“Alpine Scheme” for Ukrainian banks – crime without punishment? – Investigation

A scheme of siphoning off funds in the amount of 1 billion USD from Privatbank by nine “Ocean’s friends” revealed by Organized Crime and Corruption Reporting Project (OCCRP) is spread in news feed and Facebook.

Everyman, pretty tired of regular, but ineffective revelations, can’t help but wonder: what’s next?

A scheme of siphoning off funds in the amount of 1 billion USD from Privatbank by nine “Ocean’s friends” revealed by Organized Crime and Corruption Reporting Project (OCCRP) is spread in news feed and Facebook.

Everyman, pretty tired of regular, but ineffective revelations, can’t help but wonder: what’s next? How another loud revelation will affect the situation? Ukrainians did not forget an “Alpine Scheme” with correspondent accounts in foreign banks used for siphoning off funds from Ukrainian financial institutions in 2011-2015 which was equally resultless. And that the effectiveness of measures aimed at returning of these funds is close to zero, as well as any guarantees on prevention of such abuses in future. Investigators will not have less work and we could become even poorer.

Extraordinary adventures of Ukrainian bankers in the Alps

Activity of commercial banks in the sphere of correspondent relationships became quite specific segment of their work long ago.

Let us recall that correspondent account – is an account opened by banking institution in another banking institution and used mainly for settlements in foreign currency. Such accounts are very often used for servicing of export-import operations (sometimes you can confidently add “pseudo-“). It bears reminding to the reader about special “case” in segment of correspondent relationships of domestic banks with foreign financial institutions the price of which for banking system and Ukraine economy, according to the estimations of National Police representatives was more than 400 billon UAH.  This was the exact amount which was siphoned off the country in 2011-2015 using only Meinl Bank (Austria).   

Other Law Enforcement authorities and financial market regulators estimating the amount of mentioned Ukrainian banking institutions losses much lower. According to DT.UA, amount of 12 billion UAH is indicated in the investigation carried out by NABU. But if information of Deposit Guarantee Fund on main schemes of siphoning off assets from failed banks for 2015 (updated taking into account Finance and Credit bank), published in media is used as a basis, the estimates could be as follows (see picture).

Siphoning off money from Ukraine abroad using correspondent accounts of foreign banks as of 23.09.2015 (million USD)

Siphoning off money from Ukraine abroad using correspondent accounts of foreign banks as of 23.09.2015 (million USD) Bank Winter&Co (Austria) – 50 Bank Frick&Co (Lichtenstein) – 166 East-West United Bank (Luxembourg) – 227 Meinl Bank (Austria) – 361 Source: Letter of Deposit Guarantee Fund to the Pime-Minister of Ukraine A. Yatseniuk (#23-33924/15 dated 23.09.2015)
Source: Letter of Deposit Guarantee Fund to the Pime-Minister of Ukraine A. Yatseniuk (#23-33924/15 dated 23.09.2015). *Excluding information about criminal proceeding of General Prosecutor’s Office of Ukraine #42016000000001118 dated 26.04.2016 on siphoning off 113 million USD by management of Finance and Credit bank using Meinl Bank (Austria)

It becomes clear now why mentioned scheme with correspondent accounts got the name of “Alpine” – transactions with banks from Austria and neighbouring Lichtenstein caused almost 75% of losses mentioned by Ukrainian banks from this scheme. While Delta Bank generated half of these financial losses. Even the data on Finance and Credit bank which was released later did not shake such dubious leadership. In April this year Deposit Guarantee Fund released information on debiting of funds from correspondent accounts in mentioned foreign banks for the amount of 427,2 million USD.

Such huge losses cause a number of questions to the regulator because National Bank of Ukraine (NBU) could see quite unnatural “behavior” of balances on such correspondent accounts on-line: both increasing and decreasing fluctuations are typical for standard economic transactions, and in this case, there was a progressive increase of balance value on these accounts.

Subsequently these funds were used as a collateral for providing loans abroad and / or returned to Ukraine as loans from non-residents. And they could also be stored on accounts of foreign companies or used for transactions between non-residents with Ukrainian origins. Or, as a most delicate thing, they could be transferred to replenish the authorized capital of banks in Ukraine (as a replenish of capital using bank’s own credit funds transited through foreign jurisdiction).  And this is a natural headache for banking supervision.

