CASE STUDY OF THE

MOLDOVAN BANK FRAUD

I S E A R L Y IN T E R VE N T I O N T H E
B E S T C E N T RA L BA N K
S T R A T EG Y T O A VO ID
FI N A N C I A L C R I S E S ?

Presented by
QASIM MEHMOOD
 Introduction

 “fraud” definition.
 Categories of bank frauds:
 credit card and other financial instrument fraud
 money laundering
 electronic services fraud
 identity theft

 Central Bank role ( regulation, aimed at limiting takeovers and

limiting market monopolization, prevent unlawful operations )
 The Moldovan case presents particular interest.
 In this case, the banks themselves are the victim of the fraud.
 The Moldovan economic context before the fraud

 In 2011, Moldova (Europe’s poorest countries in terms of its

GDP)
 The sources of growth were drying up.
 Moldovan economy came into recession in 2012.
 Growth resuming in 2013 with ease of monetary policy.
 Moldova is a small, open economy having tight economic
and financial links with the EU.
 Banking sector fraud culminated in 2015.
 The Moldovan economic context before the fraud

 Moldovan banking system comprised of 14 banks one,

state-controlled (one of the three banks targeted by the
fraud).
 In 2011, inflation increase
 monetary policy was adjusted to increasing interest rates
 lending decreased.
 No tradition of maintaining excess buffers in local banks
to protect against the risk.
 “Non-interventionist” Central Bank may have not felt the
need for such buffers.
Understanding the specifics of Moldovan prudential regulation and
supervision

 Responsibility of CB (monetary policy and prudential

regulation and supervision).
 CB follow two objectives: inflation targeting & financial
stability.
 This regulatory set-up implies that the Central Bank is
slower to react to financial crises.
 CB also bails out troubled institutions.
 Off shore entities, in this case.
Understanding the specifics of Moldovan prudential regulation and
supervision

 The main prudential indicators (the Capital Adequacy

Ratio; “Large” Exposures; Long Term Liquidity Ratio;
Short Term Liquidity Ratio)
 In Moldova, Central Bank didn’t have any given set of
intervention methods.
 In theory, the Central Bank is authorized to act immediately
if any prudential indicator rises above or falls below its
acceptable value.
Unraveling the schemes that led to the crisis

Moldovan banking fraud was a carefully 4 year

planned process.
Success relied on : bank’s ownership structure and
its products.
 The process unfolded in two phases.
 Acquiring control over three banks 2012 – 2013

 Three financial institutions were taken over by the entity

called “the Holding Company”.
 In each of the cases, the financial institution was acquired
by small local firms having no apparent connections.
 Later Central Bank investigations found that purchases
were financed from the same sources.
 Shareholder structure in two of three banks changed.
 Acquiring control over three banks 2012 – 2013

 The third bank, the largest one, state had a majority stake
of 56.1%, had liquidity shortfall
 Solution : privatize the bank by means of issuing new
shares, left with 33.3% stake .
 This made the smaller firm the bank’s new majority
shareholder.
 Ownership Structure of the Holding Company and Financing of
Bank Share Purchases

To finance the share purchase, the Holding Company instructed a number of off-shore firms owned
by itself to wire funds through non-OECD banks to the off-shore entities that directly controlled the
Moldovan firms which utilized the money to purchase shares in the three Moldovan bank.
 Financial product fraud and money laundering 2014 – 2015

The objectives behind the fraud schemes were to:

 Maximization of liquidity for banks to lend to controlled firms

 prevent prudential indicators from deteriorating to avoid
supervision from the Central Bank
 extract money from the Moldovan financial system by
laundering it to non-OECD banks
1st scheme (Cession of Loan Portfolio to an Investment Vehicle)
 2nd Scheme (Loan Shifting)

Money is secretly transferred through Off-Shore entities to another

controlled firm which needs to pay back a previously obtained loan.
3rd scheme (Circular Bank Deposit Scheme)

A bank places a deposit at another bank which is used as collateral to borrow

from the second, or potentially a third bank.
4th scheme (Inter bank market)
Discussion of the findings
 Discussion of the findings

 To discuss the intervention decision of the Central Bank,

 degradation of prudential indicators does not occur simultaneously, so
immediate intervention was suboptimal.
 “early” intervention would lead the Central Bank to take control of
controlled Bank 3 at period 7 after the beginning of the fraud scheme.
 This would alert the Holding Company and would cause the holding to
extract all possible liquidity from the remaining banks.
 Discussion of the findings

 The decision of not intervening was also due to– the Central Bank: -
 didn’t have “early-warning” system
 cannot obtain information regarding the ownership structure
 no regulatory provisions
 non-interventionist by nature
 The performance of the Central Bank: suboptimal
 Legislative changes, with increased cooperation at the international
level are needed to identify the ownership structure of Moldovan banks.
 The Central Bank must also become more proactive in monitoring the
financial situation.
 To do so it needs additional tools and measures to facilitate work.
 Concluding Remarks

 Inadequacy of the Central Bank’s response to the crisis

 Policy of non-interventionism that led to significant losses.
 Regulatory weaknesses that allowed the fraud to take place.
 the regulatory institution did have an opportunity to intervene.
 The Central Bank failed , because of the lack of adequate measures.
 Recommendation
 strong regulatory framework.
 more transparency
THANK YOU.