How did Moldova lose $1 billion & where does transparency fit in?

May 15th, 2015

Moldova somehow lost $1 billion, and no one is quite sure where it went.

The small country of Moldova, wedged between Ukraine and Romania, has dealt with a number of struggles over the past few decades, and it remains one of Europe’s poorest countries. Almost 40% of the country’s working age population works abroad, and nearly 30% of the nation’s gross domestic product (GDP) comes in the form of remittances from these workers. So, when the news broke that almost 15% of the entire country’s GDP simply disappeared from Moldovan banks, there were obviously going to be a number of other questions to follow.

From Politico:

Its disappearance has raised questions not only about those responsible and the ability of the economy to take the hit, but also about the systems in place to monitor the banking sector and, perhaps most importantly, the culpability of those in positions of authority.

An independent report, commissioned by the Moldovan central bank and undertaken by US-based risk management firm Kroll, was released to the public, though only after tens of thousands of protestors took to the streets on May 3 demanding answers as well as governmental reforms. “We want the billions back!” some in the crowd shouted.

While there are still many questions to be answered, it looks as though, once again, the opacity of the financial system has been one of the main culprits in a scheme to rob an already poor country of so much wealth. The man allegedly behind the plot, Ilan Shor (who also happens to already be Moldova’s richest man, without the extra $1 billion), gained control of significant stakes in three of the country’s biggest banks, though the connection to Shor was muddied by the use of nominees, and a lack of information on the beneficial owners of entities that owned shares of the banks.

More from Politico:

Controlling stakes in the three banks had been acquired in 2012 and 2013, with the shareholders a collection of individuals who each held less than a 5 percent share. This “had the effect of transferring ownership to a series of apparently unconnected individuals and entities,” but who were in fact largely connected to Shor, and were able to act in concert without seemingly raising any red flags, the report said.

Money was then moved in various ways back and forth between the three banks as well as banks in Russia, each time artificially inflating the liquidity of the Moldovan banks to the extent that they were able to eventually issue loans worth many billions of lei.

When you dive into the 83-page auditing report completed by the US-based firm, Kroll, the role that hidden beneficial ownership information may have played becomes even more pronounced. The firm admits that their report cannot fully “trace forensically the ultimate beneficiaries”, and goes on to add that it is “clear that there appears to have been a deliberate plan to gain control of each of the banks.”

From the report:

The profile of a number of shareholders, in UB and BS in particular [two of the three banks under scrutiny], suggests that they may have been acting as nominees, in an attempt to deliberately disguise the true beneficial ownership of shares. 

In short, entities ultimately under the control of Shor were allegedly used to build up the loan power and liquidity of the banks, and eventually, make a massive increase in lending to specific Moldovan entities, also ultimately benefiting him.

More from the report:

Within a short time period of a change in  their ownership structure, the banks appear to have co-ordinated to maximize available liquidity, in order to facilitate a massive increase in lending to Moldovan entities. Whiles these entities appear unrelated, preliminary analysis shows that they effectively form a group of related parties, whose loan receipts from the banks were passed, through a complex web of transactions using predominantly UK Limited Partnerships with Latvian bank accounts. 

The above suggests a co-ordinated effort within the banks to deliberately disguise the true nature of the transactions and their beneficiaries. 

So, as often happens after a massive case of graft, embezzlement, or some other kind of illicit flow, people start to ask, “Well, how could someone actually do this?”

There’s certainly not one simple answer, but part of the problem undoubtedly lies in the amount of secrecy we provide to the global financial system. This case doesn’t highlight a problem contained solely within the borders of Moldova, and it can’t be conveniently blamed on corruption within the government or other public or private institutions. From the exhaustive report carried out by Kroll we know that UK entities and bank accounts in Latvia played a significant role in the plan.

Most countries around the world don’t require identification of the beneficial owner (the person ultimately in control or profiting) of a company when it’s created; this lack of disclosure creates a huge gap when investigators are tracking suspicious activity, when journalists and concerned citizens are trying to hold corporations, politicians and the wealthy elite accountable, or investors want to make an informed business decision.

While there’s certainly not an easy answer to solve every problem within the financial system, there is an easy one to end the use of anonymous companies: public registers of beneficial ownership information. The UK will launch the first-ever public register with this information next year, and the European Union went so far as to approve the creation of registers of beneficial ownership information at the end of 2014, though they won’t be entirely public.

We might not have all of the answers to unequivocally stop the next case of graft or tax evasion, but with some simple financial transparency measures stealing the next billion would get a lot harder.

Written by Christian Freymeyer

Christian is the FTC's Press & Digital Media Coordinator. You can follow him on Twitter @cfreymeyer

Image used under Creative Commons License / Flickr User Aurelian Săndulescu

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