Such funds which were encumbered in fact, significantly distorted the structure of banks’ balance and the fulfilment of their mandatory economic standards (liquidity and capital adequacy). Because in theory funds on correspondent accounts could be used anytime. Information about banking institutions with heaviest losses from “Alpine Scheme” is indicated in the table.

Main characteristics of Ukrainian failed banks with largest account balances in banks – participants of “Alpine Scheme”.


Thus, using of correspondent accounts in different foreign banks distorted banks reporting quite significantly (up to 20% of balance asset value). While any inspection of the National Bank of Ukraine should have reflected and indicated such specific balances on correspondent accounts in their findings report. It should also be noted that such schemes indicate hidden huge gaps in assets that were covered by a reduction of capital. That is why discussions of experts after publication of “Taruta’s brochure” about indiсator which should be used (assets or capital) in order to correctly estimate the share of Russian banks сan evoke only ironical smile. If it is possible to use such schemes with correspondent accounts, both indicators are distorted.

Never again?

But the most unpleasant thing in this case is that system-wide problem was solved by simple indication of losses and disclosure of existing and actively used “routes” for siphoning off funds. According to NBU information, which was received on the request of DT.UA, in the middle of 2014 balance of 17 Ukrainian banks on correspondent accounts in transit banks was around 2 billion USD. Management of the National Bank gave time Ukrainian banks till April 2016 to solve this issue. As a result, more than half of the balance amount on foreign correspondent accounts was repaid in 2015. And for today none of Ukrainian operating banks has correspondent accounts in such banks.

It should be recognized that most of the funds were accumulated on correspondent accounts in foreign banks before V. Honatreva became the Head of NBU. And rumors from the “inside world” of the regulator indicate drastic efforts (or declaration of intent) of the head of the NBU to solve this problem mainly through a repayment. But information from the media about criminal proceedings on money laundering for the benefit of Yanukovych “family” as a result of securities transactions (where financial group Investment Capital Ukraine, ICU close to Hontareva was taking active part) raises interesting assumptions.

For example, the fact that cash flow was directed using scheme with correspondent accounts, which were not controlled by old investment bankers could be hidden motivation in this case. But let us wait for official results of competent authorities work on this issue, which will be more significant than any assumptions. Today it can be said that the outcome of these measures is quite low. And the format of banking system “cleanup” has led to the fact that detailed investigation of these dubious transactions and provision of funds return becomes unreal (tying up loose ends – as a typical tradition of Ukrainian wild business).

According to DT.UA, NABU investigates several cases related to “Alpine Scheme” directly or indirectly. There is certain progress in these cases, investigators have the documents provided by Meinl Bank and testimonies from some of NBU employees, based on which it will be possible prove not only the guilt of banks, but also the involvement of regulatory oversight to what is happening.

However, the investigation is far from the end. Coping with the agency’s own efforts is not easy, and they cannot ask for help. Not because the PGO or the National Police  has no competent staff, but because there is little confidence in them and their ability to keep the investigation in secret.

The key to solve the problem of returning these funds, lies in the foot of the Alpine peaks. It is in close cooperation with the Austrian financial regulators and law enforcement authorities. Fortunately, the Vienna Prosecutor’s Office also began to investigate the involvement of Meinl Bank in siphoning off funds from Ukrainian banks (this was reported in early March by Der Standard). After all, it will be almost impossible to prove a criminal conspiracy without the assistance of foreign financial institutions. And it will also be very difficult to prove that overseas borrowers are affiliated with the owners of Ukrainian banks, since Ukraine does not participate in the automatic tax information exchange.

On the other hand, National Bank implemented quite strict and comprehensive measures to counter described “Alpine Scheme”, at first glance. From April 1, 2016, National Bank has forbidden Ukrainian banks to transfer funds on correspondent accounts in mentioned foreign banks. In August 2016 regulator sent a letter to banking institutions (№25-0008/72225 dated August 29) with a list of eight banking institutions cooperation with which could bear an increased risk.  Maybe, with a focus on the legal aspects of the matter, such prohibition of cooperation with these banks is very doubtful, as well as transferring money on their correspondent accounts. But with this letter regulator straightly declared the high probability of the fact that some of the transactions conducted with their participation could have signs of dishonesty. And this most likely, could cause sanctions of the National Bank for violations of financial monitoring rules.

