On December 22, U.S. private investigative firm Kroll published its second report on the 2014 Moldovan bank fraud scandal. This blog post provides background on the scandal, as well as commentary on the contents of the report.
Background: The 2014 Moldovan Bank Scandal and the First Kroll Report
In November 2014, more than $750 million disappeared from three Moldovan banks over just two days. The three banks – Banca de Economii, Unibank and Banca Socială – declared bankruptcy that month, prompting the National Bank of Moldova to bail them out with $870 billion in loans. The bailout reportedly created a government deficit equivalent to roughly one-eighth of the entire country’s GDP.
In January 2015, the National Bank of Moldova commissioned the U.S. investigative firm Kroll to conduct a confidential investigation of the fraud. The Kroll report, which the speaker of the Moldovan Parliament, Andrian Candu, leaked to the public in May 2015, revealed what investigators believed to be a “co-ordinated effort within the banks to deliberately disguise” the nearly billion dollars’ worth of transactions and their beneficiaries. The investigators tie nearly all of the transactions to Ilan Shor, a Moldovan millionaire businessman and politician, or companies either directly owned by or connected to him.
According to the first Kroll Report, between 2012 and 2014, the three banks paid out more than three billion dollars in loans to companies linked to Shor. The funds were funneled through a convoluted international money laundering scheme that primarily involved using UK limited partnerships with Latvian bank accounts as “shell” companies.
The Second Kroll Report
In their second report, Kroll investigators provide more details on the profiles of the scheme’s beneficiaries. They report that at least 77 companies make up what they term the “Shor Group:” a group of companies linked to Ilan Shor all of which documentary evidence suggests participated to some degree the coordinated fraud effort.
Over a period of two years, the companies reportedly increased their ownership stake in the three banks, thereby increasing their control over the loan approval process within each bank. Loans are approved by the Board of Directors of each bank. Kroll reported that its investigators contacted two government-appointed members of the board for one of the banks, BEM, and both members stated that had not been invited to any board meetings in November 2015, and were not informed of any loans granted during that month.
In November 2014, the companies comprising the Shor Group concentrated their loan exposure, which had up until then been spread across the three banks, into one bank – BEM. According to the Kroll report, this move “allowed the Three Moldovan Banks to pool their liquidity into BEM and enabled BEM to increase lending.”
The Core Laundering Mechanism
A series of companies were then established. These companies held a total of 81 bank accounts at two Latvian banks. The majority of the accounts were held either by UK limited partnerships or offshore companies registered in offshore tax jurisdictions, such as Belize and Panama. Investigators believe most of these accounts were established solely for the purpose of laundering money. The report describes the primary laundering mechanism in detail:
The laundering mechanisms included the frequent transfer of funds between linked accounts, the splitting of funds and layering through other accounts, simultaneous issuing and repaying of an overdraft by two linked companies to disguise the onward flow and the frequent and apparently arbitrary switching of currencies between accounts.
The investigators consider both the complexity as well as timing of the laundering mechanism to be indicative of a “highly coordinated professional laundering operation.” At one point, they point to “numerous examples” in the operation where money “flowed through a series of accounts within seconds.”
Fore more commentary on the 2nd Kroll report, see the upcoming January 2018 issue of the International Enforcement Law Reporter.