO for Czech consumer finance firm Home Credit’s rapidly expanding operation.

‘Strong experience’

“Petr has very strong experience in improving processes and control systems,” says Engin Akcakoca, head of PrivatBank’s supervisory board. “He is very good at transformations, which is what the bank needs at this point in time.”

Krumphanzl was the favoured candidate from early on in the process, Akcakoca added, but his appointment was delayed due to his mathematical background. Ukrainian law required heads of state banks to hold degrees in finance, economy or law. The legislation was amended on January 5.

PrivatBank’s new Ukrainian CFO faced no such hurdles, having studied economics at Donetsk University. Anna Samarina joined the bank in January from BNP Paribas, where she was head of financial control for international retail banking in Paris. Before that she spent 15 years at Ukrsibbank, the French group’s Ukrainian subsidiary, including eight as CFO. 

A new strategy for PrivatBank is also expected to be announced shortly by the ministry of finance, following the submission of proposals by the supervisory board. Akcakoca declined to be drawn on details but confirmed that recommendations included a focus on retail banking with minimal corporate lending. 

He added that Privat is expected to return to profitability this year, after a final recapitalization by the finance ministry in December. 

“We were loss-making last year because of toxic assets, but we are now fully provisioned, so 2018 will mark a fresh start for the bank,” he says.