Another effective step may be implementation of increased reserve requirements for encumbered balances on correspondent accounts which will make such placements of funds economically unviable for Ukrainian banks (according V.Hontareva such balances will be subject to 100 percent reservation).

But only one moment in mentioned idyll is confusing. V. Hontareva on her final press conference stated that in September 2014 she met with the Head of Austrian banking regulator Österreichische Nationalbank and stopped siphoning off capital using this country. And this raises a logical question: “Why all mentioned regulatory activities started taking place at least year and a half after the mysterious meeting?”. Because implementation of such regulatory measures was quite possible right after NBU chairman returned from Austrian business trip.    

At the same time, there was no conflict with National bank’s program of repayment of all these correspondent accounts and other interbank transactions with banks, participants of “Alpine Scheme”. There is also another question on the agenda, namely does regulator have enough instruments to prevent similar schemes in the future? After all, if there is no proper control of bank supervision over encumbrances of funds on correspondent accounts, such “Alpine Scheme” will just change names of counterparty banks and “routes” of funds siphoning off and will successfully operate in the future.

National Bank replied on the request of DT.UA regarding the control procedures that a set of measures, designed to strengthen the system of control over banking operations abroad were developed.  In particular, improved internal regulations which oblige Ukrainian banks with balances in foreign banks without investment rating to generate 100-percent reserves for these assets. Thus, it became unprofitable for banks to pull funds abroad in order to lend them to related parties after that. Also, NBU introduced weekly monitoring of Ukrainian banks balances on foreign correspondent accounts and cooperates with central banks of European countries to improve information exchange on such transactions.

Another important question is how funds already returned from foreign banks were used? Because “Alpine Scheme” was mainly used by insolvent banks but there are several operating banking institutions on the market, which had correspondent accounts in these foreign transit centers (“Kredit-Dnipro”, “Vernum”). And general public should remember that nationalized Privatbank also was in the list of “Alpine Sheme” participants.

In the middle of country’s largest financial institution nationalization process, Business New Europe (BNE) edition published an article of investigative journalist Graham Stack which states that in January 2014 Privatbank deposited 7.6 billion UAH (760 million EUR at that time) into correspondent account in Bank Winter&Co (Austria) and 4 billion UAH (400 million EUR) in East-West United Bank (Luxembourg). But these balances were not indicated in the biggest bank of the country report in June 2016, which became available to BNE. There are two possible options in this case – debiting funds from correspondent account using recurrent pattern and returning them to the bank (after persistent requests of NBU) with further siphoning off using new “route”.

Hence, the information about signing of a contract with the US Jpmorgan Chase Bank on the eve of nationalization in early December last year becomes especially important. This agreement that expands possibilities of clients on international trade agreements was signed by US bankers who obviously understood the scope of Privatbank problems and threats it faces. And the reasoning of pragmatic Americans, who started cooperating with counterparty being on thin ice is unclear. So, the results of Ernst&Young work which is carrying out audit of Privatbank’s reports and asset quality is eagerly awaited. As well as further economic investigation of its transactions before nationalization, which should be finished until the end of September this year.

* * *

Correspondent accounts situation could be the test for independence for a new Head of NBU, his level of proficiency and ability to strictly implement principal decisions. Question of special measures for investigation of “Austrian scheme” with correspondent accounts and returning funds siphoned from Ukrainian financial and banking system is on the agenda (similarly to the creation of international companies’ consortium for the restructuring Privatbank loan portfolio)

On the other hand, there is a lack of understanding by the management of the National Bank of Ukraine of Austrian financial and banking system potential. Because European Central Bank in the document “Financial Stability Overview” (May 2015, p. 128-133), designed to assess the systemic risks of European financial system, identified Austria as one of the biggest hubs of cross-border and interbank loans in Central and Eastern Europe. Austrian banking system can be compared with transit server during disposition of financial flows on mentioned areas. And that is why new management of the National Bank should create сonditions not just for turbulent volatile financial flows but for stable long-term investments to financial structures which provide banking services accessible to the public.      

Successful or at least partial solving of this task will significantly shore up new National Bank’s Head positions. That is why it will not be strange if we see the representatives of NBU in Vienna soon.

However, it is possible that  the ship of our sincere wishes will once again smash into an iceberg of political environment and “arrangements”.    

Vadym Syrota, ZN.ua, first publisged on 14 June, 2017

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